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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
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OF 1934 (FEE REQUIRED)
For the Year ended December 31, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
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1934 FOR THE TRANSITION PERIOD FROM ______ TO ________.
HEALTHCOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 8090 75-2294072
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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8150 North Central Expressway, Suite M2000
Dallas, Texas 75206
(214) 692-4663
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock; par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if the disclosure of delinquent filers pursuant
to Item 405 of Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the price at which
the stock was sold, or average of the closing bid and asked prices, as of April
7, 1999 was $10,343,340. All outstanding shares of common stock, except for
shares held by executive officers and members of the Board of Directors and
their affiliates, are deemed to be held by non-affiliates.
Documents Incorporated by Reference
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Part III incorporates by reference portions of the Registrant's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders.
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All statements, other than statements of historical facts, included in this
report, including the Company's ability to achieve significant expected cost
savings or synergies from the closing or consolidation of offices and other
restructuring efforts, and the plans, objectives and expectations of management,
are forward looking statements. These forward-looking statements are based on
the Company's current expectations. Although the Company believes that the
expectations reflected in such forward looking statements are reasonable, there
can be no assurance that such expectations will prove to be correct. Because
forward looking statements involve risks and uncertainties, the Company's actual
results could differ materially. The Company disclaims any intent or obligation
to update its forward-looking statements.
PART I
ITEM 1. BUSINESS
Recent Developments
Recent Financial Performance. HealthCor's net revenues for the three months
ended December 31, 1998, decreased by 28% to $24.9 million compared to $34.6
million recorded in the same period of 1997. HealthCor reported a net loss for
the quarter ended December 31, 1998 of $(64.2) million compared to net loss for
the fourth quarter of 1997 of $(15.4) million. The Company also recorded a loss
per share for the quarter of $(6.36) on 10.1 million average shares outstanding
compared to a loss of $(1.53) per share on 10.1 million average shares
outstanding in the fourth quarter of 1997.
HealthCor's net revenues during 1998 decreased by 19.1% to $115.8 million
compared to $143.2 million recorded in 1997. The net loss for 1998 was $(98.3)
million compared to net loss of ($15.6) million in 1997. The net loss per share
for 1998 was $(9.74) on 10.1 million average shares outstanding compared to
basic loss per share of $(1.56) on 10.1 million shares outstanding in 1997.
The net loss for the three months ended December 31, 1998, resulted from among
the following factors. The Company recorded a pre-tax goodwill write-off of
$27.0 million as a result of certain unamortized goodwill balances that were
evaluated and deemed impaired. In addition, the Company also recorded an
additional provision for doubtful accounts of $20.6 million and a loss on
disposition of assets of $1.5 million.
The Company does not have adequate liquidity or available sources of financing
to meet its contractual debt obligations and settle its other liabilities.
These factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are discussed at "Recent
Developments Sale of Company." Also, see "Management's Discussion and Analysis
- - Liquidity and Capital Resources."
In connection with their 1998 audit, the Company's independent public
accountants have issued a material weakness letter under standards established
by the American Institute of Certified Public Accountants. During 1998,
HealthCor experienced a significant amount of turnover in its operations and
financial personnel. The Company also converted several of its billing systems.
As a result of the changes in personnel, the conversion process was not
adequately supervised, resulting in significant, unreconciled conversion
differences. These differences were charged off in 1998. In addition, the lack
of experienced and trained operations and finance personnel during 1998 resulted
in the untimely reconciliation, processing and evaluation of certain cash,
accounts receivable, accounts payable, and third-party reimbursement accounts.
As a result, significant adjustments were required to the consolidated financial
statements at December 31, 1998. Management is aware of the weakness in its
accounting processes and the lack of trained staff. Despite the Company's
awareness of the material weakness and ongoing efforts to recruit additional
accounting professionals, train the current staff, and improve accounting and
financial reporting systems, there can be no assurance that the Company's
efforts will result in any improvement of the Company's financial position.
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Pending Litigation. On March 20, 1998, the Company and several of its former
officers were named as defendants in a lawsuit alleging certain violations of
federal securities laws by the Company. The plaintiffs in the lawsuit seek to
represent a class of persons who purchased shares of the Company's Common Stock
from March 31, 1997 through and including March 31, 1998. The Company has filed
a motion to dismiss the lawsuit which is pending before court for determination,
otherwise the Company intends to vigorously defend the lawsuit. The Company
intends to vigorously defend the lawsuit but is unable to assess the likelihood
of success in this litigation, which is in the early stage of fact finding. An
adverse result in the litigation could have a material adverse effect on the
Company's business and operations.
Regulatory Changes; Closing of Nursing Offices. Congress has adopted a per-
beneficiary limit on reimbursement for home nursing services based upon
historical cost, and on March 31, 1998 and August 11, 1998, published
regulations which set forth the national and regional medians on which such
limits should be based. The per-beneficiary limits had an adverse effect on the
Company's Medicare nursing operations.
Other regulatory changes have reduced the level of reimbursement available to
the Company. On January 2, 1998 and August 11, 1998, HCFA published final
Medicare nursing per-visit cost limitation guidelines, which reduced per-visit
cost limitations for the Company by approximately 18%-20% for 1998. Also,
regulations effective February 1, 1998, eliminated venipuncture as a qualifying
service for Medicare nursing visits, which materially reduced the Company's
Medicare nursing revenues. In addition, reimbursement rates for Medicare home
oxygen services, which represented approximately 6% of the Company's annualized
revenues in 1997, were reduced by 25.0% in 1998, and are to be reduced by an
additional 5% in 1999.
During the first quarter of 1998, the Company was subject to Medicare cost
limitations for home nursing that were lower than the Company's operating
expenses for that period, resulting in the Company's Medicare nursing expenses
exceeding reimbursable limits by $5.6 million. This amount was recorded at
March 31, 1998. To achieve cost savings in order to attempt to operate within
the Medicare nursing cost limitations, the Company closed substantially all of
its remaining Medicare nursing offices during 1998. These actions and the
regulatory and reimbursement changes described above reduced 1998 Medicare
nursing revenue from the 1997 level by at least $47.8 million or 82.6%.
Accounts Receivable Management. The Company's results for 1998 were adversely
affected by additional provisions for doubtful accounts of $31.6 million. The
additional provisions for doubtful accounts resulted from the Company's
continued difficulties in collecting from certain managed care organizations,
its failure to timely file claims with payors, difficulty in obtaining accurate
patient data, and maintenance of effective quality control and processes and
procedures in the revenue cycle.
Senior Notes; Credit Facilities. On December 1, 1997, the Company issued
$80.0 million aggregate principal amount of its 11% Senior Notes due 2004 (the
"Notes"). On January 13, 1998, the Company filed a Registration Statement on
Form S-4 with respect to the Notes and on February 10, 1998, commenced an Offer
to Exchange the Notes for registered Exchange Notes (the "Senior Notes"). The
Exchange Offer was completed during the second quarter of 1998. The Company is
currently in default under the Senior Notes as it was unable to meet its
December 1, 1998 interest payment obligation. On December 23, 1998, the
principal holders of the 11% Senior Notes (the "Principal Holders") provided
working capital advances of $6.0 million under a convertible loan agreement.
Through April 21, 1999, the Principal Holders have amended the convertible loan
agreement five times to provide additional working capital advances of $8.1
million. The convertible loan agreement is due December 31, 1999, and accrues
interest at 11% per annum increasing to 13% per annum in the event of any non-
payment of principal or interest amounts due. The convertible loan agreement is
secured by a pledge of the stock of the Company, as well as a security interest
in substantially all of the assets of the Company and its subsidiaries. As of
April 21, 1999, the Company is in default of several of the financial covenants
in the convertible loan agreement. The lender, however, has agreed to
forbearances for the default on both the convertible loan agreement and the
Senior Notes.
In the second quarter of 1998, the Company replaced its revolving credit line
with a two-year secured line of credit with a maximum availability of $7.8
million at December 31, 1998. Advances are based on 80% of the net
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collectible value of the Company's accounts receivable. "Net Collectible Value"
is defined as the amount the Company bills third party payors less patient co-
payments and deductible obligations and contractual allowances established by
the Company and acceptable to the lender. Interest on the outstanding balance of
the facility is payable monthly at an annual rate of the prime rate plus two
percent. The Company will also pay a collateral management fee of 0.083% per
month on the average outstanding balance. Collection of the receivables by the
Company will be credited to the facility on a daily basis. Advances under this
facility may be used to finance the working capital and general corporate
requirements of the Company. The Company had approximately $5.8 million
outstanding under the line and availability of $2.0 million at December 31,
1998. The Company also had a separate loan of $2.0 million outstanding, secured
by the stock of a subsidiary, from the same lender at December 31, 1998. The
loan carries the same interest rate as the line and is due on demand.
The secured line of credit, 11% Senior Notes and the convertible loan
agreement all contain cross default provisions. In the event that there is
default under one of the agreements, these provisions trigger a cross default of
the other agreements. There has been no default under the provisions of the
secured line of credit and the Principal Holders of the Senior Notes and the
convertible loan agreement have issued forbearances to the Company. The
Principal Holders have the risk for default for both the Senior Notes and the
convertible loan agreement and amendments.
Sale of Company. The Company has engaged the consulting firm of Chanin,
Kirkland, and Messina (CKM) to act as financial advisor and agent to the Company
in connection with (a) the private placement or raising of (i) a revolving
Credit Facility; (ii) a term loan; (iii) subordinated notes; and (iv) equity on
a best efforts basis on terms satisfactory to the Company and (b) the potential
re-capitalization or restructuring of the balance sheet of the Company. In that
capacity, CKM has been engaged in contacting individuals and companies that may
be interested in acquiring all or parts of the Company's assets and/or
operations. As of April 21, 1999, the Company was continuing to evaluate
various inquiries but had not accepted any offer. The Company continues to
receive inquiries and requests for information on its operations. The Company
continues to seek buyers of Quest Personnel Services (Quest), its personnel
placement division; and CCS, its Texas Medicaid waivered nursing program. There
is no assurance that the Company will be successful in finding a buyer for all
or part of the Company, Quest or CCS.
While CKM is marketing the Company, management has implemented an operating
strategy that is designed to position the Company to continue operating in the
event a suitable buyer is not found. Management is evaluating the Company's
current payor contracts to determine if it should cancel, renegotiate or
continue to accept the current terms. Management is considering steps to
increase payor and provider awareness of the Company as an active provider in
each of the communities where it has a presence. Finally, management is
evaluating each of its offices by product line to determine what actions need to
be taken to increase productivity, volume, and efficiency of operations. While
these actions are designed to improve profitability by product line, there is no
assurance that the outcomes will result in any improvement of the Company's
financial position.
The Company
The Company currently has 51 offices in eight states. The Company has
diversified its business mix from 98% home nursing in 1990 to 8.7% home nursing
for the year ended December 31, 1998. This shift reflects the addition and
growth of respiratory therapy/home medical equipment and infusion therapy
services and the closure of substantially all of its Medicare nursing offices.
The Company expects that it will continue to shift its business mix towards
respiratory therapy/home medical equipment and infusion therapy. Home nursing,
however, will continue to represent a part of the Company's business mix because
managed care organizations and other referral sources offer the benefit to their
subscribers. Due to the low rates currently being paid for home nursing, the
Company will continue to evaluate its nursing operations to ensure that it is
offering services at a cost and rate that benefits the Company.
The Company believes its development and implementation of financial and
clinical management information systems for providing home health care will
result in a competitive advantage when fully operational. Upon the complete
implementation of its proprietary medical information system network,
Medisyn(TM), expected to occur in
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late 1999, the Company believes that it will be able to achieve additional cost
savings, increase productivity and capture outcomes data that will provide
advantages in obtaining managed care business and adapting to regulatory and
reimbursement changes.
Industry Overview
Home health care has been among the fastest growing segments of the health
care industry with estimated annual expenditures of $42.0 billion in 1998, up
from an estimated $12.9 billion in 1990, representing a compounded annual growth
rate of approximately 16%. The underlying growth factors in the home health care
industry include: (i) the cost-effective nature of home health care; (ii) an
increasing number of patients due to growth in the elderly population; (iii)
technological advances that expand the range of home health care procedures; and
(iv) patient preference for treatment in the home. The Company believes, that
despite ascertainable published information on the health care sector, that the
industry has experienced severe financial pressure and has contracted
significantly.
The home health care industry is highly fragmented with more than 20,000
providers delivering home health care services in the United States, most of
which use unsophisticated information technology systems. Many of these
companies are local providers that offer a limited scope of services in a
defined geographical area and lack the capital necessary to substantially expand
their operations. Managed care organizations and cost containment initiatives by
payors have driven the growth of home health care by emphasizing lower cost
alternatives to hospitals and skilled nursing facilities. These organizations
and payors seek coordinated, consistent quality home health care across broad
geographic areas in order to serve their patients more effectively.
Business Strategy
Provide One-Stop Shop Home Health Care Services. HealthCor provides payors,
physicians and patients with fully integrated one-stop shop home health care
services in several of its markets. The integration of comprehensive home health
care services enhances the Company's appeal to managed care organizations and
other referral sources that prefer single-source providers of home health care.
The Company believes that full integration of services enables it to provide
highly coordinated patient care and to increase revenues and profitability by
providing multiple services to an individual patient referral.
Focus on Managed Care Relationships. The Company has intensified its managed
care marketing efforts in order to take advantage of the increased market
penetration of managed care organizations in the home health care market and the
federal government's increasing preference for Medicare beneficiaries to enroll
in managed care plans. HealthCor is a provider for a number of large managed
care plans.
Enhance Productivity through Information Technology. The Company seeks to
enhance its productivity through the development and use of innovative
management information technology that collects and integrates demographic,
financial and clinical information. The Company is developing and implementing a
proprietary financial and clinical management information system, Medisyn(TM).
The Company believes that Medisyn(TM) will improve operations by efficiently
servicing increased volumes of managed care referrals, increase productivity
gains, reduce costs and provide outcomes data to payors in an environment
increasingly influenced by managed care organizations and reimbursement changes.
The Company continues to transition its field offices to the CIMS, the
proprietary patient intake system. Data entered into CIMS is transmitted to the
Company's billing centers increasing the speed and quality of data submission to
the payors. In addition, the Company is installing SSI as the front-end editing
system to ensure quality control and provide electronic claims submission to the
majority of the Company's major payors. See "Financial and Clinical Management
Information Systems."
Sale of Company. The Company has engaged the consulting firm of Chanin,
Kirkland, and Messina (CKM) to act as financial advisor and agent to the Company
in connection with (a) the private placement or raising of (i) a revolving
Credit Facility; (ii) a term loan; (iii) subordinated notes; and (iv) equity on
a best efforts basis on terms satisfactory to the Company and (b) the potential
re-capitalization or restructuring of the balance sheet of the Company. In that
capacity, CKM has been engaged in contacting individuals and companies that may
be interested
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in acquiring all or parts of the Company's assets and/or operations. As of April
21, 1999, the Company was continuing to evaluate various inquiries but had not
accepted any offer. The Company continues to receive inquiries and requests for
information on its operations. The Company continues to seek buyers of Quest
Personnel Services (Quest), its personnel placement division business; and CCS,
its Texas Medicaid waivered nursing program. There is no assurance that the
Company will be successful in finding a buyer for all or part of the Company,
Quest or CCS.
While CKM is marketing the Company, management has implemented an operating
strategy that is designed to position the Company to continue operating in the
event a suitable buyer is not found. Management is evaluating the Company's
current payor contracts to determine if it should cancel, renegotiate or
continue to accept the current terms. Management is considering steps to
increase payor and provider awareness of the Company as an active provider in
each of the communities where it has a presence. Finally, management is
evaluating each of its offices by product line to determine what actions need to
be taken to increase productivity, volume, and efficiency of operations. While
these actions are designed to improve profitability by product line, there is no
assurance that the outcomes will result in any improvement of the Company's
financial position.
Managed Care Relationships
The market for home health services has changed dramatically during 1998. Due
to the cost of care, number of home health companies and increased competition,
there are very few contracts that remain exclusive to one provider. The Company
has one exclusive capitated contract with Physician Health Partners ("the Plan")
in Denver, Colorado. The Plan has 42,846 enrolled lives. The only remaining
exclusive fee for service contract is with Heritage Southwest Medical Group
("Heritage") located in Dallas, Texas. Heritage has approximately 100,000
enrolled lives. The Company competes directly for all other business with other
home health companies.
The Company is currently bidding for additional capitated contracts with
several managed care organizations in two markets. The Company is negotiating
the contracts consistent with its strategy to price managed care contracts
profitably and continue to provide quality service. There is no guarantee that
the Company will be successful in winning the contracts either on an exclusive
or non-exclusive basis.
Services and Products
Home Health. The Company provides a wide range of nursing services to
individuals with acute illness, long-term chronic health conditions, permanent
disabilities, terminal illness or post-procedural needs. Patients are typically
referred to the Company by primary care or specialty physicians and managed care
case managers. After reviewing the patient's medical records and treatment plan
(which are displayed on PtCT Units), a nurse, therapist or home health aide,
where appropriate, provides care to the patient in the home. The plan of care
may require a few visits over a short period of time or many visits over several
years. The Company provides the following home nursing services:
General nursing care is the periodic assessment of the appropriateness of
home health care, the performance of clinical procedures, and instruction of
the patient and the family or other care giver regarding proper treatments.
Such care is provided by registered nurses or licensed practical nurses.
Patients receiving such care typically include stabilized postoperative
patients, patients who are acutely ill but who do not require hospitalization,
and patients who are chronically or terminally ill.
Specialty nursing care is the provision of specialized nursing services such
as geriatric, pediatric or neonatal nursing. Such care is provided by nurses
with the appropriate experience or certification in such specialty. Specialty
nursing care also involves the instruction of the patient and the family or
other care giver in the self-administration of certain procedures, such as
wound care and infection control, emergency procedures and the proper handling
and usage of medication, medical supplies and equipment.
Therapy services consist of rehabilitation therapies such as physical,
occupational and speech therapy to patients recovering from strokes, trauma or
certain surgeries, high risk pregnancies, postpartum care, AIDS
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therapy, various medical social services, and case management services to
insurance companies and self-insured employers.
Home health aide care is the provision of personal care services and
assistance with activities of daily living such as personal hygiene and meal
preparation. The Company's home health aides must pass certain competency
tests and are supervised by a registered nurse.
Primary home health care is provided by the Company through state
administered programs that pay for unskilled homemaker services to the elderly
or the disabled, as ordered by a physician. A registered nurse makes the
initial assessment and assigns a homemaker to provide housekeeping, shopping
and limited personal care.
Home Respiratory Therapy/Home Medical Equipment. The Company provides a wide
variety of home respiratory, monitoring and medical equipment. Respiratory
therapists provide care to the patient according to the physician-directed
plan of care and educate the patient and the family or other care giver
regarding treatment requirements, use of equipment and self-care. The Company
rents, sells and services respiratory equipment for patient use in the home
and supplies patients with aerosol medications for use in respiratory therapy
treatments. The Company's principal respiratory services include:
Oxygen systems that assist patients with breathing. The Company provides
three types of oxygen systems: (i) oxygen concentrators, which are stationary
units that filter ordinary air in order to provide a continuous flow of oxygen
and are generally the most cost effective supply of oxygen for patients who
require a continuous flow of supplemental oxygen; (ii) liquid oxygen systems,
which are containers used for patients who require a continuous high flow of
supplemental oxygen; and (iii) high pressure oxygen cylinders, which provide
an ambulatory patient with the ability to obtain supplemental oxygen outside
of the home.
Nebulizers that deliver aerosol medications that are inhaled directly by the
patients. Nebulizers are used to treat patients with asthma, chronic
obstructive pulmonary disease, cystic fibrosis and neurologically related
respiratory problems, and patients with AIDS.
Home ventilators that mechanically sustain a patient's respiratory function
in cases of severe respiratory failure.
Continuous positive airway pressure therapy that forces air through
respiratory passageways during sleep. This treatment is provided to adults
with sleep apnea, a condition in which a patient's normal breathing patterns
are disturbed during sleep. Monitoring services are usually provided with this
therapy.
The Company also leases and sells convalescent equipment, in connection with
the provision of its other services to patients in the home. Such equipment
includes hospital beds, wheelchairs, walkers, and patient lifts as well as
medical and surgical supplies such as stethoscopes, orthopedic supplies, urinary
catheters, syringes, and needles. The Company is able to increase revenues by
providing home medical equipment and supplies to its patients who are also
receiving nursing, respiratory therapy or infusion therapy.
The Company also provides monitoring services to assist physicians with
diagnosis. The Company's principal monitoring services currently comprise a
small portion of the Company's business. Monitoring services include:
Cardiac monitoring for the detection of arrhythmias, a condition that is
responsible for an estimated 500,000 deaths each year in the United States.
The Company provides cardiac loop event recorders which are monitored
electronically and are efficient and cost-effective arrhythmia detection
devices.
Uterine monitoring which detects records and sends uterine activity
information to a prenatal monitoring center. Such monitoring is designed to
alert health care professionals of pre-term labor in high-risk pregnancies.
Apnea monitors provided to certain high risk newborn infants warn parents of
apnea episodes as a preventative measure against sudden infant death syndrome.
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Home Infusion Therapy. The Company offers comprehensive home infusion
therapies. Home infusion therapy involves the administration of nutrients,
antibiotics and other medications intravenously (into the vein), subcutaneously
(under the skin), intramuscularly (into the muscle), intrathecally or epidurally
(via spinal routes), or through feeding tubes into the digestive tract. Infusion
therapy often begins during hospitalization of a patient and continues in the
home. New patients are instructed in the administration of infusion therapy and
related services by a registered nurse who provides the patient's first home
treatment and continuing supervision of care. The Company's principal infusion
therapies follow:
Anti-infective therapy is the infusion of antibiotic medications into a
patient's bloodstream to treat a variety of infections and diseases.
Enteral nutrition is the infusion of essential nutrients through a feeding
tube, and is necessary for patients who are unable to orally ingest adequate
nutrients.
Total Parenteral Nutrition is the intraveneous infusion of a nutrient
solution to restore and/or maintain electrolyte balance and nutritional
status.
Pain management is provided to patients experiencing acute pain as a result
of traumatic injury, surgical procedures disease or other medical disorders.
The Company provides a comprehensive approach to pain management that includes
a thorough knowledge of available agents, routes of administration and
appropriate dosage levels as directed.
Chemotherapy is provided in the home or in other locations and allows
patients with cancer an alternative to frequent and expensive hospital stays.
Pentamidine is an agent used specifically in the treatment of patients with
AIDS who have experienced one or more episodes of pneumocystis carinii
pneumonia.
Financial and Clinical Management Information Systems
The Company is implementing a proprietary financial and clinical management
information system, Medisyn(TM), which is comprised of several financial and
clinical components integrated through a central interface engine. Medisyn(TM)
is designed to integrate all aspects of the Company's operations by providing
centralized information management for each patient by linking clinical services
to its financial systems. The Company believes that Medisyn(TM) will enable it
to service increased volumes of managed care referrals, reduce costs and result
in more efficient collection of receivables. The Company also believes
Medisyn(TM) will provide competitive advantages by generating data that will
enhance the Company's ability to price and manage the Company's services and
products in a managed care environment and by measuring more accurately the
quality and cost of care that is delivered in the home. The Company believes
that it is the only home health care provider implementing this technology, and
has filed a patent application with respect to Medisyn(TM) with the United
States Patent Office.
Medisyn(TM) consists of the following four principal components, which
interface with the others through a central interface engine: (i) a proprietary,
customer information management system (CIMS); (ii) hand-held clinical system
point of care computers (PtCT Units); (iii) an integrated financial services
system (the Lawson System); and (iv) a contract management and billing system
(the Innovative Managed Care System or IMACS). Medisyn(TM) processes referrals
through CIMS, which captures patient information, creates a patient profile and
interfaces with the appropriate billing system(s) to create a billing record.
CIMS also assures that the requested services are authorized by the payor. If
the referral includes nursing services, the visit and clinical information will
be recorded at the patient's home in a PtCT Unit and transmitted via modem to a
central data base to be included in the patient profile. After services have
been provided, the IMACS system applies the contract terms of the payor and
generates a customized invoice, and through an interface provides this
information to the Company's financial systems, including cash posting and the
general ledger. A description of each principal component follows.
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CIMS. CIMS coordinates all services for patients by assigning each patient a
single identification number and developing for each patient a readily
accessible comprehensive patient profile comprised of demographic, clinical,
case management and billing information. By integrating customer information
management for all of the Company's services, the Company is able to more
effectively service increased volumes of referrals from managed care payors.
CIMS enables the Company to record demographic data, obtain payor verification,
payor authorizations and diagnosis, all of which the Company believes will
enable it to more efficiently service managed care and other payor
relationships.
PtCT Units. The Company's nurses and home health aides are equipped with PtCT
Units, which are hand-held clinical system point of care computers. The PtCT
Units allow each of the Company's nurses to have an electronic patient chart in
hand and to transmit directly to the Company's system via modem clinical,
payroll and billing information. Once the clinical data has been recorded, the
system enables the Company to develop clinical assessments of patients via
computer generated documentation. Same-day reporting capabilities reduce
paperwork and transcription errors, which has increased certain nurse
productivity. The system also expedites the processing of payroll data,
accelerates the transfer of information to attending physicians, and improves
the consistency and completeness of the assessments generated.
Integrated Financial Services System. The Company has substantially
implemented the Lawson System, which is an integrated suite of financial
services software, including a general ledger, accounts payable, materials
management/purchasing, payroll and human resource elements. The general ledger,
accounts payable, payroll and human resource systems are fully operational.
IMACS. IMACS, the Company's contract management and billing system, will
enable the Company to capture the essential elements of payor relationships
(including relationships with managed care organizations, other private payors,
Medicaid and Medicare), to assess pricing, eligibility, utilization and other
information necessary to assure accurate billing and to enhance contract
profitability. In addition, IMACS will allow the Company to more effectively
manage payor contract terms and to provide payors with a consolidated bill for
multiple services. Full implementation of IMACS is expected to be complete in
late 1999.
The Company is in the process of installing the SSI Group, Inc. Claims
Management and Eligibility modules. These system modules will ensure the
accuracy of HealthCor's claims processing and insurance
verification/authorization process. The Claims Management module automates the
claim form collection process from initial filing with the primary payor through
submission to the secondary payor. The Eligibility module automates
verification/authorization of patient insurance benefits. Management feels
that, once installed, the system will significantly improve the quality and
timeliness of billing submission to third party payors. The system is expected
to be operational in late 1999.
Marketing
During 1998, the Company's marketing efforts were disrupted due to a reduction
in work force, numerous resignations within the field sales force and national
account management and spending cuts in marketing programs and spending plans.
By the end of 1998, the Company had lost or eliminated 10 of 25 marketing
positions that existed in 1997. In addition, the closure of 56 Medicare nursing
offices had a negative impact on several key integrated service contracts that
required the entire contracted area to be served. Accordingly during 1998, the
Company implemented a change in marketing strategy from programs designed to
generate additional revenue and strengthen key relationships to one of contract
and key account maintenance.
The Company is currently attempting to strategically rebuild its sales and
marketing staff in the key markets, with core strategies and programs that will
result in revenue growth during the second half of 1999. The Company still
believes that a strategy built around meeting managed care organization's
demands for pricing, value added services, billing and other special needs will
result in increased business growth and other long term benefits.
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Quality Improvement
The Company believes that the quality of services is critical to its ability
to obtain referrals and increase revenues and profitability. To assure the
delivery of high-quality patient care, and the overall quality of service, the
Company's Continuous Quality Improvement plan (CQI) was developed. Each product
line has CQI indicators to address those areas, which historically have had
complaints or problems. In addition, each office, using the FADE method (focus,
analyze, develop, and execute), develops indicators unique to their need or
area. There is a corporatewide client satisfaction survey, randomly selected,
totaled and evaluated companywide as well as by product line.
The Company has a validation/verification process beginning with a centralized
call center. The call center is responsible for taking referrals, verifying
benefits, confirming billing instructions and requesting authorization. This
information is entered into a Central Customer Information Management System
(CIMS) which provides information directly to the field offices. Information is
only entered once in CIMS, which reduces data entry errors. The billing
verification process involves the use and comparison of different sets of data,
one from CIMS and another from Patient Care Technologies (PTCT), which is the
nursing electronic charting system, and/or delivery tickets and reports
generated at the field level for HME and pharmacy.
The Company is JCAHO accredited in its major market areas.
Human Resource Management
The Company continuously recruits, screens, trains and offers benefits and
other programs in an effort to attract and retain its personnel. The Company
also recruits through Quest Personnel Resources, its personnel placement
division, reducing certain recruiting fees and expenses. Recruiting is conducted
primarily through advertising, personnel agencies, direct contact with community
groups and the use of bonuses.
The Company routinely develops and distributes quality improvement in-service
materials, manuals, and forms to its staff. In addition, skilled nurses are
initially assigned to a nurse preceptor until the Company believes that these
new nurses have acquired a sufficient degree of home health care knowledge and
experience. The Company also has implemented an infusion therapy verification
program for skilled nurses. The Company is recognized as a provider of
continuing education units by the Texas Nursing Association, which is accredited
by the American Nursing Credentialing Center.
The retention of qualified employees is a high priority for the Company. As
of December 31, 1998, the Company employed over 2,000 individuals. Management
believes that the Company's employee relations are good. None of the Company's
employees are represented by a labor union or other collective bargaining
organization.
Insurance
The Company maintains professional liability insurance covering the negligent
acts and omissions of its home health care personnel while rendering services.
This policy provides coverage of $5.0 million in the aggregate or $5.0 million
per occurrence for each policy year. The Company believes that the insurance
which it maintains, in relation to the size of its business, is customary in the
home health care industry; however, there can be no assurance that any such
insurance will be adequate to cover the Company's liabilities. The Company
maintains product liability insurance on all of the medical equipment, supplies
and pharmaceuticals that it sells, leases or provides to its home health care
patients. This insurance provides coverage of $2.0 million in the aggregate or
$1.0 million per occurrence for each policy year. The Company also maintains
umbrella coverage in excess of its general liability insurance which provides
$5.0 million in the aggregate or $5.0 million per occurrence for each policy
year.
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Competition
Changes in the Medicare reimbursement structure, increasing agings of accounts
receivables for services provided under managed care contracts and market share
pricing forced many home health providers out of business in 1998. While much
the same is forecasted for 1999, competition within the home health industry
remains intense for patients enrolled in either Medicare or managed care plans.
During the last half of 1998 low contract pricing proposals by the competition
and low margin contract pricing for services provided under current contracts
forced the Company to withdraw several contract proposals and cancel a major
contract due to delayed payment for services provided.
Consolidation within the industry through mergers and acquisitions remained
common in 1998 and may continue throughout 1999. The merged organizations may
intensify the competitiveness within the marketplace if they are successful at
providing expanded geographical coverage, employee talent, and marketing and
financial resources. The durable medical equipment ("DME") competitive bidding
process, intensified regulatory scrutiny, and low margin reimbursement for
services will continue to challenge the company during 1999.
Regulation
The Company's business is subject to extensive and increasing regulation by
federal, state and local government. Federal agencies which regulate aspects of
the Company's business include the DHHS, HCFA, the Office of the Inspector
General, the Food and Drug Administration, the Department of Labor, the Drug
Enforcement Agency, and the Occupational Safety and Health Administration. In
most states, home health care providers are regulated by the state department of
health and board of pharmacy.
The Company is subject to federal laws regulating the repackaging and
dispensing of drugs and regulating interstate motor-carrier transportation and
state laws regulating pharmacies, nursing services and certain types of home
health agency activities. Under state laws, the Company's offices must be
licensed prior to commencing business and must renew their licenses
periodically. Further, Company offices participating in the Medicare Program as
home health agencies or enrolled as durable medical equipment suppliers must
meet the Medicare conditions of participation or supplier standards. In
addition, certain of the Company's employees are subject to state laws and
regulations governing the professional practice of respiratory therapy, pharmacy
and nursing. Failure to comply with regulatory laws could expose the Company to
criminal and civil penalties, and jeopardize the licensure of one or more of its
home health care agencies, or their participation in the Medicare, Medicaid and
other reimbursement programs.
As a provider of services under the Medicare and Medicaid programs, the
Company is subject to the various "anti-fraud and abuse" laws, including the
federal health care programs anti-kickback statute. This law prohibits the
knowing and willful offer, payment, solicitation or receipt of any form of
remuneration to induce the referral of business reimbursable under a federal
health care program or in return for the purchase, lease, order, arranging for,
or recommendation of items or services covered by any such program. Federal
health care programs are any health care plans or programs that are funded by
the United States (other than certain federal employee health insurance
benefits) and certain state health care programs that receive federal funds
under various programs, such as Medicaid. A related law forbids the offer or
transfer of any item or service for less than fair market value, or certain
waivers of copayment obligations, to a beneficiary of Medicare or a state health
care program that is likely to influence the beneficiary's selection of health
care providers. Violations of the anti-fraud and abuse laws can result in the
imposition of substantial civil and criminal penalties and, potentially,
exclusion from furnishing services under any federal health care programs. In
addition, the states in which the Company operates generally have laws that
prohibit certain direct or indirect payments or fee-splitting arrangements
between health care providers where they are designed to obtain the referral of
patients to a particular provider.
Congress adopted legislation in 1989, known as the "Stark" Law, that generally
prohibits a physician ordering clinical laboratory services for a Medicare
beneficiary where the entity providing that service has a financial relationship
(including direct or indirect ownership or compensation relationships) with the
physician (or a member of his immediate family), and prohibits such entity from
billing for or receiving reimbursement for such services,
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unless a specified exemption is available. Additional legislation became
effective as of January 1, 1993 known as "Stark II," that extends the Stark Law
prohibitions to services under state Medicaid programs, and beyond clinical
laboratory services to all "designated health services," including home health
services, durable medical equipment and supplies, outpatient prescription drugs,
and parenteral and enteral nutrients, equipment, and supplies. Violations of the
Stark Law may also trigger civil monetary penalties and program exclusion.
Pursuant to Stark II, physicians who are compensated by the Company are
prohibited from making referrals to the Company, and the Company is prohibited
from seeking reimbursement for services rendered to such patients unless an
exception applies. Several of the states in which the Company conducts business
have also enacted statutes similar in scope and purpose to the federal fraud and
abuse laws and the Stark Laws. The scope of the Stark Law is evolving in that
extensive amendments to the implementing regulations have been proposed, but not
yet issued in final form. The Company believes that it is in compliance with all
such laws.
Various federal and state laws impose criminal and civil penalties for making
false claims for Medicare, Medicaid or other health care reimbursements. The
Company believes that it bills for its services under such programs accurately.
However, the rules governing coverage of, and reimbursements for, the Company's
services are complex. There can be no assurance that these rules will be
interpreted in a manner consistent with the Company's billing practices.
In May 1995, the federal government instituted Operation Restore Trust, a
health care fraud and abuse initiative focusing on nursing homes, home health
care agencies and durable medical equipment companies located in the five states
with the largest Medicare populations. Texas, the Company's corporate base, was
one of the original targeted states. The purpose of this initiative is to
identify fraudulent and abusive practices such as billing for services not
provided, providing unnecessary services and making prohibited referral payments
to health care professionals. Operation Restore Trust has been responsible for
significant fines, penalties and settlements. Operation Restore Trust was
expanded to cover twelve additional states for the next two years. The program
was also expanded to include reviews of psychiatric hospitals, certain
independent laboratories and partial hospitalization benefits. Further, the
government now applies similar investigation techniques in all fifty states and
throughout the Medicare and Medicaid programs. One of the results of the
program has been increased auditing and inspection of the records of health care
providers and stricter interpretations of Medicare regulations governing
reimbursement and other issues. Specifically, the government plans to double
the number of comprehensive home health agency audits it performs each year
(from 900 to 1800) and also to increase the number of claims reviewed by 25.0%
(from 200,000 to 250,000). In general, the application of these anti-fraud and
abuse laws is evolving.
During 1997 and 1998, the home health care industry experienced several
significant regulatory and reimbursement changes. In February 1997, the Company
learned that HCFA planned to adopt mileage limitations restricting the distance
between a nursing agency's principal office and its branches. Texas, where the
Company has significant operations, announced that it intended to implement even
more restrictive mileage limitation rules for branch offices. As a result of a
moratorium on new Medicare provider numbers, HCFA imposed a delay in permitting
branch office transfers.
The Balanced Budget Act of 1997 ("BBA"), enacted in August 1997, and amended
in the Tax and Trade Relief Extension Act of 1998, established a new
reimbursement system for home nursing services provided by Medicare
participating home health agencies, effective for cost reporting periods
beginning on or after October 1, 1997, which significantly reduced their
Medicare payments. Under this interim payment system ("IPS"), a home health
agency is reimbursed the lowest of : (1) its actual costs to the extent deemed
reasonable under Medicare reasonable cost reimbursement rules; (2) revised
Medicare per-visit cost limits; and (3) new Medicare per-beneficiary cost
limits. At present, the IPS is to remain in effect until a new prospective
payment system ("PPS") for home health agency services is adopted for cost
reporting periods beginning on or after October 1, 2000. The prospective
payment system has not yet been developed. Significantly, these changes reduced
the Company's Medicare reimbursements in 1998 due to the reduced payment
limitations.
The BBA also reduced the Medicare national payment amounts for oxygen
and oxygen equipment used in home respiratory therapy by 25% effective January
1, 1998, and an additional 5% effective January 1, 1999, as well as eliminating
inflation updates to the payment rates for those years. Reimbursements for
Medicare home oxygen
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services represented approximately 6% of the Company's annualized revenues in
1997. Further, the BBA has generally eliminated inflation updates under the
Medicare durable medical equipment benefits, which had been based upon annual
increases in the Consumer Price Index, for the period 1998 through 2002. Many of
the Company's services other than home nursing are covered by Medicare under the
durable medical equipment benefit. Further, the BBA also limits payments for
covered drugs and biologicals billed by Medicare suppliers to 95% of the average
wholesale price in each of the years 1998 through 2002.
The Medicare Program has also instructed its regional Medicare carriers to
identify items and services covered under the durable medical equipment benefit
that have inherently unreasonable payment rates, based upon price surveys and
other means. Such unreasonable payment levels may be reduced by up to 15% per
year until reduced to reasonable levels. Carriers can impose these reductions
with only an abbreviated notice and comment procedure. How such future
reductions may impact the Company is unknown.
The Medicare Program has also proposed extensive revisions to the Conditions
of Participation for home nursing agencies and the coverage standards for
durable medical equipment suppliers, some of which were recently adopted in
final form. These regulatory amendments would, among other things, generally
heighten the requirements to participate in the Medicare Program, require
background investigations of all employees, and require the use of standardized
measures of quality of care and patient outcomes. The Company believes that it
will have the capacity to comply with both the proposed and adopted regulatory
changes.
The BBA contains other provisions that would reduce Medicare reimbursements to
acute care hospitals for some Medicare patients who are discharged after a very
short inpatient stay from a hospital to a home health agency's care. This
provision could have the effect of reducing referrals for home health services
by amendments require that reimbursements be based upon the site where the
service is rendered rather than the location of the home health agency's
principal office. The BBA also requires surety bonds for Medicare and Medicaid
participating home health agencies and durable medical equipment suppliers.
However, the federal government has not yet implemented the surety bonding
requirement. If the Company is unable to obtain surety bonds when such
requirements are implemented, which may happen at any time, it could no longer
participate in the Medicare Program, which would have a material negative impact
on the Company. Other regulatory changes have reduced which services are
covered under the Medicare Program for participating home health agencies.
Rules effective February 1, 1998, eliminated venipuncture as a qualifying
service for Medicare home health nursing benefits, which negatively impacted the
Company's Medicare home health agency revenues.
Partially in response to these regulatory changes, the Company has closed
substantially all of its remaining Medicare home nursing offices during 1998.
Investment Considerations
Ability to Continue as a Going Concern
The accompanying 1998 consolidated financial statements of the Company have
been prepared under generally accepted accounting principles assuming that the
Company will continue as a going concern. The Company recorded a net loss of
approximately $(98.3) million in 1998 and has negative working capital of
$(93.0) million at December 31, 1998. In addition, at April 21, 1999, the
Company is in default on its 11% Senior Notes. The Company does not have
adequate liquidity or available sources of financing to meet its contractual
debt obligations and settle its other liabilities. These factors raise
substantial doubt about its ability to continue as a going concern. The 1998
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
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Recent Financial Losses
The Company reported a net loss for the quarter ended December 31, 1998 of
$(64.2) million compared to a net loss for the quarter ended December 31, 1997
of $(15.4) million. The Company also recorded a loss per share for the quarter
ended December 31, 1998 of $(6.36) compared to a loss of $(1.53) per share for
the quarter ended December 31, 1997. The Company recorded a loss for 1998 of
$(98.3) million compared to a net loss of $(15.6) million in 1997. Net loss per
share was $(9.74) in 1998 compared to $(1.56) per share in 1997. The Company's
net loss in 1998 was partially attributable to pre-tax goodwill write-offs of
$31.8 million as a result of certain unamortized goodwill balances that were
evaluated and deemed impaired. The Company also recorded an additional
provision for doubtful accounts of $31.6 million and a loss on disposition of
assets of $1.5 million. In addition the Company's Medicare nursing operations in
the first quarter of 1998 exceeded cost limitations by $5.6 million.
Pending Litigation
On March 20, 1998, the Company and several of its former officers were named
as defendants in a lawsuit alleging certain violations of federal securities
laws by the Company. The plaintiffs in the lawsuit seek to represent a class of
persons who purchased shares of the Company's common stock from March 31, 1997
through and including March 31, 1998. The Company has filed a motion to dismiss
the lawsuit which is pending before court for determination, otherwise the
Company intends to vigorously defend the lawsuit. The Company is currently
unable to assess the likelihood of success in this litigation, which is in the
early stages of fact finding. An adverse result in the litigation could have a
material adverse effect on the Company's business and operations.
Delisting from The NASDAQ National Market
The Company has been informed by NASDAQ National Market System ("NASDAQ") that
it fails to meet certain of the revised listing standards for inclusion on the
NASDAQ National Market, including a minimum bid price of $5.00 per share. The
Company had been traded on the NASDAQ National Market since August, 1996.
Substantial Leverage
The Company has substantial indebtedness and increased debt service
obligations compared to prior years. At December 31, 1998, the Company had
approximately $97.6 million of consolidated indebtedness (including capital
leases and lines of credit) as compared to the Company's stockholders' deficit
of $59.0 million. The Company expects that it will be necessary for its
operating results to improve significantly in order to permit it to meet the
debt service obligations under the Senior Notes and other credit facilities and
there can be no assurance that the Company will be able to make any interest
payments thereunder. The ability of the Company to improve its operating
results will depend upon a variety of factors, including economic, financial,
competitive, regulatory and other factors beyond its control. There can be no
assurance that the Company will generate sufficient earnings or cash flow from
operations in the future to service the Senior Notes and to meet its working
capital, capital expenditure and other requirements. The implementation of the
Company's restructuring plan has generated significantly greater negative cash
flow than in 1997. The Company is unable to service the Senior Notes using
earnings or cash flow from operations and is examining alternate means of
repayment that could include restructuring or refinancing its indebtedness or
sale or merger of the Company. There can be no assurance that the Company would
be able to effect such a restructuring or refinancing if permitted to do so.
The Company's ability to make payments with respect to the Senior Notes and to
satisfy its other debt obligations will depend on its future operating
performance, or sale or merger, each of which will be affected by governmental
regulations, prevailing economic conditions, financial factors, and other
factors, certain of which are beyond the Company's control.
The degree to which the Company is leveraged has important consequences,
including: (i) the Company's ability to obtain additional financing in the
future for operating expenses, acquisitions or general corporate purposes is
impaired; (ii) a substantial portion of the Company's cash flows from operations
be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available for operations; (iii) certain of the
Company's indebtedness, contain financial and other restrictive covenants,
including those restricting the incurrence
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of additional indebtedness, the creation of liens, the payment of dividends,
sales of assets and minimum net worth requirements; and (iv) the Company's
leverage substantially increases the Company's vulnerability to changes in the
industry, including, among other things, government regulations and changing
economic conditions.
Dependence on Reimbursement by Third-Party Payors; Accounts Receivable
In 1998, the percentages of the Company's net revenues from Medicare, Medicaid
and other third-party payors were approximately 14.8%, 17.8% and 67.4%,
respectively, and in 1997, the percentages of the Company's net revenues derived
from Medicare, Medicaid and other third-party payors were approximately 51.9%,
3.9% and 44.2%, respectively. The net revenues and profitability of the Company
are affected by the continuing efforts of all payors to contain or reduce the
costs of health care by, among other things, reducing reimbursement rates,
narrowing the scope of covered services, increasing case management review of
services and negotiating reduced contract pricing. In addition, the home health
care industry is characterized by long collection cycles for accounts receivable
due to the complex and time consuming requirements for obtaining reimbursement
from private and governmental third-party payors. Furthermore, reimbursement
from government payors is subject to audit and retroactive adjustment. Any
changes in reimbursement levels under Medicare, Medicaid or third-party payor
programs and any changes in applicable government regulations could have a
material adverse effect on the Company's business, financial condition, cash
flows or results of operations. Changes in the mix of the Company's patients
among Medicare, Medicaid and third-party payor categories could have a material
adverse effect on the Company's business, financial condition, cash flows or
results of operations. In addition, patients, including Medicare and Medicaid
beneficiaries, increasingly are participating in managed care plans. Managed
care organizations, in turn, are increasingly becoming involved in monitoring
and determining the appropriate health care settings for their enrollees based
primarily on cost and quality of care.
The Company recorded additional provisions for doubtful accounts of $31.6
million in 1998 due to the Company's continued difficulties in collecting from
certain managed care payors as well as its failure to timely file claims with
payors, difficulty in obtaining accurate patient data, and maintenance of
effective quality control and processes and procedures in the revenue cycle (see
Management Information Systems discussion). Managed care organizations are
increasingly challenging the billings of home health care providers and limiting
reimbursements to home health care companies. This is an important trend in the
home health care industry and there can be no assurance that this trend will not
continue and continue to have a material adverse effect on the Company in the
future. Furthermore, there can be no assurance that the Company will be able to
maintain its current payor or revenue mix. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Regulation."
Medicare Reimbursement Reforms; Closing of Nursing Offices
The Company is subject to changes in federal, state and local laws and
regulations which may have a significant effect on operating methods, costs, and
reimbursement amounts provided by governmental and other third-party payors.
The federal government is continuing to review and assess alternative health
care delivery systems and payment methodologies. During 1997 and 1998, the
federal government implemented reductions in planned Medicare spending, a number
of which directly affect the home health care industry. In late 1997, the
Company learned that the Medicare Program planned to adopt restrictions on the
extent to which home care companies participating as Medicare home health
agencies could operate as branch offices, in part depending upon the distance
between an agency's principal office and its branches. Texas, where the Company
has significant operations, announced that it intended to implement even more
restrictive mileage limitation rules for branch offices.
The Balanced Budget Act, as amended in 1998, established a new reimbursement
system for home nursing services provided by Medicare participating home health
agencies effective for cost reporting periods beginning on or after October 1,
1997 which significantly reduced their Medicare payments. Under this interim
payment system ("IPS"), a home health agency is reimbursed the lowest of: (1)
its actual costs to the extent deemed reasonable under Medicare reasonable cost
reimbursement rules; (2) revised Medicare per-visit cost limits; and (3) new
Medicare per-beneficiary cost limits. At present, the IPS is to remain in
effect until a new prospective payment
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system for home health agency services is adopted for cost reporting periods
beginning on or after October 1, 2000. The prospective payment system has not
yet been developed.
The BBA also reduced the Medicare national payment amounts for oxygen and
oxygen equipment used in home respiratory therapy by 25% effective January 1,
1998, and an additional 5% effective January 1, 1999, as well as eliminating
inflation updates to the payment rates for those years. Reimbursements for
Medicare home oxygen services represented approximately 6% of the Company's
annualized revenues in 1997. Further, the BBA has generally eliminated
inflation updates under the Medicare durable medical equipment benefits, which
had been based upon annual increases in the Consumer Price Index, for the period
1998 through 2002. Many of the Company's services other than home nursing are
covered by Medicare under the durable medical equipment benefit. Further, the
BBA also limits payments for covered drugs and biologicals billed by Medicare
suppliers to 95% of the average wholesale price in each of the years 1998
through 2002.
The Medicare Program has also instructed its regional Medicare carriers to
identify items and services covered under the durable medical equipment benefit
that have inherently unreasonable payment rates based upon price surveys and
other means. Such unreasonable payment levels may be reduced by up to 15% per
year until reduced to reasonable levels. Carriers can impose these reductions
with only an abbreviated notice and comment procedure. How such future
reductions may impact the Company is unknown.
The Medicare Program has also proposed extensive revisions to the Conditions
of Participation for home nursing agencies and the coverage standards for
durable medical equipment suppliers, some of which were recently adopted in
final form. These regulatory amendments would, among other things, generally
heighten the requirements to participate in the Medicare Program, require
background investigations of all employees, and require the use of standardized
measures of quality of care and patient outcomes. The Company believes that it
will have the capacity to comply with both the proposed and adopted regulatory
changes.
The BBA contains other provisions reducing Medicare reimbursements to acute
care hospitals for some Medicare patients who are discharged from the hospital
after a very short inpatient stay to a home health agency's care. This
provision could have the effect of reducing referrals for home health services
by giving hospitals the incentive to retain some Medicare patients longer.
Other recent amendments require that reimbursements be based upon the site where
the service is rendered rather than the location of the home health agency's
principal office. The BBA also requires surety bonds for Medicare or Medicaid
participating home health agencies and suppliers of durable medical equipment.
However, the federal government has not yet implemented the surety bonding
requirement. If the company is unable to obtain surety bonds when such
requirements are implemented, which may happen at any time, it could no longer
participate in the Medicare Program, which would have a material negative impact
on the Company. Other regulatory changes have reduced which services are
covered under the Medicare Program for participating home health agencies.
Rules effective February 1, 1998, eliminated venipuncture as a qualifying
service for Medicare home health nursing benefits, which negatively impacted the
Company's Medicare home health agency revenues.
During 1997 the Company was subject to Medicare cost limitations for home
nursing that were lower than the Company's operating expenses for that period,
resulting in the Company's Medicare nursing expenses exceeding reimbursable
limits by $8.4 million. As a result of the closing of substantially all of its
remaining Medicare nursing offices during 1998, the Company's Medicare nursing
revenue was reduced from the 1997 level by at least $47.8 million or 82.6%.
Based upon these and past initiatives to reduce Medicare costs and possible
further cost containment or other initiatives in the future, the Company expects
that the reimbursements received from the Medicare program to be subject to
continued risk of future reductions. These changes in Medicare reimbursements
for home health care have reduced reimbursements available to the Company in
1998 and could have a material adverse effect on the Company's future business,
financial condition, cash flows or results of operations. The Company is also
subject to audit of the reimbursements it receives under the Medicare program.
Any significant audit adjustment could have a material adverse effect on the
Company's business, financial condition, cash flows or results of operations.
See " -- Effect of Government Regulations," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Regulation."
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Dependence on Referral Sources
The growth and profitability of the Company depend in part on its ability to
establish and maintain close working relationships with referral sources,
including managed care organizations, payors, hospitals, physicians and other
health care professionals. The Company has experienced a significant decline in
the number of Medicare nursing referrals from such sources. There can be no
assurance that the Company will be able to successfully maintain significant
existing referral sources and develop new referral sources, or that certain of
its referral sources, such as managed care organizations and hospitals, will not
become providers of home health care services. Historically, independent home
health care companies have encountered significant competition from hospital-
based home health care organizations whose parent hospitals have financial and
operating relationships with referring physicians. There can be no assurance
that these physicians will refer cases to independent home health care companies
or, if these physicians do refer cases to independent home health care
companies, that the Company will be able to obtain referrals from these sources.
The loss of existing referral sources or the failure to develop important new
referral sources (such as managed care organizations) could have a material
adverse effect on the Company's business, financial condition, cash flows or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
Effect of Government Regulations
The Company's business is subject to extensive and increasing regulation by
federal, state and local governments, including the DHHS, HCFA, the Office of
the Inspector General, the Food and Drug Administration, the Department of
Labor, the Drug Enforcement Agency and the Occupational Safety and Health
Administration, as well as state departments of health and other local
regulatory agencies. The government recently has devoted substantial attention
to this industry and may continue to do so in the future, which could have a
material adverse effect on the Company. Federal laws governing the Company's
activities include regulations concerning the repackaging and dispensing of
drugs, Medicare certification of home health agencies, Medicare coverage
standards and reimbursement policies and various health care anti-fraud and
abuse policies. The facilities operated by the Company must comply with all
applicable laws, regulations and licensing standards. In addition, many of the
Company's employees must maintain certain licenses in order to provide some of
the services offered by the Company. In January 1998, one of the Company's home
health agencies was threatened by DHHS with a finding that it was not in
compliance with Medicare home health Conditions of Participation and that it
would be terminated from the Medicare program. Because the Company decided to
close this agency as part of its restructuring, the Company voluntarily withdrew
this home health agency from Medicare participation rather than appealing the
threatened adverse determination. There can be no assurance that federal, state
or local governments will not change existing standards or impose additional
standards or that the Company will meet, or continue to meet, existing or future
standards relating to all or a portion of the Company's activities. See
Medicare Reimbursement Reforms; Revenue Adjustments; Closing of Nursing Offices"
and "Business -- Regulation."
Operation Restore Trust
In May 1995, the federal government instituted Operation Restore Trust, a
health care fraud and abuse initiative focusing on nursing homes, home health
care agencies and durable medical equipment companies located in the five states
with the largest Medicare populations. Texas, where the Company has significant
business volume, was one of the original targeted states. The purpose of this
initiative is to identify fraudulent and abusive practices such as billing for
services not provided, providing unnecessary services and making prohibited
referral payments to health care professionals. Operation Restore Trust has been
responsible for significant fines, penalties and settlements. Operation Restore
Trust was recently expanded to cover twelve additional states for the next two
years. The program was also expanded to include reviews of psychiatric
hospitals, certain independent laboratories and partial hospitalization
benefits. Further, the government now applies similar investigation techniques
in all fifty states and throughout the Medicare and Medicaid programs. Heath
care fraud is now the second highest federal law enforcement priority, second
only to violent crime. One of the results of the program has been increased
auditing and inspection of the records of health care providers and stricter
interpretations of Medicare regulations governing reimbursement and other
issues. Specifically, the government plans to double the number of comprehensive
home health agency audits it performs each year (from 900 to 1800) and also to
increase the number of claims reviewed
17
<PAGE>
by 25.0% (from 200,000 to 250,000). Management believes that it is in compliance
with anti-fraud and above laws, but cannot predict the effect of Operation
Restore Trust and similar anti-fraud and abase initiatives on the Company or its
results of operations. See "Business -- Regulation."
Management Information Systems
Servicing a high volume of referrals from managed care organizations and other
payors requires the integration of complex and technical financial and clinical
information. Medisyn(TM), the Company's management information system, is not
yet fully implemented, and there can be no assurance that the Company will
successfully implement the remaining components of Medisyn(TM), or that the
Company will not experience unanticipated delays and expenses in such
implementation and integration. Successful implementation of Medisyn(TM) is an
important part of the Company's business strategy, and failure to successfully
implement the remaining components of Medisyn(TM), or to achieve expected cost
savings, improved productivity and more effective collection of receivables,
could have a material adverse effect on the Company's business, financial
condition, cash flows or results of operations. There can be no assurance that
the implementation of Medisyn(TM) will enable the Company to successfully
respond to such changes in the future. It is also impossible to predict the
effect of future regulatory changes on the ability of the Company's management
information systems to serve the Company's needs in an efficient and profitable
manner. Any malfunction or increase in expenses in connection with the Company's
management information systems could have a material adverse effect on the
Company's business, financial condition, cash flows or results of operations.
See "Business -- Financial and Clinical Management Information Systems" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Changes in Key Personnel
On February 25, 1999, the Company announced that S. Wayne Bazzle, the
Company's Chairman of the Board and Chief Executive Officer, and Cheryl C.
Bazzle, the Company's President and Chief Operating Officer resigned from all
positions of the Company. In addition, two senior vice presidents have
resigned. The Bazzles will continue to provide consulting services to the
Company. The Company also announced that Michael D. Ayres, the Chief Financial
Officer, has been named acting Chief Executive Officer and Charles E. Dowling
has been appointed as Senior Vice President for Operations. On April 12, 1999,
the Company appointed Mr. Ayres as the President and Treasurer. The Company has
retained Victor Palmieri of the Palmieri Company to assist the Board of
Directors in assessing the Company's business plans and financial viability. On
April 12, 1999, the Palmieri agreement with the Company was amended to provide
services on a per diem basis instead of full time.
Competition
Changes in the Medicare reimbursement structure, increasing receivables for
services provided under contracts and market share pricing forced many home
health providers out of business in 1998. While much the same is forecasted for
1999, competition within the home health industry remains intense for patients
enrolled in either Medicare or managed care plans. During the last half of 1998
low contract pricing proposals by the competition, and low margin contract
pricing for services provided under current contracts, forced the Company to
withdraw several contract proposals, and cancel a major contract due to delayed
payment for services provided.
Consolidation within the industry through mergers and acquisitions remained
strong in 1998 and will continue throughout 1999. The merged organizations will
intensify the competitiveness within the marketplace as they add expanded
geographical coverage, employee talent, marketing and financial resources. The
competitive bidding project, intensified regulatory scrutiny, and low margin
reimbursement for the Company's services will continue to challenge the Company
during 1999.
Liability and Adequacy of Insurance
In recent years, physicians, hospitals and other participants in the health
care industry have been subjected to an increasing number of lawsuits alleging
malpractice, product liability or negligence, many of which involve large claims
and significant defense costs. The Company may be subject to such suits. The
Company currently maintains
18
<PAGE>
liability insurance intended to cover such claims. While the Company has been
able to obtain liability insurance in the past, such insurance varies in cost
and may not be available in the future on acceptable terms, if at all. A
successful claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect upon the Company's financial
condition and results of operations. See "Business -- Insurance."
Control by Executive Officers and Directors
As of December 31, 1998, the Company's executive officers and directors and
their affiliates beneficially owned 51.8% of the outstanding shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"). As a
result, these stockholders, acting together, were able to control the Company in
matters requiring approval by the stockholders of the Company, including the
election of directors. Effective with the resignations of S. Wayne Bazzle,
Chairman of the Board and Chief Executive Officer, and Cheryl C. Bazzle, the
Company's President and Chief Operating Officer, the remaining executive
officers and directors own less than 1% of the Company's outstanding shares of
common stock.
19
<PAGE>
ITEM 2. PROPERTIES
The Company currently leases all of its office space. The executive offices,
consisting of approximately 57,400 square feet, are subject to a lease expiring
November 2006. The rent payable thereunder is $77,583 monthly.
The following is a list of the Company's home health care offices.
<TABLE>
<CAPTION>
Texas Texas (Cont'd) Arizona Kansas
----- ------------- ------- ------
<S> <C> <C> <C>
Amarillo Mission Casa Grande Olathe
Aransas Pass Odessa Chandler
Beaumont Plano Mesa Colorado
--------
Bryan San Antonio Payson
Corsicana Seven Points Sun City Denver
Dallas Sherman Tucson
Deleon Stephenville Arkansas
--------
El Paso Sulphur Springs Missouri
--------
Falfurrias Texarkana Fayetteville
Fort Worth Tyler Columbia Fort Smith
Grand Prairie Wichita Falls Hot Springs
Houston New Mexico Jonesboro
----------
Jasper Oklahoma Little Rock
--------
Kileen Raton Lowell
League City Ft. Gibson Russellville
Lubbock Lawton
Lufkin Oklahoma City
Marshall Ponca City
Mineral Wells
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On March 20, 1998, the Company and several of its former officers were named
as defendants in a lawsuit alleging certain violations of federal securities
laws by the Company. The plaintiffs in the lawsuit seek to represent a class of
persons who purchased shares of the Company's common stock from March 31, 1997
through and including March 31, 1998. The Company has filed a motion to dismiss
the lawsuit which is pending before court for determination, otherwise, the
Company intends to vigorously defend the lawsuit but is currently unable to
assess the likelihood of success in this litigation, which is in the early
stages of fact finding. An adverse result in the litigation could have a
material adverse effect on the Company's business and operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company has been informed by NASDAQ National Market System ("NASDAQ") that
it fails to meet certain of the revised listing standards for inclusion on the
NASDAQ National Market, including a minimum bid price of $5.00 per share. The
Company had been traded on the NASDAQ National Market since August, 1996.
The following table sets forth representative bid quotations of the common
stock for each quarter since the date of the Offering as provided by NASDAQ. The
following bid quotations reflect interdealer prices without retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions:
<TABLE>
<CAPTION>
Bid Quotations ($)
------------------
1997 High Low
- --- ----- ----
<S> <C> <C>
First Quarter 11.50 7.13
Second Quarter 10.13 6.25
Third Quarter 10.50 4.19
Fourth Quarter 7.63 3.13
1998
- ----
First Quarter 4.38 1.81
Second Quarter 2.44 1.13
Third Quarter 1.69 0.19
Fourth Quarter 0.50 0.06
</TABLE>
On January 31, 1999, there were 359 holders of record of the common stock.
Most of the Company's stockholders have their holdings in the street name of a
broker/dealer. The Company believes that the total number of stockholders ranges
between 1,400 and 1,700 individuals and entities.
The Company has not paid cash dividends on its common stock and does not
anticipate paying any such dividends in the foreseeable future. The Company is
prohibited from declaring or paying any dividends under its indebtedness.
21
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated financial data which have
been derived from the consolidated financial statements of the Company. The
selected consolidated financial data at and for the years ended December 31,
1998, 1997, 1996, 1995 and 1994, have been derived from the audited consolidated
financial statements of the Company, audited by Arthur Andersen LLP, independent
public accountants. The following selected consolidated financial data is
qualified in its entirety and should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
report. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1998 1997(1) 1996 1995 1994
---------- ------------ -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues................................................... $115,741 $143,205 $106,785 $81,557 $57,151
Direct expenses................................................ 59,720 67,380 48,314 41,392 30,337
-------- -------- -------- ------- -------
Gross profit................................................... 56,021 75,825 58,471 40,165 26,814
Other costs and expenses:......................................
General and administrative................................... 57,614 62,038 41,418 30,663 21,280
Depreciation and amortization................................ 7,344 4,984 2,579 1,240 789
Goodwill write-off and restructuring costs................... 33,063 9,850 -- -- --
Provision for doubtful accounts.............................. 45,094 14,057 3,580 1,489 1,115
-------- -------- -------- ------- -------
Total costs and expenses.............................. 143,115 90,929 47,577 33,392 23,184
-------- -------- -------- ------- -------
Income (loss) from operations.................................. (87,094) (15,104) 10,894 6,773 3,630
Interest, net.................................................. 11,303 5,318 2,144 987 244
-------- -------- -------- ------- -------
Income (loss) before income taxes.............................. (98,397) (20,422) 8,750 5,786 3,386
Provision (credit) for income taxes............................ (127) (4,784) 3,418 2,202 1,359
-------- -------- -------- ------- -------
Net income (loss).............................................. $(98,270) $(15,638) $ 5,332 $ 3,584 $ 2,027
======== ======== ======== ======= =======
Net income (loss) per common share............................. $ (9.74) $ (1.56) $ .69 $ .57 $ .32
Net income (loss) per common share-assuming dilution........... $ (9.74) $ (1.56) $ .66 $ .55 $ .31
Weighted average common shares outstanding..................... 10,091 10,054 7,770 6,297 6,297
Weighted average common shares outstanding and
dilutive common stock options............................. 10,091 10,054 8,040 6,546 6,490
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 5,948 $ 21,820 $ - $ 1,628 $ 3,775
Working capital (deficit) (92,989) 45,025 5,774 (1,737) 1,296
Property and equipment, net 21,341 29,132 22,288 11,054 3,880
Total assets 74,263 163,841 100,303 52,573 24,504
Total debt, including capital leases 97,595 90,353 24,432 19,584 4,374
Redeemable convertible preferred stock -- -- -- 5,340 5,340
Stockholders' equity (deficit) (59,007) 39,262 54,555 12,062 7,074
</TABLE>
(1) See Note 5 of the Notes to Consolidated Financial Statements for the
effects of acquisitions and dispositions completed during 1997 as if such
acquisitions and dispositions were effective at the beginning of 1997.
There were no acquisitions during 1998.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and related notes contained elsewhere herein.
Overview
The Company is one of the largest providers of comprehensive home health care
services based in the southwestern and central United States, providing home
nursing, respiratory therapy/home medical equipment and infusion therapy. The
Company currently has 51 offices in eight states. For the year ended December
31, 1998, the Company had net revenues of $115.7 million and a net loss of
$(98.3) million. The net loss includes significant pre-tax charges during 1998,
including goodwill write-offs of $31.8 million as a result of certain
unamortized goodwill balances that were evaluated and deemed impaired,
additional provisions for doubtful accounts of $31.6 million and a loss on
disposition of assets of $1.5 million. In addition, 1998 results were
adversely affected by the Company's Medicare nursing operations exceeding
Medicare nursing cost limitations by $5.6 million.
The Company has diversified its business mix from 98% home nursing in 1990 to
8.6% home nursing for the year ended December 31, 1998. This shift represents
the closure of substantially all of the Company's Medicare nursing offices and
the growth of respiratory therapy/home medical equipment line of business.
The Company's revenue mix has changed dramatically as a result of the Medicare
branch closures, internal growth, shifting from predominantly nursing services
to respiratory therapy/home medical equipment and infusion therapy businesses.
Following is a breakdown of net revenue mix (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Nursing.................................................... 22.0% 52.4% 56.9%
Respiratory therapy/medical equipment...................... 50.9 29.8 27.1
Infusion therapy........................................... 15.6 13.6 14.9
Other...................................................... 11.5 4.2 1.1
----- ----- -----
Total.................................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The Company is paid for its services and products primarily by Medicare,
Medicaid and private payors, including managed care organizations, insurance
companies and other third-party payors. The following table represents the
Company's payor mix:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Medicare Part A (cost-based)................................. 2.3% 38.2% 50.1%
Medicare Part B (charge-based)............................... 12.5 13.7 18.4
Medicaid..................................................... 17.8 3.9 4.4
Commercial payors and others................................. 67.4 44.2 27.1
----- ----- -----
Total...................................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Medicare reimburses the Company for both Part A and Part B services. Medicare
Part A reimburses the Company on a "cost basis" based on the lower of the
Company's allowable cost as defined by Medicare regulations, not to exceed
annual per beneficiary and per visit cost limits, or the Company's actual
charges. Allowable cost is generally the actual cost directly related to
providing home nursing, plus an overhead allocation. A cost report
23
<PAGE>
evidencing the fiscal year allowable costs, visit data, charges and other
financial information is filed annually and subject to audit. Medicare Part B is
paid on a fixed fee-for-service basis similar to third-party payors, such as
managed care organizations.
Results of Operations
The following table sets forth certain items included in the Company's
consolidated statements of operations as a percentage of net revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues...................................................... 100.0% 100.0% 100.0%
Direct expenses................................................... 51.6 47.0 45.2
------ ------ -----
Gross profit...................................................... 48.4 53.0 54.8
Other costs and expenses:
General and administration...................................... 49.8 43.3 38.8
Depreciation and amortization................................... 6.3 3.5 2.4
Goodwill write-off and restructuring costs...................... 28.6 6.9 --
Provision for doubtful accounts................................. 39.0 9.8 3.4
------ ------ -----
Total operating expenses...................................... 123.7 63.5 44.6
------ ------ -----
Income (loss) from operations..................................... (75.3) (10.5) 10.2
Interest, net..................................................... 9.7 3.7 2.0
------ ------ -----
Income (loss) before income taxes................................. (85.0) (14.2) 8.2
Provision (credit) for income taxes............................... (0.1) (3.3) 3.2
------ ------ -----
Net income (loss)................................................. (84.9)% (10.9)% 5.0%
====== ====== =====
</TABLE>
Years Ended December 31, 1998 and 1997
Net Revenues. Net revenues decreased to $115.7 million in 1998 from $143.2
million in 1997, a decrease of $27.4 million, or 19.1%. This decrease is
attributable to a reduction in Medicare nursing revenues resulting from
regulatory changes and office closures and is partially offset by growth in
revenue in the respiratory therapy/medical equipment line of business.
As a result of the Medicare per-visit cost and per-beneficiary limitations
enacted by the Medicare Interim Payment System (IPS), the Company recorded a
$5.6 million adjustment during 1998. This revenue adjustment is based on
estimates of the potential effect these reimbursement changes will have on the
Company's 1998 results of operations. The actual effects related to the per-
beneficiary limits could differ from the estimates used during 1998.
Direct Expenses. Direct expenses decreased from $67.4 million for 1997 to
$59.7 million in 1998, a decrease of $7.7 million, or 11.4%. This decrease is
partially attributable to closing Medicare nursing offices during the year. As
a percentage of net revenues, direct expenses increased to 51.6% for the year
ended December 31, 1998, from 47.0% for the comparable period in 1997. Direct
expenses include all costs directly related to the production of net revenues,
including salary and employee benefit costs, rental equipment depreciation,
medical supplies, and product purchase costs.
General and Administrative. General and administrative expenses decreased from
$62.0 million for 1997 to $57.6 million in 1998, a decrease of $4.4 million, or
7.1%. This decrease was primarily the result of the closure of nursing offices
and their associated overhead expenses. General and administrative expenses
increased as a percentage of net revenues to 49.8% in 1998 from 43.3% in 1997.
The rapid reduction of Medicare nursing revenues contributed to a higher ratio
of general and administrative expenses. Respiratory therapy/medical equipment
and infusion therapy businesses are proportionately higher profit
business/services because the majority of all personnel costs are classified in
this category.
24
<PAGE>
Depreciation and Amortization. Depreciation and amortization expense increased
from $5.0 million for 1997 to $7.3 million in 1998, an increase of $2.3 million,
or 46.0%. This increase was primarily the result of the effect of a change in
useful life estimate to 5 years for all property and equipment partially offset
by the closure of nursing offices.
Goodwill Write Off. Goodwill write offs and restructuring costs increased
from $9.8 million in 1997 to $33.1 million in 1998, an increase of $23.3 million
or 237.7%. As a result of the Company's continued operating losses and negative
cash flows, lack of a definitive recapitalization plan, uncertain future
operating prospects, and Medicare regulatory and reimbursement changes that
forced the Company to close Medicare nursing offices, certain of the Company's
unamortized goodwill balances were evaluated as impaired during 1998 and 1997
causing the Company to reduce the carrying value of its recorded goodwill.
Provision for Doubtful Accounts. The provision for doubtful accounts increased
to $45.1 million in 1998 from $14.1 million for 1997, an increase of $31.0
million, or 219.9%. This increase is the result of additional provisions for
doubtful accounts of $31.6 million for 1998. These additional provisions for
doubtful accounts resulted from the Company's increased difficulties in
collecting from certain managed care relationships, its failure to timely file
claims with payors, difficulty in obtaining accurate patient data, and
maintenance of effective quality control and processes and procedures in the
revenue cycle.
Interest, Net. Interest, net increased to $11.5 million for 1998 from $5.5
million in 1997, an increase of $6.0 million or 109.1%. This increase is
primarily the result of the issuance of the 11% Senior Notes on December 1,
1997.
Provision (Credit) for Income Taxes. The provision (credit) for income taxes
decreased to a credit of $0.1 million for 1998 from $4.8 million in 1997, a
decrease of $4.9 million, or 111.4%. The decrease is a result of the inability
to carry the 1998 loss back to prior periods. Benefits from the 1998 loss were
fully reserved at December 31, 1998.
Years Ended December 31, 1997 and 1996
Net Revenues. Net revenues increased to $143.2 million in 1997 from $106.8
million in 1996, an increase of $36.4 million, or 34.1%. This increase was
primarily the result of additional revenues from acquisitions and from internal
growth in respiratory therapy, infusion therapy and managed care nursing
revenues, partially offset by a decrease in Medicare nursing revenues from
certain offices resulting from regulatory changes and declining visit volumes.
Operating results for 1997 were adversely affected by the Company's Medicare
nursing operations exceeding cost limitations by a pre-tax amount of $8.4
million.
Direct Expenses. Direct expenses increased to $67.4 million for 1997 from
$48.3 million in 1996, an increase of $19.1 million, or 39.5%. This increase is
the result of the direct expenses associated with the operations of companies
acquired during 1996 and 1997 and internal growth. As a percentage of net
revenues, direct expenses increased to 47.0% for the year ended December 31,
1997, from 45.2% for the comparable period in 1996, primarily as a result of
higher costs incurred by the Company for pharmaceutical and nursing supplies and
higher costs incurred for respiratory sales and rental equipment. Direct
expenses include all costs directly related to the production of net revenues,
including salary and employee benefit costs, rental equipment depreciation,
medical supplies, and product purchase costs.
General and Administrative. General and administrative expenses increased to
$62.0 million for 1997 from $41.4 million in 1996, an increase of $20.6 million,
or 49.8%. This increase was primarily the result of additional field office
expenses associated with the operations of acquired companies and increased
central office costs. General and administrative expenses increased as a
percentage of net revenues to 43.3% in 1997 from 38.8% in 1996, primarily as a
result of increased development costs of Medisyn(TM) and other central office
expenses.
25
<PAGE>
Depreciation and Amortization. Depreciation and amortization expense increased
to $5.0 million for 1997 from $2.6 million in 1996, an increase of $2.4 million,
or 93.3%. This increase was primarily due to the amortization of goodwill
associated with acquisitions and depreciation of capital expenditures relating
to Medisyn(TM).
Goodwill Write Off and Restructuring Charge. In response to Medicare
regulatory and reimbursement changes that imposed significant reductions in per-
beneficiary visit reimbursement and in the annual per-beneficiary total
reimbursement amount, both of which had an unfavorable impact on the Company's
financial condition and results of operations, the Company implemented a
restructuring plan predominantly related to its Medicare nursing operations to
close or consolidate 32 offices and reduce headcount to attempt to mitigate the
financial impact of these changes. As a result of the restructuring plan, for
the three months ended December 31, 1997, the Company reduced the carrying value
of its recorded goodwill by approximately $8.3 million and recorded
approximately $1.6 million in restructuring costs, consisting of direct
severance costs of terminated employees of $0.4 million and future lease
termination costs and other costs related to office closings of approximately
$1.2 million.
Provision for Doubtful Accounts. The provision for doubtful accounts increased
to $14.1 million in 1997 from $3.6 million for 1996, an increase of $10.5
million, or 292.6%. This increase was the result of increased revenues and
additional provisions for doubtful accounts of $8.4 million for 1997. These
additional provisions for doubtful accounts resulted from the Company's
evaluation of certain accounts receivable in view of the then current industry
environment.
Interest, Net. Interest, net increased to $5.3 million for 1997 from $2.1
million in 1996, or 148.0%. This increase resulted from interest costs
associated with indebtedness incurred in connection with acquisitions, increased
working capital borrowings to finance additional managed care business and
accounts receivable, interest on equipment leases to service additional home
medical equipment business and leases associated with the implementation and
development of Medisyn(TM), higher borrowing costs associated with the 11%
Senior Notes issued on December 1, 1997, and the write-off of financing fees of
$0.3 million incurred in connection with the Company's early repayment of a bank
credit agreement.
Provision (Credit) for Income Taxes. The provision (credit) for income taxes
decreased to a credit of $4.8 million for 1997 from an expense of $3.4 million
in 1996, a decrease of $8.2 million. This decrease was a result of the 1997 loss
and resulting carryback to prior years, partially offset by $0.5 million in
state income taxes in 1997.
Liquidity and Capital Resources
The Company's primary capital requirements will be for debt service, for
additional working capital to fund the Company's managed care business and
accounts receivable. The Company recorded a net loss of $(98.3) million during
1998 and had negative cash flow from operations. The Company expects to report
additional net losses and negative cash flow amounts in 1999. This has
negatively impacted the availability of the Company's current financing sources
and is expected to decrease the Company's overall liquidity position during
1999. In addition, at April 21, 1999, the Company is in default on its Senior
Notes. The Company does not have adequate liquidity or available sources of
financing to meet its contractual debt obligations and settle its other
liabilities. If the Company is unable to generate sufficient cash flow levels
and the principal holders of the Senior Notes do not continue to support the
Company's current liquidity needs, there is a substantial prospect that the
Company or one of its subsidiaries would be required to seek protection under
the U.S. Bankruptcy Code.
Management is implementing actions that are designed to increase the
collection rate on current revenues and decrease direct, indirect, and
administrative and general costs within the two first quarters of 1999.
Management is evaluating all of the current operating locations to determine if
each is operating at its optimum efficiency and has adequate volume to provide a
positive operating margin. Locations not meeting minimum performance criteria
will be considered for consolidation or closure. Additionally, management is
actively marketing for the sale of non-core operating segments of the Company.
At December 31, 1998, the Company had negative working capital of $(93.0)
million as compared to working capital of $45.0 million as of December 31, 1997.
This decrease is primarily a result of the reclassification of the
26
<PAGE>
Company's Senior Notes and its related accrued interest as a short term
liability as a result of the Company's default on the indenture.
During the year ended December 31, 1998, the Company had capital expenditures
of $7.2 million.
Capital expenditures were used for medical equipment to service the
respiratory therapy medical equipment line of business. Accounts receivable at
December 31, 1998, were $28.5 million, compared to $49.3 million at December 31,
1997. Days of Sales Outstanding ("DSO"), defined as trade accounts receivable
divided by average daily net revenues for the preceding three months, were 106
as of December 31, 1998, compared to 94 at December 31, 1997. Management
increased the Company's reserve for doubtful accounts by $20.6 million during
the fourth quarter as a result of its inability to improve the collection of the
accounts receivable. Efforts to automate the process using Medisyn(TM) were
unsuccessful and control over the collection of necessary information to bill
and collect the accounts were not effective in decreasing billed amounts during
1998. As a result, the accounts aged beyond the dates allowed for timely filing
and probability of collection was very low. The Company hired a Vice President
of Patient Accounting and a Director of Patient Accounting on March 15, 1999.
Their sole responsibility is to implement policies, procedures and controls to
ensure that the Company's accounts receivables are collected to the maximum
amount allowed and within specified time frames. The Company is continuing
intensified initiatives to address the increase in DSO, including commencing
installation of an electronic claims submission system, and more closely
managing the billing and collecting process to increase efficiency and
effectiveness.
Net cash used in operating activities increased from $(7.3) million for the
year ended December 31, 1997, to $(20.4) million for the year ended 1998, or an
additional cash outflow of $11.2 million. The 1998 net loss, increase in
accounts receivable and the payments on debt obligations and interest were
primarily responsible for the reduction in operating cash during 1998. Net cash
used in investing activities decreased from $21.5 million for the year ended
1997 to cash used in investing activities of $7.3 million for the year ended
1998. Net cash provided by financing activities decreased from $56.5 million
for the year ended 1997 to $11.8 million for the year ended 1998 primarily as a
result of reduced net borrowings. The Company utilizes capital leases to
acquire equipment, primary information technology equipment and medical
equipment needed to accommodate increased sales volume in the respiratory
therapy/medical equipment business. Such lease amounts were $5.2 million and
$0.07 million for the years ended 1997 and 1998, respectively. The Company
obtained lease financing and deferred payment terms from two significant home
medical/respiratory equipment vendors during 1998.
As of December 31, 1998, the Company had a cash balance of $5.9 million. The
Indenture under the Company's Senior Notes prohibits the Company from incurring
additional indebtedness (other than limited permitted indebtedness) or issuing
preferred equity interests (as defined in the Indenture) unless the consolidated
fixed charge ratio is greater than 2.0 to 1. At December 31, 1998, the
Company's consolidated fixed charge ratio is less than 2.0 to 1. In addition,
the Company did not pay its December 1, 1998, interest obligation and is
currently in default of the Indenture. The lender, however, has agreed to
forbearances for the default. The Indenture does permit the Company to incur
indebtedness under any credit facility in an amount not to exceed $20.0 million.
The Company has a two-year secured line of credit with a maximum potential
availability of $7.8 million at December 31, 1998, subject to a borrowing base
with reference to accounts payable. The advances are based on 80% of the net
collectable value of the Company's accounts receivable. "Net Collectable Value"
is defined as the amount the Company bills third party payors less patient co-
payments and deductible obligations and contractual allowances established by
the Company and acceptable to the lender. Interest on the outstanding balance
of the facility is payable monthly at an annual rate of the prime rate plus two
percent. The Company will also pay a collateral management fee of 0.083% per
month on the average outstanding balance. Collections of receivables by the
Company will be credited to the facility on a daily basis. Advances under this
facility may be used to finance the working capital and general corporate
requirements of the Company.
27
<PAGE>
Year 2000 Issue
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
Many existing computer programs and databases use two digits to identify a
year in the date field (i.e., 98 would represent 1998). These programs and
databases were not originally designed to operate after December 31, 1999. If
not corrected, many computer programs and databases could fail or create
erroneous results relating to the year 2000. If the Company, its significant
customers, or suppliers fail to make necessary modifications and conversions on
a timely basis, the Year 2000 issue could have a material adverse effect on the
Company operations. However, the impact cannot be quantified at this time.
The Company has assessed the exposures related to the impact on its computer
programs and databases of the Year 2000 issue. Key management information
systems and operational systems, including equipment with embedded
microprocessors, have been inventoried and assessed, and detailed plans have
been or are currently being implemented for the required program and database
modifications or replacements. Progress against these plans is monitored and
reported to management on a regular basis. Implementation of required changes
to critical systems is expected to be completed during fiscal 1999. The Company
is also focusing on major payors, which consist of third-party payors such as
state and federal government, and managed care plans and certain key software
suppliers to assess their compliance. The Company expects to complete such
assessment by June 30, 1999. In the event a material payor or supplier is not
Year 2000 compliant, the Company's business, financial condition and results of
operations could be materially and adversely affected.
The cost incurred to date related to these programs have not been material and
the Company does not expect its future costs related to these programs to be
material. Such costs have been and will continue to be funded through operating
cash flows. The Company presently believes that the total cost of achieving
Year 2000 compliance will not be material to its financial condition, liquidity,
or results of operations.
Time and costs estimates are based on currently available information.
Developments that could affect estimates include, but are not limited to, the
availability and costs of trained personnel; the ability to locate and correct
all relevant computer code and systems; and remediation success of the Company's
payors and significant suppliers.
The proceeding "Year 2000 Readiness Disclosure" contains various forward-
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934 and the Section 27A Securities Act of 1933. These forward-looking
statements represent the Company's beliefs or expectations regarding future
events. When used in the "Year 2000 Readiness Disclosure", the words
"believes," "expects," "estimates" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include,
without limitation, the Company's expectations as to when it will complete the
modification and testing phases of its Year 2000 project plan as well as its
Year 2000 contingency plans; its estimated cost of achieving Year 2000
readiness; and the Company's belief that its internal systems will be Year 2000
compliant in a timely manner. All forward-looking statements involve a number
of risks and uncertainties that could cause the actual results to differ
materially from the projected results. Factors that may cause these differences
include, but are not limited to, the availability of qualified personnel and
other information technology resources; the ability to identify and remediate
all date sensitive lines of computer code or to replace embedded computer chips
in affected systems or equipment, and the actions of governmental agencies or
other third parties with respect to Year 2000 problems.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements and supplementary data are included herein.
See Item 14 of this report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Item 10 is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission not later
than 120 days after the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to Item 11 is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission not later
than 120 days after the end of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to Item 12 is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission not later
than 120 days after the end of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Item 13 is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission not later
than 120 days after the end of the Company's fiscal year.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) 1. Index to Financial Statements
The following Financial Statements are included herein:
<TABLE>
<CAPTION>
Page
----
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
<S> <C>
Report of Independent Public Accountants.................................................................. 30
Consolidated Balance Sheets as of December 31, 1998 and 1997.............................................. 31
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997, and 1996................................................................................... 32
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1998, 1997, and 1996...................................................................... 33
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997, and 1996................................................................................... 34
Notes to Consolidated Financial Statements................................................................ 35
2. Index to Financial Schedules
The following Financial Statement Schedule is included herein:
Schedule II--Valuation and Qualifying Accounts......................................................... 53
3. Index to Exhibits
The Exhibits filed as part of this Report on Form 10-K are listed in the Index to Exhibits immediately following
the consolidated financial statements.
</TABLE>
(b) Reports on Form 8-K.
There was no Report on Form 8-K filed during the three month period ended
December 31, 1998.
30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
HealthCor Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of HealthCor
Holdings, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements and the schedule referred to
below are the responsibility of the Company's 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 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 HealthCor Holdings,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying 1998 consolidated financial statements of the Company have been
prepared under generally accepted accounting principles assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company recorded a net loss of approximately
$(98,300,000) in 1998 and has negative working capital of approximately
$(93,000,000) at December 31, 1998. In addition, at April 21, 1999, the Company
is in default on its 11% Senior Notes. The Company does not have adequate
liquidity or available sources of financing to meet its contractual debt
obligations and settle its other liabilities. If the Company is unable to
generate sufficient cash flow levels and the principal holders of the 11% Senior
Notes do not continue to support the Company's current liquidity needs, there is
a substantial prospect that the Company or one of its subsidiaries would be
required to seek protection under the U.S. Bankruptcy Code. These factors raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
1998 consolidated financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 21, 1999
31
<PAGE>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
ASSETS 1998 1997
--------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 5,947,953 $ 21,820,308
Accounts receivable, net of allowance for doubtful accounts
of $33,195,000 and $11,441,000 in 1998 and 1997, respectively............... 28,462,019 49,263,806
Income tax receivable......................................................... 107,264 5,828,888
Supplies inventory............................................................ 3,799,806 4,258,834
Prepaid expenses and other.................................................... 1,059,117 1,358,026
Deferred income taxes......................................................... -- 973,233
------------ ------------
Total current assets................................................... 39,376,159 83,503,095
Property and equipment, net of accumulated depreciation of
$31,479,747 and $23,539,595 in 1998 and 1997, respectively.................... 21,340,745 29,131,578
Excess of cost of acquired businesses over fair values of
net assets acquired, net of accumulated amortization of
$36,086,000 and $3,404,000 in 1998 and 1997, respectively..................... 11,031,320 48,085,306
Other assets.................................................................... 2,515,122 3,121,044
------------ ------------
Total assets........................................................... $ 74,263,346 $163,841,023
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accrued payroll and related expenses.......................................... $ 5,676,069 $ 8,130,484
Accounts payable and accrued expenses......................................... 16,790,513 10,619,559
Accrued interest payable...................................................... 5,369,526 785,212
Payable to third party........................................................ 7,734,000 10,628,000
Line of credit payable........................................................ 7,798,632 --
Current portion of long-term debt (including debt in default)................. 86,641,015 1,576,502
Current portion of capital lease obligations.................................. 2,355,784 6,738,548
------------ ------------
Total current liabilities.............................................. 132,365,539 38,478,305
Deferred income taxes and other................................................. 104,868 4,063,260
Long-term debt.................................................................. 109,929 644,236
11% Senior Notes................................................................ -- 80,000,000
Capital lease obligations....................................................... 689,781 1,393,691
------------ ------------
Total liabilities...................................................... 133,270,117 124,579,492
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value, 40,000,000 shares
authorized; 10,092,680 and 10,089,346 shares issued and
outstanding in 1998 and 1997, respectively.................................. 100,926 100,893
Additional paid-in capital.................................................... 39,908,781 39,906,814
Retained deficit.............................................................. (99,016,478) (746,176)
------------ ------------
Total stockholders' equity (deficit)................................... (59,006,771) 39,261,531
------------ ------------
Total liabilities and stockholders' equity (deficit)................... $ 74,263,346 $163,841,023
============ ============
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
32
<PAGE>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net revenues.............................................. $115,741,421 $143,204,750 $106,785,152
Direct expenses........................................... 59,719,603 67,380,199 48,313,631
------------ ------------ ------------
Gross profit.............................................. 56,021,818 75,824,551 58,471,521
Other costs and expenses:
General and administrative.............................. 57,613,997 62,038,783 41,417,970
Depreciation and amortization........................... 7,344,069 4,983,681 2,578,751
Goodwill write-off and restructuring costs.............. 33,063,557 9,850,000 -
Provision for doubtful accounts......................... 45,094,345 14,057,018 3,580,394
------------ ------------ ------------
Total costs and expenses.......................... 143,115,968 90,929,482 47,577,115
------------ ------------ ------------
Income (loss) from operations............................. (87,094,150) (15,104,931) 10,894,406
Other income (expense):
Interest income......................................... 181,668 141,625 44,454
Interest expense........................................ (11,485,236) (5,459,343) (2,188,466)
------------ ------------ ------------
Total other income (expense)...................... (11,303,568) (5,317,718) (2,144,012)
------------ ------------ ------------
Income (loss) before income taxes......................... (98,397,718) (20,422,649) 8,750,394
Provision (credit) for income taxes....................... (127,416) (4,784,236) 3,418,386
------------ ------------ ------------
Net income (loss)......................................... $(98,270,302) $(15,638,413) $ 5,332,008
============ ============ ============
Net income (loss) per common share........................ $(9.74) $(1.56) $.69
Net income (loss) per common share-assuming dilution...... $(9.74) $(1.56) $.66
Weighted average common shares outstanding................ 10,091,340 10,053,734 7,770,175
Weighted average common shares outstanding and
dilutive common stock options...................... 10,091,340 10,053,734 8,040,250
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
33
<PAGE>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-in Retained
Shares Amount Capital Deficit Total
---------- -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............... 3,062,803 $ 30,628 $ 2,471,129 $ 9,560,229 $ 12,061,986
Exercise of common stock
warrants............................. 150,000 1,500 298,500 -- 300,000
Conversion of Series A and B
preferred stock to common
stock................................ 3,339,297 33,393 5,306,421 -- 5,339,814
Issuance of common stock in
initial public offering, net......... 3,300,000 33,000 29,835,101 -- 29,868,101
Issuance of common stock to
ESOP................................. 130,000 1,300 1,466,200 -- 1,467,500
Exercise of stock options.............. 33,867 338 78,229 -- 78,567
Tax benefit from early
dispositions of option stock......... -- -- 106,572 -- 106,572
Net income............................. -- -- -- 5,332,008 5,332,008
---------- -------- ----------- ------------ ------------
Balance, December 31, 1996............... 10,015,967 100,159 39,562,152 14,892,237 54,554,548
Exercise of stock options.............. 73,379 734 344,662 -- 345,396
Net loss............................... -- -- -- (15,638,413) (15,638,413)
---------- -------- ----------- ------------ ------------
Balance, December 31, 1997............... 10,089,346 100,893 39,906,814 (746,176) 39,261,531
Exercise of stock options............... 3,334 33 1,967 -- 2,000
Net loss............................... -- -- -- (98,270,302) (98,270,302)
---------- -------- ----------- ------------ ------------
Balance, December 31, 1998............... 10,092,680 $100,926 $39,908,781 $(99,016,478) $(59,006,771)
========== ======== =========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
34
<PAGE>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $(98,270,302) $(15,638,413) $ 5,332,008
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................................... 12,074,974 8,248,711 4,773,892
Goodwill write-off..................................................... 31,781,138 8,300,000 -
Loss on disposition of fixed assets.................................... 4,326,901 28,677 69,855
Changes in operating assets and liabilities, net
of acquired businesses:
Accounts receivable, net............................................. 20,801,787 (15,078,900) (13,099,993)
Supplies inventory................................................... 459,028 (726,362) (755,657)
Prepaid expenses and other assets.................................... 904,831 2,496,119 (1,295,126)
Deferred income taxes................................................ -- (5,000) 1,124,060
Accrued ESOP contribution............................................ 49,685 -- (60,079)
Third-party payor settlement......................................... (2,894,000) 1,912,146 (322,566)
Accounts payable and accrued expenses................................ 967,324 4,674,358 3,330,133
Income taxes payable/receivable...................................... 5,435,995 (5,042,341) (1,821,149)
Deferred revenue..................................................... 3,958,392 (2,291,274) 3,281,537
------------ ------------ ------------
Net cash provided by (used in) operating activities............... (20,404,247) (13,122,279) 556,915
------------ ------------ ------------
Cash flows from investing activities:
Payments for business acquisitions, net of cash
acquired............................................................... - (15,073,578) (21,032,649)
Additions to property and equipment....................................... (7,296,586) (6,436,244) (7,866,845)
------------ ------------ ------------
Net cash used in investing activities............................. (7,296,586) (21,509,822) (28,899,494)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt, net....................................... 73,929,174 35,859,427 65,896,628
Proceeds from issuance of 11 % Senior Notes, net.......................... -- 77,100,000 --
Payments on debt and capital lease obligations............................ (62,102,696) (56,852,414) (69,535,229)
Issuance of common stock, net............................................. 2,000 345,396 30,353,240
------------ ------------ ------------
Net cash provided by financing
activities............................................ 11,828,478 56,452,409 26,714,639
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........................ (15,872,355) 21,820,308 (1,627,940)
Cash and cash equivalents, beginning of period.............................. 21,820,308 -- 1,627,940
------------ ------------ ------------
Cash and cash equivalents, end of period.................................... $ 5,947,953 $ 21,820,308 $ --
============ ============ ============
Supplemental disclosure of cash flow information:
Debt issued in acquisitions............................................... $ -- $ 1,450,000 $ 3,266,068
Liabilities and debt assumed in acquisitions.............................. -- 772,209 635,753
Issuance of capital lease obligations..................................... -- 5,248,725 3,530,474
Issuance of common stock to employee stock option plan.................... -- -- 1,467,500
Interest paid............................................................. 5,730,018 4,985,000 2,025,000
Income taxes paid......................................................... 232,580 2,006,000 4,055,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
1. General:
HealthCor Holdings, Inc., a Delaware corporation, and subsidiaries (the
"Company") commenced operations in October 1989 and provide home healthcare
services to patients including nursing, respiratory therapy, infusion therapy,
and medical equipment. As of December 31, 1998, the Company has operations in
Arizona, Colorado, Kansas, Missouri, Oklahoma, Texas, New Mexico, and Arkansas.
2. Basis of Reporting and Current Operating Environment:
The 1998 consolidated financial statements of the Company have been prepared
under generally accepted accounting principles assuming that the Company will
continue as a going concern. The Company recorded a net loss of approximately
$(98,300,000) in 1998 and has negative working capital of approximately
$(93,000,000) at December 31, 1998. In addition, at April 15, 1999, the Company
is in default on its 11% Senior Notes due 2004 ("11% Senior Notes"). The
Company does not have adequate liquidity or available sources of financing to
meet its contractual debt obligations and settle its other liabilities. If the
Company is unable to generate sufficient cash flow levels and the principal
holders of the 11% Senior Notes do not continue to support the Company's current
liquidity needs, there is a substantial prospect that the Company or one of its
subsidiaries would be required to seek protection under the U.S. Bankruptcy
Code. These factors raise substantial doubt about its ability to continue as a
going concern. The 1998 financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
The Company did not pay its December 1, 1998 interest obligation of $4,400,000
on the 11% Senior Notes. On December 23, 1998, the principal holders of the 11%
Senior Notes provided working capital advances of $6,000,000 under a convertible
loan agreement (see Note 7). Through April 21, 1999, the principal holders have
amended the convertible loan agreement five times to provide additional working
capital advances of $8,100,000. Management continues to pursue a sale or merger
of the Company.
On February 25, 1999, the Company announced that its chairman and chief
executive officer and its president and chief operating officer resigned from
all positions of the Company. On April 12, 1999, the Company appointed a new
president.
3. Summary of Significant Accounting Policies:
Principles of Consolidation and Presentation
The consolidated financial statements of the Company include the accounts of
HealthCor Holdings, Inc. and its wholly owned subsidiaries, HealthCor, Inc.
(HealthCor), HealthCor Oxygen & Medical Equipment, Inc. (HOME), HealthCor
Pharmacy, Inc., Physicians Home Health Network, Inc., HealthCor Rehabilitation
Services, Inc., Quest Personnel Services, Inc., HealthCor Foundation, and
CareNetwork, Inc. All significant intercompany transactions and accounts have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets (including accounts receivable and
goodwill) and liabilities and disclosure of contingent assets and liabilities at
the date of the financial
36
<PAGE>
statements and the reported amounts of revenues (including net revenues recorded
by the Company) and expenses during the reporting period. Actual results could
differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Supplies Inventory
Supplies inventories are stated at the lower of cost (first-in, first-out
method) or market and consist primarily of medical and pharmaceutical supplies
sold directly to patients for use in their homes.
Property and Equipment
Property and equipment are stated at cost or fair market value at the
acquisition date (see Note 5). The cost of equipment held under capital leases
is equal to the lower of the net present value of the minimum lease commitments
or the fair value of the leased property at the inception of the lease (see Note
9). Property and equipment are depreciated using the straight-line method over
a useful life of 5 years.
Excess of Costs of Acquired Businesses Over the Fair Values of Net Assets
Acquired
The value of excess costs of acquired businesses over the fair values of net
assets acquired (goodwill) is recorded at the date of acquisition. Through 1998,
goodwill is being amortized on a straight-line basis over a 40-year period.
The Company reviews the carrying value of goodwill on an acquisition-by-
acquisition basis to determine if facts and circumstances exist which would
suggest that goodwill may be impaired or that the amortization period needs to
be modified. Among the factors the Company considers in making the evaluation
are changes in the Company's market position, regulatory changes, reputation,
profitability and geographic penetration. If indicators are present which may
indicate impairment is probable, the Company will prepare a projection of the
undiscounted cash flows of the specific acquisition and determine if goodwill is
recoverable based on these undiscounted cash flows. If impairment is indicated,
then an adjustment will be made to reduce the carrying amount of the goodwill to
its fair value. During 1998 and 1997, the Company recorded charges for goodwill
impairment (see Note 13). No such charge was required in 1996.
Other Assets
Other assets include financing costs relating to the costs of issuing the 11%
Senior Notes. The deferred financing costs are being amortized on a straight-
line basis over the life of the notes (see Note 7).
Income Taxes
Deferred income taxes are provided for temporary differences between the
financial statement and income tax basis of assets and liabilities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
Net Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which requires publicly held companies with
potentially dilutive securities to change their earnings per share computation
for years ending after December 15, 1997, and show a basic earnings per share
(based on the weighted average number of common shares outstanding) and a
diluted earnings per share (based on the weighted average number of
37
<PAGE>
common shares outstanding plus the effect of all dilutive securities, such as
stock options and warrants). The Company adopted SFAS No. 128 in the fourth
quarter of 1997 (see Note 17).
Stock-Based Compensation
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
effective January 1, 1996. SFAS No. 123 allows companies adopting the
pronouncement to either change the actual accounting methods for stock-based
compensation or to disclose certain pro forma results of operations as if the
pronouncement had been adopted. The Company accounts for its stock option plans
under the provisions of Accounting Principles Board Opinion No. 25 ("APB No.
25") and has disclosed the pro forma information required by SFAS No. 123 in
Note 14.
Net Revenues, Allowance for Doubtful Accounts, and Estimated Settlements with
Third-Party Payors
Revenues are recognized on the date services and related products are provided
to patients and are recorded at estimated net realizable amounts from patients,
third-party payors, and others for services rendered. During 1998, the Company
experienced a reduction in net revenues primarily as a result of the Medicare
nursing office closures discussed in Note 13.
The Company estimates its contractual allowances and allowance for doubtful
accounts based on contractual arrangements, historical and anticipated payment
experience and agings of its accounts receivable. As payment experience
changes, the Company adjusts its allowances by charges to the statements of
operations. During 1998, the Company experienced continued deteriorating
collections from payors (including managed care providers) and increased levels
of past due accounts receivable due to, among other things, its failure to
timely file claims with payors, difficulty in obtaining accurate patient data
and maintenance of effective quality control and processes and procedures in the
revenue cycle. As a result, during the third and fourth quarters of 1998, the
Company reduced the estimated collection factors used in determining the
allowance for doubtful accounts. In addition, during the fourth quarter of
1998, the Company wrote off unreconciled differences in its accounts receivable
balances. These factors increased the provision for doubtful accounts by
approximately $4,000,000 and $20,600,000 during the third and fourth quarters of
1998, respectively. There can be no assurance that additional charges will not
be required in the future based on changes in the estimated payment factors.
For the years ended December 31, 1998, 1997, and 1996, approximately 2%, 38%
and 50% of net patient service revenues were derived under federal third-party
reimbursement programs which are based on cost reimbursement and case payment
principles. These revenues are subject to audit and retroactive adjustment by
the respective third-party fiscal intermediary. Settlements based on third-
party reimbursement program audits are recorded in the year they become known.
The Company establishes allowances for reimbursements in anticipation of such
settlements.
Certain capital expenditures relating to the implementation of a new
management information system were expensed for third-party reimbursement
purposes resulting in deferred revenue of approximately $3,824,000 at December
31, 1997. As a result of the closing of substantially all of its Medicare
nursing offices during 1998, the remaining unamortized deferred revenue and
corresponding software development costs of approximately $3,649,200 were
adjusted in 1998. This adjustment had no effect on the Company's 1998 results
from operations.
Direct expenses
Direct expenses include salaries, wages and related benefits, medical
supplies, equipment and related depreciation, and other direct costs of
delivering home medical services.
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the
current year presentation.
38
<PAGE>
4. Current liabilities:
Accrued payroll and related expenses consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Salaries............................................................ $4,092,354 $4,332,983
Workers' compensation............................................... 793,665 912,999
Life, medical and related insurance................................. 262,443 992,494
Other............................................................... 527,607 1,892,008
---------- ----------
$5,676,069 $8,130,484
========== ==========
</TABLE>
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Accounts payable.................................................... $14,210,698 $ 5,218,745
Accrued expenses.................................................... 1,391,565 3,840,236
Accrued restructuring charges....................................... 1,188,250 1,560,578
----------- -----------
$16,790,513 $10,619,559
=========== ===========
</TABLE>
5. Acquisitions and Dispositions:
The Company made no acquisitions during the year ended December 31, 1998.
However, during the fourth quarter of 1998, the Company sold, for cash, Southern
Medical Mart, a provider of home respiratory, monitoring and medical equipment
services in Louisiana, and VNS Health Services, Inc., a provider of Medicare,
Medicaid and private duty nursing services, in Santa Fe and Espanola, New
Mexico. The Company recorded a total loss on sale for these transactions of
approximately $1,500,000.
1997 Acquisitions
Effective January 1, 1997, the Company acquired Sterling Health Services,
Inc., a provider of home nursing services in Kansas City, Missouri.
Effective April 1, 1997, the Company acquired, for $900,000 in cash and
$100,000 in debt, the net assets of VNS Health Services, Inc., which provides
Medicare, Medicaid and private duty nursing services in Santa Fe and Espanola,
New Mexico.
Effective April 19, 1997, the Company acquired, for $8,500,000 in cash and
$1,000,000 in debt, all of the outstanding capital stock of CareNetwork, Inc.,
which provides nursing services in Little Rock, Ft. Smith, Lowell and Hot
Springs, Arkansas.
Effective June 1, 1997, the Company acquired, for $3,100,000 in cash and
$250,000 in debt, the net assets of American Medical Home Care, Inc., which
sells and leases home medical equipment, respiratory therapy services and
rehabilitation equipment in Tucson, Arizona.
Effective December 31, 1997, the Company acquired, for $1,124,000 in cash, the
net assets of certain Texas operations of Lutheran Health System, which provides
comprehensive home health services throughout north central and east Texas.
39
<PAGE>
The following is a summary of the net assets acquired and liabilities assumed
in connection with the foregoing acquisitions in 1997:
<TABLE>
<CAPTION>
<S> <C>
Assets acquired:
Current assets................................................... $ 2,620,749
Other assets..................................................... 2,257,573
-----------
Total assets................................................. 4,878,322
Liabilities assumed:
Current liabilities.............................................. 969,295
Other liabilities................................................ 4,282,209
-----------
Total liabilities.............................................. 5,251,504
-----------
Net assets acquired................................................ (373,182)
Purchase price, including acquisition costs........................ 16,523,578
-----------
Excess cost of businesses acquired................................. $16,896,760
===========
</TABLE>
Pro Forma Information
The following unaudited pro forma information reflects the effects on the
consolidated statements of operations assuming that the 1997 acquisitions were
consummated as of January 1, 1997. This information does not purport to be
indicative of the results that would have actually been obtained if the
acquisitions had occurred on such date. Therefore, pro forma information cannot
be considered indicative of future operations. The unaudited pro forma
information for the year ended December 31, 1997 is as follows (in thousands,
except per share amount):
<TABLE>
<S> <C>
Net revenues............................................................... $ 161,521
Net loss................................................................... ( 16,176)
Net loss per common share.................................................. (1.61)
</TABLE>
6. Bank Credit Facility:
During 1997, the Company was party to a bank credit facility, dated as of
October 31, 1996, that was amended to provide for aggregate borrowings of $75.0
million, consisting of a $30.0 million revolving credit line and a $45.0 million
term facility for acquisitions. At September 30, 1997, the Company was not in
compliance with several of the financial covenants contained in the bank credit
facility. The lenders waived the Company's existing defaults through December
1, 1997, at which date the outstanding loans under the then existing bank credit
facility were repaid with proceeds from the 11% Senior Notes (see Note 7).
Simultaneously with the closing of the 11% Senior Notes, the Company entered
into a new bank credit facility, consisting of a three-year revolving credit
facility providing up to $20.0 million of availability. At December 31, 1997,
the Company was in default of several of the financial covenants under the new
bank credit facility and was unable to incur indebtedness under the facility.
During the second quarter of 1998, the Company replaced its bank credit
facility with a two-year secured line of credit with a maximum availability of
$7.8 million at December 31, 1998. Advances are based on 80% of the net
collectible value of the Company's accounts receivable. "Net Collectible Value"
is defined as the amount the Company bills third-party payors less patient co-
payments and deductible obligations and contractual allowances established by
the Company and acceptable to the lender. Interest on the outstanding balance
of the facility is payable monthly at an annual rate of the prime rate plus two
percent. The Company also pays a collateral management fee of 0.083% per month
on the average outstanding balance. Collections of accounts receivable by the
Company are credited to the facility on a daily basis. Advances under this
facility may be used to finance the working capital and general corporate
requirements of the Company. As of December 31, 1998, the Company had
approximately $5.8 million outstanding under the line and availability of $2.0
million. The Company also
40
<PAGE>
separately had a $2.0 million loan outstanding, secured by the stock of a
subsidiary, from the same lender at December 31, 1998. The loan carries the same
interest rate as the line and is due on demand.
7. 11 % Senior Notes and Other Debt:
During 1997, the Company engaged Bear Stearns, Inc. and Chase Securities Inc.
to offer 11% Senior Notes to refinance indebtedness outstanding under the bank
credit facility. On December 1, 1997, the offering was completed, and the
Company sold $80.0 million principal amount of 11 % Senior Notes to qualified
institutional buyers in reliance on the exemption from the registration
requirements of the Securities Act of 1933 provided by Rule 144A. The Company
filed a Form S-4 registration statement with the Securities and Exchange
Commission to register the 11% Senior Notes so the original restricted notes
could be exchanged, at the option of the holder, for identical notes without
resale or transfer restrictions. The exchange offer was completed during the
second quarter of 1998.
The 11% Senior Notes are general unsecured obligations of the Company ranking
senior in right of payment of all subordinated indebtedness and equal in right
of payment of all other obligations. The 11% Senior Notes bear interest at the
rate of 11 % per annum, payable in arrears on June 1 and December 1 of each
year, commencing June 1, 1998. The 11% Senior Notes are fully and
unconditionally guaranteed on a senior, unsecured and joint and several basis by
all of the Company's present and future subsidiaries. Proceeds of the 11%
Senior Notes were $77,100,000 after offering expenses of $2,900,000 that are
being amortized over the duration of the 11% Senior Notes on a straight-line
basis.
The Company did not pay its December 1, 1998 interest obligation of $4,400,000
on the 11% Senior Notes. As a result, the Company is currently in default of
the indenture and has classified the 11% Senior Notes as a current liability in
the accompanying 1998 consolidated balance sheet. However, as of April 21,
1999, the noteholders have not exercised the acceleration provisions under the
indenture. The indenture also effectively prohibits the Company from incurring
additional indebtedness (other than certain limited permitted indebtedness).
On December 23, 1998, the principal holders of the 11% Senior Notes provided
working capital advances of $6,000,000 under a convertible loan agreement.
Through April 21, 1999, the principal holders have amended the convertible loan
agreement five times to provide additional working capital advances of
$8,100,000. The convertible loan is due December 31, 1999, and accrues interest
at 11% per annum increasing to 13% per annum in the event of any non-payment of
principal or interest amounts due. The agreement is secured by a pledge of the
stock of the Company, as well as a security interest in substantially all of the
assets of the Company and its subsidiaries. As of April 21, 1999, the Company
is in default of several of the financial covenants in the convertible loan
agreement.
The secured line of credit (see Note 6), 11% Senior Notes and the convertible
loan agreement all contain cross default provisions. In the event that there is
default under one of the agreements, these provisions trigger a cross default of
the other agreements. There has been no default under the provisions of the
secured line of credit and the principal holders of the Senior Notes and the
convertible loan agreement have issued forbearances to the Company. The
principal holders have the risk for default for both the Senior Notes and the
convertible loan agreement and amendments.
The unamortized financing costs of $3,083,035 at December 31, 1998 will be
charged to operations at the date the 11% Senior Notes are paid or otherwise
settled.
41
<PAGE>
Debt obligations consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Notes payable to individuals in connection with
acquisitions; principal and interest payable monthly at
rates ranging from 5.5% to 8.5%, matures through May
2000, unsecured.......................................................... $ 545,343 $ 2,214,674
11 % Senior Notes due 2004 (currently in default).......................... 80,000,000 80,000,000
Convertible loan........................................................... 6,000,000 --
Other...................................................................... 205,602 6,064
------------ -----------
86,750,945 82,220,738
Less: current portion............................................. (86,641,016) (1,576,502)
------------ -----------
$ 109,929 $80,644,236
============ ===========
</TABLE>
Aggregate maturities of long-term obligations subsequent to December 31, 1998,
are as follows:
<TABLE>
<S> <C>
1999.............................................................................. $ 86,641,016
2000.............................................................................. 109,929
------------
86,750,945
Less -- Current portion........................................................... (86,641,016)
------------
Total................................................................... $ 109,929
============
</TABLE>
8. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Furniture and equipment..................................................... $ 4,203,443 $ 4,526,781
Transportation equipment.................................................... 1,240,000 1,316,796
Leasehold improvements...................................................... 1,285,957 1,188,413
Medical equipment........................................................... 29,268,826 26,282,878
Computer equipment.......................................................... 11,384,209 10,800,688
Software development costs.................................................. 5,438,057 8,555,617
------------ ------------
52,820,492 52,671,173
Less -- Accumulated depreciation............................................ (31,479,747) (23,539,595)
------------ ------------
Property and equipment, net................................................. $ 21,340,745 $ 29,131,578
============ ============
</TABLE>
9. Lease Commitments:
The Company leases office space, furniture, and equipment under noncancelable
operating lease agreements which expire on various dates up to 2009 and contain
renewal options for up to 5 years.
The Company leases various office equipment under capital lease arrangements.
The capitalized value of leases amounted to approximately $11,188,000 and
$11,272,000 at December 31, 1998 and 1997, respectively, and net book value
amounted to approximately $3,619,000 and $6,008,000 at December 31, 1998 and
1997, respectively. Future minimum lease payments at December 31, 1998, under
the capital leases and noncancelable operating leases with initial or remaining
terms of one year or more are as follows:
42
<PAGE>
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------------- ----------------
<S> <C> <C>
1999............................................................................. $ 3,273,149 $ 2,505,640
2000............................................................................. 2,342,015 407,538
2001............................................................................. 1,498,072 323,735
2002............................................................................. 1,129,058 23,534
2003 and thereafter.............................................................. 3,169,338 --
----------- -----------
Total minimum payments........................................................... $11,411,632 3,260,447
===========
Amount representing interest..................................................... (214,882)
-----------
Present value of minimum payments................................................ 3,045,565
Current portion.................................................................. (2,355,784)
-----------
Total............................................................................ $ 689,781
===========
</TABLE>
Rent expense under all operating leases was approximately $4,083,000 and
$3,736,000, $3,050,000, for the years ended December 31, 1998, 1997, and 1996,
respectively.
10. Income Taxes:
The provision for income taxes includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Current:
Federal......................................... $ -- $ (4,858,888) $2,571,912
State........................................... (127,416) 514,500 326,233
--------- ------------ ----------
(127,416) (4,344,388) 2,898,145
--------- ------------ ----------
Deferred:
Federal......................................... -- (439,848) 468,175
State........................................... -- -- 52,066
--------- ------------ ----------
-- (439,848) 520,241
--------- ------------ ----------
Total................................... $(127,416) $( 4,784,236) $3,418,386
========= ============ ==========
</TABLE>
The reconciliation of the provision (credit) for income taxes to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Income taxes at statutory rate.................... $(33,411,903) $(6,943,701) $2,975,134
Deferred income tax valuation allowance........... 33,411,903 2,068,595 --
Amortization...................................... -- 153,000 148,931
State taxes, net of federal tax effect............ (127,416) 322,400 249,691
Other............................................. -- (384,530) 44,630
------------ ----------- ----------
$ (127,416) $(4,784,236) $3,418,386
============ =========== ==========
</TABLE>
43
<PAGE>
Deferred tax assets and deferred tax liabilities consist of the following
items:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Deferred tax assets:
<S> <C> <C>
Allowance for doubtful accounts.................................. $ 6,509,790 $ (467,443)
Self-insurance and workers' compensation......................... 414,697 720,312
Amounts due to third-party payors................................ 2,938,920 4,038,640
Accrued payroll and related expenses............................. 586,019 223,751
State income taxes............................................... 34,465 (17,170)
Amortization..................................................... 11,807,484 2,222,298
Net operating loss carryforward.................................. 25,675,404 --
------------ -----------
Total before valuation allowance......................... 47,966,779 6,720,388
Valuation allowance.............................................. (45,367,652) (3,524,857)
------------ -----------
Net deferred tax assets.................................. 2,599,127 3,195,531
Deferred tax liabilities:
Depreciation and amortization.................................... (951,589) (1,561,269)
Deferred software cost, net of deferred revenue.................. (2,015,023) (1,746,639)
Deferred compensation expense.................................... -- (255,108)
Accrued restructuring costs...................................... 451,466 451,466
Other............................................................ (62,328) (62,328)
------------ -----------
Total.................................................... (2,577,474) (3,173,878)
------------ -----------
Other tax liability.............................................. (21,653) (21,653)
------------ -----------
Total net tax (liabilities) assets................................. $ -- $ --
==================== ====================
</TABLE>
Due to the loss recorded in 1998 and 1997, the Company fully reserved its net
deferred asset balance at December 31, 1998 and 1997. The Company had an
estimated tax loss carryforward of $62.7 million at December 31, 1998, which
expires beginning in 2012.
11. Redeemable Convertible Preferred Stock:
In 1989, the Company sold 2,000,000 shares of its Series A preferred stock
($.01 par value) for $2,000,000, less issuance costs of $85,532, to an unrelated
entity. The shares were converted into 2,000,000 shares of the Company's common
stock coincident with the Company's initial public offering (IPO) on August 8,
1996.
In 1992, the Company issued 1,071,438 shares of its Series B preferred stock
($.01 par value) for $3,000,025 to the Series A preferred stock investor and an
unrelated investor and 178,575 shares of its Series B preferred stock for
$500,010 to the Company's Employee Stock Ownership Plan (ESOP). The Company
paid $72,636 in costs associated with these two issuances. The Series B
preferred shares were convertible into 1,562,517 shares of the Company's common
stock. The conversion rate was subject to adjustment of up to $1.25 for one
(312,503 additional shares) common share based on the Company's post issuance
earnings level. On November 28, 1994, the 178,575 Series B preferred shares held
by the ESOP were converted to 223,220 common shares. The remaining Series B
preferred shares were converted into 1,339,297 shares of common stock coincident
with the Company's IPO on August 8, 1996.
12. Common Stock:
The Company completed an IPO of 3,000,000 shares of its common stock, $.01 par
value, on August 8, 1996, and on September 11, 1996, the underwriters exercised
their overallotment option to purchase an additional 300,000 shares. The
Company used the net proceeds from the IPO of approximately $29,800,000 to repay
outstanding indebtedness under its bank credit facilities and for general
corporate purposes. In addition, on July 26, 1996, the Company declared a 5 for
2 stock split in the form of a stock dividend of its common stock. The
accompanying consolidated financial statements give retroactive effect to the
stock split.
44
<PAGE>
On December 28, 1998, the Company's securities ceased to be listed on the
Nasdaq SmallCap Market as the result of its failure to meet the minimum bid
price requirement. The Company's securities continue to be listed on the OTC
Bulletin Board.
13. Goodwill Write-Off and Restructuring Costs:
During 1997, the home health care industry experienced several significant
regulatory and reimbursement changes. In February 1997, the Health Care
Financing Administration ("HCFA") announced that it intended to implement
mileage limitations restricting the distance between a nursing agency's
principal office and its branches. Texas, where the Company had significant
operations, announced that it intended to implement even more restrictive
mileage limitation rules for branch offices. During 1998, following a
moratorium on new Medicare provider numbers announced by President Clinton, HCFA
imposed a delay in permitting branch office transfers. The 1997 Federal Budget
contained other reimbursement changes that reduced the level of reimbursement
available to the Company.
On January 2, 1998 and August 11, 1998, HCFA published Medicare nursing per-
visit cost limitation guidelines which reduced per-visit cost limitations for
the Company by approximately 18%-20% for 1998. Also, regulations effective
February 1, 1998, eliminated venipuncture as a covered service for Medicare
nursing visits, which materially reduced the Company's Medicare nursing
revenues. In addition, reimbursement rates for Medicare home oxygen services,
which represented approximately 6% of the Company's annualized revenues for the
year ended December 31, 1997, were reduced by 25.0% beginning January 1, 1998,
with an additional 5.0% reduction effective in 1999. Congress also adopted a
per-beneficiary limit on reimbursement for nursing services based upon
historical cost, and on March 31, 1998 and August 11, 1998, published
regulations which set forth the national and regional medians on which such
limits should be based. During late 1997, the Company estimated that the per-
beneficiary limits would have a material adverse effect on the Company's
Medicare nursing operations.
In late December 1997, after passage of the 1997 Federal Budget, the Company
began to assess the potential financial effects of the above described
regulatory changes on its Medicare nursing and home oxygen service businesses.
Coincident therewith, the Company developed and implemented a restructuring
plan to close certain Medicare nursing offices in order to mitigate the
financial impact of the changes. In addition, the changes prompted the Company
to evaluate whether its long-lived assets were impaired at December 31, 1997.
As a result, during the fourth quarter of 1997, the Company reduced the carrying
value of its recorded goodwill by approximately $8,300,000, recognized
additional Medicare cost limitations for 1997 aggregating $5,600,000, announced
significant headcount reductions, and the closure of 32 Medicare nursing field
offices. The offices were closed at March 31, 1998. In addition, during the
fourth quarter of 1997, the Company recorded $1,575,000 in restructuring costs,
consisting of direct severance costs for terminated employees of $375,000 and
future lease termination costs and other costs related to office closings of
approximately $1,200,000.
During early 1998, the Company continued to evaluate the ongoing prospects of
its Medicare nursing business. In connection with the Company's decision in the
second quarter of 1998 to close substantially all of its remaining Medicare
nursing offices, the Company determined that an additional goodwill impairment
charge of approximately $4,800,000 was required at June 30, 1998.
As a result of the Company's continued operating losses and negative cash
flows, lack of a definitive recapitalization plan and uncertain future operating
prospects, the Company evaluated its unamortized goodwill balances for
impairment during the fourth quarter of 1998. As a result, an additional charge
of approximately $27,037,000 was recorded. This amount includes approximately
$1,495,000 of goodwill related to a personnel placement business held-for-sale
at December 31, 1998. The Company's remaining goodwill balances at December
31,1998 relate primarily to its infusion therapy operations. In addition,
beginning January 1, 1999, goodwill will be amortized on a straight-line basis
over a 10-year period.
45
<PAGE>
14. Employee Benefit Plans:
The Company has two qualified incentive stock option plans and has reserved
387,500 shares of the Company's common stock, all of which were granted, for
issuance under the 1989 plan and 237,500 shares under the 1996 plan. Options
for 187,000 shares have been granted under the 1996 stock option plan and 50,500
are available for future grants. The Company accounts for its stock option
plans in accordance with the provisions of APB No. 25, under which no
compensation cost is recognized for financial statement purposes.
Pro forma information regarding net income (loss) and net income (loss) per
share and net income (loss) per share assuming dilution is required by SFAS No.
123. The fair value of each option grant is estimated as of the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.25%, 6.0 % and 6.5 %; expected dividend yield of zero;
expected option lives until exercise date of 6.5 years; and expected price
volatility of 35%, 35 % and 25%, respectively. Had compensation cost for stock
options granted in 1998, 1997 and 1996 been determined based on the fair value
at the grant dates for options awarded consistent with the provisions of SFAS
No. 123, the Company's net income (loss) and net income (loss) per common share
and net income (loss) per common share assuming dilution for the years ended
December 31, 1998, 1997 and 1996, would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ----------
<S> <C> <C> <C> <C>
Net income (loss)......................... As reported........... $(98,270,302) $(15,638,413) $5,332,008
Pro forma............ (98,457,758) $(15,868,618) $5,206,173
Net income (loss) per common share........ As reported........... $ (9.74) $ (1.56) $ .69
Pro forma............ $ (9.76) $ (1.58) $ .67
Net income (loss) per common share-
Assuming dilution.................... As reported........... $ (9.74) $ (1.56) $ .66
Pro forma............ $ (9.76) $ (1.58) $ .65
</TABLE>
Since the provisions of SFAS No. 123 have not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost is not
representative of the pro forma compensation expected to be presented in future
years.
Options to purchase shares of the Company's common stock have been granted to
nonofficer and noninvestor directors and key employees. Options are granted at
fair market value at the dates of grant. Options granted become exercisable at
the rate of 1/3 per year, and expire 10 years after the date of grant.
Information on stock options and related information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- -----------------------------
Number of Wtd. Avg. Number of Wtd. Avg. Number of Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------------- --------- ------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 414,457 $4.49 356,926 $5.63 359,627 $ 4.68
Granted 58,000 1.86 235,500 (1) 6.14 48,250 10.13
Exercised (3,334) 5.00 (73,379) 5.07 (33,867) 2.32
Forfeited (116,887) 3.75 (104,590)(1) 6.10 (17,084) 5.04
----------- ----- ------------ ----- ------------- ------
Outstanding at end of year 352,236 4.29 414,457 $4.49 356,926 $ 5.63
=========== ===== ============ ===== ============= ======
Exercisable at end of year 194,034 4.65 188,891 $3.86 198,884 $ 4.06
=========== ===== ============ ===== ============= ======
Price range $1.50--$9.00 $.80 - $9.00 $.80 - $11.50
=========== ============ =============
Weighted-average fair value of
options granted during the year $ 0.85 $ 3.87 $ 4.26
=========== ============ =============
</TABLE>
46
<PAGE>
(1) Excludes 174,783 options repriced on September 16, 1997, at $5.00 per share
from $8.03 per share weighted average exercise price. Such options were treated
as an option modification for purposes of computing the weighted average fair
value of options granted during 1997.
The following table summarizes information about stock options that are
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- -------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1998 Life Price 1998 Price
------------------ -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$1.50 to 2.16 87,300 7.4 years $1.91 29,300 $2.00
3.75 to 5.20 259,437 7.5 5.02 159,568 5.05
7.04 to 9.00 5,499 8.0 7.40 5,166 7.29
------- ------- -----
$1.50 to 9.00 352,236 7.51 4.29 194,034 $4.65
======= ======= =====
</TABLE>
On April 1, 1990, the Company established an Employee Stock Ownership Plan
(ESOP), which awards shares of the Company's common stock on a noncontributory
basis to eligible employees of the Company. The Company contributed 130,000 and
125,000 common shares in 1996 and 1995. Participants are not vested in any
amounts allocated to them until they have completed at least 1,000 hours of
service per year for one year. After five such years, a participant is 100%
vested in such amounts. Generally, a participant also will be fully vested upon
attaining age 65 or in the event of total and permanent disability, death or
termination of the ESOP. ESOP shares which are committed to be released are
treated as outstanding for earnings per share computations. During 1998 and
1997, the Board of Directors authorized no contribution to the ESOP.
Effective April 1, 1991, the Company formed a deferred compensation plan
structured under Section 401(k) of the Internal Revenue Code. The plan covers
substantially all employees meeting certain minimum service requirements. Under
the plan, contributions are made by the employees and matched by the Company
subject to certain limitations. The Company's contribution to this plan was
approximately $542,000, $329,000, and $157,000 for the years ended December 31,
1998, 1997, and 1996, respectively.
15. Commitments and Contingencies:
Litigation
On March 20, 1998, the Company and several of its former officers were named
as defendants in a lawsuit alleging certain violations of federal securities
laws by the Company. The plaintiffs in the lawsuit seek to represent a class of
persons who purchased shares of the Company's common stock from March 31, 1997
through and including March 31, 1998. The Company has filed a motion to dismiss
the lawsuit which is currently pending determination by the court, otherwise,
the Company intends to vigorously defend the lawsuit but is currently unable to
assess the likelihood of success in this litigation, which is in the early
stages of fact finding. An adverse result in the litigation could have a
material adverse effect on the Company's business and operations.
In addition, the Company, in the normal course of business, is party to
various other matters of litigation. Management is of the opinion that the
eventual outcome of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
The healthcare industry is subject to numerous laws and regulations of
federal, state and local governments. These laws and regulations include, but
are not necessarily limited to, matters such as licensure, accreditation,
47
<PAGE>
government healthcare program participation requirements, reimbursement for
patient services, and Medicare and Medicaid fraud and abuse. Recently,
government activity has increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and regulations by
healthcare providers. Violations of these laws and regulations could result in
expulsion from government healthcare programs together with the imposition of
significant fines and penalties, as well as significant repayments for patient
services previously billed. Management believes that the Company is in
compliance with fraud and abuse as well as other applicable government laws and
regulations. While no regulatory inquiries have been made, compliance with such
laws and regulations can be subject to future government review and
interpretation as well as regulatory actions unknown or unasserted at this time.
Self-Insurance
The Company self-insures its employees and their dependents for injury and
hospitalization. The Company self-insures claims up to $75,000 per person, with
an insurance company covering claims in excess of this amount up to a maximum of
$1,000,000 per person. A liability is accrued for claims incurred but not yet
reported (IBNR) based on historical claims paid information as provided by the
respective insurance company. The IBNR liability at December 31, 1998 and 1997,
was approximately $320,000 and $1,005,000, respectively. The Company has paid
claims of approximately $2,597,000, $1,126,000, and $1,101,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.
16. Segment Reporting
The Company has three reportable segments: nursing, respiratory
therapy/medical equipment (HME), and infusion therapy. The Company's reportable
segments are strategic business units defined by lines of service. Each engages
in business activities which are key to the Company providing fully integrated
comprehensive home health care services.
The nursing segment derives its revenue from a wide range of nursing services
to individuals with acute illness, long term chronic health conditions,
permanent disabilities, terminal illness or post-procedural needs. Patients are
typically referred to the Company by primary care or specialty physicians and
managed care case managers. The HME segment derives its revenue from home
respiratory monitoring and medical equipment. The Company rents, sells and
services respiratory equipment for patient use in the home and supplies patients
with aerosol medications for use in respiratory therapy treatments. Finally,
the infusion therapy segment derives its revenues from the administration of
nutrients, antibiotics and other medications intravenously (into the vein),
subcutaneously (under the skin), intramuscularly (into the muscle),
intrathecally or epidurally (via spinal routes), or through feeding tubes into
the digestive tract.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The following tables summarize the
segment information by lines of service.
48
<PAGE>
As of and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Infusion
Nursing HME Therapy Total
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net revenues $ 33,039,098 $ 58,956,377 $18,104,011 $110,099,486
Direct expenses 27,832,100 17,103,888 10,798,038 55,734,026
------------ ------------ ----------- ------------
Gross profit 5,206,998 41,852,489 7,305,973 54,365,460
Depreciation and amortization 8,578,472 23,255,113 298,633 32,132,218
General and administrative 20,516,048 29,784,910 6,272,396 56,573,354
Provision for doubtful accounts 7,075,748 29,128,773 8,868,611 45,073,132
Interest expense 8,447,743 153,244 5,606 8,606,593
Income tax benefit (94,046) (36,357) (119,677) (250,080)
------------ ------------ ----------- ------------
Net loss $(39,316,967) $(40,433,194) $(8,019,596) $(87,769,757)
============ ============ =========== ============
</TABLE>
Reconciliation to consolidated statement of operations for the year ended
December 31, 1998:
<TABLE>
<S> <C>
Total net revenues for reportable segments $110,099,486
Total net revenues for non-reportable segments (1) 5,466,777
Unallocated amounts 175,158
------------
Consolidated net revenues $115,741,421
============
Total net loss from reportable segments $(87,769,757)
Total net income from non-reportable segments (1) (936,906)
Unallocated Amounts:
Net revenues 175,158
Depreciation and amortization (6,737,917)
Interest expense (2,696,976)
Income taxes (125,854)
General and administrative (178,050)
------------
Consolidated net loss $(98,270,302)
============
</TABLE>
<TABLE>
<CAPTION>
Infusion
Nursing HME Therapy Total
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Total assets $9,208,060 $37,654,282 $18,461,398 $65,323,740
</TABLE>
Reconciliation to consolidated balance sheet as of December 31, 1998:
<TABLE>
<S> <C>
Total assets for reportable segments $65,323,740
Total assets for non-reportable segments (1) 754,632
Unallocated amounts 8,184,974
-----------
Consolidated total assets $74,263,346
===========
</TABLE>
49
<PAGE>
As of and for the year ended December 31, 1997:
<TABLE>
<CAPTION>
Infusion
Nursing HME Therapy Total
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Net revenues $75,591,166 $42,722,064 $19,487,029 $137,800,259
Direct expenses 40,696,130 14,303,501 7,804,481 62,804,112
----------- ----------- ----------- ------------
Gross profit 34,895,036 28,418,563 11,682,548 74,996,147
Depreciation and amortization 1,801,875 758,745 228,946 2,789,566
General and administrative 38,505,671 19,532,169 5,634,154 63,671,994
Provision for doubtful accounts 2,948,679 8,789,785 2,318,553 14,057,017
Interest expense 2,848,209 206,046 6,861 3,061,116
Income tax expense (benefit) (1,366,219) 952,769 2,273,580 1,860,130
----------- ----------- ----------- ------------
Net income (loss) $(9,843,179) $(1,820,951) $ 1,220,454 $(10,443,676)
=========== =========== =========== ============
</TABLE>
Reconciliation to consolidated statement of operations for the year ended
December 31, 1997:
<TABLE>
<S> <C>
Total net revenues for reportable segments $137,800,259
Total net revenues for non-reportable segments (1) 5,967,406
Unallocated amounts (562,915)
------------
Consolidated net revenues $143,204,750
============
Total net loss from reportable segments $(10,443,676)
Total net income from non-reportable segments (1) 58,158
Unallocated Amounts:
Net revenues (562,915)
Depreciation and amortization (10,445,266)
Interest expense (2,256,602)
Income taxes 6,700,000
General and administrative 1,311,888
------------
Consolidated net loss $(15,638,413)
============
</TABLE>
<TABLE>
<CAPTION>
Infusion
Nursing HME Therapy Total
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Total assets $42,957,631 $65,779,404 $22,225,141 $130,962,176
</TABLE>
Reconciliation to consolidated balance sheet at December 31, 1997:
<TABLE>
<S> <C>
Total assets for reportable segments $130,962,176
Total assets for non-reportable segments (1) 2,392,307
Unallocated amounts (2) 30,486,540
------------
Consolidated total assets $163,841,023
============
</TABLE>
50
<PAGE>
For the year ended December 31, 1996:
<TABLE>
<CAPTION>
Infusion
Nursing HME Therapy Total
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net revenues $64,251,594 $28,999,266 $15,892,206 $109,143,066
Direct expenses 32,380,114 8,068,472 6,995,825 47,444,411
----------- ----------- ----------- ------------
Gross profit 31,871,480 20,930,794 8,896,381 61,698,655
Depreciation and amortization 1,165,771 386,778 139,376 1,691,925
General and administrative 28,870,412 12,797,913 3,470,523 45,138,848
Provision for doubtful accounts 722,919 2,007,400 450,075 3,180,394
Interest expense 896,691 57,286 3,548 957,525
Income tax expense 84,117 2,215,752 1,890,556 4,190,425
----------- ----------- ----------- ------------
Net income $ 131,570 $ 3,465,665 $ 2,942,303 $ 6,539,538
=========== =========== =========== ============
</TABLE>
Reconciliation to consolidated statement of earnings for the year ended December
31, 1996:
<TABLE>
<S> <C>
Total net revenues for reportable segments $109,143,066
Total net revenues for non-reportable segments 1,180,654
Unallocated amounts (3,538,568)
------------
Consolidated net revenues $106,785,152
============
Total net income from reportable segments $ 6,539,538
Total net income from non-reportable segments 91,061
Unallocated amounts:
Net revenues (3,538,568)
Depreciation and amortization (884,284)
Provision for doubtful accounts (400,000)
Interest Expense (1,185,708)
Income Taxes 830,258
General and adminsitrative 3,879,711
------------
Consolidated net income $ 5,332,008
============
</TABLE>
(1) Non-reportable segments do not meet the definition of the quantitative
thresholds for a reportable operating segment and are attributable to a nurse
staffing business and the holding company for certain of the Company's assets
and liabilities. Neither of these entities has ever met the definition or
quantitative thresholds for determining reportable segments.
(2) Includes $23 million in short-term investments purchased with the proceeds
from the Senior Notes (see Note 7) recorded on the balance sheet of the holding
company, a non-reportable segment.
51
<PAGE>
17. Net Income (Loss) Per Common Share:
The following table sets forth the computation of basic and diluted net income
(loss) per common share:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------------- ------------- ------------
<S> <C> <C> <C>
Numerator:
Net income (loss).................................. $(98,270,302) $(15,638,413) $5,332,008
============ ============ ==========
Denominator:
Weighted average common shares issued.............. 10,091,340 10,053,734 7,770,175
Effect of dilutive stock options:
Assuming exercise of options, reduced by the
number of common shares which could have ------------ ----------
been purchased with the proceeds from
exercise of such options.................. -- -- 270,075
------------ ------------ ----------
Weighted average number of common shares
outstanding and dilutive stock options........ 10,091,340 10,053,734 8,040,250
============ ============ ==========
Net income (loss) per common share.................... $ (9.74) $ (1.56) $ (0.69)
Net income (loss) per common share - assuming
dilution......... $ (9.74) $ (1.56) $ 0.66
</TABLE>
18. Fair Value of Financial Instruments:
On January 1, 1995, the Company adopted SFAS No. 107, "Disclosure About Fair
Value of Financial Instruments." Cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value because of the short-term
maturity of those instruments. Because of the financial issues faced by the
Company at December 31, 1998 (see Note 2), the Company cannot reasonably
estimate the fair value of its 11% Senior Notes at December 31, 1998. The fair
value of the Company's long-term debt (including the 11% Senior Notes) and
capital lease obligations at December 31, 1997 were determined to approximate
its carrying value since the 11% Senior Notes were issued on December 1, 1997.
19. Consolidated Quarterly Data (unaudited):
The following is a summary of the consolidated quarterly results of operations
of the Company for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
1998 March 31 June 30 September 30 December 31
- -------------------------------------------------- --------- --------- ------------- ------------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts)
Net revenues...................................... $32,682 $ 30,259 $ 27,950 $ 24,850
Gross profit...................................... 14,881 14,363 14,349 12,429
Loss from operations.............................. (3,128) (15,841) (7,300) (60,825)
Loss before income taxes.......................... (5,488) (18,517) (10,231) (64,162)
Net loss.......................................... (5,488) (18,715) (9,883) (64,184)
Net loss per common share......................... (0.54) (1.85) (0.98) (6.36)
Net loss per common share-
assuming dilution............................ (0.54) (1.85) (0.98) (6.36)
Weighted average common shares outstanding........ 10,090 10,095 10,095 10,091
Weighted average common shares outstanding
and dilutive common stock options............ 10,090 10,095 10,095 10,091
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
1997 March 31 June 30 September 30 December 31
- ---- -------- -------- ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net revenues............................................. $33,765 $34,314 $40,504 $ 34,622
Gross profit............................................. 19,961 16,588 23,052 16,224
Income (loss) from operations............................ 3,675 (4,069) 3,592 (18,303)
Income (loss) before income taxes........................ 3,014 (5,185) 2,154 (20,406)
Net income (loss)........................................ 1,808 (3,336) 1,293 (15,403)
Net income (loss) per common share....................... .18 (.33) .13 (1.53)
Net income (loss) per common share-
assuming dilution................................... .18 (.33) .13 (1.53)
Weighted average common shares outstanding............... 10,023 10,041 10,064 10,086
Weighted average common shares outstanding
and dilutive common stock options................... 10,178 10,041 10,159 10,086
</TABLE>
During the three months ended December 31, 1998, net revenues and net income
were adversely affected by a goodwill write-off of $27,037,000 and an increase
in the provision for doubtful accounts of $20,600,000.
During the three months ended September 30, 1998, net income was adversely
affected by an increase in the provision for doubtful accounts of $4,000,000.
During the three months ended June 30, 1998, net revenues and net income were
adversely affected by a $900,000 revenue adjustment related to Medicare nursing
cost limitations, an increase in the provision for doubtful accounts of
$7,000,000 and by a goodwill write off of $4,800,000.
During the three months ended March 31, 1998, net revenues and net income were
adversely affected by a $5,600,000 revenue adjustment related to Medicare
nursing per-beneficiary cost limitations.
*************************************
53
<PAGE>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to from Balance
Beginning Costs and Acquired at End
Classification of Period Expenses Companies Deductions of Period
-------------- ---------- -------- ---------- ---------- ---------
December 31, 1998:
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts..... $11,441,000 $45,094,000 $ -- $(23,340,000)(b) $33,195,000
Accrued Restructuring Costs......... 1,575,000 -- -- (387,000) 1,188,000
Accumulated Amortization of
Intangible Assets............... 3,404,000 32,682,000 -- -- 36,086,000
----------- ----------- ---------- ------------ -----------
Total Reserves and $16,420,000 $77,776,000 $ -- $(23,727,000) $70,469,000
Allowances =========== =========== ========== ============ ===========
December 31, 1997:
Allowance for Doubtful Accounts..... $ 5,101,000 $14,057,000 $4,122,000 $(11,839,000)(b) $11,441,000
Accrued Restructuring Costs......... -- 1,575,000 -- -- 1,575,000
Accumulated Amortization of
Intangible Assets............... 2,038,000 9,641,000 -- (8,275,000)(c) 3,404,000
----------- ----------- ---------- ------------ -----------
Total Reserves and $ 7,139,000 $25,273,000 $4,122,000 $(20,114,000) $16,420,000
Allowances =========== =========== ========== ============ ===========
December 31, 1996:
Allowance for Doubtful Accounts..... $ 2,056,000 $ 3,580,000 $2,753,000 $ (3,288,000)(b) $ 5,101,000
Accumulated Amortization of
Intangible Assets............... 1,186,000 852,000 -- -- 2,038,000
----------- ----------- ---------- ------------ -----------
Total Reserves and $ 3,242,000 $ 4,432,000 $2,753,000 $ (3,288,000) $ 7,139,000
Allowances =========== =========== ========== ============ ===========
</TABLE>
- -----------
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
(b) Write-off of uncollectible receivables net of recoveries.
54
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on April 21,
1999 on its behalf by the undersigned thereunto duly authorized.
HEALTHCOR HOLDINGS, INC.
By: /S/ Michael D. Ayres
--------------------
Michael D. Ayres
President and Treasurer
Each person whose signature appears below hereby authorizes S. Wayne Bazzle
and Cheryl C. Bazzle, or either of them, as attorneys-in-fact to sign on his or
her behalf, individually and in the capacity stated below and to file all
amendments and supplements to the Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ Michael D. Ayres President and Treasurer April 21, 1999
- ---------------------------
Michael D. Ayres
/S/ Sue Collins Secretary April 21, 1999
- ---------------------------
Sue Collins
/S/ Charles E. Dowling Vice President April 21, 1999
- ---------------------------
Charles E. Dowling
/S/ Robert B. Crates Director April 21, 1999
- ---------------------------
Robert B. Crates
/S/ Jane B. Finley Director April 21, 1999
- ---------------------------
Jane B. Finley, Ph.D.
/S/ Michael J. Foster Director April 21, 1999
- ---------------------------
Michael J. Foster
55
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
(a) Exhibits
1.1 -- Purchase Agreement dated November 24, 1997, by and among the Company, the guarantors named on
the signature pages thereto, Bear, Stearns & Co. Inc. and Chase Securities Inc (incorporated by
reference to the Company's Registration Statement on Form S-4 (File No. 333-44175), as filed with
the Securities and Exchange Commission on January 13, 1998).
3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to
the Company's Registration Statement on Form S-1 (File No. 333-5779), as filed with the Commission
on June 12, 1996).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-5779), as filed with the Commission on June 12,
1996).
4.1 -- Specimen Stock Certificate of the Company (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-5779), as filed with the Commission on June 12,
1996).
4.2 -- Indenture dated as of December 1, 1997, by and among the Company, the Guarantors Signatories
Thereto and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to
the Company's Registration Statement on Form S-4 (File No. 333-44175), as filed with the Securities
and Exchange Commission on January 13, 1998).
4.3 -- First Supplemental Indenture dated as of December 2, 1997 to Indenture dated as of December 1,
1997, by and among the Company, the Guarantors Signatories Thereto and Norwest Bank Minnesota,
National Association, as Trustee (incorporated by reference to the Company's Registration Statement
on Form S-4 (File No. 333-44175), as filed with the Securities and Exchange Commission on January
13, 1998).
4.4 -- Form of Global Note (included in Exhibit 4.2).
4.5 -- Registration Rights Agreement dated as of December 1, 1997, by and among Bear Stearns & Co.
Inc., Chase Securities Inc., the Company, and certain subsidiaries of the Company, as Guarantors
(incorporated by reference to the Company's Registration Statement on Form S-4 (File No.
333-44175), as filed with the Securities and Exchange Commission on January 13, 1998).
4.6 -- Second Amended and Restated Credit Agreement dated December 1, 1997, by and among Texas
Commerce Bank National Association, as Agent and an Issuing Bank, the Several Financial
Institutions from time to time a party thereto and the Company (incorporated by reference to the
Company's Registration Statement on Form S-4 (File No. 333-44175), as filed with the Securities and
Exchange Commission on January 13, 1998).
10.1 -- Registration Rights Agreement, dated as of June 1, 1992 between the Company and certain
stockholders of the Company (incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-5779) as filed with the Commission on June 12, 1996).
10.2 -- The Company Employee Stock Ownership Plan and Trust, dated April 1, 1990, as amended
(incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-5779)
as filed with the Commission on June 12, 1996).
10.3 -- Form of HealthCor Holdings, Inc. 1996 Long-Term Incentive Plan (incorporated by reference to
the Company's Registration Statement on Form S-1 (File No. 333-5779) as filed with the Commission
on June 12, 1996).
10.4 -- HealthCor Holdings, Inc. Employee Stock Ownership Plan and Trust, dated April 1, 1990, as
amended (incorporated by reference to the Company's Registration Statement on Form S-1 (File No.
333-5779) as filed with the Commission on June 12, 1996).
10.5 -- Warrant Agreement between the Company and an individual to purchase Common Stock of the
Company, dated as of November 1, 1994 (incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-5779) as filed with the Commission on June 12, 1996).
</TABLE>
56
<PAGE>
<TABLE>
<C> <S>
10.6 -- Form of Indemnification Agreement entered into between the Company and its executive officers
and directors (incorporated by reference to the Company's Registration Statement on Form S-1 (File
No. 333-5779) as filed with the Commission on June 12, 1996).
10.7 -- Stock Purchase Agreement, dated April 15, 1996, by and between I Care Home I.V. Affiliates,
Inc., I Care of Arkansas, Inc., I Care, Inc. and the Company (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 333-5779) as filed with the Commission on
June 12, 1996).
10.8 -- Asset Purchase Agreement, dated as of September 1, 1996, by and between HealthCor Oxygen and
Medical Equipment, Inc. and Southern Medical Mart, Inc. (incorporated by reference to the Company's
Current Report on Form 8-K, as filed with the Commission on November 12, 1996).
10.9 -- Credit Agreement, dated as of October 31, 1996, by and between HealthCor Holdings, Inc.,
HealthCor, Inc. and the certain financial institutions named therein (incorporated by reference to
the Company's Annual Report on Form 10-K, as filed with the Commission on April 15, 1997).
10.10 -- Form of Change of Control Agreement (incorporated by reference to the Company's Registration
Statement on Form S-4 (File No. 333-44175) as filed with the Commission on January 13, 1998.
10.11 -- Loan and Security Agreement dated as of May 19, 1998, by and among HealthCor Holdings, Inc. and
its subsidiaries as Borrower and HCFP Funding, Inc. as Lender, with Amendment No. 1 thereto dated
as of September 14, 1998, Amendment No. 2 thereto dated as of November 16, 1998, Amendment No. 3
thereto dated as of January 5, 1999 and Amendment No. 4 thereto dated as of March 1, 1999.
10.12 -- Convertible Loan Agreement dated as of December 31, 1998, by and among HealthCor Holdings, Inc.
as the Borrower, the Lenders from time to time party to the Agreement and Credit Suisse First
Boston Management Corporation, as Agent for the Lenders, with the First Amendment thereto dated as
of February 22, 1999, the Second Amendment thereto dated as of March 2, 1999, the Third Amendment
thereto dated as of March 15, 1999, the Fourth Amendment thereto dated as of March 30, 1999, the
Fifth Amendment thereto dated as of April 13, 1999.
10-13 -- Employment Termination Agreement dated as of February 25, 1999 by and between HealthCor
Holdings, Inc. and S. Wayne Bazzle.
10-14 -- Employment Termination Agreement dated as of February 25, 1999 by and between HealthCor
Holdings, Inc. and Cheryl C. Bazzle.
10-15 -- Tatum CFO Retainer Agreement dated as of January 1, 1999.
10.16 -- Consulting Agreement dated as of April 12, 1999, by and among HealthCor Holdings, Inc. and The
Palmieri Company.
10.17 -- Consulting Agreement dated as of January 1 ,1999, by and among HealthCor Holdings, Inc. and
Chanin, Kirkland, and Messina with Amendment No. 1 dated April 1, 1999.
11.1 -- Computation of net income (loss) per common share.
23.1 -- Consent of Arthur Andersen LLP, independent public accountants.
</TABLE>
57
<PAGE>
Exhibit 10.11
$20,000,000.00
LOAN AND SECURITY AGREEMENT
---------------------------
by and between
HEALTHCOR, INC.
HEALTHCOR HOLDINGS, INC.
HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC.
HEALTHCOR PHARMACY, INC.
PHHN, INC.
HEALTHCOR REHABILITATION SERVICES, INC.
HC PERSONNEL RESOURCES, INC.
CARENETWORK, INC.
(collectively, "Borrower")
and
HCFP FUNDING, INC.
("Lender")
May 19, 1998
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of
May 19, 1998, by and among HEALTHCOR, INC., a Delaware corporation,
HEALTHCOR HOLDINGS, INC., a Delaware corporation (AHoldings@), HEALTHCOR OXYGEN
& MEDICAL EQUIPMENT, INC., a Texas corporation, HEALTHCOR PHARMACY, INC. a Texas
corporation, PHHN, INC. a Texas corporation, HEALTHCOR REHABILITATION SERVICES,
INC. a Texas corporation, HC PERSONNEL RESOURCES, INC., a Texas corporation,
CARENETWORK, INC., an Arkansas corporation (collectively, "Borrower"), and HCFP
FUNDING, INC., a Delaware corporation ("Lender").
RECITALS
--------
A. Borrower desires to establish certain financing arrangements with and
borrow funds from Lender, and Lender is willing to establish such arrangements
for and make loans and extensions of credit to Borrower, on the terms and
conditions set forth below.
B. The parties desire to define the terms and conditions of their
relationship and to reduce their agreements to writing.
NOW, THEREFORE, in consideration of the promises and covenants contained in
this Agreement, and for other consideration, the receipt and sufficiency of
which are acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
-----------
As used in this Agreement, the following terms shall have the following
meanings:
Section 1.1. Account. "Account" means any right to payment for goods
--------
sold or leased or services rendered, whether or not evidenced by an instrument
or chattel paper, and whether or not earned by performance.
Section 1.2. Account Debtor. "Account Debtor" means any Person
---------------
obligated on any Account of Borrower, including without limitation, any Insurer
and any Medicaid/Medicare Account Debtor.
Section 1.3. Affiliate. "Affiliate" means, with respect to a
----------
specified Person, any Person directly or indirectly controlling, controlled by,
or under common control with the specified Person, including without limitation
their stockholders and any Affiliates thereof. A Person shall be deemed to
control a corporation or other entity if the Person possesses, directly or
indirectly, the power to direct or cause the direction of the management and
business of the
<PAGE>
corporation or other entity, whether through the ownership of voting securities,
by contract, or otherwise.
Section 1.4. Agreement. "Agreement" means this Loan and Security
----------
Agreement, as it may be amended or supplemented from time to time.
Section 1.5. Base Rate. "Base Rate" means a rate of interest equal to
----------
two percent (2%) above the "Prime Rate of Interest,@ but in no event in excess
of the Highest Lawful Rate.
Section 1.6. Borrowed Money. "Borrowed Money" means any obligation to
---------------
repay money, any indebtedness evidenced by notes, bonds, debentures or similar
obligations, any obligation under a conditional sale or other title retention
agreement and the net aggregate rentals under any lease which under GAAP would
be capitalized on the books of Borrower or which is the substantial equivalent
of the financing of the property so leased.
Section 1.7. Borrower. "Borrower" has the meaning set forth in the
---------
Preamble.
Section 1.8. Borrowing Base. "Borrowing Base" has the meaning set
---------------
forth in Section 2.1(d).
Section 1.9.a. Business Day. "Business Day" means any day on which
-------------
financial institutions are open for business in the State of Maryland, excluding
Saturdays and Sundays.
Section 1.9.b. Change of Control. AChange of Control@ means the
------------------
occurrence of any of the following: (i) the sale, lease, transfer, conveyance or
other disposition (other than by way of merger of consolidation), in one or a
series of related transactions, of all or substantially all of the assets of the
Borrower taken as a whole to any Aperson@ (as such term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the A1934 Act@));
(ii) the adoption of a plan relating to the liquidation or dissolution of
Holdings; or (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
Aperson@ (as defined above), other than C. Wayne Bazzle, Cheryl C. Bazzle and
any of their Affiliates, is or becomes the Abeneficial owner@ (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the 1934 Act, except that a person
shall be deemed to have Abeneficial ownership@ of all securities that such
person has the right to acquire, whether such right is currently exercisable or
is exercisable only upon the occurrence of a subsequent condition), directly or
indirectly, of more than 35% of the common equity interest in Holdings (measured
by voting power rather than number of shares or equivalent units).
Section 1.10. Closing; Closing Date. "Closing" and "Closing Date" have
----------------------
the meanings set forth in Section 5.3.
Section 1.11. Collateral. "Collateral" has the meaning set forth in
-----------
Section 3.1.
2
<PAGE>
Section 1.12. Commitment Fee. "Commitment Fee" has the meaning set
---------------
forth in Section 2.4(a).
Section 1.13. Concentration Account. "Concentration Account" has the
----------------------
meaning set forth in Section 2.3.
Section 1.14. Controlled Group. "Controlled Group" means a "controlled
-----------------
group" within the meaning of Section 4001(b) of ERISA.
Section 1.15. Cost Report Settlement Account. "Cost Report Settlement
------------------------------
Account" means an "Account" owed to Borrower by a Medicaid/Medicare Account
Debtor pursuant to any cost report, either interim, filed or audited, as the
context may require.
Section 1.16. Default Rate. "Default Rate" means a rate per annum equal
-------------
to five percent (5%) above the then applicable Base Rate, but in no event in
excess of the Highest Lawful Rate.
Section 1.17a. EBITDA. AEBITDA@ has the meaning set forth in Section
-------
6.23.
Section 1.17b. ERISA. "ERISA" has the meaning set forth in Section 4.12.
------
Section 1.18. Event of Default. "Event of Default" and "Events of
-----------------
Default" have the meanings set forth in Section 8.1.
Section 1.19. GAAP. "GAAP" means generally accepted accounting
-----
principles applied in a manner consistent with the financial statements referred
to in Section 4.7.
Section 1.20. Governmental Authority. "Governmental Authority" means
-----------------------
and includes any federal, state, District of Columbia, county, municipal, or
other government and any department, commission, board, bureau, agency or
instrumentality thereof, whether domestic or foreign.
Section 1.21. Hazardous Material. "Hazardous Material" means any
-------------------
substances defined or designated as hazardous or toxic waste, hazardous or toxic
material, hazardous or toxic substance, or similar term, by any environmental
statute, rule or regulation or any Governmental Authority.
Section 1.22. Highest Lawful Rate. "Highest Lawful Rate" means the
--------------------
maximum lawful rate of interest referred to in Section 2.7 that may accrue
pursuant to this Agreement.
Section 1.23. Insurer. AInsurer@ means a Person that insures a Patient
--------
against certain of the costs incurred in the receipt by such Patient of Medical
Services, or that has an agreement with Borrower to compensate Borrower for
providing services to a Patient.
3
<PAGE>
Section 1.24. Lender. "Lender" has the meaning set forth in the
-------
Preamble.
Section 1.25. Loan. "Loan" has the meaning set forth in Section
-----
Section 1.26. Loan Documents. "Loan Documents" means and includes this
---------------
Agreement, the Note, and each and every other document now or hereafter
delivered in connection therewith, as any of them may be amended, modified, or
supplemented from time to time.
Section 1.27. Loan Management Fee. "Loan Management Fee" has the meaning
--------------------
set forth in Section 2.4(c).
Section 1.28a. Lockbox. "Lockbox" has the meaning set forth in Section
--------
2.3.
Section 1.28b. Lockbox Account. "Lockbox Account" means an account
----------------
maintained by Borrower at the Lockbox Bank into which all collections of
Accounts are paid directly.
Section 1.29. Lockbox Bank. "Lockbox Bank" has the meaning set forth in
-------------
Section 2.3.
Section 1.30. Maximum Loan Amount. "Maximum Loan Amount" has the
--------------------
meaning set forth in Section 2.1(a)(i).
Section 1.31. Medicaid/Medicare Account Debtor. "Medicaid/ Medicare
---------------------------------
Account Debtor" means any Account Debtor which is (i) the United States of
America acting under the Medicaid/Medicare program established pursuant to the
Social Security Act, (ii) any state or the District of Columbia acting pursuant
to a health plan adopted pursuant to Title XIX of the Social Security Act or
(iii) any agent, carrier, administrator or intermediary for any of the
foregoing.
Section 1.32.a. Medical Services. Medical and health care services
-----------------
provided to a Patient, including, but not limited to, medical and health care
services provided to a Patient and performed by Borrower which are covered by a
policy of insurance issued by an Insurer, and includes physician services, nurse
and therapist services, dental services, hospital services, skilled nursing
facility services, comprehensive outpatient rehabilitation services, home health
care services, residential and out-patient behavioral healthcare services, and
medicine or health care equipment provided by Borrower to a Patient for a
necessary or specifically requested valid and proper medical or health purpose.
Section 1.32.b. Minimum Loan Amount. "Minimum Loan Amount" has the meaning
--------------------
set forth in Section 2.1(a)(ii).
Section 1.33. Note. "Note" has the meaning set forth in Section
-----
2.1(c).
4
<PAGE>
Section 1.34. Obligations. "Obligations" has the meaning set forth in
------------
Section 3.1.
Section 1.35. Patient. APatient@ means any Person receiving Medical
--------
Services from Borrower and all Persons legally liable to pay Borrower for such
Medical Services other than Insurers.
Section 1.36. Permitted Liens. "Permitted Liens" means: (a) liens for
----------------
taxes not delinquent, or which are being contested in good faith and by
appropriate proceedings which suspend the collection thereof and in respect of
which adequate reserves have been made (provided that such proceedings do not,
in Lender's sole discretion, involve any substantial danger of the sale, loss or
forfeiture of such property or assets or any interest therein); (b) deposits or
pledges to secure obligations under workmen's compensation, social security or
similar laws, or under unemployment insurance; (c) deposits or pledges to secure
bids, tenders, contracts (other than contracts for the payment of money),
leases, statutory obligations, surety and appeal bonds and other obligations of
like nature arising in the ordinary course of business; (d) mechanic's,
workmen's, materialmen's or other like liens arising in the ordinary course of
business with respect to obligations which are not due, or which are being
contested in good faith by appropriate proceedings which suspend the collection
thereof and in respect of which adequate reserves have been made (provided that
such proceedings do not, in Lender's sole discretion, involve any substantial
danger of the sale, loss or forfeiture of such property or assets or any
interest therein); (e) liens and encumbrances in favor of Lender; (f) liens
granted in connection with the lease or purchase of property or assets financed
by borrowings permitted by Section 7.1 (provided, however, that no such
borrowings permitted by Section 7.1 may be secured by liens on any of the
Collateral); (g) contractual and statutory landlords liens; and (h) liens set
forth on Schedule 1.36.
-------------
Section 1.37. Person. "Person" means an individual, partnership,
-------
corporation, trust, joint venture, joint stock company, limited liability
company, association, unincorporated organization, Governmental Authority, or
any other entity.
Section 1.38. Plan. "Plan" has the meaning set forth in Section 4.12.
-----
Section 1.39. Premises. "Premises" has the meaning set forth in Section
---------
4.15.
Section 1.40. Prime Rate of Interest. "Prime Rate of Interest" means
-----------------------
that rate of interest designated as such by Fleet National Bank of Connecticut,
N.A., or any successor thereto, as the same may from time to time fluctuate.
Section 1.41. Prohibited Transaction. "Prohibited Transaction" means a
-----------------------
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975(c)(1) of the Internal Revenue Code.
5
<PAGE>
Section 1.42. Qualified Account. "Qualified Account" means an Account
------------------
of Borrower generated in the ordinary course of Borrower's business from the
sale of goods or rendition of medical services which Lender, in its reasonable
credit judgment, deems to be a Qualified Account. Without limiting the
generality of the foregoing, no Account shall be a Qualified Account if: (a)
the Account or any portion thereof is payable by an individual beneficiary,
recipient or subscriber individually and not directly to Borrower by a
Medicaid/Medicare Account Debtor or commercial medical insurance carrier
acceptable to Lender in its sole discretion; (b) except for those Accounts
listed on Schedule 1.42, the Account remains unpaid more than one hundred-twenty
-------------
(120) days past the claim or invoice date; (c) the Account is listed on Schedule
--------
1.42 and remains unpaid more than ninety (90) days past the claim or invoice
- ----
date; (d) the Account is subject to any defense, set-off, counterclaim,
deduction, discount, credit, chargeback, freight claim, allowance, or adjustment
of any kind; (e) any part of any goods the sale of which has given rise to the
Account has been returned, rejected, lost, or damaged; (f) if the Account arises
from the sale of goods by Borrower, such sale was not an absolute sale or on
consignment or on approval or on a sale-or-return basis or subject to any other
repurchase or return agreement, or such goods have not been shipped to the
Account Debtor or its designee; (g) if the Account arises from the performance
of services, such services have not been actually been performed or were
undertaken in violation of any law; (h) the Account is subject to a lien other
than a Permitted Lien; (i) Borrower knows or should have known of the
bankruptcy, receivership, reorganization, or insolvency of the Account Debtor;
(j) the Account is evidenced by chattel paper or an instrument of any kind, or
has been reduced to judgment; (k) the Account is an Account of an Account Debtor
having its principal place of business or executive office outside the United
States; (l) the Account Debtor is an Affiliate or Subsidiary of Borrower; (m)
more than ten percent (10%) of the aggregate balance of all Accounts owing from
the Account Debtor obligated on the Account are outstanding more than one
hundred-fifty (150) days past their invoice date; (n) fifty percent (50%) or
more of the aggregate unpaid Accounts from any individual Account Debtor are not
deemed Qualified Accounts hereunder; (o) the total unpaid Accounts of the
Account Debtor, except for a Medicaid/Medicare Account Debtor, exceed twenty
percent (20%) of the net amount of all Qualified Accounts (including
Medicaid/Medicare Account Debtors); (p) any covenant, representation or warranty
contained in the Loan Documents with respect to such Account has been breached;
or (q) the Account fails to meet such other specifications and requirements
which may from time to time be established by Lender.
Section 1.43. Reportable Event. "Reportable Event" means a "reportable
-----------------
event" as defined in Section 4043(b) of ERISA.
Section 1.44. Revolving Credit Loan. "Revolving Credit Loan" has the
----------------------
meaning set forth in Section 2.1(b).
Section 1.45. Term. "Term" has the meaning set forth in Section 2.8.
-----
6
<PAGE>
ARTICLE II
LOAN
----
Section 2.1. Terms.
------
(a) (i) The maximum aggregate principal amount of credit extended
by Lender to Borrower hereunder (the "Loan") that will be outstanding at any
time is twenty million and No/100 Dollars ($20,000,000.00) (the "Maximum Loan
Amount").
(ii) The minimum aggregate principal amount of Revolving Credit
Loans that must remain outstanding at all times under the Loan during the Term
of this Agreement, as amended from time to time, is five million and No/100
Dollars ($5,000,000.00) (the AMinimum Loan Amount@).
(b) The Loan shall be in the nature of a revolving line of credit, and
shall include sums advanced and other credit extended by Lender to or for the
benefit of Borrower from time to time under this Article II (each a "Revolving
Credit Loan") up to the Maximum Loan Amount depending upon the availability in
the Borrowing Base, the requests of Borrower pursuant to the terms and
conditions of Section 2.2 below, and on such other basis as Lender may
reasonably determine. The outstanding principal balance of the Loan may
fluctuate from time to time, to be reduced by repayments made by Borrower (which
may be made without penalty or premium), and to be increased by future Revolving
Credit Loans, advances and other extensions of credit to or for the benefit of
Borrower, and shall be due and payable in full upon the expiration of the Term.
For purposes of this Agreement, any determination as to whether there is ability
within the Borrowing Base for advances or extensions of credit shall be made by
Lender in its reasonable discretion, subject to notice to Borrower and ten (10)
days opportunity to cure, and thereafter shall be final and binding upon
Borrower.
(c) At Closing, Borrower shall execute and deliver to Lender a
promissory note evidencing Borrower's unconditional obligation to repay Lender
for Revolving Credit Loans, advances, and other extensions of credit made under
the Loan, in the form of Exhibit A to this Agreement (the "Note"), dated the
---------
date hereof, payable to the order of Lender in accordance with the terms
thereof. The Note shall bear interest from the date thereof until repaid, with
interest payable monthly in arrears on the first Business Day of each month, at
a rate per annum (on the basis of the actual number of days elapsed over a year
of 360 days) equal to the Base Rate, provided that after an Event of Default
such rate shall be equal to the Default Rate. Each Revolving Credit Loan,
advance and other extension of credit shall be deemed evidenced by the Note,
which is deemed incorporated by reference herein and made a part hereof.
(d) Subject to the terms and conditions of this Agreement, advances
under the Loan shall be made against a borrowing base equal to eighty percent
(80%) of Qualified Accounts (the "Borrowing Base").
7
<PAGE>
Section 2.2. Loan Administration. Borrowings under the Loan shall be as
--------------------
follows:
(a) A request for a Revolving Credit Loan shall be made, or shall be
deemed to be made, in the following manner: (i) Borrower may give Lender notice
of its intention to borrow, in which notice Borrower shall specify the amount of
the proposed borrowing and the proposed borrowing date, not later than 3:00 p.m.
Eastern time one (1) Business Day prior to the proposed borrowing date;
provided, however, that no such request may be made at a time when there exists
- -------- -------
an Event of Default; and (ii) the becoming due of any amount required to be paid
under this Agreement, whether as interest or for any other Obligation, shall be
deemed irrevocably to be a request for a Revolving Credit Loan on the due date
in the amount required to pay such interest or other Obligation.
(b) Borrower hereby irrevocably authorizes Lender to disburse the
proceeds of each Revolving Credit Loan requested, or deemed to be requested, as
follows: (i) the proceeds of each Revolving Credit Loan requested under
subsection 2.2(a)(i) shall be disbursed by Lender by wire transfer to such bank
account as may be agreed upon by Borrower or Lender from time to time or
elsewhere if pursuant to written direction from Borrower; and (ii) the proceeds
of each Revolving Credit Loan requested under subsection 2.2(a)(ii) shall be
disbursed by Lender by way of direct payment of the relevant interest or other
Obligation.
(c) All Revolving Credit Loans, advances and other extensions of
credit to or for the benefit of Borrower shall constitute one general Obligation
of Borrower, and shall be secured by Lender's lien upon all of the Collateral.
(d) Lender shall enter all Revolving Credit Loans as debits to a loan
account in the name of Borrower and shall also record in said loan account all
payments made by Borrower on any Obligations and all proceeds of Collateral
which are indefeasibly paid to Lender, and may record therein, in accordance
with customary accounting practice, other debits and credits, including interest
and all charges and expenses properly chargeable to Borrower. All collections
into the Concentration Account pursuant to Section 2.3 shall be applied first to
fees, costs and expenses due and owing under the Loan Documents, then to
interest due and owing under the Loan Documents, and then to principal
outstanding with respect to Revolving Credit Loans.
(e) Lender will account to Borrower monthly with a statement of
Revolving Credit Loans, charges and payments made pursuant to this Agreement,
and such accounting rendered by Lender shall be deemed final, binding and
conclusive upon Borrower unless Lender is notified by Borrower in writing to the
contrary within thirty (30) days of the date each accounting is mailed to
Borrower. Such notice shall be deemed an objection to those items specifically
objected to therein.
Section 2.3. Collections, Disbursements, Borrowing Availability, and
-------------------------------------------------------
Lockbox Account. Borrower shall maintain a lockbox account (the "Lockbox") with
- ----------------
Bank One Arizona,
8
<PAGE>
N.A. (the "Lockbox Bank"), subject to the provisions of this Agreement, and
shall execute with the Lockbox Bank a Lockbox Agreement in the form attached as
Exhibit B, and such other agreements related thereto as Lender may require. In
- ---------
the event that the Lockbox Bank becomes a participant in the Loan, a bank that
is not a participant in the Loan will become the Lockbox Bank. Borrower shall
ensure that all collections of Accounts are paid directly from Account Debtors
into the Lockbox, and that all funds paid into the Lockbox are transferred by
the close of business on the day of payment to the Lockbox, into a depository
account maintained by Lender at Bank One Arizona, N.A. or U.S. Bank N.A., as
determined by Lender in its sole discretion and communicated to Borrower (the
"Concentration Account"). Lender shall apply, on a daily basis, all funds
transferred into the Concentration Account pursuant to this Section 2.3 to
reduce the outstanding indebtedness under the Loan (in accordance with Section
2.2(d)) with future Revolving Credit Loans, advances and other extensions of
credit to be made by Lender under the conditions set forth in this Article II.
To the extent that any collections of Accounts or proceeds of other Collateral
are not sent directly to the Lockbox but are received by Borrower, such
collections shall be held in trust for the benefit of Lender and immediately
remitted, in the form received, to the Lockbox Bank for transfer to the
Concentration Account immediately upon receipt by Borrower. Borrower
acknowledges and agrees that its compliance with the terms of this Section 2.3
is essential, and that upon its failure to comply with any such terms, Lender
shall be entitled to assess Borrower a fee in an amount that shall have the
effect of increasing the Base Rate by two percent (2%) per annum during the
continuance of such non-compliance. Lender shall be entitled to assess such fee
whether or not an Event of Default is declared or otherwise occurs. All funds
transferred from the Concentration Account for application to Borrower's
indebtedness to Lender shall be applied to reduce the Loan balance, but for
purposes of calculating interest shall be subject to a five (5) Business Day
clearance period. If as the result of collections of Accounts pursuant to the
terms and conditions of this Section 2.3 a credit balance exists with respect to
the Concentration Account, such credit balance shall not accrue interest in
favor of Borrower, but shall be available to Borrower at any time or times for
so long as no Event of Default exists.
Section 2.4. Fees.
-----
(a) At Closing, Borrower shall unconditionally pay to Lender a
commitment fee equal to one percent (1%) of the Maximum Loan Amount (the
"Commitment Fee"), payable as follows:
Outstanding Revolving Credit Loans Portion of Commitment Fee Due
- ---------------------------------- -----------------------------
Initial advance under this Agreement $150,000.00
due at or prior to Closing
Total of Revolving Credit Loans Additional $50,000.00
exceeds 15,000,000.00 for the first time
9
<PAGE>
(b) INTENTIONALLY OMITTED.
(c) For so long as the Loan is available to Borrower, Borrower
unconditionally shall pay to Lender a monthly loan management fee (the "Loan
Management Fee") equal to eighty-three thousandths of one percent (0.083%) of
the average amount of the outstanding principal balance of the Revolving Credit
Loans during the preceding month. The Loan Management Fee shall be payable
monthly in arrears on the first day of each successive calendar month.
(d) Borrower shall pay to Lender all out-of-pocket audit and appraisal
fees in connection with audits and appraisals of Borrower's books and records
and such other matters as Lender shall deem appropriate, which shall be due and
payable on the first Business Day of the month following the date of issuance by
Lender of a request for payment thereof to Borrower. Absent an Event of
Default, such fees shall not exceed $25,000.00 per year.
(e) Borrower shall pay to Lender, on demand, any and all fees, costs
or expenses which Lender pays to a bank or other similar institution arising out
of or in connection with (i) the forwarding to Borrower or any other Person on
behalf of Borrower, by Lender, of proceeds of Revolving Credit Loans made by
Lender to Borrower pursuant to this Agreement, and (ii) the depositing for
collection by Lender of any check or item of payment received or delivered to
Lender on account of Obligations.
Section 2.5. Payments. Principal payable on account of Revolving Credit
---------
Loans shall be payable by Borrower to Lender immediately upon the earliest of
(i) the receipt by Borrower of any proceeds of any of the Collateral, to the
extent of such proceeds, (ii) the occurrence of an Event of Default in
consequence of which the Loan and the maturity of the payment of the Obligations
are accelerated, or (iii) the termination of this Agreement pursuant to Section
2.8 hereof; provided, however, that if any advance made by Lender in excess of
-------- -------
the Borrowing Base shall exist at any time, Borrower shall, immediately upon
demand, repay such overadvance. Interest accrued on the Revolving Credit Loans
shall be due on the earliest of (i) the first Business Day of each month (for
the immediately preceding month), computed on the last calendar day of the
preceding month, (ii) the occurrence of an Event of Default in consequence of
which the Loan and the maturity of the payment of the Obligations are
accelerated, or (iii) the termination of this Agreement pursuant to Section 2.8
hereof. Except to the extent otherwise set forth in this Agreement, all
payments of principal and of interest on the Loan, all other charges and any
other obligations of Borrower hereunder, shall be made to Lender to the
Concentration Account, in immediately available funds.
Section 2.6. Use of Proceeds. The proceeds of Lender's advances under
----------------
the Loan shall be used solely for working capital and for other costs of
Borrower arising in the ordinary course of Borrower's business.
10
<PAGE>
Section 2.7. Interest Rate Limitation. The parties intend to conform
-------------------------
strictly to the applicable usury laws in effect from time to time during the
term of the Loan. Accordingly, if any transaction contemplated hereby would be
usurious under such laws, then notwithstanding any other provision hereof: (i)
the aggregate of all interest that is contracted for, charged, or received under
this Agreement or under any other Loan Document shall not exceed the maximum
amount of interest allowed by applicable law (the "Highest Lawful Rate"), and
any excess shall be promptly credited to Borrower by Lender (or, to the extent
that such consideration shall have been paid, such excess shall be promptly
refunded to Borrower by Lender); (ii) neither Borrower nor any other Person now
or hereafter liable hereunder shall be obligated to pay the amount of such
interest to the extent that it is in excess of the Highest Lawful Rate; and
(iii) the effective rate of interest shall be reduced to the Highest Lawful
Rate. All sums paid, or agreed to be paid, to Lender for the use, forbearance,
and detention of the debt of Borrower to Lender shall, to the extent permitted
by applicable law, be allocated throughout the full term of the Note until
payment is made in full so that the actual rate of interest does not exceed the
Highest Lawful Rate in effect at any particular time during the full term
thereof. If at any time the rate of interest under the Note exceeds the Highest
Lawful Rate, the rate of interest to accrue pursuant to this Agreement shall be
limited, notwithstanding anything to the contrary herein, to the Highest Lawful
Rate, but any subsequent reductions in the Base Rate shall not reduce the
interest to accrue pursuant to this Agreement below the Highest Lawful Rate
until the total amount of interest accrued equals the amount of interest that
would have accrued if a varying rate per annum equal to the interest rate under
the Note had at all times been in effect. If the total amount of interest paid
or accrued pursuant to this Agreement under the foregoing provisions is less
than the total amount of interest that would have accrued if a varying rate per
annum equal to the interest rate under the Note had been in effect, then
Borrower agrees to pay to Lender an amount equal to the difference between (i)
the lesser of (x) the amount of interest that would have accrued if the Highest
Lawful Rate had at all times been in effect, or (y) the amount of interest that
would have accrued if a varying rate per annum equal to the interest rate under
the Note had at all times been in effect, and (ii) the amount of interest
actually paid or accrued in accordance with the other provisions of this
Agreement.
11
<PAGE>
Section 2.8. Term.
-----
(a) Subject to Lender's right to cease making Revolving Credit Loans
to Borrower upon or after any Event of Default, this Agreement shall be in
effect for a period of two (2) years from the Closing Date, unless terminated as
provided in this Section 2.8 (the "Term"), and this Agreement may be renewed for
one-year periods thereafter upon the mutual written agreement of the parties.
(b) Notwithstanding anything herein to the contrary, Lender may
terminate this Agreement with notice upon an Event of Default.
(c) Upon at least thirty (30) days prior written notice to Lender,
Borrower may terminate this Agreement prior to the second annual anniversary of
the Closing Date, provided that, at the effective date of such termination,
Borrower shall pay to Lender (in addition to the then outstanding principal,
accrued interest and other Obligations owing under the terms of this Agreement
and any other Loan Documents) as liquidated damages for the loss of bargain and
not as a penalty, an amount equal to (i) one and one-half (1.5%) of the Maximum
Loan Amount if the effective date of such termination by Borrower is on or prior
to the first annual anniversary of the Closing Date, and (ii) one percent (1%)
of the Maximum Loan Amount if the effective date of such termination by Borrower
is after the first annual anniversary of the Closing Date and prior to the
second annual anniversary of the Closing Date.
(d) All of the Obligations shall be immediately due and payable upon
the termination date stated in any notice of termination of this Agreement. All
undertakings, agreements, covenants, warranties, and representations of Borrower
contained in the Loan Documents shall survive any such termination and Lender
shall retain its liens in the Collateral and all of its rights and remedies
under the Loan Documents notwithstanding such termination until Borrower has
paid the Obligations to Lender, in full, in immediately available funds.
Section 2.9. Joint and Several Liability; Binding Obligations. Each
-------------------------------------------------
entity comprising Borrower and executing this Agreement on behalf of Borrower
shall be jointly and severally liable for all of the Obligations. In addition,
each entity comprising Borrower hereby acknowledges and agrees that all of the
representations, warranties, covenants, obligations, conditions, agreements and
other terms contained in this Agreement shall be applicable to and shall be
binding upon each individual entity comprising Borrower, and shall be binding
upon all such entities when taken together.
12
<PAGE>
ARTICLE III
COLLATERAL
----------
Section 3.1. Generally. As security for the payment of all liabilities
----------
of Borrower to Lender, including without limitation: (i) indebtedness evidenced
under the Note, repayment of Revolving Credit Loans, advances and other
extensions of credit, all fees and charges owing by Borrower, and all other
liabilities and obligations of every kind or nature whatsoever of Borrower to
Lender, whether now existing or hereafter incurred, joint or several, matured or
unmatured, direct or indirect, primary or secondary, related or unrelated, due
or to become due, including but not limited to any extensions, modifications,
substitutions, increases and renewals thereof, (ii) the payment of all amounts
advanced by Lender to preserve, protect, defend, and enforce its rights
hereunder and in the following property in accordance with the terms of this
Agreement, and (iii) the payment of all expenses incurred by Lender in
connection therewith (collectively, the "Obligations"). Borrower hereby assigns
and grants to Lender, to the extent permitted by applicable law, a continuing
first priority lien on and security interest in, upon, and to the following
property (the "Collateral"):
(a) all of Borrower's now owned and hereafter acquired Accounts,
contract rights, general intangibles, chattel paper, documents and instruments,
as such terms are defined in the UCC, including, without limitation, all
obligations for the payment of money arising out of Borrower's sale of goods or
rendition of services;
(b) all moneys, securities and other property and the proceeds
thereof, now or hereafter held or received by, or in transit to, Lender from or
for Borrower, whether for safekeeping, pledge, custody, transmission, collection
or otherwise, and all of Borrower's deposits (general or special), balances,
sums and credits with Lender at any time existing;
(c) all of Borrower's right, title and interest, and all of Borrower's
rights, remedies, security and liens, in, to and in respect of the Accounts,
including, without limitation, rights of stoppage in transit, replevin,
repossession and reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, guaranties or other contracts of suretyship with
respect to the Accounts, deposits or other security for the obligation of any
Account debtor, and credit and other insurance;
(d) all of Borrower's right, title and interest in, to and in respect
of all goods relating to, or which by sale have resulted in, Accounts,
including, without limitation, all goods described in invoices or other
documents or instruments with respect to, or otherwise representing or
evidencing, any Account, and all returned, reclaimed or repossessed goods;
(e) All of Borrower's now or hereafter acquired deposit accounts into
which Accounts are deposited, including the Lockbox Account;
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(f) all books, records, ledger cards, computer programs and other
property at any time evidencing or relating to the Accounts;
(g) all of Borrower's now owned or hereafter acquired inventory of
every description which is held by Borrower for sale or lease or is furnished by
Borrower under any contract of service or is held by Borrower as raw materials,
work in process or materials used or consumed in a business, wherever located,
and as the same may now and hereafter from time to time be constituted, together
with all cash and non-cash proceeds and products thereof;
(h) unless such assets are subject to a conflicting lien on specific
equipment (and not a blanket lien) arising (i) in connection with equipment
financing, or (ii) in connection with a purchase money financing, all of
Borrower's now owned or hereafter acquired machinery, equipment, computer
equipment, tools, tooling, furniture, fixtures, goods, supplies, materials, work
in process, whether now owned or hereafter acquired (unless acquired under an
equipment lease), together with all additions, parts, fittings, accessories,
special tools, attachments, and accessions now and hereafter affixed thereto
and/or used in connection therewith, all replacements thereof and substitutions
therefor, and all cash and non-cash proceeds and products thereof;
(i) all of Borrower's general intangibles (including, without
limitation, any proceeds from insurance policies after payment of prior
interests), patents, unpatented inventions, trade secrets, copyrights, contract
rights (except for rights arising under equipment leases under which Borrower is
lessee), goodwill, literary rights, rights to performance, rights under
licenses, choses-in-action, claims, information contained in computer media
(such as data bases, source and object codes, and information therein), things
in action, investment property (other than investment property pledged to secure
Borrower=s $747,000.00 letter of credit issued by Chase Bank of Texas National
Association and renewals and refinancings thereof (the AL/C@)), trademarks and
trademarks applied for (together with the goodwill associated therewith) and
derivatives thereof (other than intent-to-use trademark applications to the
extent that the grant of a lien thereon would result in the termination thereof
under applicable law), trade names, including the right to make, use, and vend
goods utilizing any of the foregoing, and permits, licenses, certifications,
authorizations and approvals, and the rights of Borrower thereunder, issued by
any governmental, regulatory, or private authority, agency, or entity whether
now owned or hereafter acquired, together with all cash and non-cash proceeds
and products thereof;
(j) other than property pledged to secure the L/C, all of Borrower's
monies and other property of every kind and nature now or at any time or times
hereafter in the possession of or under the control of Secured Party or a bailee
or Affiliate of Secured Party; and
(k) other than property pledged to secure the L/C, all proceeds of the
foregoing, in any form, including, without limitation, any claims against third
parties for loss or damage to or destruction of any or all of the foregoing.
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Section 3.2. Lien Documents. At Closing and thereafter as Lender deems
---------------
necessary in its sole discretion, Borrower shall execute and deliver to Lender,
or have executed and delivered (all in form and substance satisfactory to Lender
in its sole discretion):
(a) UCC-1 Financing statements pursuant to the Uniform Commercial Code
in effect in the jurisdiction(s) in which Borrower operates, which Lender may
file in any jurisdiction where any Collateral is or may be located and in any
other jurisdiction that Lender deems appropriate; provided that a carbon,
--------
photographic, or other reproduction or other copy of this Agreement or of a
financing statement is sufficient as and may be filed in lieu of a financing
statement; and
(b) Any other agreements, documents, instruments, and writings deemed
necessary by Lender or as Lender may otherwise request from time to time in its
reasonable discretion to evidence, perfect, or protect Lender's lien and
security interest in the Collateral required hereunder.
Section 3.3. Collateral Administration.
--------------------------
(a) All Collateral (except deposit accounts) will at all times be kept
by Borrower at its principal office(s) as set forth on Schedule 4.15 hereto and
-------------
shall not, without the prior written approval of Lender, be moved therefrom.
(b) Borrower shall keep accurate and complete records of its Accounts
and all payments and collections thereon and shall submit to Lender on such
periodic basis as Lender shall request a sales and collections report for the
preceding period, in form satisfactory to Lender. In addition, if Accounts in
an aggregate face amount in excess of $50,000.00 become ineligible because they
fall within one of the specified categories of ineligibility set forth in the
definition of Qualified Accounts or otherwise, Borrower shall notify Lender of
such occurrence on the first Business Day following such occurrence and the
Borrowing Base shall thereupon be adjusted to reflect such occurrence. If
requested by Lender, Borrower shall execute and deliver to Lender formal written
assignments of all of its Accounts weekly or daily, which shall include all
Accounts that have been created since the date of the last assignment, together
with copies of claims, invoices or other information related thereto.
(c) Whether or not an Event of Default has occurred, any of Lender's
officers, employees or agents shall have the right, at any time or times
hereafter, in the name of Lender, any designee of Lender or Borrower, to verify
the validity, amount or any other matter relating to any Accounts by mail,
telephone, telegraph or otherwise. Borrower shall cooperate fully with Lender
in an effort to facilitate and promptly conclude such verification process.
(d) To expedite collection, Borrower shall endeavor in the first
instance to make collection of its Accounts for Lender. Lender retains the
right at all times upon the occurrence of and during the existence of an Event
of Default, subject to applicable law
15
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regarding Medicaid/Medicare Account Debtors, to notify Account Debtors that
Accounts have been assigned to Lender and to collect Accounts directly in its
own name and to charge the collection costs and expenses, including attorneys'
fees, to Borrower.
Section 3.4. Other Actions. In addition to the foregoing, Borrower (i)
--------------
shall provide prompt written notice to each private indemnity, managed care or
other Insurer who either is currently an Account Debtor or becomes an Account
Debtor at any time following the date hereof that Lender has been granted a
first priority lien and security interest in, upon and to all Accounts
applicable to such Insurer, and hereby authorizes Lender to send any and all
similar notices to such Insurers by Lender, and (ii) shall do anything further
that may be lawfully required by Lender to secure Lender and effectuate the
intentions and objects of this Agreement, including but not limited to the
execution and delivery of lockbox agreements, continuation statements,
amendments to financing statements, and any other documents required hereunder.
At Lender's request, Borrower shall also immediately deliver to Lender all items
for which Lender must receive possession to obtain a perfected security
interest. Borrower shall, on Lender's demand, deliver to Lender all notes,
certificates, and documents of title, chattel paper, warehouse receipts,
instruments, and any other similar instruments constituting Collateral.
Section 3.5. Searches. Prior to Closing, and thereafter (as and when
---------
requested by Lender in its reasonable discretion), Borrower shall obtain and
deliver to Lender the following searches against Borrower (the results of which
are to be consistent with Borrower's representations and warranties under this
Agreement), all at its own expense:
(a) Uniform Commercial Code searches with the Secretary of State and
local filing offices of each jurisdiction where Borrower maintains its executive
offices, a place of business, or assets;
(b) Judgment, federal tax lien and corporate and partnership tax lien
searches, in each jurisdiction searched under clause (a) above; and
(c) Good standing certificates showing Borrower to be in good standing
in its state of formation and in each other state in which it is doing and
presently intends to do business for which qualification is required.
Section 3.6. Power of Attorney. Upon the occurrence of an Event of
------------------
Default and while an Event of Default is continuing, and subject to applicable
law regarding Medicaid/Medicare Account Debtors, each of the officers of Lender
is hereby irrevocably made, constituted and appointed the true and lawful
attorney for Borrower (without requiring any of them to act as such) with full
power of substitution to do the following: (i) endorse the name of Borrower upon
any and all checks, drafts, money orders, and other instruments for the payment
of money that are payable to Borrower and constitute collections on Borrower's
Accounts; (ii) execute in the name of Borrower any financing statements,
schedules, assignments, instruments, documents, and statements that Borrower is
obligated to give Lender hereunder; and (iii) do such other and
16
<PAGE>
further acts and deeds in the name of Borrower that Lender may deem necessary or
desirable to enforce any Account or other Collateral or perfect Lender's
security interest or lien in any Collateral.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
Each entity comprising Borrower represents and warrants to Lender, and
shall be deemed to represent and warrant on each day on which any Obligations
shall be outstanding hereunder, that:
Section 4.1. Subsidiaries. Except as set forth in Schedule 4.1,
------------- ------------
Borrower has no subsidiaries.
Section 4.2. Organization and Good Standing. Borrower is a corporation
-------------------------------
duly organized, validly existing, and in good standing under the laws of its
state of formation, is in good standing as a foreign corporation in each
jurisdiction in which the character of the properties owned or leased by it
therein or the nature of its business makes such qualification necessary, has
the corporate power and authority to own its assets and transact the business in
which it is engaged, and has obtained all certificates, licenses and
qualifications required under all laws, regulations, ordinances, or orders of
public authorities necessary for the ownership and operation of all of its
properties and transaction of all of its business except where the failure to
have obtained such certificates, licenses, or qualifications would not have a
material adverse effect on the business properties, condition (financial or
otherwise) or operations of Borrower taken as a whole or upon its ability to
perform its obligations under the Loan Documents (AMaterial Adverse Effect@).
Section 4.3. Authority. Borrower has full corporate power and authority
----------
to enter into, execute, and deliver this Agreement and to perform its
obligations hereunder, to borrow the Loan, to execute and deliver the Note, and
to incur and perform the obligations provided for in the Loan Documents, all of
which have been duly authorized by all necessary corporate action.
Except as otherwise disclosed on Schedule 4.3, no consent or approval of
------------
shareholders of, or lenders to, Borrower and no consent, approval, filing or
registration with any Governmental Authority is required as a condition to the
validity of the Loan Documents or the performance by Borrower of its obligations
thereunder.
Section 4.4. Binding Agreement. This Agreement and all other Loan
-----------------
Documents constitute, and the Note, when issued and delivered pursuant hereto
for value received, will constitute, the valid and legally binding obligations
of Borrower, enforceable against Borrower in accordance with their respective
terms.
17
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Section 4.5. Litigation. Except as disclosed in Schedule 4.5, there are
---------- ------------
no actions, suits, proceedings or investigations pending or threatened against
Borrower before any court or arbitrator or before or by any Governmental
Authority which, in any one case or in the aggregate, could reasonably be
expected to have a Material Adverse Effect. Borrower is not in default with
respect to any order of any court, arbitrator, or Governmental Authority
applicable to Borrower or its properties.
Section 4.6. No Conflicts. The execution and delivery by Borrower of
------------
this Agreement and the other Loan Documents do not, and the performance of its
obligations thereunder will not, violate, conflict with, constitute a default
under, or result in the creation of a lien or encumbrance upon the property of
Borrower under: (i) any provision of Borrower's articles of incorporation or
bylaws, (ii) any provision of any law, rule, or regulation applicable to
Borrower, or (iii) any of the following: (A) any indenture or other agreement or
instrument to which Borrower is a party or by which Borrower or its property is
bound; or (B) any judgment, order or decree of any court, arbitration tribunal,
or Governmental Authority having jurisdiction over Borrower which is applicable
to Borrower, the violation of any of which would have a Material Adverse Effect.
Section 4.7. Financial Condition. The annual financial statements of
--------------------
Borrower as of December 31, 1997, audited by Arthur Andersen L.L.P. and the
unaudited financial statements of Borrower as of March 31, 1998, certified by
the chief financial officer of Borrower, which have been delivered to Lender,
fairly present in all material respects the financial condition of Borrower and
the results of its operations and changes in financial condition as of the dates
and for the periods referred to, and have been prepared in accordance with GAAP.
There are no material unrealized or anticipated liabilities, direct or indirect,
fixed or contingent, of Borrower as of the dates of such financial statements
which are required by GAAP to be disclosed therein that are not reflected
therein or in the notes thereto. There has been no adverse change in the
business, properties, condition (financial or otherwise) or operations (present
or prospective) of Borrower since December 31, 1997. Borrower's fiscal year
ends on December 31. The federal tax identification number of each entity
comprising Borrower is set forth on Schedule 4.15.
--------------
Section 4.8. No Default. Borrower is not in default under or with
-----------
respect to any obligation in any respect which could reasonably be expected to
result in a Material Adverse Effect. No Event of Default or event which, with
the giving of notice or lapse of time, or both, could become an Event of
Default, has occurred and is continuing.
Section 4.9. Title to Properties. Borrower has good and marketable
--------------------
title to its properties and assets, including the Collateral and the properties
and assets reflected in the financial statements described in Section 4.7,
subject to no lien, mortgage, pledge, encumbrance or charge of any kind, other
than Permitted Liens. Borrower has not agreed or consented to cause any of its
properties or assets whether owned now or hereafter acquired to be subject in
the future (upon the happening of a contingency or otherwise) to any lien,
mortgage, pledge, encumbrance or charge of any kind other than Permitted Liens.
18
<PAGE>
Section 4.10. Taxes. Borrower has filed, or has obtained extensions for
------
the filing of, all federal, state and other tax returns which are required to be
filed, and has paid all taxes shown as due on those returns and all assessments,
fees and other amounts due as of the date hereof. All tax liabilities of
Borrower were, as of December 31, 1996 and are now, adequately provided for on
Borrower's books. No tax liability has been asserted by the Internal Revenue
Service or other taxing authority against Borrower for taxes in excess of those
already paid.
Section 4.11. Securities and Banking Laws and Regulations.
--------------------------------------------
(a) The use of the proceeds of the Loan and Borrower's issuance of the
Note will not directly or indirectly violate or result in a violation of the
Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, or
any regulations issued pursuant thereto, including without limitation
Regulations U, T, G, or X of the Board of Governors of the Federal Reserve
System. Borrower is not engaged in the business of extending credit for the
purpose of the purchasing or carrying "margin stock" within the meaning of those
regulations. No part of the proceeds of the Loan hereunder will be used to
purchase or carry any margin stock or to extend credit to others for such
purpose.
(b) Borrower is not an investment company within the meaning of the
Investment Company Act of 1940, as amended, nor is it, directly or indirectly,
controlled by or acting on behalf of any Person which is an investment company
within the meaning of that Act.
Section 4.12. ERISA. No employee benefit plan (a "Plan") subject to the
------
Employee Retirement Income Security Act of 1974 ("ERISA") and regulations issued
pursuant thereto that is maintained by Borrower or under which Borrower could
have any liability under ERISA (a) has failed to meet minimum funding standards
established in Section 302 of ERISA, (b) has failed to comply with all
applicable requirements of ERISA and of the Internal Revenue Code, including all
applicable rulings and regulations thereunder, (c) has engaged in or been
involved in a prohibited transaction (as defined in ERISA) under ERISA or under
the Internal Revenue Code, or (d) has been terminated. Borrower has not
assumed, or received notice of a claim asserted against Borrower for, withdrawal
liability (as defined in the Multi-Employer Pension Plan Amendments Act of 1980,
as amended) with respect to any multi-employer pension plan and is not a member
of any Controlled Group (as defined in ERISA). Borrower has timely made when
due all contributions with respect to any multi-employer pension plan in which
it participates and no event has occurred triggering a claim against Borrower
for withdrawal liability with respect to any multi-employer pension plan in
which Borrower participates.
Section 4.13. Compliance with Law. Except as described in Schedule 4.13,
-------------------- -------------
Borrower is not in violation of any statute, rule or regulation of any
Governmental Authority (including, without limitation, any statute, rule or
regulation relating to employment practices or to environmental, occupational
and health standards and controls), the violation of which could reasonably be
expected to have a Material Adverse Effect. Borrower has obtained all licenses,
permits, franchises, and other governmental authorizations necessary for the
ownership of its
19
<PAGE>
properties and the conduct of its business. Except for such failure to file or
failure to comply as could not reasonably be expected to have a Material Adverse
Effect, Borrower is current with all reports and documents required to be filed
with any state or federal securities commission or similar Governmental
Authority and is in full compliance with all applicable rules and regulations of
such commissions.
Section 4.14. Environmental Matters. No use, exposure, release,
----------------------
generation, manufacture, storage, treatment, transportation or disposal of
Hazardous Material has occurred or is occurring on or from any real property on
which the Collateral is located or which is owned, leased or otherwise occupied
by Borrower (the "Premises"), or off the Premises as a result of any action of
Borrower, except as would not have a Material Adverse Effect and except as
described in Schedule 4.14. Except as would not have a Material Adverse Effect,
-------------
all Hazardous Material used, treated, stored, transported to or from, generated
or handled on the Premises, or off the Premises by Borrower, has been disposed
of on or off the Premises by or on behalf of Borrower in a lawful manner. There
are no underground storage tanks present on or under the Premises owned or
leased by Borrower. Except as would not have a Material Adverse Effect, no
other environmental, public health or safety hazards exist with respect to the
Premises.
Section 4.15. Places of Business. The only places of business of
-------------------
Borrower, and the places where it keeps and intends to keep the Collateral and
records concerning the Collateral, are at the addresses set forth in Schedule
--------
4.15. Schedule 4.15 also lists the owner of record of each such property.
- ---- -------------
Section 4.16. Intellectual Property. Borrower exclusively owns or
----------------------
possesses all the patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, franchises, licenses, and
rights with respect to the foregoing necessary for the present and planned
future conduct of its business, without any conflict with the rights of others.
A list of all such intellectual property (indicating the nature of Borrower's
interest), as well as all outstanding franchises and licenses given by or held
by Borrower, is attached as Schedule 4.16. Borrower is not in default of any
-------------
obligation or undertaking with respect to such intellectual property or rights.
Section 4.17. Stock Ownership. The identity of the stockholders of
----------------
record of all classes of the outstanding stock of each entity comprising
Borrower, other than Holdings, together with the respective ownership
percentages held by such stockholders, are as set forth on Schedule 4.17.
-------------
Section 4.18. Material Facts. Neither this Agreement nor any other
---------------
Loan Document nor any other agreement, document, certificate, or statement
furnished to Lender by or on behalf of Borrower in connection with the
transactions contemplated hereby contains any untrue statement of material fact
or omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading. There is no fact known to Borrower
that has or in the future could reasonably be expected to have a Material
Adverse Effect.
20
<PAGE>
Section 4.19. Investments, Guarantees, and Certain Contracts. Borrower
-----------------------------------------------
does not own or hold any equity or long-term debt investments in, have any
outstanding advances to, have any outstanding guarantees for the obligations of,
or have any outstanding borrowings from, any Person, except as described on
Schedule 4.19. Borrower is not a party to any contract or agreement, or subject
- -------------
to any corporate restriction, which materially adversely affects its business.
Section 4.20. Business Interruptions. Within five years prior to the
-----------------------
date hereof, neither the business, property or assets, or operations of Borrower
has been adversely affected in any way by any casualty, strike, lockout,
combination of workers, or order of the United States of America or other
Governmental Authority, directed against Borrower. There are no pending or
threatened labor disputes, strikes, lockouts, or similar occurrences or
grievances against Borrower or its business.
Section 4.21. Names. Within five years prior to the date hereof,
------
Borrower has not conducted business under or used any other name (whether
corporate, partnership or assumed) other than as shown on Schedule 4.21.
--------------
Borrower is the sole owner of all names listed on that Schedule and any and all
business done and invoices issued in such names are Borrower's sales, business,
and invoices. Each trade name of Borrower represents a division or trading style
of Borrower and not a separate Person or independent Affiliate.
Section 4.22 Joint Ventures. Borrower is not engaged in any joint
---------------
venture or partnership with any other Person, except as set forth on Schedule
--------
4.22.
- -----
Section 4.23 Accounts. Lender may rely, in determining which Accounts
---------
are Qualified Accounts, on all statements and representations made by Borrower
with respect to any Account or Accounts. Except in the case of any
representation or statement known by Borrower to be inaccurate when made or
deemed made, the inaccuracy or breach thereof shall result in the applicable
Account ceasing to be a Qualified Account but shall not result in an Event of
Default if the applicable Account or Accounts are for an aggregate amount that
is less than $100,000.00. Unless otherwise indicated in writing to Lender, with
respect to each Account:
(a) It is genuine and in all respects what it purports to be, and is
not evidenced by a judgment;
(b) It arises out of a completed, bona fide sale and delivery of goods
---- ----
or rendition of services by Borrower in the ordinary course of its business and
in accordance with the terms and conditions of all purchase orders, contracts,
certification, participation, certificate of need, or other documents relating
thereto and forming a part of the contract between Borrower and the Account
Debtor;
(c) It is for a liquidated amount maturing as stated in a duplicate
claim or invoice covering such sale or rendition of services, a copy of which
has been furnished or is available to Lender;
21
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(d) Such Account, and Lender's security interest therein, is not, and
will not (by voluntary act or omission by Borrower), be in the future, subject
to any offset, lien, deduction, defense, dispute, counterclaim or any other
adverse condition, and each such Account is absolutely owing to Borrower and is
not contingent in any respect or for any reason;
(e) There are no facts, events or occurrences which in any way impair
the validity or enforceability of any Accounts or tend to reduce the amount
payable thereunder from the face amount of the claim or invoice and statements
delivered to Lender with respect thereto;
(f) To the best of Borrower's knowledge, (i) the Account Debtor
thereunder had the capacity to contract at the time any contract or other
document giving rise to the Account was executed and (ii) such Account Debtor is
solvent;
(g) To the best of Borrower's knowledge, there are no proceedings or
actions which are threatened or pending against any Account Debtor thereunder
which might result in any material adverse change in such Account Debtor's
financial condition or the collectibility of such Account;
(h) It has been billed and forwarded to the Account Debtor for payment
in accordance with applicable laws and compliance and conformance with any and
requisite procedures, requirements and regulations governing payment by such
Account Debtor with respect to such Account, and such Account if due from a
Medicaid/Medicare Account Debtor is properly payable directly to Borrower; and
(i) Borrower has obtained and currently has all certificates of need,
Medicaid and Medicare provider numbers, licenses, permits and authorizations as
necessary in the generation of such Accounts.
Section 4.24. Solvency. Both before and after giving effect to the
---------
transactions contemplated by the terms and provisions of this Agreement, (i)
Borrower (taken as a whole) owns property whose fair saleable value is greater
than the amount required to pay all of Borrower's Indebtedness (including
contingent debts), (ii) Borrower (taken as a whole) was and is able to pay all
of its Indebtedness as such Indebtedness matures, and (iii) Borrower (taken as a
whole) had and has capital sufficient to carry on its business and transactions
and all business and transactions in which it about to engage. For purposes
hereof, the term "Indebtedness" means, without duplication (a) all items which
in accordance with GAAP would be included in determining total liabilities as
shown on the liability side of a balance sheet of such Borrower as of the date
on which Indebtedness is to be determined, (b) all obligations of any other
person or entity which such Borrower has guaranteed, and (c) the Obligations.
Section 4.25. Borrowers. All of the entities which generate Accounts and
----------
which are owned, directly or indirectly, fifty percent (50%) or more by any
entity comprising Borrower, are identified as Borrowers under this Agreement.
22
<PAGE>
ARTICLE V
CLOSING AND CONDITIONS OF LENDING
---------------------------------
Section 5.1. Conditions Precedent to Agreement. The obligation of
----------------------------------
Lender to enter into and perform this Agreement and to make Revolving Credit
Loans is subject to the following conditions precedent:
(a) Lender shall have received two (2) originals of this Agreement and
all other Loan Documents required to be executed and delivered at or prior to
Closing (other than the Note, as to which Lender shall receive only one
original), executed by Borrower and any other required Persons, as applicable.
(b) Lender shall have received all searches and good standing
certificates required by Section 3.5.
(c) Borrower shall have complied and shall then be in compliance with
all the terms, covenants and conditions of the Loan Documents.
(d) There shall have occurred no Event of Default and no event which,
with the giving of notice or the lapse of time, or both, could constitute such
an Event of Default.
(e) The representations and warranties contained in Article IV shall
be true and correct; provided, however, that with respect to the obligation of
-------- -------
Lender to make Revolving Credit Loans, the representations and warranties on the
part of Borrower contained in Article IV of this Agreement shall be true and
correct in all respects at and as of the date of disbursement or advance, as
though made on and as of such date (except to the extent that such
representations and warranties expressly relate solely to an earlier date and
except that the references in Section 4.7 to financial statements shall be
deemed to be a reference to the then most recent annual and interim financial
statements of Borrower furnished to Lender pursuant to Section 6.1 hereof).
(f) Lender shall have received copies of all board of directors
resolutions of Borrower, and other corporate action taken by Borrower to
authorize the execution, delivery and performance of the Loan Documents and the
borrowing of the Loan thereunder, as well as the names and signatures of the
officers of Borrower authorized to execute documents on its behalf in connection
herewith, all as also certified as of the date hereof by Borrower's chief
financial officer, and such other papers as Lender may require.
(g) Lender shall have received copies, certified as true, correct and
complete by a corporate officer of each Borrower, of the articles of
incorporation of each Borrower, with any amendments to any of the foregoing, and
all other documents necessary for performance of the obligations of Borrower
under this Agreement and the other Loan Documents.
23
<PAGE>
(h) Lender shall have received a written opinion of counsel for
Borrower, dated the date hereof, in the form of Exhibit C.
---------
(i) Lender shall have received such financial statements, reports,
certifications, and other operational information required to be delivered
hereunder, including without limitation an initial borrowing base certificate
calculating the Borrowing Base.
(j) Lender shall have received the Commitment Fee.
(k) The Lockbox and the Concentration Account shall have been
established.
(l) Lender shall have received a certificate of Borrower's chief
financial officer, dated the Closing Date, certifying that all of the conditions
specified in this Section have been fulfilled.
Section 5.2. Conditions Precedent to Advances. Notwithstanding any
---------------------------------
other provision of this Agreement, no Loan proceeds, Revolving Credit Loans,
advances or other extensions of credit under the Loan shall be disbursed
hereunder unless the following conditions have been satisfied or waived
immediately prior to such disbursement:
(a) The representations and warranties on the part of Borrower
contained in Article IV of this Agreement shall be true and correct in all
respects at and as of the date of disbursement or advance, as though made on and
as of such date (except to the extent that such representations and warranties
expressly relate solely to an earlier date and except that the references in
Section 4.7 to financial statements shall be deemed to be a reference to the
then most recent annual and interim financial statements of Borrower furnished
to Lender pursuant to Section 6.1 hereof).
(b) No Event of Default or event which, with the giving of notice of
the lapse of time, or both, could become an Event of Default shall have occurred
and be continuing or would result from the making of the disbursement or
advance.
(c) No material adverse change in the condition (financial or
otherwise), properties, business, or operations of Borrower (taken as a whole)
shall have occurred and be continuing with respect to Borrower since the date
hereof.
Section 5.3. Closing. Subject to the conditions of this Article V, the
--------
Loan shall be made available on the date as is mutually agreed by the parties
(the "Closing Date") at such time as may be mutually agreeable to the parties
upon the execution hereof (the "Closing") at such place as may be requested by
Lender.
Section 5.4. Waiver of Rights. By completing the Closing hereunder,
-----------------
or by making advances under the Loan, Lender does not waive a breach of any
representation or warranty of
24
<PAGE>
Borrower hereunder or under any other Loan Document, and all of Lender's claims
and rights resulting from any breach or misrepresentation by Borrower are
specifically reserved by Lender.
ARTICLE VI
AFFIRMATIVE COVENANTS
---------------------
Each entity constituting Borrower covenants and agrees that for so long as
Borrower may borrow hereunder and until payment in full of the Note and
performance of all other obligations of Borrower under the Loan Documents:
Section 6.1. Financial Statements and Collateral Reports. Borrower will
--------------------------------------------
furnish to Lender (i) a sales and collections report and accounts receivable
aging schedule on a form acceptable to Lender within twenty-five (25) days after
the end of each calendar month, which shall include, but not be limited to, a
report of sales, credits issued, and collections received; (ii) payable aging
schedules within twenty-five (25) days after the end of each calendar month;
(iii) internally prepared monthly financial statements for Borrower, certified
by the chief financial officer of Borrower, within forty-five (45) days of the
end of each calendar month (except that such financial statements for the month
ending December 31 shall be furnished to Lender within sixty (60) days of the
end of such calendar month), accompanied by management analysis and actual vs.
budget variance reports; (iv) to the extent prepared by Borrower, annual
projections, profit and loss statements, balance sheets, and cash flow reports
(prepared on a monthly basis) for the succeeding fiscal year within thirty (30)
days before the end of each of Borrower's fiscal years; (v) internally prepared
annual financial statements for Borrower within sixty (60) days after the end of
each of Borrower's fiscal years; (vi) annual audited financial statements for
Borrower prepared by Arthur Andersen L.L.P., or a firm of independent public
accountants satisfactory to Lender, within ninety (90) days after the end of
each of Borrower's fiscal years; (vii) promptly upon receipt thereof, copies of
any reports submitted to Borrower by the independent accountants in connection
with any interim audit of the books of Borrower and copies of each management
control letter provided to Borrower by independent accountants; (viii) as soon
as available, copies of all financial statements and notices provided by
Borrower to all of its stockholders; and (ix) such additional information,
reports or statements as Lender may from time to time request. Annual financial
statements shall set forth in comparative form figures for the corresponding
periods in the prior fiscal year. All financial statements shall include a
balance sheet and statement of earnings and shall be prepared in accordance with
GAAP.
Section 6.2. Payments Hereunder. Borrower will make all payments of
------------------
principal, interest, fees, and all other payments required hereunder, under the
Loan, and under any other agreements with Lender to which Borrower is a party,
as and when due.
25
<PAGE>
Section 6.3. Existence, Good Standing, and Compliance with Laws.
--------------------------------------------------
Borrower will do or cause to be done all things necessary (a) to obtain and keep
in full force and effect all corporate existence, rights, licenses, privileges,
and franchises of Borrower necessary to the ownership of its property or the
conduct of its business, and comply with all applicable present and future laws,
ordinances, rules, regulations, orders and decrees of any Governmental Authority
having or claiming jurisdiction over Borrower where the failure to maintain such
rights, licenses, and franchises, or the failure to comply with any applicable
laws or regulations would have a Material Adverse Effect; and (b) to maintain
and protect the properties used or useful in the conduct of the operations of
Borrower, in a prudent manner, including without limitation the maintenance at
all times of such insurance upon its insurable property and operations as
required by law or by Section 6.7 hereof.
Section 6.4. Legality. The making of the Loan and each disbursement or
---------
advance under the Loan shall not be subject to any penalty or special tax, shall
not be prohibited by any governmental order or regulation applicable to
Borrower, and shall not violate any rule or regulation of any Governmental
Authority, and necessary consents, approvals and authorizations of any
Governmental Authority to or of any such disbursement or advance shall have been
obtained.
Section 6.5. Lender's Satisfaction. All instruments and legal documents
----------------------
and proceedings in connection with the transactions contemplated by this
Agreement shall be satisfactory in form and substance to Lender and its counsel,
and Lender shall have received all documents, including records of corporate
proceedings and opinions of counsel, which Lender may have requested in
connection therewith.
Section 6.6. Taxes and Charges. Borrower will timely file all tax
------------------
reports and pay and discharge all taxes, assessments and governmental charges or
levies imposed upon Borrower, or its income or profits or upon its properties or
any part thereof, before the same shall be in default and prior to the date on
which penalties attach thereto, as well as all lawful claims for labor,
material, supplies or otherwise which, if unpaid, might become a lien or charge
upon the properties or any part thereof of Borrower; provided, however, that
-------- -------
Borrower shall not be required to pay and discharge or cause to be paid and
discharged any such tax, assessment, charge, levy or claim so long as the
validity or amount thereof shall be contested in good faith and by appropriate
proceedings by Borrower, and Borrower shall have set aside on their books
adequate reserve therefor; and provided further, that such deferment of payment
-------- -------
is permissible only so long as Borrower's title to, and its right to use, the
Collateral is not adversely affected thereby and Lender's lien and priority on
the Collateral are not adversely affected, altered or impaired thereby.
Section 6.7. Insurance. Borrower will carry adequate public liability
----------
and professional liability insurance with responsible companies satisfactory to
Lender in such amounts and against such risks as is customarily maintained by
similar businesses and by owners of similar property in the same general area.
26
<PAGE>
Section 6.8. General Information. Borrower will furnish to Lender such
--------------------
information as Lender may, from time to time, request with respect to the
business or financial affairs of Borrower, and permit any officer, employee or
agent of Lender to visit and inspect any of the properties, to examine the
minute books, books of account and other records, including management letters
prepared by Borrower's auditors, of Borrower, and make copies thereof or
extracts therefrom, and to discuss its and their business affairs, finances and
accounts with, and be advised as to the same by, the accountants and officers of
Borrower, all at such times and as often as Lender may require.
Section 6.9. Maintenance of Property. Except as would not have a
------------------------
Material Adverse Effect, Borrower will maintain, keep and preserve all of its
properties in good repair, working order and condition and from time to time
make all needful and proper repairs, renewals, replacements, betterments and
improvements thereto, so that the business carried on in connection therewith
may be properly and advantageously conducted at all times.
Section 6.10. Notification of Events of Default and Adverse
---------------------------------------------
Developments. Borrower promptly will notify Lender upon the occurrence of: (i)
- ------------
any Event of Default; (ii) any event which, with the giving of notice or lapse
of time, or both, could constitute an Event of Default; (iii) any event,
development or circumstance whereby the financial statements previously
furnished to Lender fail in any material respect to present fairly, in
accordance with GAAP, the financial condition and operational results of
Borrower; (iv) any judicial, administrative or arbitration proceeding pending
against Borrower, and any judicial or administrative proceeding known by
Borrower to be threatened against it which could reasonably be expected to have
a Material Adverse Effect or which may expose Borrower to uninsured liability of
$100,000.00 or more; (v) any default claimed by any other creditor for Borrowed
Money of Borrower other than Lender where the unpaid balance of such Borrowed
Money exceeds $100,000.00; and (vi) any other development in the business or
affairs of Borrower which may be adverse; in each case describing the nature
thereof and (in the case of notification under clauses (i) and (ii)) the action
Borrower proposes to take with respect thereto.
Section 6.11. Employee Benefit Plans. Borrower will (i) comply with the
-----------------------
funding requirements of ERISA with respect to the Plans for its employees, or
will promptly satisfy any accumulated funding deficiency that arises under
Section 302 of ERISA; (ii) furnish Lender, promptly after filing the same, with
copies of all reports or other statements filed with the United States
Department of Labor, the Pension Benefit Guaranty Corporation, or the Internal
Revenue Service with respect to all Plans, or which Borrower, or any member of a
Controlled Group, may receive from such Governmental Authority with respect to
any such Plans, and (iii) promptly advise Lender of the occurrence of any
Reportable Event or Prohibited Transaction with respect to any such Plan and the
action which Borrower proposes to take with respect thereto. Borrower will make
all contributions when due with respect to any multi-employer pension plan in
which it participates and will promptly advise Lender: (i) upon its receipt of
notice of the assertion against Borrower of a claim for withdrawal liability;
(ii) upon the
27
<PAGE>
occurrence of any event which could trigger the assertion of a claim for
withdrawal liability against Borrower; and (iii) upon the occurrence of any
event which would place Borrower in a Controlled Group as a result of which any
member (including Borrower) thereof may be subject to a claim for withdrawal
liability, whether liquidated or contingent.
Section 6.12. Financing Statements. Borrower shall provide to Lender
---------------------
evidence satisfactory to Lender as to the due recording of termination
statements, releases of collateral, and Forms UCC-3, and shall cause to be
recorded financing statements on Form UCC-1, duly executed by Borrower and
Lender, in all places necessary to release all existing security interests and
other liens in the Collateral (other than as permitted hereby) and to perfect
and protect Lender's first priority lien and security interest in the
Collateral, as Lender may request.
Section 6.13. Financial Records. Borrower shall keep current and
------------------
accurate books of records and accounts in which full and correct entries will be
made of all of its business transactions, and will reflect in its financial
statements adequate accruals and appropriations to reserves, all in accordance
with GAAP.
Section 6.14. Collection of Accounts. Borrower shall continue to collect
-----------------------
its Accounts in the ordinary course of business.
Section 6.15. Places of Business. Borrower shall give thirty (30) days'
-------------------
prior written notice to Lender of any change in the location of any of its
places of business, of the places where its records concerning its Accounts are
kept, of the places where the Collateral is kept, or of the establishment of any
new, or the discontinuance of any existing, places of business.
Section 6.16. Business Conducted. Borrower shall continue in the
-------------------
business presently conducted by it using its best efforts to maintain its
customers and goodwill. Borrower shall not engage, directly or indirectly, in
any line of business substantially different from the business conducted by it
immediately prior to the Closing Date, or engage in business or lines of
business which are not reasonably related thereto.
Section 6.17. Litigation and Other Proceedings. Borrower shall give
---------------------------------
prompt notice to Lender of any litigation, arbitration, or other proceeding
before any Governmental Authority against or affecting Borrower if the amount
claimed is more than $60,000.00.
Section 6.18. Bank Accounts. Borrower shall assign all of its depository
--------------
and disbursement accounts to Lender.
Section 6.19. Submission of Collateral Documents. Subject to applicable
-----------------------------------
patient confidentiality laws, Borrower will, on demand of Lender, make available
to Lender copies of shipping and delivery receipts evidencing the shipment of
goods that gave rise to an Account, medical records, insurance verification
forms, assignment of benefits, in-take forms or other proof of the satisfactory
performance of services that gave rise to an Account, a copy of the claim or
invoice for each Account and copies of any written contract or order from which
the Account
28
<PAGE>
arose. Borrower shall promptly notify Lender if an Account becomes evidenced or
secured by an instrument or chattel paper and upon request of Lender, will
promptly deliver any such instrument or chattel paper to Lender.
Section 6.20. Licensure; Medicaid/Medicare Cost Reports. Borrower will
------------------------------------------
maintain all certificates of need, provider numbers and licenses necessary to
conduct its business as presently conducted, and take any steps required to
comply with any such new or additional requirements that may be imposed on
providers of medical products and services. If required, all Medicaid/Medicare
cost reports will be properly filed.
Section 6.21. Officer's Certificates. Together with the monthly
-----------------------
financial statements delivered pursuant to clause (iii) of Section 6.1, and
together with the audited annual financial statements delivered pursuant to
clause (vi) of that Section, Borrower shall deliver to Lender a certificate of
its chief financial officer, in form and substance satisfactory to Lender:
(a) Setting forth the information (including detailed calculations)
required to establish whether Borrower is in compliance with the requirements of
Articles VI and VII as of the end of the period covered by the financial
statements then being furnished; and
(b) Stating that the signer has reviewed the relevant terms of this
Agreement, and has made (or caused to be made under his supervision) a review of
the transactions and conditions of Borrower from the beginning of the accounting
period covered by the income statements being delivered to the date of the
certificate, and that such review has not disclosed the existence during such
period of any condition or event which constitutes an Event of Default or which
is then, or with the passage of time or giving of notice or both, could become
an Event of Default, and if any such condition or event existed during such
period or now exists, specifying the nature and period of existence thereof and
what action Borrower has taken or proposes to take with respect thereto.
Section 6.22. Visits and Inspections. Borrower agrees to permit
-----------------------
representatives of Lender, from time to time, as often as may be reasonably
requested, but only during normal business hours, to visit and inspect the
properties of Borrower, and to inspect, audit and make extracts from its books
and records, and discuss with its officers and employees, as authorized by its
officers, and its independent accountants, Borrower's business, assets,
liabilities, financial condition, business prospects and results of operations.
Section 6.23. EBITDA. For each of the six months commencing with the
-------
month ending October 31, 1998, and through the month ending March 31, 1999, and
quarterly thereafter, Borrower shall have positive earnings before interest,
taxes, depreciation and amortization (AEBITDA@).
29
<PAGE>
Section 6.24. Minimum Loan Amount. Borrower will maintain at all times
--------------------
outstanding Revolving Credit Loans in the aggregate principal amount of at least
the Minimum Loan Amount.
ARTICLE VII
NEGATIVE COVENANTS
------------------
Each entity constituting Borrower covenants and agrees that so long as
Borrower may borrow hereunder and until payment in full of the Note and
performance of all other obligations of Borrower under the Loan Documents:
Section 7.1. Borrowing. Borrower will not create, incur, assume or
---------
suffer to exist any liability for Borrowed Money except: (i) indebtedness to
Lender; (ii) indebtedness of Borrower secured by mortgages, encumbrances or
liens expressly permitted by Section 7.3 hereof; (iii) accounts payable to trade
creditors and current operating expenses (other than for borrowed money) which
are not aged more than one hundred twenty (120) days from the billing date or
more than sixty (60) days from the due date, in each case incurred in the
ordinary course of business and paid within such time period, unless the same
are being contested in good faith and by appropriate and lawful proceedings, and
Borrower shall have set aside such reserves, if any, with respect thereto as are
required by GAAP and deemed adequate by Borrower and its independent
accountants; (iv) borrowings incurred in the ordinary course of its business and
not exceeding $10,000.00 in the aggregate outstanding at any one time; and (v)
borrowings described on Schedule 7.1. Borrower will not make prepayments on any
existing or future indebtedness for Borrowed Money to any Person (other than
Lender, to the extent permitted by this Agreement or any subsequent agreement
between Borrower and Lender).
Section 7.2. Joint Ventures. Borrower will not invest directly or
--------------
indirectly in any joint venture for any purpose without the prior written notice
to, and the express written consent of, Lender, which consent may be withheld in
Lender's reasonable discretion.
Section 7.3. Liens and Encumbrances. Borrower will not create, incur,
----------------------
assume or suffer to exist any mortgage, pledge, lien or other encumbrance of any
kind (including the charge upon property purchased under a conditional sale or
other title retention agreement) upon, or any security interest in, any of its
Collateral, whether now owned or hereafter acquired, except for Permitted Liens.
Section 7.4. Merger, Acquisition, or Sale of Assets. Borrower will not
---------------------------------------
enter into any merger or consolidation with or acquire all or substantially all
of the assets of any Person, and will not sell, lease, or otherwise dispose of
any of its assets except in the ordinary course of its business. Consistent
with the foregoing, until the Obligations are repaid in full none of the
entities comprising Borrower shall transfer, assign, convey or grant to any
other Person the right
30
<PAGE>
to operate or control any of the nursing homes listed on Schedule 4.15, whether
-------------
by lease, sublease, management agreement, joint venture agreement or otherwise.
Section 7.5. Sale and Leaseback. Borrower will not, directly or
-------------------
indirectly, enter into any arrangement whereby Borrower sells or transfers all
or any part of its assets and thereupon and within one year thereafter rents or
leases the assets so sold or transferred without the prior written notice to,
and the express written consent of, Lender, which consent may be withheld in
Lender's sole discretion.
Section 7.6. Dividends, Distributions and Management Fees. During the
---------------------------------------------
existence of an Event of Default hereunder, Borrower will not declare or pay any
dividends or other distributions with respect to, purchase, redeem or otherwise
acquire for value any of its outstanding stock now or hereafter outstanding, or
return any capital of its stockholders, nor shall Borrower pay management fees
or fees of a similar nature to any Person.
Section 7.7. Loans. Borrower will not make loans or advances to any
------
Person, other than (i) trade credit extended in the ordinary course of its
business, and (ii) advances for business travel and similar temporary advances
in the ordinary course of business to officers, stockholders, directors, and
employees.
Section 7.8. Contingent Liabilities. Borrower will not assume,
-----------------------
guarantee, endorse, contingently agree to purchase or otherwise become liable
upon the obligation of any Person, except by the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business.
Section 7.9. Subsidiaries. Borrower will not form any subsidiary, or
-------------
make any investment in or any loan in the nature of an investment to, any other
Person.
Section 7.10. Compliance with ERISA. Borrower will not permit with
----------------------
respect to any Plan covered by Title IV of ERISA any Prohibited Transaction or
any Reportable Event.
Section 7.11. Certificates of Need. Borrower will not amend, alter or
---------------------
suspend or terminate or make provisional in any material way, any certificate of
need or provider number without the prior written consent of Lender.
Section 7.12. Transactions with Affiliates. Borrower will not enter into
-----------------------------
any transaction, including without limitation the purchase, sale, or exchange of
property, or the loaning or giving of funds to any Affiliate or subsidiary that
is not an entity comprising Borrower, except in the ordinary course of business
and pursuant to the reasonable requirements of Borrower's business and upon
terms substantially the same and not materially less favorable to Borrower as it
would obtain in a comparable arm's length transaction with any Person not an
Affiliate or subsidiary that is not an entity comprising Borrower, and so long
as the transaction is
31
<PAGE>
not otherwise prohibited hereunder. For purposes of the foregoing, Lender
consents to the transactions described on Schedule 7.12.
-------------
Section 7.13. Use of Lender's Name. Borrower will not use Lender's name
---------------------
(or the name of any of Lender's affiliates) in connection with any of its
business operations. Borrower may disclose to third parties that Borrower has a
borrowing relationship with Lender. Nothing herein contained is intended to
permit or authorize Borrower to make any contract on behalf of Lender.
Section 7.14. Change of Control. There shall occur no Change of Control.
------------------
Section 7.15. Contracts and Agreements. Borrower will not become or be a
-------------------------
party to any contract or agreement which would breach this Agreement, or breach
any other instrument, agreement, or document to which Borrower is a party or by
which it is or may be bound.
Section 7.16. Margin Stock. Borrower will not carry or purchase any
-------------
"margin security" within the meaning of Regulations U, G, T or X of the Board of
Governors of the Federal Reserve System.
Section 7.17. Truth of Statements and Certificates. Borrower will not
-------------------------------------
furnish to Lender any certificate or other document that contains any untrue
statement of a material fact or that omits to state a material fact necessary to
make it not misleading in light of the circumstances under which it was
furnished.
ARTICLE VIII
EVENTS OF DEFAULT
-----------------
Section 8.1. Events of Default. Each of the following (individually, an
------------------
"Event of Default" and collectively, the "Events of Default") shall constitute
an event of default hereunder:
(a) A default in the payment of any installment of principal of, or
interest upon, the Note when due and payable, whether at maturity or otherwise,
or any breach of Section 2.3 of this Agreement, which default or breach, as
applicable, shall have continued unremedied for a period of five (5) days after
written notice thereof from Lender to Borrower;
(b) A default in the payment of any other charges, fees, or other
monetary obligations owing to Lender arising out of or incurred in connection
with this Agreement when such payment is due and payable, which default shall
have continued unremedied for a period of five (5) days after written notice
from Lender;
32
<PAGE>
(c) A default in the due observance or performance by Borrower of any
other term, covenant or agreement contained in any of the Loan Documents, which
default shall have continued unremedied for a period of twenty (20) days after
written notice from Lender;
(d) If any representation or warranty made by Borrower herein or in
any of the other Loan Documents, any financial statement, or any statement or
representation made in any other certificate, report or opinion delivered in
connection herewith or therewith proves to have been incorrect or misleading in
any material respect when made, which default shall have continued unremedied
for a period of twenty (20) days after written notice from Lender;
(e) If any obligation of Borrower (other than its Obligations
hereunder) for the payment of Borrowed Money in excess of $100,000.00 is not
paid when due or within any applicable grace period, or such obligation becomes
or is declared to be due and payable prior to the expressed maturity thereof, or
there shall have occurred an event which, with the giving of notice or lapse of
time, or both, would cause any such obligation to become, or allow any such
obligation to be declared to be, due and payable;
(f) If Borrower makes an assignment for the benefit of creditors,
offers a composition or extension to creditors, or makes or sends notice of an
intended bulk sale of any business or assets now or hereafter conducted by
Borrower;
(g) If Borrower files a petition in bankruptcy, is adjudicated
insolvent or bankrupt, petitions or applies to any tribunal for any receiver of
or any trustee for itself or any substantial part of its property, commences any
proceeding relating to itself under any reorganization, arrangement,
readjustment or debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect, or there is commenced against
Borrower any such proceeding which remains undismissed for a period of sixty
(60) days, or any Borrower by any act indicates its consent to, approval of, or
acquiescence in, any such proceeding or the appointment of any receiver of or
any trustee for a Borrower or any substantial part of its property, or suffers
any such receivership or trusteeship to continue undischarged for a period of
sixty (60) days;
(h) If one or more final judgments against Borrower or attachments
against its property in excess of $100,000.00 not fully and unconditionally
covered by insurance shall be rendered by a court of record and shall remain
unpaid, unstayed on appeal, undischarged, unbonded and undismissed for a period
of thirty (30) days;
(i) A Reportable Event which might constitute grounds for termination
of any Plan covered by Title IV of ERISA or for the appointment by the
appropriate United States District Court of a trustee to administer any such
Plan or for the entry of a lien or encumbrance to secure any deficiency, has
occurred and is continuing thirty (30) days after its occurrence, or any such
Plan is terminated, or a trustee is appointed by an appropriate United States
District Court to administer any such Plan, or the Pension Benefit Guaranty
Corporation institutes proceedings to
33
<PAGE>
terminate any such Plan or to appoint a trustee to administer any such Plan, or
a lien or encumbrance is entered to secure any deficiency or claim;
(j) If there shall occur a Change of Control;
(k) If there shall occur any uninsured damage to or loss, theft or
destruction of any portion of the Collateral in excess of $100,000.00;
(l) If Borrower breaches or violates the terms of, or if a default or
an event which could, whether with notice or the passage of time, or both,
constitute a default, occurs under any other existing or future agreement
(related or unrelated) between Borrower and Lender;
(m) Upon the issuance of any execution or distraint process against
Borrower or any of its property or assets involving in excess of $100,000.00;
(n) If Borrower ceases any material portion of its business operations
as presently conducted;
(o) If any indication or evidence is received by Lender that Borrower
may have directly or indirectly been engaged in any type of activity which, in
Lender's discretion, might result in the forfeiture of any property of Borrower
with a fair market value in excess of $100,000.00 to any Governmental Authority,
which default shall have continued unremedied for a period of thirty (30) days
after written notice from Lender;
(p) Borrower or any Affiliate of Borrower, shall challenge or contest,
in any action, suit or proceeding, the validity or enforceability of this
Agreement, or any of the other Loan Documents, the legality or the
enforceability of any of the Obligations or the perfection or priority of any
Lien granted to Lender;
(q) Borrower shall be criminally indicted or convicted under any law
that could lead to a forfeiture of any Collateral in excess of $100,000.00;
(r) There shall occur a material adverse change in the financial
condition or business prospects of Borrower (taken as a whole), or if Lender in
good faith deems itself insecure as a result of acts or events bearing upon the
financial condition of Borrower or the repayment of the Note, which default
shall have continued unremedied for a period of fifteen (15) days after written
notice from Lender.
Section 8.2. Acceleration. Upon the occurrence of any of the foregoing
------------
Events of Default, the Note shall become and be immediately due and payable upon
declaration to that effect delivered by Lender to Borrower; provided that, upon
the happening of any event specified
34
<PAGE>
in Section 8.1(g) hereof, the Note shall be immediately due and payable without
declaration or other notice to Borrower.
Section 8.3. Remedies.
---------
(a) In addition to all other rights, options, and remedies granted to
Lender under this Agreement, upon the occurrence of an Event of Default Lender
may (i) terminate the Loan, whereupon all outstanding Obligations shall be
immediately due and payable, (ii) exercise all other rights granted to it
hereunder and all rights under the Uniform Commercial Code in effect in the
applicable jurisdiction(s) and under any other applicable law, and (iii)
exercise all rights and remedies under all Loan Documents now or hereafter in
effect, including the following rights and remedies (which list is given by way
of example and is not intended to be an exhaustive list of all such rights and
remedies):
(i) The right to take possession of, send notices regarding,
and collect directly the Collateral, with or without judicial process, and to
exercise all rights and remedies available to Lender with respect to the
Collateral under the Uniform Commercial Code in effect in the jurisdiction(s) in
which such Collateral is located;
(ii) The right to (by its own means or with judicial
assistance) enter any of Borrower's premises and take possession of the
Collateral, or render it unusable, or dispose of the Collateral on such premises
in compliance with subsection (b), without any liability for rent, storage,
utilities, or other sums, and Borrower shall not resist or interfere with such
action;
(iii) The right to require Borrower at Borrower's expense to
assemble all or any part of the Collateral and make it available to Lender at
any place designated by Lender;
(iv) The right to reduce the Maximum Loan Amount or to use the
Collateral and/or funds in the Concentration Account in amounts up to the
Maximum Loan Amount for any reason; and
(v) The right to relinquish or abandon any Collateral or any
security interest therein.
(b) Borrower agrees that a notice received by it at least ten (10)
days before the time of any intended public sale, or the time after which any
private sale or other disposition of the Collateral is to be made, shall be
deemed to be reasonable notice of such sale or other disposition. If permitted
by applicable law, any perishable Collateral which threatens to speedily decline
in value or which is sold on a recognized marked may be sold immediately by
Lender without prior notice to Borrower. At any sale or disposition of
Collateral, Lender may (to the extent permitted by applicable law) purchase all
or any part of the Collateral, free from any right
35
<PAGE>
of redemption by Borrower, which right is hereby waived and released. Borrower
covenants and agrees not to interfere with or impose any obstacle to Lender's
exercise of its rights and remedies with respect to the Collateral.
Section 8.4. Nature of Remedies. Lender shall have the right to proceed
-------------------
against all or any portion of the Collateral to satisfy the liabilities and
Obligations of Borrower to Lender in any order. All rights and remedies granted
Lender hereunder and under any agreement referred to herein, or otherwise
available at law or in equity, shall be deemed concurrent and cumulative, and
not alternative remedies, and Lender may proceed with any number of remedies at
the same time until the Loans, and all other existing and future liabilities and
obligations of Borrower to Lender, are satisfied in full. The exercise of any
one right or remedy shall not be deemed a waiver or release of any other right
or remedy, and Lender, upon the occurrence of an Event of Default, may proceed
against Borrower, and/or the Collateral, at any time, under any agreement, with
any available remedy and in any order.
ARTICLE IX
MISCELLANEOUS
-------------
Section 9.1. Expenses and Taxes.
-------------------
(a) Borrower agrees to pay, whether or not the Closing occurs, a
reasonable documentation preparation fee, together with actual audit and
appraisal fees and all other out-of-pocket charges and expenses incurred by
Lender in connection with the negotiation, preparation and execution of each of
the Loan Documents and preparation for Closing. In addition, Borrower shall
pay all fees associated with any amendments to the Loan Documents following
Closing. Borrower also agrees to pay all out-of-pocket charges and expenses
incurred by Lender (including the fees and expenses of Lender's counsel) in
connection with the enforcement, protection or preservation of any right or
claim of Lender and the collection of any amounts due under the Loan Documents.
(b) Borrower shall pay all taxes (other than taxes based upon or
measured by Lender's income or revenues or any personal property tax), if any,
in connection with the issuance of the Note and the recording of the security
documents therefor. The obligations of Borrower under this clause (b) shall
survive the payment of Borrower's indebtedness hereunder and the termination of
this Agreement.
Section 9.2. Entire Agreement; Amendments. This Agreement and the other
-----------------------------
Loan Documents constitute the full and entire understanding and agreement among
the parties with regard to their subject matter and supersede all prior written
or oral agreements, understandings, representations and warranties made with
respect thereto. No amendment, supplement or
36
<PAGE>
modification of this Agreement nor any waiver of any provision thereof shall be
made except in writing executed by the party against whom enforcement is sought.
Section 9.3. No Waiver; Cumulative Rights. No waiver by any party
-----------------------------
hereto of any one or more defaults by the other party in the performance of any
of the provisions of this Agreement shall operate or be construed as a waiver of
any future default or defaults, whether of a like or different nature. No
failure or delay on the part of any party in exercising any right, power or
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
The remedies provided for herein are cumulative and are not exclusive of any
remedies that may be available to any party hereto at law, in equity or
otherwise.
Section 9.4. Notices. Any notice or other communication required or
--------
permitted hereunder shall be in writing and personally delivered, mailed by
registered or certified mail (return receipt requested and postage prepaid),
sent by telecopier (with a confirming copy sent by regular mail), or sent by
prepaid overnight courier service, and addressed to the relevant party at its
address set forth below, or at such other address as such party may, by written
notice, designate as its address for purposes of notice hereunder:
(a) If to Lender, at:
HCFP Funding, Inc.
2 Wisconsin Circle, 4th floor
Chevy Chase, Maryland 20815
Attention: Ethan D. Leder, President
Telephone: (301) 961-1640
Telecopier: (301) 664-9860
(b) If to Borrower, at:
HealthCor, Inc.
8150 North Central Expressway
Dallas, TX 75206
Attention: Joel Williams, CFO
Telephone: (214) 750-2266
Telecopier: (214) 696-6756
If mailed, notice shall be deemed to be given five (5) days after being sent, if
sent by personal delivery or telecopier, notice shall be deemed to be given when
delivered, and if sent by prepaid courier, notice shall be deemed to be given on
the next Business Day following deposit with the courier.
37
<PAGE>
Section 9.5. Severability. If any term, covenant or condition of this
-------------
Agreement, or the application of such term, covenant or condition to any party
or circumstance shall be found by a court of competent jurisdiction to be, to
any extent, invalid or unenforceable, the remainder of this Agreement and the
application of such term, covenant, or condition to parties or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term, covenant or condition shall be valid and
enforced to the fullest extent permitted by law. Upon determination that any
such term is invalid, illegal or unenforceable, the parties hereto shall amend
this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner.
Section 9.6. Successors and Assigns. This Agreement, the Note, and the
-----------------------
other Loan Documents shall be binding upon and inure to the benefit of Borrower
and Lender and their respective successors and assigns. Notwithstanding the
foregoing, Borrower may not assign any of its rights or delegate any of its
obligations hereunder without the prior written consent of Lender, which may be
withheld in its sole discretion. Lender may sell, assign, transfer, or
participate any or all of its rights or obligations hereunder without notice to
or consent of Borrower.
Section 9.7. Counterparts. This Agreement may be executed in any number
-------------
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one instrument.
Section 9.8. Interpretation. No provision of this Agreement or any
---------------
other Loan Document shall be interpreted or construed against any party because
that party or its legal representative drafted that provision. The titles of the
paragraphs of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement. Any pronoun used in this
Agreement shall be deemed to include singular and plural and masculine, feminine
and neuter gender as the case may be. The words "herein," "hereof," and
"hereunder" shall be deemed to refer to this entire Agreement, except as the
context otherwise requires.
Section 9.9. Survival of Terms. All covenants, agreements,
------------------
representations and warranties made in this Agreement, any other Loan Document,
and in any certificates and other instruments delivered in connection therewith
shall be considered to have been relied upon by Lender and shall survive the
making by Lender of the Loans herein contemplated and the execution and delivery
to Lender of the Note, and shall continue in full force and effect until all
liabilities and obligations of Borrower to Lender are satisfied in full.
Section 9.10. Release of Lender. Borrower releases Lender, its officers,
------------------
employees, and agents, of and from any claims for loss or damage resulting from
acts or conduct of any or all of them, unless caused by Lender's recklessness,
gross negligence, or willful misconduct.
Section 9.11. Time. Whenever Borrower is required to make any payment or
-----
perform any act on a Saturday, Sunday, or a legal holiday under the laws of the
State of Maryland (or
38
<PAGE>
other jurisdiction where Borrower is required to make the payment or perform the
act), the payment may be made or the act performed on the next Business Day.
Time is of the essence in Borrower's performance under this Agreement and all
other Loan Documents.
Section 9.12. Commissions. The transaction contemplated by this
------------
Agreement was brought about by Lender and Borrower acting as principals and
without any brokers, agents, or finders being the effective procuring cause.
Borrower represents that it has not committed Lender to the payment of any
brokerage fee, commission, or charge in connection with this transaction. If any
such claim is made on Lender by any broker, finder, or agent or other person,
Borrower will indemnify, defend, and hold Lender harmless from and against the
claim and will defend any action to recover on that claim, at Borrower's cost
and expense, including Lender's counsel fees. Borrower further agrees that until
any such claim or demand is adjudicated in Lender's favor, the amount demanded
will be deemed a liability of Borrower under this Agreement, secured by the
Collateral.
Section 9.13. Third Parties. No rights are intended to be created
--------------
hereunder or under any other Loan Document for the benefit of any third party
donee, creditor, or incidental beneficiary of Borrower. Nothing contained in
this Agreement shall be construed as a delegation to Lender of Borrower's duty
of performance, including without limitation Borrower's duties under any account
or contract in which Lender has a security interest.
Section 9.14. Discharge of Borrower's Obligations. Lender, in its sole
------------------------------------
discretion, shall have the right at any time during an Event of Default, and
from time to time, after prior notice to Borrower if Borrower fails to do so,
to: (i) obtain insurance covering any of the Collateral as required hereunder;
(ii) pay for the performance of any of Borrower's obligations hereunder; (iii)
discharge taxes, liens, security interests, or other encumbrances at any time
levied or placed on any of the Collateral in violation of this Agreement unless
Borrower is in good faith with due diligence by appropriate proceedings
contesting those items; and (iv) pay for the maintenance and preservation of any
of the Collateral. Expenses and advances shall be added to the Loan, until
reimbursed to Lender and shall be secured by the Collateral. Any such payments
and advances by Lender shall not be construed as a waiver by Lender of an Event
of Default.
Section 9.15. Information to Participants. Lender may divulge to any
----------------------------
participant it may obtain in the Loan, or any portion thereof, all information,
and furnish to such participant copies of reports, financial statements,
certificates, and documents obtained under any provision of this Agreement or
any other Loan Document.
Section 9.16. Indemnity. Borrower hereby agrees to indemnify and hold
----------
harmless Lender, its partners, officers, agents and employees (collectively,
"Indemnitee") from and against any liability, loss, cost, expense, claim,
damage, suit, action or proceeding ever suffered or incurred by Lender
(including reasonable attorneys' fees and expenses) arising from Borrower's
failure to observe, perform or discharge any of its covenants, obligations,
agreements or duties hereunder, or from the breach of any of the representations
or warranties contained in Article IV
39
<PAGE>
hereof. In addition, Borrower shall defend Indemnitee against and save it
harmless from all claims of any Person with respect to the Collateral.
Notwithstanding any contrary provision in this Agreement, the obligation of
Borrower under this Section 9.16 shall survive the payment in full of the
Obligations and the termination of this Agreement.
Section 9.17. Choice of Law; Consent to Jurisdiction. THIS AGREEMENT AND
---------------------------------------
THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF
CONFLICTS OF LAWS. IF ANY ACTION ARISING OUT OF THIS AGREEMENT OR THE NOTE IS
COMMENCED BY LENDER IN THE STATE COURTS OF THE STATE OF MARYLAND OR IN THE U.S.
DISTRICT COURT FOR THE DISTRICT OF MARYLAND, BORROWER HEREBY CONSENTS TO THE
JURISDICTION OF ANY SUCH COURT IN ANY SUCH ACTION AND TO THE LAYING OF VENUE IN
THE STATE OF MARYLAND. ANY PROCESS IN ANY SUCH ACTION SHALL BE DULY SERVED IF
MAILED BY REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS DESCRIBED
IN SECTION 9.4 HEREOF.
Section 9.18. Waiver of Trial by Jury. BORROWER HEREBY (A) COVENANTS AND
------------------------
AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND
(B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT
SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS
SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY BORROWER, AND THIS WAIVER IS
INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE
RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND
REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE
SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF
BORROWER'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, BORROWER HEREBY
CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING LENDER'S COUNSEL)
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO BORROWER THAT LENDER WILL NOT SEEK
TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION.
Section 9.19. Confession of Judgment. BORROWER AUTHORIZES ANY ATTORNEY
----------------------
ADMITTED TO PRACTICE BEFORE ANY COURT OF RECORD IN THE UNITED STATES OR THE
CLERK OF SUCH COURT TO APPEAR ON BEHALF OF BORROWER IN ANY COURT IN ONE OR MORE
PROCEEDINGS, OR BEFORE ANY CLERK THEREOF OF PROTHONOTARY OR OTHER COURT
OFFICIAL, AND TO CONFESS JUDGMENT AGAINST BORROWER IN FAVOR OF LENDER IN THE
FULL AMOUNT DUE ON THIS AGREEMENT (INCLUDING PRINCIPAL, ACCRUED INTEREST AND ANY
AND ALL CHARGES, FEES AND COSTS) PLUS ATTORNEYS'
40
<PAGE>
FEES EQUAL TO FIFTEEN PERCENT (15%) OF THE AMOUNT DUE, PLUS COURT COSTS, ALL
WITHOUT PRIOR NOTICE OR OPPORTUNITY OF BORROWER FOR PRIOR HEARING. BORROWER
AGREES AND CONSENTS THAT VENUE AND JURISDICTION SHALL BE PROPER IN THE CIRCUIT
COURT OF ANY COUNTY OF THE STATE OF MARYLAND OR OF BALTIMORE CITY, MARYLAND, OR
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND. BORROWER
WAIVES THE BENEFIT OF ANY AND EVERY STATUTE, ORDINANCE, OR RULE OF COURT WHICH
MAY BE LAWFULLY WAIVED CONFERRING UPON BORROWER ANY RIGHT OR PRIVILEGE OF
EXEMPTION, HOMESTEAD RIGHTS, STAY OF EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR
OTHER RELIEF FROM THE ENFORCEMENT OR IMMEDIATE ENFORCEMENT OF A JUDGMENT OR
RELATED PROCEEDINGS ON A JUDGMENT. THE AUTHORITY AND POWER TO APPEAR FOR AND
ENTER JUDGMENT AGAINST BORROWER SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES
THEREOF, OR BY ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY
ANY JUDGMENT ENTERED PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE EXERCISED
ON ONE OR MORE OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT
JURISDICTIONS, AS OFTEN AS LENDER SHALL DEEM NECESSARY, CONVENIENT, OR PROPER.
41
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
BORROWER:
ATTEST: HEALTHCOR, INC.
a Delaware corporation
By:________________________ By:__________________________ [SEAL]
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR HOLDINGS, INC.
a Delaware corporation
By:________________________ By:__________________________ [SEAL]
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR OXYGEN & MEDICAL
EQUIPMENT, INC.
a Texas corporation
By:________________________ By:__________________________ [SEAL]
Name:
Title:
ATTEST: HEALTHCOR PHARMACY, INC.
a Texas corporation
By:________________________ By:__________________________ [SEAL]
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: PHHN, INC.
42
<PAGE>
a Texas corporation
By:________________________ By:__________________________ [SEAL]
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR REHABILITATION
SERVICES, INC.
a Texas corporation
By:________________________ By:__________________________ [SEAL]
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HC PERSONNEL RESOURCES, INC.
a Texas corporation
By:________________________ By:__________________________ [SEAL]
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: CARENETWORK, INC.
an Arkansas corporation
By:________________________ By:__________________________ [SEAL]
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
43-A
43
<PAGE>
LENDER:
ATTEST: HCFP FUNDING, INC.
a Delaware corporation
By:________________________ By:__________________________
Name:
Title:
43-B
44
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit A - Form of Revolving Credit Note
Exhibit B - Form of Lockbox Agreement
Exhibit C - Form of Legal Opinion
43-B
45
<PAGE>
LIST OF SCHEDULES
-----------------
Schedule 1.36 - Permitted Liens
Schedule 4.1 - Subsidiaries
Schedule 4.5 - Litigation
Schedule 4.7 - Tax Identification Numbers
Schedule 4.13 - Non-Compliance with Law
Schedule 4.14 - Environmental Matters
Schedule 4.15 - Places of Business
Schedule 4.16 - Licenses
Schedule 4.17 - Stock Ownership
Schedule 4.19 - Borrowings and Guarantees
Schedule 4.21 - Trade Names
Schedule 4.22 - Joint Ventures
Schedule 7.12 - Transactions with Affiliates
43-B
46
<PAGE>
$20,000,000.00
AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------
dated May 19, 1998
by and among
HEALTHCOR, INC.
HEALTHCOR HOLDINGS, INC.
HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC.
HEALTHCOR PHARMACY, INC.
PHHN, INC.
HEALTHCOR REHABILITATION SERVICES, INC.
HC PERSONNEL RESOURCES, INC.
CARENETWORK, INC.
(collectively, "Borrower")
and
HCFP FUNDING, INC.
September 14 , 1998
<PAGE>
AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
THIS AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT (This "Amendment") is
made as of this 14th day of September, 1998, by and among HEALTHCOR, INC., a
Delaware corporation, HEALTHCOR HOLDINGS, INC., a Delaware corporation
("Holdings"), HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC., a Texas corporation,
- ----------
HEALTHCOR PHARMACY, INC. a Texas corporation, PHHN, INC. a Texas corporation,
HEALTHCOR REHABILITATION SERVICES, INC. a Texas corporation, HC PERSONNEL
RESOURCES, INC., a Texas corporation, CARENETWORK, INC., an Arkansas corporation
(collectively, "Borrower"), and HCFP FUNDING, INC., a Delaware corporation
--------
("Lender"). Capitalized terms used but not defined in this Amendment shall have
- --------
the meanings that are set forth in the Loan Agreement (as defined below).
RECITALS
--------
A. Pursuant to that certain Loan and Security Agreement dated as of May
19, 1998 by and between Borrower and Lender (the "Loan Agreement"), the parties
--------------
have established certain financing arrangements under a master credit facility
that allows Borrower to borrow funds from Lender in accordance with the terms
and conditions set forth in the Loan Agreement.
2. Borrower's consistent cash flow losses and significant Medicare offset
exposure constitute a "material adverse change" as contemplated by Section
8.1(r) of the Loan Agreement, and have resulted in the absence of further
availability for Borrower to receive additional Revolving Credit Loans in
accordance with the Borrowing Base. Consequently, as specified in Section 5.2 of
the Loan Agreement, Lender is not obligated or required to advance any
additional funds to Borrower and Lender is entitled to exercise all of its
rights and remedies against Borrower and the Collateral as provided in the Loan
Agreement.
C. Notwithstanding the foregoing, Lender has agreed to make an additional
advance (the "Overline Loan") under the Loan Agreement in the maximum aggregate
------------------
principal amount of Two Million and No/100 Dollars ($2,000,000.00) (the
"Principal Sum").
- --------------
4. Lender has agreed to forbear from exercising its rights and remedies
under the Loan Agreement for so long as no Event of Default arises after the
date hereof (the "Limited Forbearance").
-------------------
5. The Overline Loan from Lender provides the Borrower with a significant
benefit
<PAGE>
in the form of additional funds which the Borrower could not otherwise obtain.
6. Lender's Limited Forbearance provides Borrower with a substantial
additional benefit. In the absence of Lender's Limited Forbearance, Lender is
entitled to exercise immediately its rights and remedies under the Loan
Agreement against the Borrower and against the Collateral.
7. Borrower's agreements stated in Section 1.04 are a material inducement
to Lender to enter into the Limited Forbearance and to provide the additional
financing pursuant to the Overline Loan. Borrower has consulted with counsel in
making the agreements stated in Section 1.04. Borrower has been advised by its
counsel of and understands the rights under the Bankruptcy Code that is agreeing
to waive or modify pursuant to this Section 1.04. Borrower acknowledges and
confirms that this Amendment, including its agreements in Section 1.04 are in
the best interests of Borrower.
8. Lender is willing to make the Overline Loan and to provide the Limited
Forbearance but only upon the condition, among others, that Borrower shall have
executed and delivered to Lender this Amendment.
9. The parties now desire to amend the Loan Agreement to state the terms
of the Overline Loan and to make certain other changes in the Loan Agreement, in
accordance with the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained in this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Lender and Borrower hereby agree as follows:
1.01 The Overline Loan
-----------------
a. Except as expressly modified by this Amendment, the Overline Loan
will be treated for all purposes as a Revolving Credit Loan under the Loan
Agreement and the Note, and all principal, interest, fees and other costs and
expenses relating thereto shall be treated as additional Obligations under the
Loan Agreement and the other Loan Documents.
b. If not sooner repaid, Borrower promises to pay to Lender the
entire Principal Sum on March 10, 1999 (the "Maturity Date"). The failure to
-------------
make such repayment shall constitute an immediate Event of Default under Section
8.1(a) of the Loan Agreement.
<PAGE>
c. In addition to the repayment of the Principal Sum, Borrower
promises to pay to Lender interest on the Principal Sum on a monthly basis from
the date of this Amendment until the Maturity Date. Interest shall be at a
fluctuating rate per annum (on the basis of the actual number of days elapsed
over a year of 360 days) equal to the Prime Rate of Interest plus four percent
(Prime plus 4.0%) (the "Overline Base Rate"), provided that during an Event of
------------------
Default such rate shall be equal to the Overline Base Rate plus five percent
(5%), but in no event in excess of the Highest Lawful Rate. Accrued interest
shall be payable monthly in arrears on the last Business Day (as defined below)
of each month from September 30, 1998 and continuing through and including the
Maturity Date. Lender shall be entitled to apply amounts transferred to the
Concentration Account pursuant to Section 2.3 of the Loan Agreement in
satisfaction of Borrower's obligations with respect to the Overline Loan.
d. Borrower shall pay Lender a overline fee of Twenty Thousand and
No/100 Dollars ($20,000.00) (the "Overline Fee"), which fee shall be deducted
from the advance by Lender so that the net amount to be advanced by Lender with
respect to the Overline Loan shall be One Million Nine Hundred Eighty Thousand
and No/100 Dollars ($1,980,000.00).
e. Upon a Sale Event (as defined below), Borrower shall prepay all of
the Principal Sum outstanding (and, if applicable, the Success Fee), together
with all interest accrued on the Principal Sum and all other sums that are
payable pursuant to this Amendment.
f. The Maximum Loan Amount under the Loan Agreement shall be
inclusive of the Overline Loan.
g. Subject to the terms and conditions of this Amendment, Lender
shall make available to Borrower the Principal Sum in immediately available
funds not later than 12:00 Noon (Maryland time) on the Business Day on which the
following conditions precedent are satisfied: (i) Borrower shall have executed
and delivered to Lender this Amendment, and all financing statements and other
documents, certificates and agreements reasonably deemed necessary or
appropriate by Lender to effectuate the Overline Loan; (ii) Lender shall have
received the Stock Pledge Agreement of Healthcor Holdings, Inc. in favor of
Lender dated even date herewith (the "Stock Pledge Agreement"), the related
----------------------
Irrevocable Stock Power and the certificates evidencing the stock that is the
subject of the Stock Pledge Agreement; (iii) Lender shall have received a letter
from S. Wayne Bazzle, Chief Executive Officer of HC (as defined below), stating
that after giving effect to the Overline Loan, HC will be solvent; and (iv)
Lender shall have received a legal opinion in form and substance satisfactory to
Lender.
1.02. Section 2.4 of the Loan Agreement is hereby amended to include a new
Subsection 2.4(f) as follows:
"(a) If such is greater than zero, Borrower shall pay to Lender a fee
(the "Success Fee") upon the consummation of (i) a transaction of merger or
consolidation involving HC
3
<PAGE>
Personnel Resources, Inc. ("HC"), or (ii) HC's conveyance, sale, lease,
sublease, transfer or other disposition of, in one transaction or a series of
transactions, all or substantially all of its assets, whether now or hereafter
acquired, or the capital stock of HC (any such transaction described in clause
(i) or (ii) above, a "Sale Event"). The Success Fee shall be based on the
aggregate consideration paid (net of applicable commissions, and other
reasonable expenses of the Sale Event transaction) to HC or any other entity
comprising Borrower in connection with the Sale Event (the "Sale
Consideration"), whether such consideration is in the form of cash, securities,
indebtedness or otherwise, and shall be computed and paid as follows:
The Success Fee shall equal (i) five Percent (5.0%) of the Excess Proceeds
if the Sale Event occurs within sixty (60) days from the date of this Amendment,
(ii) eight percent (8%) of the Excess Proceeds, if the Sale Event occurs between
sixty-one (61) and ninety (90) days from the date of this Amendment, (iii)
eleven and one half percent (11.5%) of the Excess Proceeds, if the Sale Event
occurs between ninety-one (91) and one hundred twenty (120) days from the date
of this Amendment, (iv) fifteen and one half percent (15.5%) of the Excess
Proceeds, if the Sale Event occurs between one hundred twenty-one (121) and one
hundred fifty (150) days from the date of this Amendment, and (v) twenty percent
(20.0%) of the Excess Proceeds, if the Sale Event occurs above 150 days from the
date of this Amendment. "Excess Proceeds" shall mean the Sale Consideration up
---------------
to Three Million Five Hundred Thousand Dollars ($3,500,000.00) (with any noncash
consideration included therein to be valued at the fair market value thereof as
determined by the Board of Directors of Holdings) minus the sum of the Principal
Sum plus all interest thereon and other Obligations directly related to the
Overline Loan.
1.03 Subection 3.1(j) of the Loan Agreement is deleted in its entirety and
replaced as follows:
(j) other than property pledged to secure the L/C, all of Borrower's
monies and other property of every kind and nature now or at any time or times
hereafter in the possession of or under the control of Lender or a bailee or
Affiliate of Lender; and
1.04. Article VIII of the Loan Agreement (Events of Default) is hereby
amended to add a new Section 8.5 of the Loan Agreement as follows:
"Section 8.5. Agreement to Waive the Protections of the Automatic
----------------------------------------------------------------
Stay and to Take Certain Other Action in the Event of a Bankruptcy Proceeding.
- ------------------------------------------------------------------------------
Borrower hereby agrees that if during the Term, a voluntary or
involuntary petition(s) is filed commencing a proceeding under any Chapter of
the United States Bankruptcy Code (Title 11, United States Code) relating to any
or all of the entities comprising Borrower (such entity or entities,
individually and/or collectively referred to for the purpose of this Section 8.5
as the "Debtor"):
Debtor waives the protections of any stay or injunction in the
Debtor's
4
<PAGE>
bankruptcy proceeding, including the automatic stay of Bankruptcy Code
(S)362(a), 11 U.S.C. (S)362, that may arise through the filing of a bankruptcy
proceeding regarding the Debtor and the Debtor will consent to and not oppose
any motion by Lender seeking relief from any such stays and injunctions in the
bankruptcy proceeding in order to allow Lender to exercise all of its rights and
remedies with respect to the Collateral under this Agreement, the other Loan
Documents and/or any applicable non-bankruptcy law, including without
limitation, the Uniform Commercial Code. In addition, the Debtor acknowledges
that in any bankruptcy proceeding regarding the Debtor, Lender will be entitled
to immediate stay relief under Bankruptcy Code (S)362(d)(1), 11
U.S.C.(S)362(d)(1), "for cause", such "cause" being (in addition to anything
else Lender may present) the filing of the bankruptcy case and the agreement
stated in this paragraph and the impact the bankruptcy filing will create on the
Debtor's business and the Collateral; and
Debtor will discuss and cooperate with Lender in good faith to permit
Lender to provide debtor-in-possession financing on terms and conditions
mutually agreeable to the parties ("Mutually Agreeable DIP Financing"), and
Debtor will petition the applicable bankruptcy court to request that Lender be
authorized (if Lender consents and agrees) to provide Mutually Agreeable DIP
Financing and senior priming liens to Debtor pursuant to, without limitation,
Bankruptcy Code (S)364, 11 U.S.C. (S)364. If after such discussion and
cooperation in good faith, Borrower and Lender do not agree to a Mutually
Agreeable DIP Financing, Lender shall subsequently have the right of first
refusal to provide debtor-in-possession financing and senior priming liens to
Debtor pursuant to, without limitation, Bankruptcy Code (S)364, 11 U.S.C.
(S)364, on the same terms and conditions as may be offered by any other third-
party lender (and Debtor shall so petition the bankruptcy court to request that
Lender be approved to provide such debtor-in-possession financing if it
exercises its right of first refusal).
[REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
1.05. Reference to the Effect on the Loan Agreement.
---------------------------------------------
(a) Upon the effectiveness of this Amendment, each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of
similar import shall mean and be a reference to the Loan Agreement as amended by
this Amendment.
(b) Except as specifically amended above, the Loan Agreement, and all
other Loan Documents, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided in this Amendment, operate as a waiver of any
right, power or remedy of Lender, nor constitute a waiver of any provision of
the Loan Agreement, or any other documents, instruments and agreements executed
or delivered in connection with the Loan Agreement.
2. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of Maryland.
3. Headings. Section headings in this Amendment are included for
--------
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
4. Counterparts. This Amendment may be executed in counterparts, and both
------------
counterparts taken together shall be deemed to constitute one and the same
instrument.
[SIGNATURES TO FOLLOW]
6
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the date first written above.
LENDER:
ATTEST: HCFP FUNDING, INC.
a Delaware corporation
By:________________________ By:_________________________________
Name: Name:
Title: Title:
BORROWER:
ATTEST: HEALTHCOR, INC.
a Delaware corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR HOLDINGS, INC.
a Delaware corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR OXYGEN & MEDICAL
EQUIPMENT, INC.
a Texas corporation
By:________________________ By:__________________________
Name:
Title:
[ADDITIONAL SIGNATURES FOLLOW]
7
<PAGE>
ATTEST: HEALTHCOR PHARMACY, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: PHHN, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR REHABILITATION
SERVICES, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HC PERSONNEL RESOURCES, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: CARENETWORK, INC.
An Arkansas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
8
<PAGE>
$20,000,000.00
AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
originally dated May 19, 1998
by and among
HEALTHCOR, INC.
HEALTHCOR HOLDINGS, INC.
HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC.
HEALTHCOR PHARMACY, INC.
PHHN, INC.
HEALTHCOR REHABILITATION SERVICES, INC.
HC PERSONNEL RESOURCES, INC.
CARENETWORK, INC.
(collectively, "Borrower")
and
HCFP FUNDING, INC.
Amended as of November 16, 1998
<PAGE>
AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
THIS AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT (this "Amendment") is
made as of this 16th day of November, 1998, by and among HEALTHCOR, INC., a
Delaware corporation, HEALTHCOR HOLDINGS, INC., a Delaware corporation
("Holdings"), HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC., a Texas corporation,
--------
HEALTHCOR PHARMACY, INC. a Texas corporation, PHHN, INC. a Texas corporation,
HEALTHCOR REHABILITATION SERVICES, INC. a Texas corporation, HC PERSONNEL
RESOURCES, INC., a Texas corporation and CARENETWORK, INC., an Arkansas
corporation (collectively, "Borrower"), and HCFP FUNDING, INC., a Delaware
--------
corporation ("Lender"). Capitalized terms used but not defined in this
------
Amendment shall have the meanings that are set forth in the Loan Agreement (as
defined below).
RECITALS
--------
A. Pursuant to that certain Loan and Security Agreement dated as of May
19, 1998 by and between Borrower and Lender (as amended, restated, modified or
supplemented from time to time, the "Loan Agreement"), the parties have
--------------
established certain financing arrangements under a master credit facility that
allows Borrower to borrow funds from Lender in accordance with the terms and
conditions set forth in the Loan Agreement.
2. Pursuant to that certain Asset Purchase Agreement by and among
HealthCor Oxygen & Medical Equipment, Inc. ("HealthCor Equipment"), HealthCor
-------------------
Holdings, Inc. ("Holdings") and Home Care Supply, Inc. ("Home Care"), HealthCor
-------- ---------
Equipment and Holdings have agreed to sell (the "SMM Sale") to Home Care
--------
substantially all of the assets of the Southern Medical Mart division of
HealthCor Equipment (the "Transferred Assets"), other than Accounts generated by
------------------
such Southern Medical Mart division and proceeds from such Accounts (such
Accounts and related proceeds, the "SMM Accounts").
------------
C. Lender is willing to release the Transferred Assets as Collateral
under the Loan Agreement upon the condition, among others, that Borrower shall
have executed and delivered to Lender this Amendment.
4. The parties now desire to amend the Loan Agreement, in accordance with
the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained in this Amendment, and other good and valuable
consideration, the receipt
<PAGE>
and sufficiency of which are hereby acknowledged, Lender and Borrower have
agreed to the following amendments to the Loan Agreement. Capitalized terms used
but not defined in this Amendment shall have the meanings that are set forth in
the Loan Agreement.
1. Maximum Availability.
---------------------
As of the closing date of the SMM Sale (the "SMM Closing Date"), the
maximum availability under the Borrowing Base for advances under the Loan (the
"Maximum Availability for Advances"), exclusive of that certain Overline Loan in
the maximum principal amount of $2,000,000.00 made to Borrower in accordance
with the terms of Amendment No. 1 to the Loan Agreement dated as of September
14, 1998, shall equal $8,137,500.00. Subsequent to the SMM Closing Date, the
Maximum Availability for Advances shall be reduced by the aggregate dollar
amount of collections from SMM Accounts as they liquidate. Borrower shall
account for such collections monthly in connection with its monthly aging, but
in no event later than the fifteenth day of each month, by providing Lender with
documentation sufficient in Lender's reasonable discretion to verify such
collections. Notwithstanding anything herein to the contrary, the Maximum
Availability for Advances shall be equal to $7,775,000.00 by the sixtieth (60th)
day following the SMM Closing Date.
2. Reference to the Effect on the Loan Agreement.
---------------------------------------------
(a) Upon the effectiveness of this Amendment, each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of
similar import shall mean and be a reference to the Loan Agreement as amended by
this Amendment.
(b) Except as specifically amended above, the Loan Agreement, and all
other Loan Documents, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided in this Amendment, operate as a waiver of any
right, power or remedy of Lender, nor constitute a waiver of any provision of
the Loan Agreement, or any other documents, instruments and agreements executed
or delivered in connection with the Loan Agreement.
3. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of Maryland.
4. Headings. Section headings in this Amendment are included for
--------
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
5. Counterparts. This Amendment may be executed in counterparts, and
------------
both counterparts taken together shall be deemed to constitute one and the same
instrument.
<PAGE>
[SIGNATURES TO FOLLOW]
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the date first written above.
LENDER:
ATTEST: HCFP FUNDING, INC.
a Delaware corporation
By:________________________ By:_________________________________
Name: Name:
Title: Title:
BORROWER:
ATTEST: HEALTHCOR, INC.
a Delaware corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR HOLDINGS, INC.
a Delaware corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR OXYGEN & MEDICAL
EQUIPMENT, INC.
a Texas corporation
By:________________________ By:__________________________
Name:
Title:
3
<PAGE>
[ADDITIONAL SIGNATURES FOLLOW]
4
<PAGE>
ATTEST: HEALTHCOR PHARMACY, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: PHHN, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR REHABILITATION
SERVICES, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HC PERSONNEL RESOURCES, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: CARENETWORK, INC.
an Arkansas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
5
<PAGE>
$20,000,000.00
AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
originally dated May 19, 1998
by and among
HEALTHCOR, INC.
HEALTHCOR HOLDINGS, INC.
HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC.
HEALTHCOR PHARMACY, INC.
PHHN, INC.
HEALTHCOR REHABILITATION SERVICES, INC.
HC PERSONNEL RESOURCES, INC.
CARENETWORK, INC.
(collectively, "Borrower")
and
HCFP FUNDING, INC.
Amended as of January 5, 1999
<PAGE>
AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
THIS AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT (this "Amendment") is
made as of this 5th day of January, 1999, by and among HEALTHCOR, INC., a
Delaware corporation, HEALTHCOR HOLDINGS, INC., a Delaware corporation
("Holdings"), HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC., a Texas corporation,
- ----------
HEALTHCOR PHARMACY, INC. a Texas corporation, PHHN, INC. a Texas corporation,
HEALTHCOR REHABILITATION SERVICES, INC. a Texas corporation, HC PERSONNEL
RESOURCES, INC., a Texas corporation and CARENETWORK, INC., an Arkansas
corporation (collectively, "Borrower"), and HCFP FUNDING, INC., a Delaware
--------
corporation ("Lender"). Capitalized terms used but not defined in this
------
Amendment shall have the meanings that are set forth in the Loan Agreement (as
defined below).
RECITALS
--------
A. Pursuant to that certain Loan and Security Agreement dated as of May
19, 1998 by and between Borrower and Lender (as amended, restated, modified or
supplemented from time to time, the "Loan Agreement"), the parties have
--------------
established certain financing arrangements under a master credit facility that
allows Borrower to borrow funds from Lender in accordance with the terms and
conditions set forth in the Loan Agreement.
2. Pursuant to that certain Asset Purchase Agreement by and among
HealthCor, Inc. ("HealthCor") and Addus HealthCare, Inc. ("Addus"), HealthCor
---------
has agreed to sell (the "VNS Sale") to Addus substantially all of the assets of
--------
the New Mexico Medicaid Waiver program business (the "Business") of HealthCor
--------
(the "Transferred Assets"), other than Accounts generated by such Business and
------------------
proceeds from such Accounts for services rendered prior to January 1, 1999 (such
Accounts and related proceeds, the "VNS Accounts").
------------
C. Lender is willing to release the Transferred Assets as Collateral
under the Loan Agreement upon the condition, among others, that Borrower shall
have executed and delivered to Lender this Amendment.
4. The parties now desire to amend the Loan Agreement, in accordance with
the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained in this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Lender and Borrower have agreed to the
<PAGE>
following amendments to the Loan Agreement. Capitalized terms used but not
defined in this Amendment shall have the meanings that are set forth in the Loan
Agreement.
<PAGE>
1. Maximum Availability.
---------------------
As of the closing date of the VNS Sale (the "VNS Closing Date"), and at all
----------------
times hereafter until all Obligations under the Loan Agreement have been paid,
the maximum availability under the Borrowing Base for advances under the Loan
(the "Maximum Availability for Advances"), exclusive of that certain Overline
-------------------- ------------
Loan in the maximum principal amount of $2,000,000.00 made to Borrower in
accordance with the terms of Amendment No. 2 to the Loan Agreement dated as of
November 16, 1998, shall equal $7,532,000.00.
2. Reference to the Effect on the Loan Agreement.
---------------------------------------------
(a) Upon the effectiveness of this Amendment, each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of
similar import shall mean and be a reference to the Loan Agreement as amended by
this Amendment.
(b) Except as specifically amended above, the Loan Agreement, and all
other Loan Documents, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided in this Amendment, operate as a waiver of any
right, power or remedy of Lender, nor constitute a waiver of any provision of
the Loan Agreement, or any other documents, instruments and agreements executed
or delivered in connection with the Loan Agreement.
3. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of Maryland.
4. Headings. Section headings in this Amendment are included for
--------
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
5. Counterparts. This Amendment may be executed in counterparts, and
------------
both counterparts taken together shall be deemed to constitute one and the same
instrument.
[SIGNATURES TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the date first written above.
LENDER:
ATTEST: HCFP FUNDING, INC.
a Delaware corporation
By:________________________ By:_________________________________
Name: Name:
Title: Title:
BORROWER:
ATTEST: HEALTHCOR, INC.
a Delaware corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR HOLDINGS, INC.
a Delaware corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC.
a Texas corporation
By:________________________ By:__________________________
Name:
Title:
[ADDITIONAL SIGNATURES FOLLOW]
<PAGE>
ATTEST: HEALTHCOR PHARMACY, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: PHHN, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HEALTHCOR REHABILITATION SERVICES, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: HC PERSONNEL RESOURCES, INC.
a Texas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
ATTEST: CARENETWORK, INC.
an Arkansas corporation
By:________________________ By:__________________________
Name: S. Wayne Bazzle
Title: Chief Executive Officer and Secretary
<PAGE>
$20,000,000.00
AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
dated May 19, 1998
by and among
HEALTHCOR, INC.
HEALTHCOR HOLDINGS, INC.
HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC.
HEALTHCOR PHARMACY, INC.
PHHN, INC.
HEALTHCOR REHABILITATION SERVICES, INC.
HC PERSONNEL RESOURCES, INC.
CARENETWORK, INC.
(collectively, "Borrower")
and
HCFP FUNDING, INC.
March 1, 1999
<PAGE>
AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
THIS AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT (This "Amendment") is
made as of this 1st day of March, 1999, by and among HEALTHCOR, INC., a Delaware
corporation, HEALTHCOR HOLDINGS, INC., a Delaware corporation ("Holdings"),
--------
HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC., a Texas corporation, HEALTHCOR
PHARMACY, INC. a Texas corporation, PHHN, INC. a Texas corporation, HEALTHCOR
REHABILITATION SERVICES, INC. a Texas corporation, HC PERSONNEL RESOURCES, INC.,
a Texas corporation, CARENETWORK, INC., an Arkansas corporation (collectively,
"Borrower"), and HCFP FUNDING, INC., a Delaware corporation ("Lender").
- --------- ------
Capitalized terms used but not defined in this Amendment shall have the meanings
that are set forth in the Loan Agreement (as defined below).
RECITALS
--------
A. Pursuant to that certain Loan and Security Agreement dated as of May
19, 1998 by and between Borrower and Lender (as amended, restated, modified or
supplemented from time to time, the "Loan Agreement"), the parties have
--------------
established certain financing arrangements under a master credit facility that
allows Borrower to borrow funds from Lender in accordance with the terms and
conditions set forth in the Loan Agreement.
B. Pursuant to that certain Amendment No. 1 to Loan and Security Agreement
dated as of September 14, 1998 by and between Borrower and Lender (the "First
-----
Amendment"), Lender has made an Overline Loan (as defined in the First Amendment
- ---------
and referred to herein as the "September Overline Loan") to Borrower. The
-----------------------
outstanding amount of the September Overline Loan, after taking into account
interest that has been charged to the September Overline Loan to date and all
other fees applicable thereto, equals Two Million Three Hundred Thousand and
00/100 Dollars ($2,300,000.00).
C. Borrower has paid the September Overline Loan in full concurrently with
the execution of this Amendment.
D. Lender has agreed to make an additional advance (the "March Overline
--------------
Loan") under the Loan Agreement in the maximum aggregate principal amount of Two
- ----
Million Four Hundred Fifty Thousand and 00/100 Dollars ($2,450,000.00) (the
"Principal Sum").
- --------------
E. Lender is willing to make the March Overline Loan but only upon the
condition, among others, that Borrower shall have executed and delivered to
Lender this Amendment.
F. Healthcor Holdings, Inc. ("Holdings") is a party to that certain
--------
Convertible Loan Agreement dated as of December 23, 1998 (as the same may be
amended from time to time, the
<PAGE>
"Convertible Loan Agreement") entered into with Credit Suisse First Boston
--------------------------
Management Corporation, as agent (the "Agent") and the several lenders from
-----
time to time parties thereto (collectively, the "Convertible Loan Lenders").
------------------------
The Convertible Loan Lenders' lien on certain assets of Borrower and its
subsidiaries have been subordinated to the Lender's lien on Borrower's assets
pursuant to that certain Intercreditor and Subordination Agreement dated as of
December 23, 1998 between Borrower, the Lender and the Agent (the "Intercreditor
-------------
Agreement"). The Convertible Loan Lenders currently intend to advance additional
- ----------
funds to Borrower.
G. Borrower is a party to that certain Indenture dated as of December 1,
1997 (as the same may be amended from time to time, the "Indenture") entered
---------
into with Norwest Bank Minnesota, N.A., as trustee (together with its successors
and assigns, "Trustee").
-------
H. The parties now desire to amend the Loan Agreement to state the terms
of the March Overline Loan and to make certain other changes in the Loan
Agreement, in accordance with the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained in this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Lender and Borrower hereby agree as follows:
1.01 The September Overline Loan.
---------------------------
Borrower and Lender hereby acknowledge that the September Overline
Loan has been paid in full through the payment of the sum of Two Million Three
Hundred Thousand and No/100 ($2,300,000.00) on the date hereof.
1.02 The March Overline Loan
-----------------------
a. Except as expressly modified by this Amendment, the March Overline
Loan will be treated for all purposes as a Revolving Credit Loan under the Loan
Agreement and the Note, and all principal, interest, fees and other costs and
expenses relating thereto shall be treated as additional Obligations under the
Loan Agreement and the other Loan Documents.
b. If not sooner repaid, Borrower promises to pay to Lender the
entire Principal Sum on April 30, 1999 (as such date may be extended pursuant to
the terms of this Amendment, the "Maturity Date"). Notwithstanding the
-------------
foregoing, if Borrower does not repay the entire Principal sum on April 30,
1999, upon payment by Borrower of an extension fee of Twenty Five Thousand and
No/100 Dollars ($25,000.00), the Maturity Date shall be automatically extended
to May 31, 1999. The failure to make such repayment on the Maturity Date shall
constitute an immediate Event of Default under Section 8.1(a) of the Loan
Agreement.
2
<PAGE>
c. In addition to the repayment of the Principal Sum, Borrower
promises to pay to Lender interest on the Principal Sum on a monthly basis from
the date of this Amendment until the Maturity Date. Interest shall be at a
fluctuating rate per annum (on the basis of the actual number of days elapsed
over a year of 360 days) equal to the Prime Rate of Interest plus four percent
(Prime plus 4.0%) (the "Overline Base Rate"), provided that during an Event of
------------------
Default such rate shall be equal to the Overline Base Rate plus five percent
(5%), but in no event in excess of the Highest Lawful Rate. Accrued interest
shall be payable monthly in arrears on the last Business Day (as defined below)
of each month from March 31, 1999 and continuing through and including the
Maturity Date. Lender shall be entitled to apply amounts transferred to the
Concentration Account pursuant to Section 2.3 of the Loan Agreement in
satisfaction of Borrower's obligations with respect to the March Overline Loan.
d. Borrower shall pay Lender a overline fee of One Hundred and Fifty
Thousand and No/100 Dollars ($150,000.00) (the "Overline Fee"), which fee shall
be deducted from the advance by Lender so that the net amount to be advanced by
Lender with respect to the Overline Loan shall be Two Million Three Hundred
Thousand and No/100 Dollars ($2,300,000.00).
e. The Maximum Loan Amount under the Loan Agreement shall be
inclusive of the March Overline Loan.
f. Subject to the terms and conditions of this Amendment, Lender
shall make available to Borrower the Principal Sum in immediately available
funds not later than 12:00 Noon (Maryland time) on the Business Day on which
Borrower shall have executed and delivered to Lender this Amendment, and all
financing statements and other documents, certificates and agreements reasonably
deemed necessary or appropriate by Lender to effectuate the March Overline Loan.
1.03 Stock Pledge Agreement.
----------------------
Borrower hereby confirms that the security interest granted Lender pursuant
to the Stock Pledge Agreement (as defined in the First Amendment) secures
Borrower's obligations for the March Overline Loan.
1.04 Convertible Loan.
----------------
Lender hereby acknowledges and consents to the advance of additional funds by
the Convertible Loan Lenders to Borrower pursuant to the terms of the
Convertible Loan Agreement or any amendment or supplement thereto, which
additional funds shall be secured by a lien subordinate to Lender's lien on
Borrower's assets, in accordance with the terms of the Intercreditor Agreement
in all respects.
3
<PAGE>
1.05 Indenture.
---------
Lender hereby acknowledges and consents to the grant of a third lien
on the assets (including stock) of the Borrower and its subsidiaries to the
Trustee under the Indenture on terms substantially identical to the
Intercreditor Agreement.
1.06. Reference to the Effect on the Loan Agreement.
---------------------------------------------
(a) Upon the effectiveness of this Amendment, each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of
similar import shall mean and be a reference to the Loan Agreement as amended by
this Amendment.
(b) Except as specifically amended above, the Loan Agreement, and all
other Loan Documents, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided in this Amendment, operate as a waiver of any
right, power or remedy of Lender, nor constitute a waiver of any provision of
the Loan Agreement, or any other documents, instruments and agreements executed
or delivered in connection with the Loan Agreement and Lender expressly reserves
any and all rights and remedies available to it under the Loan Agreement the
other Loan documents.
2. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of Maryland.
3. Headings. Section headings in this Amendment are included for
--------
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
4. Counterparts. This Amendment may be executed in counterparts, and both
------------
counterparts taken together shall be deemed to constitute one and the same
instrument.
[SIGNATURES TO FOLLOW]
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the date first written above.
LENDER:
ATTEST: HCFP FUNDING, INC.
a Delaware corporation
By:________________________ By:_________________________________
Name: Name:
Title: Title:
BORROWER:
ATTEST: HEALTHCOR, INC.
a Delaware corporation
By:________________________ By:__________________________
Name:
Title:
ATTEST: HEALTHCOR HOLDINGS, INC.
a Delaware corporation
By:________________________ By:__________________________
Name:
Title:
ATTEST: HEALTHCOR OXYGEN & MEDICAL
EQUIPMENT, INC.
a Texas corporation
By:________________________ By:__________________________
Name:
Title:
[ADDITIONAL SIGNATURES FOLLOW]
5
<PAGE>
ATTEST: HEALTHCOR PHARMACY, INC.
a Texas corporation
By:________________________ By:__________________________
Name:
Title:
ATTEST: PHHN, INC.
a Texas corporation
By:________________________ By:__________________________
Name:
Title:
ATTEST: HEALTHCOR REHABILITATION
SERVICES, INC.
a Texas corporation
By:________________________ By:__________________________
Name:
Title:
ATTEST: HC PERSONNEL RESOURCES, INC.
a Texas corporation
By:________________________ By:__________________________
Name:
Title:
ATTEST: CARENETWORK, INC.
an Arkansas corporation
By:________________________ By:__________________________
Name:
Title:
6
<PAGE>
- -------------------------------------------------------------------------------
CONVERTIBLE LOAN AGREEMENT
among
HEALTHCOR HOLDINGS, INC.,
Borrower,
The Several Lenders
from Time to Time Parties Hereto,
and
CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION,
as Agent
Dated as of December 23, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
SECTION 1. DEFINITIONS...........................................................................1
1.1 Defined Terms...........................................................................1
1.2 Other Definitional Provisions..........................................................11
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS......................................................11
2.1 Commitments............................................................................11
2.2 Notes..................................................................................11
2.3 Procedure for Borrowing................................................................11
2.4 Interest Rates and Payment Dates.......................................................12
2.5 Optional Prepayments...................................................................12
2.6 Mandatory Prepayments..................................................................12
2.7 Computation of Interest and Fees.......................................................12
2.8 Pro Rata Treatment and Payments........................................................13
2.9 Requirements of Law....................................................................13
2.10 Taxes.................................................................................14
2.11 Lending Offices; Change of Lending Office.............................................15
SECTION 3. REPRESENTATIONS AND WARRANTIES.......................................................16
3.1 Financial Condition....................................................................16
3.2 No Change..............................................................................17
3.3 Existence; Compliance with Law.........................................................17
3.4 Power; Authorization; Enforceable Obligations..........................................17
3.5 No Legal Bar...........................................................................18
3.6 No Material Litigation.................................................................18
3.7 No Default.............................................................................18
3.8 Ownership of Property; Liens...........................................................18
3.9 Intellectual Property..................................................................18
3.10 No Burdensome Restrictions............................................................18
3.11 Taxes.................................................................................18
3.12 Federal Regulations...................................................................19
3.13 ERISA.................................................................................19
</TABLE>
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<TABLE>
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3.14 Investment Company Act; Other Regulations.............................................19
3.15 Subsidiaries..........................................................................20
3.16 Security Documents....................................................................20
3.17 Accuracy and Completeness of Information..............................................20
3.18 Labor Relations.......................................................................21
3.19 Insurance.............................................................................21
3.20 Solvency..............................................................................21
3.21 Purpose of Loans......................................................................22
3.22 Environmental Matters.................................................................22
3.23 Common Stock..........................................................................23
SECTION 4. CONDITIONS PRECEDENT.................................................................23
4.1 Conditions to Loans....................................................................23
SECTION 5. AFFIRMATIVE COVENANTS................................................................27
5.1 Financial Statements...................................................................27
5.2 Certificates; Other Information........................................................28
5.3 Payment of Obligations.................................................................28
5.4 Conduct of Business and Maintenance of Existence.......................................28
5.5 Maintenance of Property; Insurance.....................................................29
5.6 Inspection of Property; Books and Records; Discussions.................................29
5.7 Notices................................................................................29
5.8 Environmental Laws.....................................................................30
5.9 Periodic Audit of Accounts Receivable and Inventory....................................30
5.10 Additional Collateral; Additional Guarantors..........................................31
5.11 Relief From Automatic Stay in Bankruptcy..............................................31
5.12 Exchange Offer........................................................................32
SECTION 6. NEGATIVE COVENANTS...................................................................32
6.1 Financial Condition Covenants..........................................................32
6.2 Limitation on Indebtedness.............................................................33
6.3 Limitation on Liens....................................................................33
6.4 Limitation on Guarantee Obligations....................................................34
6.5 Limitation on Fundamental Changes......................................................35
6.6 Limitation on Sale of Assets...........................................................35
</TABLE>
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<TABLE>
<S> <C>
6.7 Reserved...............................................................................35
6.8 Limitation on Dividends................................................................35
6.9 Limitation on Capital Expenditures.....................................................36
6.10 Limitation on Investments, Loans and Advances.........................................36
6.11 Limitation on Optional Payments and Modifications of Debt Instruments.................36
6.12 Limitation on Transactions with Affiliates............................................36
6.13 Limitation on Sales and Leasebacks....................................................37
6.14 Limitation on Changes in Fiscal Year..................................................37
6.15 Limitation on Negative Pledge Clauses.................................................37
6.16 Limitation on Lines of Business.......................................................37
6.17 Governing Documents...................................................................37
6.18 Limitation on Subsidiary Formation....................................................37
6.19 Limitation on Securities Issuances....................................................37
SECTION 7. EVENTS OF DEFAULT....................................................................38
SECTION 8. CONVERSION...........................................................................40
8.1 Conversion Right.......................................................................40
8.2 Exercise of Conversion Right; Issuance of Shares of Common Stock on Conversion.........42
8.3 Cash Payment in Lieu of Fractional Shares..............................................43
8.4 Conversion Price.......................................................................44
8.5 Adjustments to the Conversion Price....................................................44
8.6 Stamp and Other Duties and Exchange Costs..............................................49
8.7 Reservation of Shares; Shares to be Fully Paid; Listing of Shares of Common Stock......49
8.8 Responsibility of the Agent............................................................50
8.9 Notice to Lenders Prior to Certain Actions.............................................50
SECTION 9. THE AGENT............................................................................51
9.1 Appointment............................................................................51
9.2 Delegation of Duties...................................................................51
9.3 Exculpatory Provisions.................................................................51
9.4 Reliance by Agent......................................................................51
9.5 Notice of Default......................................................................52
9.6 Non-Reliance on Agent and Other Lenders................................................52
9.7 Indemnification........................................................................52
</TABLE>
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<S> <C>
9.8 Agent in Its Individual Capacity.......................................................53
9.9 Successor Agent........................................................................53
SECTION 10. MISCELLANEOUS.......................................................................53
10.1 Amendments and Waivers................................................................53
10.2 Notices...............................................................................54
10.3 No Waiver; Cumulative Remedies........................................................55
10.4 Survival of Representations and Warranties............................................55
10.5 Payment of Expenses and Taxes.........................................................55
10.6 Successors and Assigns; Participations and Assignments................................56
10.7 Adjustments; Set-off..................................................................58
10.8 Counterparts..........................................................................58
10.9 Severability..........................................................................59
10.10 Integration..........................................................................59
10.11 Governing Law........................................................................59
10.12 Submission To Jurisdiction; Waivers..................................................59
10.13 Acknowledgments......................................................................60
10.14 Waivers of Jury Trial................................................................60
10.15 Confidentiality......................................................................60
10.16 Limitation on Interest...............................................................60
</TABLE>
SCHEDULES
Schedule I Lenders, Commitments, and Lending Offices
Schedule 1.1(a) Milestones
Schedule 1.1(b) Terms of Convertible PIK Preferred Stock
Schedule 1.1(c) Terms of Split Rate Subordinated Notes
Schedule 3.1(a) Exceptions to Financial Statements
Schedule 3.1(b) Sale/Acquisition Disclosure
Schedule 3.2 Certain Events
Schedule 3.3 Good Standing
Schedule 3.6 Litigation
Schedule 3.7 Default on Contractual Obligations
Schedule 3.15 Subsidiaries
Schedule 3.16 UCC Filing Locations
Schedule 3.22 Environmental Matters
Schedule 6.2 Existing Indebtedness
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Schedule 6.3 Existing Guarantee Obligations
Schedule 6.6 Assets to be Sold
Schedule 8.1 Stock Legend
EXHIBITS
Exhibit A Form of Note
Exhibit B Form of Intercreditor Agreement
Exhibit C Form of Pledge Agreement
Exhibit D Form of Registration Rights Agreement
Exhibit E Form of Security Agreement
Exhibit F Form of Subsidiaries Guarantee
Exhibit G Form of Non-Bank Status Certificate
Exhibit H Form of Borrowing Certificate
Exhibit I Form of Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Exhibit J Form of Assignment and Acceptance
Exhibit K Form of Conversion Notice
v
<PAGE>
CONVERTIBLE LOAN AGREEMENT
CONVERTIBLE LOAN AGREEMENT, dated as of December 23, 1998, among
HEALTHCOR HOLDINGS, INC., a Delaware corporation (the "Borrower"), the lenders
--------
from time to time parties to this Agreement (the "Lenders") and CREDIT SUISSE
-------
FIRST BOSTON MANAGEMENT CORPORATION, as agent for the Lenders hereunder.
RECITALS
The Borrower has requested that the Lenders make senior secured term
loans to the Borrower in the aggregate principal amount of $6,000,000, the
proceeds of which would be used to reduce certain payables of the Borrower and
its subsidiaries, for other working capital purposes of the Borrower and its
subsidiaries in the ordinary course of business and to pay fees and expenses
incurred in connection herewith. The Lenders are willing to make such credit
available to the Borrower, but only on the terms, and subject to the conditions,
set forth in this Agreement.
The parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms
-------------
shall have the following meanings:
"Affiliate": as to any Person, any other Person (other than a
---------
Subsidiary) which, directly or indirectly, is in control of, is controlled
by, or is under common control with, such Person. For purposes of this
definition, "control" of a Person (including, with its correlative
-------
meanings, "controlled by" and "under common control with") means the power,
------------- -------------------------
directly or indirectly, either to (a) vote 10% or more of the securities
having ordinary voting power for the election of directors of such Person
or (b) direct or cause the direction of the management and policies of such
Person, whether by contract or otherwise.
"Agent": Credit Suisse First Boston Management Corporation, together
-----
with its affiliates, as the arranger of the Commitments and as the agent
for the Lenders under this Agreement and the other Loan Documents.
"Agreement": this Convertible Loan Agreement, as amended,
---------
supplemented or otherwise modified from time to time.
"Borrower": as defined in the heading to this Agreement.
--------
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"Borrowing Date": any Business Day specified in a notice pursuant to
--------------
Section 2.3 as a date on which the Borrower requests the Lenders to make
Loans hereunder.
"Business": as defined in Section 3.22.
--------
"Business Day": a day other than a Saturday, Sunday or other day on
------------
which commercial banks in New York City are authorized or required by law
to close.
"Capital Stock": any and all shares, interests, participations or
-------------
other equivalents (however designated) of capital stock of a corporation,
any and all similar ownership interests in a Person (other than a
corporation) and any and all warrants or options to purchase any of the
foregoing.
"Cash Equivalents": (a) securities with maturities of 90 days or less
----------------
from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof, (b) certificates of deposit
and eurodollar time deposits with maturities of 90 days or less from the
date of acquisition and overnight bank deposits of any Lender or of any
commercial bank having capital and surplus in excess of $500,000,000, (c)
repurchase obligations of any Lender or of any commercial bank satisfying
the requirements of clause (b) of this definition, having a term of not
more than seven days with respect to securities issued or fully guaranteed
or insured by the United States Government, (d) commercial paper of a
domestic issuer rated at least A-1 or the equivalent thereof by Standard
and Poor's Ratings Group ("S&P") or P-1 or the equivalent thereof by
---
Moody's Investors Service, Inc. ("Moody's") and in either case maturing
-------
within 90 days after the day of acquisition, (e) securities with maturities
of 90 days or less from the date of acquisition issued or fully guaranteed
by any state, commonwealth or territory of the United States, by any
political subdivision or taxing authority of any such state, commonwealth
or territory or by any foreign government, the securities of which state,
commonwealth, territory, political subdivision, taxing authority or foreign
government (as the case may be) are rated at least A by S&P or A by
Moody's, (f) securities with maturities of 90 days or less from the date of
acquisition backed by standby letters of credit issued by any Lender or any
commercial bank satisfying the requirements of clause (b) of this
definition or (g) shares of money market mutual or similar funds which
invest exclusively in assets satisfying the requirements of clauses (a)
through (f) of this definition.
"Closing Date": the date on which the conditions precedent set forth
------------
in Section 4.1 shall be satisfied.
"Closing Price": the closing price of the shares of Common Stock on a
-------------
Qualifying Stock Exchange or, if the shares of Common Stock are listed on
more than one such exchange, the average of such closing prices on all such
exchanges.
"Code": the Internal Revenue Code of 1986, as amended from time to
----
time.
2
<PAGE>
"Collateral": all property and interests in property of the Loan
----------
Parties, now owned or hereinafter acquired, upon which a Lien is purported
to be created by any Security Document.
"Commitment": as to any Lender, its obligation to make a Loan to the
----------
Borrower pursuant to Section 2.1 in the amount set forth opposite such
Lender's name on Schedule I.
"Commitment Percentage": as to any Lender, the percentage equal to
---------------------
the quotient of such Lender's Commitment divided by the aggregate
Commitments.
"Commonly Controlled Entity": an entity, whether or not incorporated,
--------------------------
which is under common control with the Borrower within the meaning of
Section 4001 of ERISA or is part of a group which includes the Borrower and
which is treated as a single employer under Section 414 of the Code.
"Common Stock": the Common Stock, par value $0.01 per share, of the
------------
Borrower as the same exists at the date of execution and delivery of this
Agreement or as such stock may be reconstituted from time to time.
"Contractual Obligation": as to any Person, any provision of any
----------------------
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"Conversion Notice": as defined in Section 8.2(a).
-----------------
"Conversion Price": as defined in Section 8.4(a).
----------------
"Conversion Right": as defined in Section 8.1(a).
----------------
"Convertible PIK Preferred Stock": preferred stock issued by the
-------------------------------
Borrower having an aggregate liquidation preference of not more than
$34,400,000 on the terms set forth on Schedule 1.1(b), and otherwise on
terms and conditions satisfactory to the Agent.
"Credit Exposure": as to any Lender at any time, (a) if the Loans
---------------
have not been made at such time, its Commitment, and (b) if the Loans have
been made, the unpaid principal amount of its Loan.
"Credit Exposure Percentage": as to any Lender at any time, the
--------------------------
fraction (expressed as a percentage), the numerator of which is the Credit
Exposure of such Lender at such time and the denominator of which is the
aggregate Credit Exposures of all of the Lenders at such time.
"Default": any of the events specified in Section 7, whether or not
-------
any requirement for the giving of notice, the lapse of time, or both, or
any other condition, has been satisfied.
3
<PAGE>
"Dollars" and "$": dollars in lawful currency of the United States of
------- -
America.
"Environmental Laws": any and all foreign, Federal, state, local or
------------------
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority or other Requirements
of Law (including common law) regulating, relating to or imposing liability
or standards of conduct concerning protection of human health or the
environment, as now or may at any time hereafter be in effect.
"11% Senior Note Indenture": the Indenture, dated as of December 1,
-------------------------
1997, among the Borrower, as issuer, the guarantors signatories thereto as
guarantors, and Norwest Bank Minnesota, N.A., as trustee, as modified by
the First Supplemental Indenture thereto, dated December 2, 1997, the
Second Supplemental Indenture thereto dated December 3, 1997, and the
Forbearance Letter, and as the same may be further amended, supplemented or
otherwise modified from time to time in accordance with Section 6.11.
"11% Senior Notes": the Borrower's 11% Senior Notes due 2004, issued
----------------
pursuant to the 11% Senior Note Indenture in an original aggregate
principal amount of $80,000,000.
"ERISA": the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
"Event of Default": any of the events specified in Section 7;
----------------
provided that any requirement for the giving of notice, the lapse of time,
--------
or both, or any other condition, has been satisfied.
"Exchange Offer": the exchange offer of the Borrower to the holders of
--------------
the 11% Senior Notes, offering to exchange each $1,000 principal amount of
11% Senior Notes for (a) $625 principal amount of Split Rate Subordinated
Notes and (b) shares of Convertible PIK Preferred Stock having an aggregate
liquidation preference of $430.
"Expiration Time": as defined in Section 8.5(g).
---------------
"Federal Funds Effective Rate": for any day, the weighted average of
----------------------------
the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published on
the next succeeding Business Day by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day which is a Business Day,
the average of the quotations for the day of such transactions received by
the Agent from three federal funds brokers of recognized standing selected
by it.
"Financing Lease": any lease of property, real or personal, the
---------------
obligations of the lessee in respect of which are required in accordance
with GAAP to be capitalized on a balance sheet of the lessee.
4
<PAGE>
"Forbearance Letter": the letter agreement, dated the date hereof,
------------------
between Credit Suisse First Boston Corporation and the Loan Parties,
pursuant to which Credit Suisse First Boston Corporation shall agree to
forbear from exercising remedies under the 11% Senior Note Indenture with
respect to certain events of default under the 11% Senior Note Indenture,
as the same may be amended, supplemented or otherwise modified from time to
time.
"GAAP": generally accepted accounting principles in the United States
----
of America in effect from time to time.
"Governing Documents": as to any Person, its articles or certificate
-------------------
of incorporation and by-laws, its partnership agreement, its certificate of
formation and operating agreement, and/or the other organizational or
governing documents of such Person.
"Governmental Authority": any nation or government, any state or
----------------------
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Guarantee Obligation": as to any Person (the "guaranteeing person"),
-------------------- -------------------
any obligation of (a) the guaranteeing person or (b) another Person
(including, without limitation, any bank under any letter of credit) to
induce the creation of which the guaranteeing person has issued a
reimbursement, counterindemnity or similar obligation, in either case
guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends
or other obligations (the "primary obligations") of any other third Person
-------------------
(the "primary obligor") in any manner, whether directly or indirectly,
---------------
including, without limitation, any obligation of the guaranteeing person,
whether or not contingent, (i) to purchase any such primary obligation or
any property constituting direct or indirect security therefor, (ii) to
advance or supply funds (1) for the purchase or payment of any such primary
obligation or (2) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (iii) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such
primary obligation or (iv) otherwise to assure or hold harmless the owner
of any such primary obligation against loss in respect thereof; provided,
--------
however, that the term Guarantee Obligation shall not include endorsements
-------
of instruments for deposit or collection in the ordinary course of
business. The terms "Guarantee" and "Guaranteed" used as a verb shall have
--------- ----------
a correlative meaning. The amount of any Guarantee Obligation of any
guaranteeing person shall be deemed to be the lower of (a) an amount equal
to the stated or determinable amount of the primary obligation in respect
of which such Guarantee Obligation is made and (b) the maximum amount for
which such guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the
5
<PAGE>
amount of such Guarantee Obligation shall be such guaranteeing person's
maximum reasonably anticipated liability in respect thereof as determined
by the Borrower in good faith.
"HCFP": HCFP Funding, Inc., a Delaware corporation.
----
"HCFP Loan Agreement": the Loan and Security Agreement, dated as of
-------------------
May 19, 1998, among Healthcor, Inc., the Borrower, Healthcor Oxygen &
Medical Equipment, Inc., Healthcor Pharmacy, Inc., PHHN, Inc., Healthcor
Rehabilitation Services, Inc., HC Personnel Resources, Inc. and
Carenetwork, Inc., as modified by Amendment No. 1 thereto dated as of
September 14, 1998, Amendment No. 2 thereto dated as of November, 1998, and
by the Intercreditor Agreement, and as the same may be further amended,
supplemented or otherwise modified from time to time in accordance with
Section 6.11.
"HCFP Loan Documents": collectively, the HCFP Loan Agreement and the
-------------------
other "Loan Documents" as defined therein.
"Indebtedness": of any Person at any date, without duplication, (a)
------------
all indebtedness of such Person for borrowed money (whether by loan or the
issuance and sale of debt securities) or for the deferred purchase price of
property or services (other than current trade liabilities incurred in the
ordinary course of business and payable in accordance with customary
practices), (b) any other indebtedness of such Person which is evidenced by
a note, bond, debenture or similar instrument, (c) all obligations of such
Person under Financing Leases, (d) all obligations of such Person in
respect of letters of credit, acceptances or similar instruments issued or
created for the account of such Person and (e) all liabilities secured by
any Lien on any property owned by such Person even though such Person has
not assumed or otherwise become liable for the payment thereof.
"Insolvency": with respect to any Multiemployer Plan, the condition
----------
that such Plan is insolvent within the meaning of Section 4245 of ERISA.
"Insolvent": pertaining to a condition of Insolvency.
---------
"Interest Payment Date": the last Business Day of each month and the
---------------------
Maturity Date (or such earlier date on which the Loans shall become due and
payable pursuant to this Agreement), commencing January 29, 1999.
"Intercreditor Agreement": the Intercreditor and Subordination
-----------------------
Agreement to be executed and delivered by HCFP, the Agent and the Borrower,
substantially in the form of Exhibit B, as the same may be amended,
supplemented or otherwise modified from time to time.
"Lending Office": for each Lender, the lending office of such Lender
--------------
designated on Schedule I hereto (or any other lending office from time to
time notified
6
<PAGE>
to the Agent by such Lender ) as the office at which its Loans are to be
made and maintained.
"Lien": any mortgage, pledge, hypothecation, assignment, deposit
----
arrangement, encumbrance, lien (statutory or other), charge or other
security interest or any preference, priority or other security agreement
or preferential arrangement of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement
and any Financing Lease having substantially the same economic effect as
any of the foregoing), and the filing of any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction in respect of
any of the foregoing.
"Loan": as defined in Section 2.1.
----
"Loan Documents": this Agreement, the Notes, the Subsidiaries
--------------
Guarantee, the Security Documents, the Intercreditor Agreement and the
Registration Rights Agreement.
"Loan Parties": the Borrower and each Subsidiary of the Borrower
------------
which is a party to a Loan Document.
"Material Adverse Effect": a material adverse effect on (a) the
-----------------------
business, operations, property, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole or (b) the
validity or enforceability of this or any of the other Loan Documents or
the rights or remedies of the Agent or the Lenders hereunder or thereunder.
"Material Environmental Amount": an amount payable by the Borrower
-----------------------------
and/or its Subsidiaries in excess of $100,000 for remedial costs,
compliance costs, compensatory damages, punitive damages, fines, penalties
or any combination thereof.
"Materials of Environmental Concern": any gasoline or petroleum
----------------------------------
(including crude oil or any fraction thereof) or petroleum products or any
hazardous or toxic substances, materials or wastes, defined or regulated as
such in or under any Environmental Law, including, without limitation,
asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.
"Maturity Date": December 31, 1999.
-------------
"Milestone": each of the events listed on Schedule 1.1(a) under the
---------
heading "Milestones".
"Milestone Date": with respect to each Milestone, the date set forth
--------------
opposite such Milestone on Schedule 1.1(a) under the heading "Milestone
Date".
7
<PAGE>
"Multiemployer Plan": a Plan which is a multiemployer plan as defined
------------------
in Section 4001(a)(3) of ERISA.
"Net Proceeds": (i) the aggregate cash consideration received by the
------------
Borrower or a Subsidiary in connection with any transaction referred to in
Section 2.6 less (ii) (A) any portion of such consideration required to be
----
paid to HCFP pursuant to the HCFP Loan Documents and the Intercreditor
Agreement or to any obligee under any Financing Lease permitted by this
Agreement, and (B) the expenses (including out-of-pocket expenses) incurred
by the Borrower or such Subsidiary in connection with such transaction
(including reasonable brokerage commissions and fees), (C) the amount of
any federal and state taxes incurred in connection with such transaction,
and (D) reserves requires to be maintained in accordance with GAAP against
foreseeable sale-related liabilities, in each case as certified by a
Responsible Officer to the Agent at the time of such transaction.
"Non-Bank Status Certificate": as defined in Section 2.10(b)(i)(B).
---------------------------
"Non-Excluded Taxes": as defined in Section 2.10(a).
------------------
"Note": as defined in Section 2.2.
----
"Obligations": the unpaid principal amount of, and interest
-----------
(including, without limitation, interest accruing after the maturity of the
Loans and interest accruing after the filing of any petition in bankruptcy,
or the commencement of any insolvency, reorganization or like proceeding,
relating to the Borrower, whether or not a claim for post-filing or post-
petition interest is allowed in such proceeding) on the Loans, and all
other obligations and liabilities of the Loan Parties to the Agent and the
Lenders, whether direct or indirect, absolute or contingent, due or to
become due, or now existing or hereafter incurred, which may arise under,
or out of or in connection with this Agreement, the Notes, the Subsidiaries
Guarantee, the Security Documents and any other Loan Documents and any
other document made, delivered or given in connection therewith or
herewith, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses (including, without
limitation, all fees and disbursements of counsel to the Agent or to the
Lenders that are required to be paid by a Loan Party pursuant to the terms
of the Loan Documents) or otherwise.
"Participant": as defined in Section 10.6(b).
-----------
"PBGC": the Pension Benefit Guaranty Corporation established pursuant
----
to Subtitle A of Title IV of ERISA.
"Person": an individual, partnership, corporation, limited liability
------
company, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Authority or other entity of
whatever nature.
8
<PAGE>
"Plan": at a particular time, any employee benefit plan which is
----
covered by Title IV of ERISA and in respect of which the Borrower or a
Commonly Controlled Entity is (or, if such plan were terminated at such
time, would under Section 4069 of ERISA be deemed to be) an "employer" as
defined in Section 3(5) of ERISA.
"Pledge Agreement": the Pledge Agreement to be executed and delivered
----------------
by the Borrower, substantially in the form of Exhibit C, as the same may be
amended, supplemented or otherwise modified from time to time.
"Properties": as defined in Section 3.22.
----------
"Purchased Shares": as defined in Section 8.5(g).
----------------
"Qualifying Stock Exchange": the New York Stock Exchange, the American
-------------------------
Stock Exchange or the NASDAQ National Market.
"Recapitalization": the collective reference to the Exchange Offer,
----------------
the issuance of the Split Rate Subordinated Notes and the Convertible PIK
Preferred Stock in connection therewith, and the making of the Loans
hereunder.
"Reference Date": as defined in Section 8.5(f).
--------------
"Register": as defined in Section 10.6(d).
--------
"Registration Rights Agreement": the Registration Rights Agreement to
-----------------------------
be made by the Borrower and the Agent for the benefit of the Lenders,
substantially in the form of Exhibit D, as the same may be amended,
supplemented or otherwise modified from time to time.
"Regulation U": Regulation U of the Board of Governors of the Federal
------------
Reserve System as in effect from time to time.
"Reorganization": with respect to any Multiemployer Plan, the
--------------
condition that such plan is in reorganization within the meaning of Section
4241 of ERISA.
"Reportable Event": any of the events set forth in Section 4043(b) of
----------------
ERISA, other than those events as to which the thirty day notice period is
waived under Sections .21, .22, .23, .26, .27 or .28 of PBGC Reg. (S) 4043.
"Required Lenders": at any time, Lenders the Credit Exposure
----------------
Percentages of which aggregate more than 50%.
"Requirement of Law": as to any Person, the certificate of
------------------
incorporation and by-laws or other organizational or Governing Documents of
such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case
applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject.
9
<PAGE>
"Responsible Officer": the chief executive officer and the president
-------------------
of the Borrower or, with respect to financial matters, the chief financial
officer of the Borrower.
"Security Agreement": the Security Agreement to be executed and
------------------
delivered by the Borrower and each Subsidiary Guarantor, substantially in
the form of Exhibit E, as the same may be amended, supplemented or
otherwise modified from time to time.
"Security Documents": the collective reference to the Pledge
------------------
Agreement, the Security Agreement, and all other security documents
hereafter delivered to the Agent granting a Lien on any asset or assets of
any Person to secure any of the Obligations or to secure any guarantee of
any such Obligations.
"Shared Collateral": the "Collateral", as defined in the HCFP Loan
-----------------
Agreement.
"Single Employer Plan": any Plan which is covered by Title IV of
--------------------
ERISA, but which is not a Multiemployer Plan.
"Split Rate Subordinated Notes": senior subordinated notes to be
-----------------------------
issued by the Borrower having an aggregate principal amount of not more
than $50,000,000 on the terms set forth on Schedule 1.1(c), and otherwise
on terms and conditions satisfactory to the Agent.
"Subsidiaries Guarantee": the Guarantee to be executed and delivered
----------------------
by each Subsidiary, substantially in the form of Exhibit F, as the same may
be amended, supplemented or otherwise modified from time to time.
"Subsidiary": as to any Person, a corporation, partnership or other
----------
entity of which shares of stock or other ownership interests having
ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through
one or more intermediaries, or both, by such Person. Unless otherwise
qualified, all references to a "Subsidiary" or to "Subsidiaries" in this
Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower.
"Subsidiary Guarantor": any Subsidiary party to the Subsidiaries
--------------------
Guarantee as a guarantor.
"Trading Day": with respect to a securities exchange or automated
-----------
quotation system, a day on which such exchange or system is open for a full
day of trading.
"Transferee": as defined in Section 10.6(f).
----------
10
<PAGE>
1.2 Other Definitional Provisions. (a) Unless otherwise specified
-----------------------------
therein, all terms defined in this Agreement shall have the defined meanings
when used in any Notes or any certificate or other document made or delivered
pursuant hereto.
(b) As used herein and in any Notes, and any certificate or other
document made or delivered pursuant hereto, accounting terms relating to the
Borrower and its Subsidiaries not defined in Section 1.1 and accounting terms
partly defined in Section 1.1, to the extent not defined, shall have the
respective meanings given to them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and Section, Schedule and
Exhibit references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS
2.1 Commitments. Subject to the terms and conditions hereof, each
-----------
Lender severally agrees to make a term loan (a "Loan") to the Borrower on the
----
Closing Date in an amount not to exceed the amount of the Commitment of such
Lender then in effect; provided, that the Commitments shall terminate at 3:00
--------
p.m., New York City time, on December 28, 1998, if the Loans have not been made
prior to that time.
2.2 Notes. The Loan of each Lender shall be evidenced by a
-----
promissory note of the Borrower, substantially in the form of Exhibit A with
appropriate insertions as to payee, date and principal amount (a "Note"),
----
payable to the order of such Lender and representing the obligation of the
Borrower to pay the amount of the Loan made by such Lender. Each Lender is
hereby authorized to record the date, and amount of its Loan and the date and
amount of each payment or prepayment of principal thereof, on the schedule
annexed to and constituting a part of its Note, and any such recordation shall
constitute prima facie evidence of the accuracy of the information so recorded;
----- -----
provided, that the failure of such Lender to make any such recordation shall not
- --------
impair or otherwise affect the validity or enforceability of its Note. Each Note
shall (a) be dated the Closing Date, (b) be stated to mature on the Maturity
Date, and (c) bear interest for the period from the date thereof on the unpaid
principal amount thereof at the applicable interest rates per annum specified in
Section 2.4. Interest on the Notes shall be payable on the dates specified in
Section 2.4(b).
2.3 Procedure for Borrowing. The Borrower shall give the Agent
-----------------------
irrevocable notice (which notice must be received by the Agent 10:00 a.m., New
York City time on the Closing Date requesting that the Lenders make the Loans on
the Closing Date and specifying (i) the Closing Date, and (ii) the amount to be
borrowed. Upon receipt of such notice the Agent shall promptly notify each
Lender thereof. Not later than 11:00 a.m. on the Closing Date each Lender shall
make available to the Agent at its office or to the account
11
<PAGE>
maintained by it, as specified in Section 10.2 the amount of such Lender's Loans
in immediately available funds. The Agent shall on such date make available to
the Borrower the aggregate of the amounts made available to the Agent by the
Lenders, by wire transfer and in like funds as received by the Agent, to such
account of the Borrower as may be specified by the Borrower in writing to the
Agent.
2.4 Interest Rates and Payment Dates. (a) Each Loan shall bear
--------------------------------
interest at 11.00% per annum, but in no event in excess of the maximum
nonusurious interest rate permitted by applicable law .
(b) If all or a portion of (i) any principal of any Loan, (ii) any
interest payable thereon, or (iii) any other amount payable hereunder shall not
be paid when due (whether at the stated maturity, by acceleration or otherwise),
the principal of the Loans and any such overdue interest, or other amount shall
bear interest at 13% per annum from the date of such non-payment until such
overdue principal, interest, commitment fee or other amount is paid in full (as
well after as before judgment), but in no event in excess of the maximum
nonusurious interest rate permitted by applicable law.
(c) Interest shall be payable in arrears on each Interest Payment
Date, provided that interest accruing pursuant to paragraph (b) of this Section
--------
shall be payable from time to time on demand.
2.5 Optional Prepayments. The Borrower may at any time and from time
--------------------
to time prepay the Loans, in whole or in part, without premium or penalty, upon
at least four Business Days' irrevocable notice to the Agent, specifying the
date and amount of prepayment. Upon receipt of any such notice the Agent shall
promptly notify each Lender thereof. If any such notice is given, the amount
specified in such notice shall be due and payable on the date specified therein,
together with accrued interest to such date on the amount prepaid. Amounts
prepaid on account of the Loans may not be reborrowed. Partial prepayments
pursuant to this Section shall be in an aggregate principal amount of $100,000
or a whole multiple thereof.
2.6 Mandatory Prepayments. Unless the Required Lenders otherwise
---------------------
agree, the Borrower shall prepay the Loans and reduce the Commitments in an
amount equal to 100% of the Net Proceeds of any sale, lease, assignment,
exchange or other disposition for cash of any asset or group of assets
(including, without limitation, insurance proceeds paid as a result of any
destruction, casualty or taking of any property of the Borrower or any
Subsidiary), not made in the ordinary course of business, by the Borrower or any
Subsidiary of the Borrower, in any such case no later than three Business Days
following receipt by the Borrower or such Subsidiary of such proceeds, together
with accrued interest to such date on the amount prepaid. Prepayments of Loans
may not be reborrowed. Nothing in this Section 2.6 shall be construed to
derogate any restriction or limitation contained in any Loan Document imposed on
any transaction of the types described in this Section 2.6, including without
limitation the restrictions set forth in Sections 6.5 and 6.6 hereof.
2.7 Computation of Interest and Fees. (a) Interest shall be
--------------------------------
calculated on the basis of a 360-day year for the actual days elapsed.
12
<PAGE>
2.8 Pro Rata Treatment and Payments. (a) Each borrowing by the
-------------------------------
Borrower from the Lenders hereunder, and any reduction of the Commitments of the
Lenders shall be made pro rata according to the respective Commitment
Percentages of the Lenders. Each payment (including each prepayment) by the
Borrower on account of principal of and interest on the Loans shall be made pro
rata according to the respective outstanding principal amounts of the Loans then
held by the Lenders. All payments (including prepayments) to be made by the
Borrower hereunder, whether on account of principal, interest, fees or
otherwise, shall be made without set-off or counterclaim and shall be made prior
to 12:00 noon, New York City time, on the due date thereof to the Agent, for the
account of the Lenders, at the Agent's office in New York, New York, and to the
Agent's account specified in Section 10.2, in Dollars and in immediately
available funds. The Agent shall distribute such payments to the Lenders
promptly upon receipt in like funds as received. If any payment hereunder
becomes due and payable on a day other than a Business Day, such payment shall
be extended to the next succeeding Business Day, and, with respect to payments
of principal, interest thereon shall be payable at the then applicable rate
during such extension.
(b) Unless the Agent shall have been notified in writing by any
Lender prior to a borrowing that such Lender will not make the amount that would
constitute its Commitment Percentage of such borrowing available to the Agent,
the Agent may assume that such Lender is making such amount available to the
Agent, and the Agent may, in reliance upon such assumption, make available to
the Borrower a corresponding amount. If such amount is not made available to the
Agent by the required time on the Borrowing Date therefor, such Lender shall pay
to the Agent, on demand, such amount with interest thereon at a rate equal to
the daily average Federal Funds Effective Rate for the period until such Lender
makes such amount immediately available to the Agent. A certificate of the Agent
submitted to any Lender with respect to any amounts owing under this Section
shall be conclusive in the absence of manifest error. If such Lender's
Commitment Percentage of such borrowing is not made available to the Agent by
such Lender within three Business Days of such Borrowing Date, the Agent shall
also be entitled to recover such amount with interest thereon at 11% per annum
on demand, from the Borrower, but in no event or excess of the maximum
nonusurious interest rate permitted by the applicable law.
2.9 Requirements of Law.
--------------------
(a) If any Lender shall have determined that the adoption of or any
change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Lender or any
corporation controlling such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on such Lender's or such corporation's capital as a
consequence of its obligations hereunder to a level below that which such Lender
or such corporation could have achieved but for such adoption, change or
compliance (taking into consideration such Lender's or such corporation's
policies with respect to capital adequacy) by an amount deemed by such Lender to
be material, then from time to time, the Borrower shall promptly pay to
13
<PAGE>
such Lender such additional amount or amounts as will compensate such Lender for
such reduction.
(b) If any Lender becomes entitled to claim any additional amounts
pursuant to this Section, it shall promptly notify the Borrower (with a copy to
the Agent) of the event by reason of which it has become so entitled. A
certificate as to any additional amounts payable pursuant to this Section
submitted by such Lender to the Borrower (with a copy to the Agent) shall be
conclusive in the absence of manifest error. The agreements in this Section
shall survive the termination of this Agreement and the payment of the Loans and
all other amounts payable hereunder.
2.10 Taxes. (a) All payments made by the Borrower under this
-----
Agreement and any Notes shall be made free and clear of, and without deduction
or withholding for or on account of, any present or future income, stamp or
other taxes, levies, imposts, duties, charges, fees, deductions or withholdings,
now or hereafter imposed, levied, collected, withheld or assessed by any
Governmental Authority, excluding net income taxes and franchise taxes (imposed
in lieu of net income taxes) imposed on the Agent or any Lender as a result of a
present or former connection between the Agent or such Lender and the
jurisdiction of the Governmental Authority imposing such tax or any political
subdivision or taxing authority thereof or therein (other than any such
connection arising solely from the Agent or such Lender having executed,
delivered or performed its obligations or received a payment under, or enforced,
this Agreement or any Note). If any such non-excluded taxes, levies, imposts,
duties, charges, fees deductions or withholdings ("Non-Excluded Taxes") are
------------------
required to be withheld from any amounts payable to the Agent or any Lender
hereunder or under any Note, the amounts so payable to the Agent or such Lender
shall be increased to the extent necessary to yield to the Agent or such Lender
(after payment of all Non-Excluded Taxes) interest or any such other amounts
payable hereunder at the rates or in the amounts specified in this Agreement,
provided, however, that the Borrower shall not be required to increase any such
- -------- -------
amounts payable to any Lender that is not organized under the laws of the United
States of America or a state thereof if such Lender fails to comply with the
requirements of clause (b) of this Section. Whenever any Non-Excluded Taxes are
payable by the Borrower, as promptly as possible thereafter the Borrower shall
send to the Agent for its own account or for the account of such Lender, as the
case may be, a certified copy of an original official receipt received by the
Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded
Taxes when due to the appropriate taxing authority or fails to remit to the
Agent the required receipts or other required documentary evidence, the Borrower
shall indemnify the Agent and the Lenders for any incremental taxes, interest or
penalties that may become payable by the Agent or any Lender as a result of any
such failure. The agreements in this Section shall survive the termination of
this Agreement and the payment of the Loans and all other amounts payable
hereunder.
(b) Each Lender that is not incorporated under the laws of the United
States of America or a state thereof shall:
14
<PAGE>
(i) (A) if such Lender is a "bank" within the meaning of Section
881(c)(3)(A) of the Code, deliver to the Borrower and the Agent (x) two
duly completed copies of United States Internal Revenue Service Form 1001
or 4224, or successor applicable form, as the case may be, and (y) an
Internal Revenue Service Form W-8 or W-9, or successor applicable form, as
the case may be, or (B) if such Lender is not a "bank" within the meaning
of Section 881(c)(3)(A) of the Code and cannot deliver either Internal
Revenue Service Form 1001 or 4224, deliver (x) a certificate substantially
in the form of Exhibit G (a "Non-Bank Status Certificate") and (y) two
---------------------------
completed and signed copies of Internal Revenue Service Form W-8 or
successor applicable form;
(ii) deliver to the Borrower and the Agent two further copies of any
such form or certification on or before the date that any such form or
certification expires or becomes obsolete and after the occurrence of any
event requiring a change in the most recent form previously delivered by it
to the Borrower; and
(iii) obtain such extensions of time for filing and complete such
forms or certifications as may reasonably be requested by the Borrower or
the Agent;
unless in any such case an event (including, without limitation, any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender so advises the Borrower and the Agent.
Such Lender shall certify (i) in the case of a Form 1001 or 4224, that it is
entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes, (ii) in the case of a
Non-Bank Status Certificate, that it is not a "bank" as such term is defined in
Section 881(c)(3)(A) of the Code, and (iii) in the case of a Form W-8 or W-9,
that it is entitled to an exemption from United States backup withholding tax.
Each Person that shall become a Lender or a Participant pursuant to Section 9.6
shall, upon the effectiveness of the related transfer, be required to provide
all of the forms and statements required pursuant to this Section, provided that
--------
in the case of a Participant such Participant shall also furnish all such
required forms and statements to the Lender from which the related participation
shall have been purchased.
2.11 Lending Offices; Change of Lending Office. (a) Loans of made
-----------------------------------------
by any Lender shall be made and maintained at such Lender's Applicable Lending
Office.
(b) Each Lender agrees that if it makes any demand for payment under
Section 2.10(a), or if any adoption or change of the type described in Section
2.9 shall occur with respect to it, it will use reasonable efforts (consistent
with its internal policy and legal and regulatory restrictions and so long as
such efforts would not be disadvantageous to it, as determined in its sole
discretion) to designate a different lending office if the making of such a
designation would reduce or obviate the need for the Borrower to make payments
under Section 2.10(a), or would eliminate or reduce the effect of any adoption
or change described in Section 2.9.
15
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES
To induce the Agent and the Lenders to enter into this Agreement and
to make the Loans, the Borrower hereby represents and warrants to the Agent and
each Lender that:
3.1 Financial Condition. (a) The consolidated balance sheet of the
-------------------
Borrower and its consolidated Subsidiaries as at December 31, 1997 and the
related consolidated statements of income and of cash flows for the fiscal year
ended on such date, reported on by Arthur Anderson LLP, copies of which have
heretofore been furnished to each Lender, present fairly the consolidated
financial condition of the Borrower and its consolidated Subsidiaries as at such
date, and the consolidated results of their operations and their consolidated
cash flows for the fiscal year then ended. Except as set forth on Schedule
3.1(a), the unaudited consolidated balance sheet of the Borrower and its
consolidated Subsidiaries as at September 30, 1998 and the related unaudited
consolidated statements of income and of cash flows for the nine-month period
ended on such date, certified by a Responsible Officer, copies of which have
heretofore been furnished to each Lender, present fairly the consolidated
financial condition of the Borrower and its consolidated Subsidiaries as at such
date, and the consolidated results of their operations and their consolidated
cash flows for the nine-month period then ended (subject to normal year-end
audit adjustments and absence of footnotes). All such financial statements,
including the related schedules and notes thereto, have been prepared in
accordance with GAAP applied consistently throughout the periods involved
(except as approved by such accountants or Responsible Officer, as the case may
be, and as disclosed therein). Neither the Borrower nor any of its consolidated
Subsidiaries had, at the date of the most recent balance sheet referred to
above, any material Guarantee Obligation, contingent liability or liability for
taxes, or any long-term lease or unusual forward or long-term commitment,
including, without limitation, any interest rate or foreign currency swap or
exchange transaction or other financial derivative, which is not reflected in
the foregoing statements or in the notes thereto and is required to be disclosed
pursuant to GAAP. Except as set forth on Schedule 3.1(b), during the period
from September 30, 1998 to and including the date hereof there has been no sale,
transfer or other disposition by the Borrower or any of its consolidated
Subsidiaries of any material part of its business or property and no purchase or
other acquisition of any business or property (including any Capital Stock of
any other Person) material in relation to the consolidated financial condition
of the Borrower and its consolidated Subsidiaries at September 30, 1998.
(b) The operating forecast and cash flow projections of the Borrower
and its consolidated Subsidiaries, copies of which have heretofore been
furnished to the Lenders, have been prepared in good faith under the direction
of a Responsible Officer of the Borrower, and in accordance with GAAP except
that such forecast and projections do not include footnotes and other
disclosures which may be required pursuant to GAAP. The Borrower has no reason
to believe that as of the date of delivery thereof such operating forecast and
cash flow projections are materially incorrect or misleading in any material
respect, or omit to state any material fact which would render them misleading
in any material respect.
16
<PAGE>
3.2 No Change. (a) Except as set forth on Schedule 3.2, Since
---------
September 30, 1998 there has been no development or event which has had or could
have a Material Adverse Effect, and (b) during the period from September 30,
1998 to and including the date hereof no dividends or other distributions have
been declared, paid or made upon the Capital Stock of the Borrower nor has any
of the Capital Stock of the Borrower been redeemed, retired, purchased or
otherwise acquired for value by the Borrower or any of its Subsidiaries.
3.3 Existence; Compliance with Law. Except as set forth on
------------------------------
Schedule 3.3, each of the Borrower and its Subsidiaries (a) is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, (b) has the corporate power and authority, and the legal right, to
own and operate its property, to lease the property it operates as lessee and to
conduct the business in which it is currently engaged, (c) is duly qualified as
a foreign corporation and in good standing under the laws of each jurisdiction
where its ownership, lease or operation of property or the conduct of its
business requires such qualification and (d) is in compliance with all
Requirements of Law except to the extent that the failure to comply therewith
could not, in the aggregate, reasonably be expected to have a Material Adverse
Effect.
3.4 Power; Authorization; Enforceable Obligations. The Borrower
---------------------------------------------
has the corporate power and authority, and the legal right, to make, deliver and
perform the Loan Documents to which it is a party and to borrow hereunder and
has taken all necessary corporate action to authorize the borrowings on the
terms and conditions of this Agreement and any Notes and to authorize the
execution, delivery and performance of the Loan Documents to which it is a
party. No consent or authorization of, filing with, notice to or other act by
or in respect of, any Governmental Authority or any other Person ("Approval") is
--------
required in connection with the borrowings hereunder or with the execution,
delivery, performance, validity or enforceability of the Loan Documents to which
the Borrower is a party other than Approvals which have been heretofore obtained
or made; it being understood, however, that the continued performance by the
Borrower and the other Loan Parties of their respective obligations under this
Agreement and the other Loan Documents after the date hereof will require
various Approvals, such as filings relating to environmental matters, ERISA
matters, tax matters, intellectual property filings, filings to maintain
corporate and similar standing and existence, filings pursuant to the Uniform
Commercial Code and other security filings and recordings, filings with the
Securities and Exchange Commission, Approvals necessary in connection with the
Split Rate Subordinated Notes and the Convertible PIK Preferred Stock, routine
filings in the ordinary course of business, and filings required in connection
with the exercise by the Agent and the Lenders of remedies in connection with
the Loan Documents. This Agreement has been, and each other Loan Document to
which it is a party will be, duly executed and delivered on behalf of the
Borrower. This Agreement constitutes, and each other Loan Document to which it
is a party when executed and delivered will constitute, a legal, valid and
binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights
17
<PAGE>
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
3.5 No Legal Bar. Except as set forth on Schedule 3.7, the
------------
execution, delivery and performance of the Loan Documents to which the Borrower
is a party, the borrowings hereunder and the use of the proceeds thereof will
not violate any Requirement of Law or Contractual Obligation of the Borrower or
of any of its Subsidiaries and will not result in, or require, the creation or
imposition of any Lien on any of its or their respective properties or revenues
pursuant to any such Requirement of Law or Contractual Obligation (other than
Liens created by the Security Documents in favor of the Agent).
3.6 No Material Litigation. Except as set forth on Schedule 3.6,
----------------------
no litigation, investigation or proceeding of or before any arbitrator or
Governmental Authority is pending or, to the knowledge of the Borrower,
threatened by or against the Borrower or any of its Subsidiaries or against any
of its or their respective properties or revenues (a) with respect to any of the
Loan Documents or any of the transactions contemplated hereby or thereby, or (b)
which could have a Material Adverse Effect.
3.7 No Default. Except as set forth on Schedule 3.7, neither the
----------
Borrower nor any of its Subsidiaries is in default under or with respect to any
of its Contractual Obligations in any respect which could have a Material
Adverse Effect. No Default or Event of Default has occurred and is continuing.
3.8 Ownership of Property; Liens. Each of the Borrower and its
----------------------------
Subsidiaries has good record and indefeasible title in fee simple to, or a valid
leasehold interest in, all its real property, and good title to, or a valid
leasehold interest in, all its other property, and none of such property is
subject to any Lien except as permitted by Section 6.3.
3.9 Intellectual Property. The Borrower and each of its
---------------------
Subsidiaries owns, or is licensed to use, all trademarks, tradenames,
copyrights, technology, know-how and processes necessary for the conduct of its
business as currently conducted except for those which the failure to own or
license could not reasonably be expected to have a Material Adverse Effect (the
"Intellectual Property"). No claim has been asserted and is pending by any
---------------------
Person challenging or questioning the use of any such Intellectual Property or
the validity or effectiveness of any such Intellectual Property. The use of
such Intellectual Property by the Borrower and its Subsidiaries does not
infringe on the rights of any Person, except for such claims and infringements
that, in the aggregate, could not reasonably be expected to have a Material
Adverse Effect.
3.10 No Burdensome Legal Restriction. No Requirement of Law of the
--------------------------------
Borrower or any of its Subsidiaries could reasonably be expected to have a
Material Adverse Effect.
3.11 Taxes. Each of the Borrower and its Subsidiaries has filed or
-----
caused to be filed all tax returns which, to the knowledge of the Borrower, are
required to be filed and has paid all taxes shown to be due and payable on said
returns or on any assessments made
18
<PAGE>
against it or any of its property and all other taxes, fees or other charges
imposed on it or any of its property by any Governmental Authority (other than
any the amount or validity of which are currently being contested in good faith
by appropriate proceedings and with respect to which reserves in conformity with
GAAP have been provided on the books of the Borrower or its Subsidiaries, as the
case may be); no tax Lien has been filed, and, to the knowledge of the Borrower,
no claim is being asserted, with respect to any such tax, fee or other charge.
3.12 Federal Regulations. No part of the proceeds of any Loans will
-------------------
be used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation U of the Board of
Governors of the Federal Reserve System as now and from time to time hereafter
in effect, or for any purpose which violates, or which would be inconsistent
with, the provisions of the regulations of such Board of Governors. If
requested by any Lender or the Agent, the Borrower will furnish to the Agent and
each Lender a statement to the foregoing effect in conformity with the
requirements of FR Form G-3 or FR Form U-1 referred to in said Regulation U.
3.13 ERISA. Neither a Reportable Event nor an "accumulated funding
-----
deficiency" (within the meaning of Section 412 of the Code or Section 302 of
ERISA) has occurred during the five-year period prior to the date on which this
representation is made or deemed made with respect to any Plan, and each Plan
has complied in all material respects with the applicable provisions of ERISA
and the Code. No termination of a Single Employer Plan has occurred, and no
Lien in favor of the PBGC or a Plan has arisen, during such five-year period.
The present value of all accrued benefits under each Single Employer Plan (based
on those assumptions used to fund such Plans) did not, as of the last annual
valuation date prior to the date on which this representation is made or deemed
made, exceed the value of the assets of such Plan allocable to such accrued
benefits. Neither the Borrower nor any Commonly Controlled Entity has had a
complete or partial withdrawal from any Multiemployer Plan, and neither the
Borrower nor any Commonly Controlled Entity would become subject to any
liability under ERISA if the Borrower or any such Commonly Controlled Entity
were to withdraw completely from all Multiemployer Plans as of the valuation
date most closely preceding the date on which this representation is made or
deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. The
present value (determined using actuarial and other assumptions which are
reasonable in respect of the benefits provided and the employees participating)
of the liability of the Borrower and each Commonly Controlled Entity for post
retirement benefits to be provided to their current and former employees under
Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA) does
not, in the aggregate, exceed to any material degree the assets under all such
Plans allocable to such benefits.
3.14 Investment Company Act; Other Regulations. The Borrower is not
-----------------------------------------
an "investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. The
Borrower is not subject to regulation under any Federal or State statute or
regulation (other than Regulation X of the Board of Governors of the Federal
Reserve System) which limits its ability to incur Indebtedness.
19
<PAGE>
3.15 Subsidiaries. Schedule 3.15 sets forth the name of each direct
------------
or indirect Subsidiary of the Borrower, its form of organization, its
jurisdiction of organization, the total number of issued and outstanding shares
or other interests of Capital Stock thereof, the classes and number of issued
and outstanding shares or other interests of Capital Stock of each such class,
the name of each holder of Capital Stock thereof and the number of shares or
other interests of such Capital Stock held by each such holder and the
percentage of all outstanding shares or other interests of such class of Capital
Stock held by such holders.
3.16 Security Documents. (a) The provisions of each Security
------------------
Document are effective to create in favor of the Agent for the ratable benefit
of the Lenders a legal, valid and enforceable security interest in all right,
title and interest of the Loan Party party thereto in the "Collateral" described
therein.
(b) (i) When financing statements have been filed in the offices in
the jurisdictions listed in Schedule 3.16, the Security Agreement shall
constitute a fully perfected first Lien (or, with respect to (x) the Shared
Collateral, second Lien subject only to the Lien created pursuant to HCFP Loan
Documents and (y) equipment and other property subject to Financing Leases,
second Lien subject only to the prior Liens created by such Financing Leases)
on, and security interest in, all right, title and interest of the Borrower in
the "Collateral" described therein, which can be perfected by such filing.
(ii) When certificates representing the Pledged Stock (as defined in
the Pledge Agreement) are delivered to the Agent, together with stock powers
endorsed in blank by a duly authorized officer of the pledgors thereof (or, with
respect to the stock of HC Personnel Resources, Inc., and so long as
certificates representing that stock is in the possession of HCFP, upon the
execution and delivery of the Intercreditor Agreement), the Pledge Agreement
shall constitute a fully perfected first Lien (or with respect to the Shared
Collateral, second Lien subject only to the Lien created pursuant to the HCFP
Loan Documents) on, and security interest in, all right, title and interest of
the pledgors parties thereto in the "Collateral" described therein.
(c) Neither the Borrower nor any Subsidiary owns any property, or has
any interest in any property, that is not subject to a fully perfected first
priority Lien (or, with respect to (x) the Shared Collateral, second Lien
subject only to the Lien created pursuant to the HCFP Loan Documents and (y)
equipment and other property subject to Financing Leases, second Lien subject
only to the prior Liens created by such Financing Leases) on, or security
interest in, such property in favor of the Agent, other than any such property
having an aggregate fair market value at any one time not exceeding $250,000.
3.17 Accuracy and Completeness of Information. (a) All factual
----------------------------------------
information, reports and other papers and data with respect to the Loan Parties
(other than projections) furnished, and all factual statements and
representations made, to the Agent or the Lenders by a Loan Party, or on behalf
of a Loan Party, were, at the time the same were so furnished or made, when
taken together with all such other factual information, reports and other papers
and data previously so furnished and all such other factual statements and
representations
20
<PAGE>
previously so made, complete and correct in all material respects, to the extent
necessary to give the Agent and the Lenders true and accurate knowledge of the
subject matter thereof in all material respects, and did not, as of the date so
furnished or made, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements contained
therein not misleading in light of the circumstances in which the same were
made.
(b) All projections with respect to the Loan Parties furnished by or
on behalf of a Loan Party to the Agent or the Lenders were prepared and
presented in good faith by or on behalf of such Loan Party. No fact is known to
a Loan Party which materially and adversely affects or in the future is
reasonably likely (so far as such Loan Party can reasonably foresee) to have a
Material Adverse Effect which has not been set forth in the financial statements
referred to in Section 3.1 or in such information, reports, papers and data or
otherwise disclosed in writing to the Agent or the Lenders prior to the Closing
Date.
3.18 Labor Relations. No Loan Party is engaged in any unfair labor
---------------
practice which could reasonably be expected to have a Material Adverse Effect.
There is (a) no unfair labor practice complaint pending or, to the best
knowledge of each Loan Party and each of the Subsidiaries, threatened against a
Loan Party before the National Labor Relations Board which could reasonably be
expected to have a Material Adverse Effect and no grievance or arbitration
proceeding arising out of or under a collective bargaining agreement is so
pending or threatened; (b) no strike, labor dispute, slowdown or stoppage
pending or, to the best knowledge of each Loan Party, threatened against a Loan
Party; and (c) no union representation question existing with respect to the
employees of a Loan Party and no union organizing activities are taking place
with respect to any thereof.
3.19 Insurance. Each Loan Party has, with respect to its properties
---------
and business, insurance covering the risks, in the amounts, with the deductible
or other retention amounts, and with the carriers, listed on Schedule 3.19,
which insurance meets the requirements of Section 5.5 hereof and Section 5(m) of
the Security Agreement as of the date hereof and the Closing Date.
3.20 Solvency. On the Closing Date, after giving effect on a pro
--------
forma basis to the consummation of the Recapitalization and to the incurrence
and discharge of all indebtedness and obligations being incurred or discharged
on or prior to such date in connection herewith and therewith, (i) the amount of
the "present fair saleable value" of the assets of the Borrower and of the
Borrower and its Subsidiaries, taken as a whole, will, as of such date, exceed
the amount of all "liabilities of the Borrower and of the Borrower and its
Subsidiaries, taken as a whole, contingent or otherwise", as of such date, as
such quoted terms are determined in accordance with applicable federal and state
laws governing determinations of the insolvency of debtors, (ii) the present
fair saleable value of the assets of the Borrower and of the Borrower and its
Subsidiaries, taken as a whole, will, as of such date, be greater than the
amount that will be required to pay the liabilities of the Borrower and of the
Borrower and its Subsidiaries, taken as a whole, on their respective debts as
such debts become absolute and matured, (iii) neither the Borrower nor the
Borrower and its Subsidiaries, taken as a
21
<PAGE>
whole, will have, as of such date, an unreasonably small amount of capital with
which to conduct their respective businesses, and (iv) each of the Borrower and
the Borrower and its Subsidiaries, taken as a whole, will be able to pay their
respective debts as they mature. For purposes of this Section 3.20, "debt" means
"liability on a claim", "claim" means any (x) right to payment, whether or not
such a right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured
or unsecured, and (y) right to an equitable remedy for breach of performance if
such breach gives rise to a right to payment, whether or not such right to an
equitable remedy is reduced to judgment, fixed, contingent, matured or
unmatured, disputed, undisputed, secured or unsecured.
3.21 Purpose of Loans. The proceeds of the Loans shall be used by
----------------
the Borrower for working capital purposes in the ordinary course of business.
3.22 Environmental Matters. Except as set forth on Schedule 3.22:
---------------------
(a) The facilities and properties owned, leased or operated by the
Borrower or any of its Subsidiaries (the "Properties") do not contain, and have
----------
not previously contained, any Materials of Environmental Concern in amounts or
concentrations which (i) constitute or constituted a violation of, or (ii) could
give rise to liability under, any Environmental Law except in either case
insofar as such violation or liability, or any aggregation thereof, is not
reasonably likely to result in the payment of a Material Environmental Amount.
(b) The Properties and all operations at the Properties are in
compliance, and have in the last five years been in compliance, in all material
respects with all applicable Environmental Laws, and there is no contamination
at, under or about the Properties or violation of any Environmental Law with
respect to the Properties or the business operated by the Borrower or any of its
Subsidiaries (the "Business") which could materially interfere with the
--------
continued operation of the Properties or materially impair the fair saleable
value thereof.
(c) Neither the Borrower nor any of its Subsidiaries has received any
notice of violation, alleged violation, non-compliance, liability or potential
liability regarding environmental matters or compliance with Environmental Laws
with regard to any of the Properties or the Business, nor does the Borrower have
knowledge or reason to believe that any such notice will be received or is being
threatened except insofar as such notice or threatened notice, or any
aggregation thereof, does not involve a matter or matters that is or are
reasonably likely to result in the payment of a Material Environmental Amount.
(d) Materials of Environmental Concern have not been transported or
disposed of from the Properties in violation of, or in a manner or to a location
which could give rise to liability under, any Environmental Law, nor have any
Materials of Environmental Concern been generated, treated, stored or disposed
of at, on or under any of the Properties in violation of, or in a manner that
could give rise to liability under, any applicable Environmental Law except
insofar as any such violation or liability referred to in this paragraph, or any
aggregation thereof, is not reasonably likely to result in the payment of a
Material Environmental Amount.
22
<PAGE>
(e) No judicial proceeding or governmental or administrative action
is pending or, to the knowledge of the Borrower, threatened, under any
Environmental Law to which the Borrower or any Subsidiary is or will be named as
a party with respect to the Properties or the Business, nor are there any
consent decrees or other decrees, consent orders, administrative orders or other
orders, or other administrative or judicial requirements outstanding under any
Environmental Law with respect to the Properties or the Business except insofar
as such proceeding, action, decree, order or other requirement, or any
aggregation thereof, is not reasonably likely to result in the payment of a
Material Adverse Amount.
(f) There has been no release or threat of release of Materials of
Environmental Concern at or from the Properties, or arising from or related to
the operations of the Borrower or any Subsidiary in connection with the
Properties or otherwise in connection with the Business, in violation of or in
amounts or in a manner that could give rise to liability under Environmental
Laws except insofar as any such violation or liability referred to in this
paragraph, or any aggregation thereof, is not reasonably likely to result in the
payment of a Material Environmental Amount.
3.23 Common Stock. As of the Closing Date, there were (a) 40,000,000
------------
shares of Common Stock and 10,000,000 shares of preferred stock authorized under
the certificate of incorporation of the Borrower, (b) 10,092,680 shares of
Common Stock issued and outstanding, and (c) not more than 400,000 shares of
Common Stock reserved for issuance in respect of all outstanding options,
warrants, securities convertible into or exchangeable for Common Stock,
subscriptions, and similar rights (other than the Conversion Right).
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions to Loans. The agreement of each Lender to make the
-------------------
Loan requested to be made by it is subject to the satisfaction, immediately
prior to or concurrently with the making of such Loan on the Closing Date, of
the following conditions precedent:
(a) Loan Documents. The Agent shall have received:
--------------
(i) this Agreement, executed and delivered by a duly authorized
officer of the Borrower, with a counterpart for each Lender,
(ii) for the account of each Lender, a Note of the Borrower
conforming to the requirements hereof and executed by a duly
authorized officer of the Borrower,
(iii) the Pledge Agreement, executed and delivered by a duly
authorized officer of the party thereto, with a counterpart or a
conformed copy for each Lender,
23
<PAGE>
(iv) the Subsidiaries Guarantee, executed and delivered by a duly
authorized officer of each of the parties thereto, with a counterpart
or a conformed copy for each Lender,
(v) the Security Agreement, each executed and delivered by a duly
authorized officer of each of the parties thereto, with a counterpart
or a conformed copy for each Lender,
(vi) the Registration Rights Agreement, executed and delivered by
a duly authorized officer of the Borrower, with a counterpart or a
conformed copy for each Lender, and
(vii) the Intercreditor Agreement, executed and delivered by a
duly authorized officer of each of HCFP, the Borrower and the Agent,
with a counterpart or a conformed copy for each Lender.
(b) Related Agreements. The Agent shall have received, with a copy
------------------
for each Lender, true and correct copies, certified as to authenticity by
the Borrower, of the 11% Senior Note Indenture, each of the HCFP Loan
Documents and such other documents or instruments as may be reasonably
requested by the Agent, including, without limitation, a copy of any debt
instrument, security agreement or other material contract to which the
Borrower, or its Subsidiaries may be a party.
(c) Forbearances. There shall have been entered into the Forbearance
------------
Letter and any other necessary waivers or forbearance agreements with
respect to certain outstanding and incipient events of default under the
HCFP Loan Documents and the 11% Senior Note Indenture, in each case in form
and substance satisfactory to the Agent, and the Agent shall have received
fully executed copies of each waiver or forbearance agreement or other
agreement or instrument evidencing such waivers or forbearances, and such
other documents relative thereto as the Agent shall reasonably request,
with copies for each of the Lenders.
(d) Borrowing Certificate. The Agent shall have received, with a
---------------------
counterpart for each Lender, a certificate of the Borrower and each
Subsidiary Guarantor, dated the Closing Date, substantially in the form of
Exhibit H, with appropriate insertions and attachments, satisfactory in
form and substance to the Agent, executed by the President or any Vice
President and the Secretary or any Assistant Secretary of the Borrower or
such Subsidiary Guarantor, as the case may be.
(e) Corporate Proceedings of the Borrower. The Agent shall have
-------------------------------------
received, with a counterpart for each Lender, a copy of the resolutions, in
form and substance satisfactory to the Agent, of the Board of Directors of
the Borrower authorizing (i) the execution, delivery and performance of
this Agreement and the other Loan Documents to which it is a party, (ii)
the borrowings contemplated hereunder and (iii) the granting by it of the
Liens created pursuant to the Security Documents, certified by the
Secretary or an Assistant Secretary of the Borrower as of the Closing Date,
which certificate shall
24
<PAGE>
be in form and substance satisfactory to the Agent and shall state that the
resolutions thereby certified have not been amended, modified, revoked or
rescinded.
(f) Borrower Incumbency Certificate. The Agent shall have received,
-------------------------------
with a counterpart for each Lender, a certificate of the Borrower, dated
the Closing Date, as to the incumbency and signature of the officers of the
Borrower executing any Loan Document satisfactory in form and substance to
the Agent, executed by the President or any Vice President and the
Secretary or any Assistant Secretary of the Borrower.
(g) Corporate Proceedings of Subsidiaries. The Agent shall have
-------------------------------------
received, with a counterpart for each Lender, a copy of the resolutions, in
form and substance satisfactory to the Agent, of the Board of Directors of
each Subsidiary of the Company which is a party to a Loan Document
authorizing (i) the execution, delivery and performance of the Loan
Documents to which it is a party and (ii) the granting by it of the Liens
created pursuant to the Security Documents to which it is a party,
certified by the Secretary or an Assistant Secretary of each such
Subsidiary as of the Closing Date, which certificate shall be in form and
substance satisfactory to the Agent and shall state that the resolutions
thereby certified have not been amended, modified, revoked or rescinded.
(h) Subsidiary Incumbency Certificates. The Agent shall have
----------------------------------
received, with a counterpart for each Lender, a certificate of each
Subsidiary of the Borrower which is a Loan Party, dated the Closing Date,
as to the incumbency and signature of the officers of such Subsidiaries
executing any Loan Document, satisfactory in form and substance to the
Agent, executed by the President or any Vice President and the Secretary or
any Assistant Secretary of each such Subsidiary.
(i) Corporate Documents. The Agent shall have received, with a
-------------------
counterpart for each Lender, true and complete copies of the certificate of
incorporation and by-laws of each Loan Party, certified as of the Closing
Date as complete and correct copies thereof by the Secretary or an
Assistant Secretary of the such Loan Party.
(j) Good Standing Certificates. The Agent shall have received, with
--------------------------
a copy for each Lender, certificates dated as of a recent date from the
Secretary of State or other appropriate authority, evidencing the good
standing of each Loan Party (i) in the jurisdiction of its organization and
(ii) in each other jurisdiction where its ownership, lease or operation of
property or the conduct of its business requires it to qualify as a foreign
Person except, as to this subclause (ii), where the failure to so qualify
could not reasonably be expected to have a Material Adverse Effect.
(k) Consents, Licenses and Approvals. The Agent shall have received,
--------------------------------
with a counterpart for each Lender, a certificate of a Responsible Officer
of the Borrower (i) attaching copies of all consents, authorizations and
filings referred to in Section 3.4, and (ii) stating that such consents,
licenses and filings are in full force and effect, and
25
<PAGE>
each such consent, authorization and filing shall be in form and substance
satisfactory to the Agent.
(l) Legal Opinions. The Agent shall have received, with a
--------------
counterpart for each Lender, the executed legal opinion of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., counsel to the Borrower and the other Loan
Parties, substantially in the form of Exhibit I. Such legal opinion shall
cover such other matters incident to the transactions contemplated by this
Agreement as the Agent may reasonably require.
(m) Pledged Stock; Stock Powers. The Agent shall have received the
---------------------------
certificates representing the shares pledged pursuant to the Pledge
Agreement (other than shares of HC Personal Resources, Inc., which are held
by HCFP), together with an undated stock power for each such certificate
executed in blank by a duly authorized officer of the pledgor thereof.
Each Issuer referred to in the Pledge Agreement shall have delivered an
acknowledgment of and consent to the Pledge Agreement, executed by a duly
authorized officer of such Issuer, in substantially the form appended to
the Pledge Agreement.
(n) Actions to Perfect Liens. The Agent shall have received all duly
------------------------
executed financing statements on form UCC-1, and shall have received
evidence in form and substance satisfactory to it that all filings,
recordings, registrations and other actions, necessary or, in the opinion
of the Agent, desirable to perfect the Liens created by the Security
Documents shall have been completed or that arrangements satisfactory to
the Agent to complete them have been made.
(o) Lien Searches. The Agent shall have received the results of a
-------------
recent search by a Person satisfactory to the Agent, of the Uniform
Commercial Code, judgment and tax lien filings which may have been filed
with respect to personal property of each Loan Party, and the results of
such search shall be satisfactory to the Agent.
(p) Insurance. The Agent shall have received evidence in form and
---------
substance satisfactory to it that all of the requirements of Section 5.5
hereof and Section 5(m) of the Security Agreement shall have been
satisfied.
(q) Representations and Warranties. Each of the representations and
------------------------------
warranties made by the Borrower and the other Loan Parties in or pursuant
to the Loan Documents shall be true and correct in all material respects on
and as of the Closing Date as if made on and as of such date.
(r) No Default. No Default or Event of Default shall have occurred
----------
and be continuing on the Closing Date or after giving effect to the Loans
requested to be made on such date.
(s) Additional Matters. All corporate and other proceedings, and all
------------------
documents, instruments and other legal matters in connection with the
transactions
26
<PAGE>
contemplated by this Agreement, and the other Loan Documents shall be
satisfactory in form and substance to the Agent, and the Agent shall have
received such other documents and legal opinions in respect of any aspect
or consequence of the transactions contemplated hereby or thereby as it
shall reasonably request.
SECTION 5. AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as any of the Commitments
remain in effect or any amount is owing to any Lender or the Agent hereunder or
under any other Loan Document, the Borrower shall and (except in the case of
delivery of financial information, reports and notices) shall cause each of its
Subsidiaries to:
5.1 Financial Statements. Furnish to each Lender:
--------------------
(a) as soon as available, but in any event within 90 days after the
end of each fiscal year of the Borrower, a copy of the consolidated balance
sheet of the Borrower and its consolidated Subsidiaries as at the end of
such year and the related consolidated statements of income and retained
earnings and of cash flows for such year, setting forth in each case in
comparative form the figures for the previous year, reported on without a
"going concern" or like qualification or exception, or qualification
arising out of the scope of the audit, by Arthur Anderson LLP or other
independent certified public accountants of nationally recognized standing;
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each fiscal
year of the Borrower, the unaudited consolidated balance sheet of the
Borrower and its consolidated Subsidiaries as at the end of such quarter
and the related unaudited consolidated statements of income and retained
earnings and of cash flows of the Borrower and its consolidated
Subsidiaries for such quarter and the portion of the fiscal year through
the end of such quarter, setting forth in each case in comparative form the
figures for the previous year, certified by a Responsible Officer as being
fairly stated in all material respects (subject to normal year-end audit
adjustments and absence of footnotes);
(c) as soon as available, but in any event not later than 30 days
after the end of each calendar month, the unaudited consolidated balance
sheet of the Borrower and its consolidated Subsidiaries as at the end of
such month and the related unaudited consolidated statements of income and
retained earnings and of cash flows of the Borrower and its consolidated
Subsidiaries for such month and the portion of the fiscal year through the
end of such month, setting forth in each case in comparative form the
figures for the previous year, certified by a Responsible Officer as being
fairly stated in all material respects (subject to normal year-end audit
adjustments); and
(d) as soon as available, but in any event not later than the last
Business Day of the week following each week, a "flash report" in form
satisfactory to the Agent
27
<PAGE>
detailing collections, cash disbursements, payables and other information
as agreed with the Agent for such week;
all such financial statements shall present fairly the financial condition of
the Borrower and its Subsidiaries and shall be prepared in reasonable detail and
in accordance with GAAP applied consistently throughout the periods reflected
therein and with prior periods (except as approved by such accountants or
officer, as the case may be, and disclosed therein).
5.2 Certificates; Other Information. Furnish to each Lender:
-------------------------------
(a) concurrently with the delivery of the financial statements
referred to in Section 5.1(a), a certificate of the independent certified
public accountants reporting on such financial statements stating that in
making the examination necessary therefor no knowledge was obtained of any
Default or Event of Default, except as specified in such certificate;
(b) concurrently with the delivery of the financial statements
referred to in Sections 5.1(a), (b) and (c), a certificate of a Responsible
Officer (i) stating that, to the best of such Officer's knowledge, the
Borrower during such period has observed or performed all of its covenants
and other agreements, and satisfied every condition, contained in this
Agreement and the other Loan Documents to be observed, performed or
satisfied by it, and that such Officer has obtained no knowledge of any
Default or Event of Default except as specified in such certificate and
(ii) showing in detail the calculations supporting such Officer's
certification of the Borrower's compliance with the requirements of Section
6.1(a) through 6.1(c);
(c) within five days after the same are sent, copies of all financial
statements and reports which the Borrower sends to its stockholders, and
within five days after the same are filed, copies of all financial
statements and reports which the Borrower may make to, or file with, the
Securities and Exchange Commission or any successor or analogous
Governmental Authority;
(d) promptly, such additional financial and other information as any
Lender may from time to time reasonably request.
5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at
----------------------
or before maturity or before they become delinquent, as the case may be, all its
obligations of whatever nature, except (i) as noted in Schedule 3.7 and (ii)
where the amount or validity thereof is currently being contested in good faith
by appropriate proceedings and reserves in conformity with GAAP with respect
thereto have been provided on the books of the Borrower or its Subsidiaries, as
the case may be.
5.4 Conduct of Business and Maintenance of Existence. Continue to
------------------------------------------------
engage in business of the same general type as now conducted by it and preserve,
renew and keep in full force and effect its corporate existence and take all
reasonable action to maintain all rights, privileges and franchises necessary or
desirable in the normal conduct of its business except as
28
<PAGE>
otherwise permitted pursuant to Section 6.5; except as noted on Schedule 3.7,
comply with all Contractual Obligations and Requirements of Law except to the
extent that failure to comply therewith could not, in the aggregate, have a
Material Adverse Effect.
5.5 Maintenance of Property; Insurance. Keep all property useful
----------------------------------
and necessary in its business in good working order and condition; maintain with
financially sound and reputable insurance companies insurance on all its
property in at least such amounts and against at least such risks (but including
in any event public liability, product liability and business interruption) as
are usually insured against in the same general area by companies engaged in the
same or a similar business, which insurance shall name the Agent as lender loss
payee, in the case of property or casualty insurance, and as an additional
insured, in the case of liability insurance; and furnish to each Lender, upon
written request, full information as to the insurance carried.
5.6 Inspection of Property; Books and Records; Discussions. Keep
------------------------------------------------------
proper books of records and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities; and permit
representatives of any Lender to visit and inspect any of its properties and
examine and make abstracts from any of its books and records at any reasonable
time and as often as may reasonably be desired and to discuss the business,
operations, properties and financial and other condition of the Borrower and its
Subsidiaries with officers and employees of the Borrower and its Subsidiaries
and with its independent certified public accountants.
5.7 Notices. Promptly give notice to the Agent and each Lender of:
-------
(a) the occurrence of any Default or Event of Default;
(b) any (i) default or event of default under any Contractual
Obligation of the Borrower or any of its Subsidiaries or (ii) litigation,
investigation or proceeding which may exist at any time between the
Borrower or any of its Subsidiaries and any Governmental Authority, which
in either case, if not cured or if adversely determined, as the case may
be, could reasonably be expected to have a Material Adverse Effect;
(c) any litigation or proceeding affecting the Borrower or any of its
Subsidiaries in which the amount involved is $1,000,000 or more and not
covered by insurance or in which injunctive or similar relief is sought;
(d) the acquisition by any Loan Party of any property or interest in
property (including, without limitation, real property), but excluding
property subject to Financing Leases permitted under this Agreement, that
is not subject to a perfected Lien in favor of the Agent pursuant to the
Security Documents;
(e) the occurrence of any transaction or occurrence referred to in
Section 2.6, and the receipt of any Net Proceeds or any insurance proceeds
as a result thereof (and the amount of any consideration or insurance
proceeds in connection with such
29
<PAGE>
transaction or occurrence required to be paid to HCFP pursuant to the HCFP
Loan Documents or to the obligee under any Financing Lease);
(f) the following events, as soon as possible and in any event within
30 days after the Borrower knows or has reason to know thereof: (i) the
occurrence or expected occurrence of any Reportable Event with respect to
any Plan, a failure to make any required contribution to a Plan, the
creation of any Lien in favor of the PBGC or a Plan or any withdrawal from,
or the termination, Reorganization or Insolvency of, any Multiemployer Plan
or (ii) the institution of proceedings or the taking of any other action by
the PBGC or the Borrower or any Commonly Controlled Entity or any
Multiemployer Plan with respect to the withdrawal from, or the terminating,
Reorganization or Insolvency of, any Plan; and
(g) any development or event which has had or could reasonably be
expected to have a Material Adverse Effect.
Each notice pursuant to this Section shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action the Borrower proposes to take with respect thereto.
5.8 Environmental Laws. (a) Comply with, and ensure compliance by
------------------
all tenants and subtenants, if any, with, all applicable Environmental Laws and
obtain and comply with and maintain, and ensure that all tenants and subtenants
obtain and comply with and maintain, any and all licenses, approvals,
notifications, registrations or permits required by applicable Environmental
Laws.
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply with all lawful orders and directives of
all Governmental Authorities regarding Environmental Laws.
5.9 Periodic Audit of Accounts Receivable and Inventory. The Agent
---------------------------------------------------
shall be entitled to perform a periodic due diligence inspection, test and
review of the accounts receivable and inventory of the Borrower and its
Subsidiaries on a mutually convenient Business Day once during each calendar
quarter and shall in each case be satisfied in all material respects with the
results thereof; provided however, if the Agent in its reasonable judgment is
-------- -------
not satisfied that the results of any due diligence inspection, test, and review
performed pursuant to this Section 5.9, the Agent shall be entitled to perform
additional due diligence inspections, tests and reviews of such inventory and
accounts receivable on mutually convenient Business Days during the succeeding
twelve-month period until the Agent shall be so satisfied; and provided further,
-------- -------
that upon the occurrence and during the continuation of an Event of Default, the
Agent shall be entitled to perform such additional due diligence inspections,
tests and review of such accounts receivable as any Lender shall deem necessary
or advisable.
30
<PAGE>
5.10 Additional Collateral; Additional Guarantors. (a) In the
--------------------------------------------
event that the Borrower or any Subsidiary acquires any personal property or
interest in personal property other than property made subject to a Lien
permitted under Section 6.3(g), that is not subject to a perfected Lien in favor
of the Agent pursuant to the Security Documents, the Borrower shall, and shall
cause Subsidiary to, take such action (including, without limitation, the
preparation and filing of mortgages or deeds of trust in form and substance
satisfactory to the Agent) as the Agent shall request in order to create and/or
perfect a Lien in favor of the Agent on such property.
(b) In the event that the Borrower is permitted to acquire or form
any additional Subsidiary, such Subsidiary shall execute a guarantee and a
security agreement, or supplements to the Subsidiaries Guarantee and the
Security Agreement, and the Borrower and/or any Subsidiary which is a holder of
any Capital Stock of such Subsidiary shall execute such pledge agreements or
supplements to the Pledge Agreement, each in form and substance satisfactory to
the Agent, and shall take such other action as shall be necessary or advisable
(including, without limitation, the execution of financing statements on form
UCC-1) in order to perfect the Liens granted by such Subsidiary in favor of the
Agent for the benefit of the Lenders and to effect and perfect the pledge of all
of the Capital Stock of such Subsidiary in favor of the Agent for the benefit of
the Lenders. Such Subsidiary shall thereupon become a Guarantor for all purposes
under the Loan Documents, including, without limitation, Section 5.10(a) of this
Agreement. The Agent shall be entitled to receive legal opinions of one or more
counsel to the Borrower and such Subsidiary addressing such matters as the Agent
or its counsel may reasonably request, including, without limitation, the
enforceability of the guaranty and the security agreement to which such
Subsidiary becomes a party and the pledge of the Capital Stock of such
Subsidiary, and the creation, validity and perfection of the Liens so granted by
such Subsidiary and the Borrower and/or other Subsidiaries to the Agent for the
benefit of the Lenders.
5.11 Relief From Automatic Stay in Bankruptcy. (a) Upon the
----------------------------------------
occurrence of an Event of Default under subparagraph (f)(i) or (ii) of Section 7
of this Agreement, the Borrower and each of its Subsidiaries, as applicable,
shall immediately, upon request therefor by the Agent, deliver to the Agent its
written consent to the entry of an order modifying the automatic stay provided
for under 11 U.S.C. Section 362(a) (including any similar or analogous provision
under applicable state law, the "Automatic Stay") to the extent necessary to
--------------
permit the Agent to exercise and enforce any and all rights and remedies that
the Agent has under the Loan Documents and applicable law.
(b) Neither the Borrower nor any of its Subsidiaries shall seek,
apply for or cause the entry of any order enjoining, staying or otherwise
interfering with the exercise and enforcement of any of the Agent's rights or
remedies under the Loan Documents and applicable law after the Automatic Stay
shall have been modified under the circumstances contemplated under subparagraph
(a) of this Section 5.11 or otherwise.
(c) The Borrower and each of its Subsidiaries acknowledge the exigent
circumstances surrounding the execution and delivery of the Loan Documents and
the making
31
<PAGE>
of the Loans, that the inclusion of this Section 5.11 in this Agreement and
provision of the relief contemplated hereby is a material inducement to the
making of the Loans and that the occurrence of an Event of Default under
subparagraph (f)(i) or (ii) of Section 7 of this Agreement would constitute
"cause" within the meaning of the Automatic Stay.
5.12 Exchange Offer. The Borrower shall, and shall cause each of
--------------
its Subsidiaries to, use its best efforts to prosecute the successful
consummation of the Exchange Offer, including without limitation, promptly
creating or causing the creation of, entering into, and to the extent necessary
or desirable in connection with the Exchange Offer, filing any and all
agreements, documents and instruments which may be necessary or desirable in
connection with the Exchange Offer, promptly addressing any comments or other
communications from any Governmental Authority in connection therewith, and
cooperating in all respects with the Agent and the Lenders in connection with
the Exchange Offer.
5.13 Landlord Waivers. The Borrower shall, and shall cause each of
----------------
its Subsidiaries to, use commercially reasonable efforts to obtain a landlord's
lien waiver and collateral access agreement from each landlord of any leased
premises on which any material portion of the Collateral is located as soon as
reasonably practicable following the Closing Date.
SECTION 6. NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as any of the Commitments
remain in effect or any amount is owing to any Lender or the Agent hereunder or
under any other Loan Document, the Borrower shall not, and (except with respect
to Section 6.1) shall not permit any of its Subsidiaries to, directly or
indirectly:
6.1 Financial Condition Covenants.
-----------------------------
(a) Minimum Cash Collections. Permit the cash collections of the
------------------------
Borrower and its consolidated Subsidiaries during any month set forth below to
be less than the amount set forth opposite such month below:
<TABLE>
<CAPTION>
Month Amount
----- ------
<S> <C>
December 1998 $ 6,500,000
January 1999 9,110,000
February 1999 11,454,000
March 1999 10,925,000
April 1999 6,995,000
May 1999 7,245,000
June 1999 7,635,000
July 1999 7,675,000
August 1999 8,455,000
September 1999 8,015,000
October 1999 7,650,000
32
<PAGE>
November 1999 8,010,000
December 1999 8,090,000
</TABLE>
(b) Maximum Cash Uses. Permit the aggregate cash payments of the
-----------------
Borrower and its consolidated Subsidiaries during any month in respect of direct
and indirect salaries, other direct costs, payroll, indirect costs, and interest
expense (but excluding balance sheet cash) to exceed (i) $8,000,000 for January
1999, and (ii) $6,500,000 for any month thereafter.
(c) Payables. Permit any of the accounts payable of the Borrower and
--------
its Subsidiaries to be more than 30 days past due, or more than 75 days past
invoice date.
6.2 Limitation on Indebtedness. Create, incur, assume or suffer to
--------------------------
exist any Indebtedness, except:
(a) Indebtedness of the Borrower under this Agreement;
(b) Indebtedness of the Borrower to any Subsidiary Guarantor and of
any Subsidiary Guarantor to the Borrower or any other Subsidiary Guarantor;
(c) incurrence of Indebtedness of the Borrower and any of its
Subsidiaries incurred to finance the acquisition of fixed or capital assets
(whether pursuant to a loan, a Financing Lease or otherwise) in an
aggregate principal amount not exceeding as to the Borrower and its
Subsidiaries $1,200,000 per quarter;
(d) Indebtedness outstanding pursuant to the HCFP Loan Documents, or
pursuant to a replacement credit facility on substantially the same terms
or more favorable terms to the Lenders;
(e) the 11% Senior Notes;
(f) from and after the consummation of the Exchange Offer, the Split
Rate Subordinated Notes; and
(g) Indebtedness outstanding on the date hereof and listed on
Schedule 6.2.
6.3 Limitation on Liens. Create, incur, assume or suffer to exist
-------------------
any Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired, except for:
(a) Liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings, provided that adequate reserves with
--------
respect thereto are maintained on the books of the Borrower or its
Subsidiaries, as the case may be, in conformity with GAAP;
(b) carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like Liens arising in the ordinary course of business which are
not overdue for a
33
<PAGE>
period of more than 60 days or which are being contested in good faith by
appropriate proceedings, and contractual and statutory landlords' Liens so
long as the Borrower and its Subsidiaries are in compliance with Section
5.13;
(c) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation and deposits
securing liability to insurance carriers under insurance or self-insurance
arrangements;
(d) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business;
(e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the property subject thereto or
materially interfere with the ordinary conduct of the business of the
Borrower or such Subsidiary;
(f) Liens in existence on the date hereof listed on Schedule 6.2,
securing Indebtedness permitted by Section 6.2(g), provided that no such
--------
Lien is spread to cover any additional property after the Closing Date and
that the amount of Indebtedness secured thereby is not increased;
(g) Liens securing Indebtedness of the Borrower and its Subsidiaries
permitted by Section 6.2(c) incurred to finance the acquisition of fixed or
capital assets, provided that (i) such Liens shall be created substantially
--------
simultaneously with the acquisition of such fixed or capital assets, (ii)
such Liens do not at any time encumber any property other than the property
financed by such Indebtedness, (iii) the amount of Indebtedness secured
thereby is not increased and (iv) the principal amount of Indebtedness
secured by any such Lien shall at no time exceed 100% of the original
purchase price of such property of such property at the time it was
acquired;
(h) Liens created pursuant to the Security Documents; and
(i) Liens created pursuant to the HCFP Loan Documents.
6.4 Limitation on Guarantee Obligations. Create, incur, assume or
-----------------------------------
suffer to exist any Guarantee Obligation except:
(a) Guarantee Obligations in existence on the date hereof and listed
on Schedule 6.4;
(b) Guarantee Obligations in favor of HCFP pursuant to the HCFP Loan
Documents;
34
<PAGE>
(c) guarantees made in the ordinary course of its business by the
Borrower of obligations of any of the Subsidiary Guarantors, which
obligations are otherwise permitted under this Agreement; and
(d) the Subsidiaries Guarantee.
6.5 Limitation on Fundamental Changes. Enter into any merger,
---------------------------------
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer
or otherwise dispose of, all or substantially all of its property, business or
assets, or make any material change in its present method of conducting
business, except:
(a) any Subsidiary of the Borrower may be merged or consolidated with
or into the Borrower (provided that the Borrower shall be the continuing or
--------
surviving corporation) or with or into any one or more wholly owned
Subsidiaries of the Borrower (provided that the wholly owned Subsidiary or
--------
Subsidiaries shall be the continuing or surviving corporation); and
(b) any wholly owned Subsidiary may sell, lease, transfer or
otherwise dispose of any or all of its assets (upon voluntary liquidation
or otherwise) to the Borrower or any other wholly owned Subsidiary of the
Borrower.
6.6 Limitation on Sale of Assets. Convey, sell, lease, assign,
----------------------------
transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, receivables and leasehold interests), whether
now owned or hereafter acquired, or, in the case of any Subsidiary, issue or
sell any shares of such Subsidiary's Capital Stock to any Person other than the
Borrower or any wholly owned Subsidiary, except:
(a) the sale or other disposition of obsolete or worn out property in
the ordinary course of business, and the sale or other disposition of the
assets listed on Schedule 6.6; provided that the Net Proceeds of each such
--------
transaction are applied to the prepayment of the Loans as provided in
Section 2.6;
(b) the sale of inventory in the ordinary course of business;
(c) the sale or discount without recourse of accounts receivable
arising in the ordinary course of business in connection with the
compromise or collection thereof; and
(d) as permitted by Section 6.5(b).
6.7 . Reserved.
6.8 Limitation on Dividends . Declare or pay any dividend (other
-----------------------
than dividends payable solely in common stock of the Borrower) on, or make any
payment on account of, or set apart assets for a sinking or other analogous fund
for, the purchase,
35
<PAGE>
redemption, defeasance, retirement or other acquisition of, any shares of any
class of Capital Stock of the Borrower or any warrants or options to purchase
any such Stock, whether now or hereafter outstanding, or make any other
distribution in respect thereof, either directly or indirectly, whether in cash
or property or in obligations of the Borrower or any Subsidiary (such
declarations, payments, setting apart, purchases, redemptions, defeasances,
retirements, acquisitions and distributions being herein called
"Restricted Payments"), except that:
- --------------------
(a) from and after the issuance of the Convertible PIK Preferred
Stock, so long as no Default or Event of Default shall have occurred and be
continuing or would result therefrom, the Borrower may declare and pay
dividends on the Convertible PIK Preferred Stock in accordance with the
terms thereof.
6.9 Limitation on Capital Expenditures. Make or commit to make (by
----------------------------------
way of the acquisition of securities of a Person or otherwise) any expenditure
in respect of the purchase or other acquisition of fixed or capital assets
(excluding any such asset acquired in connection with normal replacement and
maintenance programs properly charged to current operations) except for
expenditures in the ordinary course of business not exceeding, in the aggregate
for the Borrower and its Subsidiaries, during each period of six months ending
on each June 30 and December 31 during the term of this Agreement, the sum of
(a) $500,000 and (b) the amount of any Indebtedness (including Financing Leases)
incurred during such period pursuant to Section 6.2(c).
6.10 Limitation on Investments, Loans and Advances. Make any
---------------------------------------------
advance, loan, extension of credit or capital contribution to, or purchase any
stock, bonds, notes, debentures or other securities of or any assets
constituting a business unit of, or make any other investment in, any Person,
except :
(a) extensions of trade credit in the ordinary course of business;
(b) investments in Cash Equivalents; and
(c) investments by the Borrower in Subsidiary Guarantors and
investments by such Subsidiary Guarantors in the Borrower and in other
Subsidiary Guarantors.
6.11 Limitation on Optional Payments and Modifications of Debt
---------------------------------------------------------
Instruments. (a) Make any optional payment or prepayment on or redemption or
- -----------
purchase of any Indebtedness (other than (x) the Loans and (y) Indebtedness
under the HCFP Loan Agreement, and other than pursuant to the Exchange Offer),
or (b) amend, modify or change, or consent or agree to any amendment,
modification or change to any of the terms of any Indebtedness (other than the
Loans).
6.12 Limitation on Transactions with Affiliates. Enter into any
------------------------------------------
transaction, including, without limitation, any purchase, sale, lease or
exchange of property or the rendering of any service, with any Affiliate unless
such transaction is (a) otherwise permitted under this Agreement, (b) in the
ordinary course of the Borrower's or such Subsidiary's business and (c) upon
fair and reasonable terms no less favorable to the Borrower or such
36
<PAGE>
Subsidiary, as the case may be, than it would obtain in a comparable arm's
length transaction with a Person which is not an Affiliate.
6.13 Limitation on Sales and Leasebacks. Enter into any arrangement
----------------------------------
with any Person providing for the leasing by the Borrower or any Subsidiary of
real or personal property which has been or is to be sold or transferred by the
Borrower or such Subsidiary to such Person or to any other Person to whom funds
have been or are to be advanced by such Person on the security of such property
or rental obligations of the Borrower or such Subsidiary.
6.14 Limitation on Changes in Fiscal Year. Permit the fiscal year
------------------------------------
of the Borrower to end on a day other than December 31.
6.15 Limitation on Negative Pledge Clauses. Enter into with any
-------------------------------------
Person any agreement, other than (a) this Agreement, and (b) any industrial
revenue bonds, purchase money mortgages, Financing Leases and operating leases
permitted by this Agreement (in which cases, any prohibition or limitation shall
only be effective against the assets financed thereby), (c) the HCFP Loan
Documents, (d) the 11% Senior Note Indenture, (e) the Split Rate Senior Notes
and any indenture relating thereto, and (f) customary restrictions contained in
asset sale agreements for asset dispositions permitted under this Agreement and
relating only to the assets subject to such disposition which prohibits or
limits the ability of the Borrower or any of its Subsidiaries to create, incur,
assume or suffer to exist any Lien upon any of its property, assets or revenues,
whether now owned or hereafter acquired.
6.16 Limitation on Lines of Business. Enter into any type of
-------------------------------
business, either directly or through any Subsidiary, except for those businesses
in which the Borrower and its Subsidiaries are engaged on the date of this
Agreement.
6.17 Governing Documents. Amend its certificate of incorporation,
-------------------
partnership agreement or other Governing Documents, without the prior written
consent of the Required Lenders.
6.18 Limitation on Subsidiary Formation. Form any Subsidiaries
----------------------------------
unless, immediately upon the formation of such Subsidiary, all requirements of
Section 5.10 shall have been satisfied.
6.19 Limitation on Securities Issuances. (A) Permit any Subsidiary
----------------------------------
to issue any shares of Capital Stock that are not "certificated securities" (as
defined in (S) 8-102 of the Uniform Commercial Code as in effect in the State of
New York on the date hereof) and are not pledged to the Agent pursuant to the
Pledge Agreement or (B) issue or permit any Subsidiary to issue any shares of
preferred stock, other than the Convertible PIK Preferred Stock pursuant to the
Exchange Offer.
37
<PAGE>
SECTION 7. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of any Loan when due
in accordance with the terms thereof or hereof; or the Borrower shall fail
to pay any interest on any Loan, or any other amount payable hereunder or
under the other Loan Documents, within five days after any such interest or
other amount becomes due in accordance with the terms thereof or hereof; or
(b) Any representation or warranty made or deemed made by the
Borrower or any other Loan Party herein or in any other Loan Document or
which is contained in any certificate, document or financial or other
statement furnished by it at any time under or in connection with this
Agreement or any such other Loan Document shall prove to have been
incorrect in any material respect on or as of the date made or deemed made;
or
(c) The Borrower or any other Loan Party shall default in the
observance or performance of any agreement contained in Section 6 or
Section 8 of this Agreement, Section 5 of the Pledge Agreement, or Section
5 of the Security Agreement; or
(d) The Borrower or any other Loan Party shall default in the
observance or performance of any other agreement contained in this
Agreement or any other Loan Document (other than as provided in paragraphs
(a) through (c) of this Section), and such default shall continue
unremedied for a period of 15 days; or
(e) (i) There shall occur any "Event of Default" as defined in the
HCFP Loan Agreement or the 11% Senior Note Indenture, without giving effect
to any waiver or forbearance thereof, or (ii) the Borrower or any of its
Subsidiaries shall (A) default in any payment of principal of or interest
of any other Indebtedness (other than the Loans, and other than non-current
trade payables listed on Schedule 3.7 to the extent the same are in
compliance with the payment terms specified on Schedule 3.7) or in the
payment of any Guarantee Obligation, beyond the period of grace (not to
exceed 30 days), if any, provided in the instrument or agreement under
which such Indebtedness or Guarantee Obligation was created; or (B) default
in the observance or performance of any other agreement or condition
relating to any such Indebtedness or Guarantee Obligation or contained in
any instrument or agreement evidencing, securing or relating thereto, or
any other event shall occur or condition exist, the effect of which default
or other event or condition is to cause, or to permit the holder or holders
of such Indebtedness or beneficiary or beneficiaries of such Guarantee
Obligation (or a trustee or agent on behalf of such holder or holders or
beneficiary or beneficiaries) to cause, with the giving of notice if
required, such Indebtedness to become due prior to its stated maturity or
such Guarantee Obligation to become payable; or
(f) (i) The Borrower or any of its Subsidiaries shall commence any
case, proceeding or other action (A) under any existing or future law of
any jurisdiction,
38
<PAGE>
domestic or foreign, relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking to have an order for relief entered with respect
to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts,
or (B) seeking appointment of a receiver, trustee, custodian, conservator
or other similar official for it or for all or any substantial part of its
assets, or the Borrower or any of its Subsidiaries shall make a general
assignment for the benefit of its creditors; or (ii) there shall be
commenced against the Borrower or any of its Subsidiaries any case,
proceeding or other action of a nature referred to in clause (i) above
which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of 30 days; or (iii) there shall be commenced against
the Borrower or any of its Subsidiaries any case, proceeding or other
action seeking issuance of a warrant of attachment, execution, distraint or
similar process against all or any substantial part of its assets which
results in the entry of an order for any such relief which shall not have
been vacated, discharged, or stayed or bonded pending appeal within 30 days
from the entry thereof; or (iv) the Borrower or any of its Subsidiaries
shall take any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any of the acts set forth in clause (i),
(ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries shall
generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due; or
(g) (i) Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan or
any Lien in favor of the PBGC or a Plan shall arise on the assets of the
Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall
occur with respect to, or proceedings shall commence to have a trustee
appointed, or a trustee shall be appointed, to administer or to terminate,
any Single Employer Plan, which Reportable Event or commencement of
proceedings or appointment of a trustee is, in the reasonable opinion of
the Required Lenders, likely to result in the termination of such Plan for
purposes of Title IV of ERISA, (iv) any Single Employer Plan shall
terminate for purposes of Title IV of ERISA, (v) the Borrower or any
Commonly Controlled Entity shall, or in the reasonable opinion of the
Required Lenders is likely to, incur any liability in connection with a
withdrawal from, or the Insolvency or Reorganization of, a Multiemployer
Plan or (vi) any other event or condition shall occur or exist with respect
to a Plan; and in each case in clauses (i) through (vi) above, such event
or condition, together with all other such events or conditions, if any,
could have a Material Adverse Effect; or
(h) One or more judgments or decrees shall be entered against the
Borrower or any of its Subsidiaries involving in the aggregate a liability
(not paid or fully covered by insurance) of $200,000 or more, and all such
judgments or decrees shall not have been vacated, discharged, stayed or
bonded pending appeal within 30 days from the entry thereof; or
39
<PAGE>
(i) (i) Any of the Security Documents shall cease, for any reason,
to be in full force and effect, or the Borrower or any other Loan Party
which is a party to any of the Security Documents shall so assert or (ii)
the Lien created by any of the Security Documents shall cease to be
enforceable and of the same effect and priority purported to be created
thereby; or
(j) the Subsidiaries Guarantee shall cease, for any reason, to be in
full force and effect or any Subsidiary Guarantor shall so assert; or
(k) other than in connection with the Recapitalization, (i) any
Person or "group" (within the meaning of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended) (A) shall have acquired
beneficial ownership of 20% or more of any outstanding class of Capital
Stock having ordinary voting power in the election of directors of the
Borrower or (B) shall obtain the power (whether or not exercised) to elect
a majority of the Borrower's directors or (ii) the Board of Directors of
the Borrower shall not consist of a majority of Continuing Directors;
"Continuing Directors" shall mean the directors of the Borrower on
--------------------
the Closing Date and each other director, if such other director's
nomination for election to the Board of Directors of the Borrower is
recommended by a majority of the then Continuing Directors;
(l) Any Milestone shall not be accomplished on or prior to the
Milestone Date applicable thereto;
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (f) of this Section with respect to the
Borrower, automatically the Commitments shall immediately terminate and the
Loans hereunder (with accrued interest thereon) and all other amounts owing
under this Agreement shall immediately become due and payable, and (B) if such
event is any other Event of Default, either or both of the following actions may
be taken: (i) with the consent of the Required Lenders, the Agent may, or upon
the request of the Required Lenders, the Agent shall, by notice to the Borrower
declare the Commitments to be terminated forthwith, whereupon the Commitments
shall immediately terminate; and (ii) with the consent of the Required Lenders,
the Agent may, or upon the request of the Required Lenders, the Agent shall, by
notice to the Borrower, declare the Loans hereunder (with accrued interest
thereon) and all other amounts owing under this Agreement to be due and payable
forthwith, whereupon the same shall immediately become due and payable. Except
as expressly provided above in this Section, presentment, demand, protest,
notice of acceleration, notice of interest to accelerate and all other notices
of any kind are hereby expressly waived.
SECTION 8. CONVERSION
8.1 Conversion Right.
----------------
(a) Subject to and upon compliance with the provisions of this
Section, each Lender shall have the right (the "Conversion Right"), at its
----------------
option, upon (x) the occurrence of
40
<PAGE>
an Event of Default specified in Section 7(k), or (y) the Maturity Date, except
to the extent that the Loans have been previously prepaid, to convert the
principal amount of any such Loan, or any portion of such principal amount, into
that number of fully paid and non-assessable shares of Common Stock (as such
shares shall then be constituted) obtained by dividing the principal amount of
the Loans or portion thereof to be so converted by the Conversion Price in
effect at such time, by surrender of its Note in the manner provided in Section
8.2. A Lender is not entitled to any rights of a holder of shares of Common
Stock until such Lender has converted its Loan to shares of Common Stock, and
only to the extent such Loans are deemed to have been converted to shares of
Common Stock under this Section 8. If any amount paid or prepaid in respect of
any Loan is avoided, rescinded or must otherwise be restored or returned upon
the insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Borrower or any other Loan Party, or upon or as a result of the appointment of a
receiver, intervenor or conservator of, or trustee or similar officer for, the
Borrower or any other Loan Party or any substantial part of its property, or
otherwise, the Conversion Right with respect to such amount shall be reinstated
or shall continue to be effective, all as though such payments had not been
made.
(b) Common Stock issuable upon conversion of any Loan will bear
legends substantially in the form of those set forth on Schedule 8.1.
(c) The Borrower shall at all times reserve and keep available out of
its authorized Common Stock, solely for the purpose of issuance or delivery upon
conversion of the Loans, the number of shares of Common Stock that will be
required to be delivered in connection with such conversion pursuant to the
terms of the Indenture.
(d) If on the Closing Date or on the date the Conversion Price is
adjusted pursuant to the provisions of Sections 8.4 and 8.5, the Borrower shall
not have available sufficient authorized Common Stock for the purpose of
issuance or delivery upon conversion of the Loans, the Borrower shall, within
180 days from the Closing Date and/or any such date of adjustment, obtain such
additional authorized Common Stock for such purpose (the "Reservation Grace
-----------------
Period"). If any Reservation Grace Period shall have expired prior to the
- ------
Borrower's obtaining additional authorized Common Stock sufficient to meet its
obligation under Section 8.1(c) (an "Authorization Default"), additional
---------------------
interest ("Authorization Default Liquidated Damages") will accrue on the Loans
----------------------------------------
from and including the day following such Authorization Default to but excluding
the day on which such Authorization Default has been cured. Authorization
Default Liquidated Damages will be paid monthly in arrears on each Interest
Payment Date, with the first such payment due on the first Interest Payment Date
following the date on which such Authorization Default Liquidated Damages begin
to accrue and will accrue at a rate per annum of one quarter of one percent
(0.25%) of the principal amount, to and including the 90th day following such
Authorization Default and at a rate per annum of one half of one percent (0.50%)
thereof from and after the 91st day following such Authorization Default. In no
event will Authorization Default Liquidated Damages accrue at a rate per annum
exceeding one half of one percent (0.50%).
41
<PAGE>
8.2 Exercise of Conversion Right; Issuance of Shares of Common Stock
----------------------------------------------------------------
on Conversion.
- -------------
(a) The Lenders have a Conversion Right which is exercisable in whole
or in part at any time and from time to time, subject to the limitations set
forth in Section 8.1(a). In order to exercise its Conversion Right, a Lender
shall complete a notice in the then current form obtainable from the Agent and
in the form of Exhibit K (a "Conversion Notice") (which may be accompanied by a
-----------------
share transfer form, or other instrument which may be required, signed by the
Lender or may include an authorization signed by the Lender, authorizing the
Lender's nominee to become the registered transferee and to execute any
requisite transfer form or other instrument which may be required, on behalf of
the Lender) and deliver such Conversion Notice and where appropriate, an
executed share transfer form, or other instrument which may be required, to the
Agent (together with the relevant Note) and any payment required by Section 8.6.
Once given, a Conversion Notice shall be irrevocable and may not be withdrawn
without the consent in writing of the Agent and, so long as no Default or Event
of Default has occurred and is continuing, the Borrower. The Agent shall deliver
to the Borrower promptly after receipt each Conversion Notice and each such
share transfer form or other instrument.
(b) The Conversion Right of any Lender in respect of a Loan being
prepaid pursuant to this Agreement and in respect of which the conditions
required for conversion have not been satisfied by the relevant Lender by the
end of the second Business Day prior to any date for prepayment thereof shall,
except as provided below, thereupon terminate. Notwithstanding the foregoing, if
there is a default in making full payment when due of the prepayment monies in
respect of any Loan, the Conversion Right in respect thereof shall extend up to
and including the date on which payment has been received by the relevant
Lender. The Conversion Right of a Lender in respect of a Loan becoming due and
payable as a result of the acceleration of the Loans following an Event of
Default shall terminate on the date that payment with respect to such Loan has
been received by such Lender.
(c) In the event that any Lenders have elected to convert their Loans
pursuant to this Section 8 by giving notice thereof to the Borrower in
accordance with the terms of this Agreement, then any subsequent prepayment of
the Loans shall not affect the right of such Lenders to receive shares of Common
Stock and such Loans of such Lenders shall not be so prepaid. No earlier than 60
days and no later than 30 days prior to the Maturity Date, the Borrower shall
deliver a notice to the Agent and the Lenders of the status of the Conversion
Rights, if any, of the Lenders.
(d) In order to exercise the Conversion Right with respect to any
Loan, the Lender shall surrender its Note, duly endorsed, at the office of the
Agent specified in Section 10.2 and shall give the Conversion Notice as
specified in Section 8.2(a). Such Conversion Notice shall state the portion of
the Loan of such Lender to be converted and the name or names (with address) in
which the certificate or certificates for shares of Common Stock which shall be
issuable on such conversion shall be issued, and shall be accompanied by
transfer taxes, if required pursuant to Section 8.7. The Agent shall promptly
notify the Borrower of
42
<PAGE>
such conversion and shall deliver such Note to the Borrower against delivery by
the Borrower to the Agent, for the account of the Lender converting such Loan or
portion thereof, of certificates for Common Stock receivable by such Lender upon
such conversion. Each such Note surrendered for conversion shall, unless the
shares of Common Stock issuable on conversion are to be issued in the same name
as the registration of such Note, be duly endorsed by, or be accompanied by
instruments of transfer in form satisfactory to the Agent and the Borrower duly
executed by the Lender or its duly authorized attorney.
(e) As promptly as practicable after satisfaction of the requirements
for conversion set forth above, subject to compliance with any restrictions on
transfer if shares of Common Stock issuable on conversion are to be issued in a
name other than that of the Lender (as if such transfer were a transfer of the
Note or Notes (or portion thereof) so converted), the Borrower shall issue and
shall deliver to the Agent, for the account of such Lender, at the office of the
Agent specified in Section 10.2, a certificate or certificates for the number of
shares of Common Stock issuable upon the conversion of such Note or portion
thereof in accordance with the provisions of this Section and a check or cash in
respect of any fractional interest in respect of a share Common Stock arising
upon such conversion, as provided in Section 8.3. In case any Note shall be
surrendered for partial conversion, the Borrower shall execute and deliver to
Agent, for the account of such Lender, without charge to such Lender, a new Note
in an aggregate principal amount equal to the unconverted portion of the
surrendered Note.
(f) Each conversion shall be deemed to have been effected as to any
such Loan (or portion thereof) within 3 Business Days of the date on which the
requirements set forth above in this Section 8.2 have been satisfied as to such
Loan (or portion thereof), and the Person in whose name any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall become the holder of record of the shares represented thereby on such
conversion date; provided, however, that any such surrender on any date when the
--------
stock transfer books of the Borrower shall be closed shall constitute the Person
in whose name the certificates are to be issued as the record holder thereof for
all purposes on the next succeeding day on which such stock transfer books are
open, but such conversion shall be at the Conversion Price in effect on the date
upon which such Note shall be surrendered.
(g) Interest on the principal amount of any Loan or portion thereof
surrendered for conversion shall cease to accrue from and after the effective
date of such conversion.
8.3 Cash Payment in Lieu of Fractional Shares.
-----------------------------------------
No fractional shares of Common Stock or scrip representing fractional
shares shall be issued upon conversion of Loans. If any fractional share of
stock otherwise would be issuable upon the conversion of any Loan or Loans, the
Borrower shall make an adjustment therefor in cash at the current market value
thereof to the Lenders of such Loans. Upon exercise of its Conversion Right a
Lender shall, when delivering the relevant Conversion Notice or no later than 21
days following the relevant Conversion Date, give directions to the
43
<PAGE>
Agent for payment of any cash sum (rounded up to the nearest $0.01) which such
Lender is entitled to receive pursuant to this Section 8.3 and which shall be
paid by way of U.S. Dollar check drawn on a bank in the City of New York or, by
wire transfer to a U.S. Dollar account maintained by the Lender with a bank in
the City of New York.
8.4 Conversion Price.
----------------
(a) The initial conversion price of the Loans will be $2.379448 per
share of Common Stock (as adjusted in accordance with the terms of this
Agreement, from time to time, the "Conversion Price").
----------------
(b) Upon receipt of a Conversion Notice from a Lender, the Borrower
shall promptly file with the Agent a certificate of a Responsible Officer
setting forth the applicable Conversion Price and setting forth all the
information relevant to a determination of such Conversion Price.
8.5 Adjustments to the Conversion Price.
-----------------------------------
(a) The Conversion Price is subject to adjustment hereunder in
certain events, including: (i) the issuance of Common Stock of the Borrower as a
dividend or distribution on Common Stock of the Borrower; (ii) certain
subdivisions and combinations of the Common Stock of the Borrower; (iii) the
issuance to all holders of Common Stock of the Borrower of certain rights or
warrants to purchase Common Stock of the Borrower (provided that the Conversion
Price will be readjusted to the extent that such rights or warrants are not
exercised prior to the expiration thereof); (iv) the distribution to all holders
of Common Stock of the Borrower of shares of Capital Stock of the Borrower
(other than Common Stock) or evidences of Indebtedness of the Borrower or assets
(including securities, but excluding those rights, warrants, dividends and
distributions referred to above or paid in cash); (v) distributions consisting
of cash; and (vi) payment in respect of a tender offer or exchange offer by the
Borrower or any Affiliate of the Borrower. In the event of a distribution to
substantially all holders of the Borrower's Common Stock of rights to subscribe
for additional shares of the Borrower's Capital Stock as provided in clause
(iii) above, the Borrower may, instead of making any adjustment in the
Conversion Price, make proper provision so that each Lender who converts such
Loan after the record date for such distribution and prior to the expiration or
redemption of such rights shall be entitled to receive upon such conversion, in
addition to shares of Common Stock of the Borrower, an appropriate number of
such rights. If any adjustment is required to be made as set forth in clause (v)
above as a result of a cash distribution, such adjustment would be based upon
the full amount of the distribution.
(b) If the Borrower issues (i) shares of Common Stock for a
consideration per share less than the current market value per share (determined
as provided in subparagraph (h) of this Section 8.5), or (ii) any securities
convertible into or exchangeable for Common Stock initially deliverable upon
conversion or exchange of such securities that is less than the then current
market value per share (determined as provided in subparagraph (h) of this
Section 8.5) on the date of issuance of such securities (but excluding, among
other things, issuances otherwise permitted under this Agreement (a) pursuant to
any bona fide plan for the
44
<PAGE>
benefit of employees, directors or consultants of the Borrower now or hereafter
in effect; (b) to acquire all or any portion of a business in an arm's-length
transaction between the Borrower and an unaffiliated third party including, if
applicable, issuances upon exercise of options or warrants issued in connection
with such an acquisition; (c) in a bona fide public offering pursuant to a firm
commitment underwriting or sales at the market pursuant to a continuous stock
offering program; and (d) pursuant to the exercise of warrants, rights
(including, without limitation, earnout rights) or options, or upon the
conversion of convertible securities, which are issued and outstanding on the
date hereof, or which may be issued in the future at fair value and with an
exercise price or conversion price at least equal to the current market value of
the Common Stock (determined as provided in subparagraph (h) of this Section
8.5) at the date of issuance of such warrant, right, option or convertible
security), then the Conversion Price of the Loans to be in effect after the date
of such issuance shall be determined by multiplying the Conversion Price thereof
in effect immediately prior to the date of such issuance by a fraction, the
numerator of which shall be the number of shares of such Common Stock
outstanding on the date of, but immediately prior to, such issuance or such
record date plus the number of shares of such Common Stock the
----
aggregate offering price of the total number of shares of such Common Stock so
to be issued or to be offered for subscription or purchase (or the aggregate
initial Conversion Price of the convertible securities so to be offered) would
purchase at such then current market price (determined as provided in
subparagraph (h) of this Section 8.5) and the denominator of which shall be the
number of shares of Common Stock outstanding on the date of, but immediately
prior to, such issuance plus the number of additional shares of such Common
----
Stock to be issued or to be offered for subscription or purchase (or into which
the convertible securities so to be offered are initially convertible). In case
such subscription price may be paid in a consideration part or all of which
shall be in a form other than cash, the value of such consideration shall be as
determined by an independent investment banking firm reasonably acceptable to
the Borrower and the Agent and Lenders holding a majority in principal amount of
such Loans (the cost of the engagement of said investment banking firm to be
borne by the Borrower). Such adjustment shall be made successively whenever the
date of such issuance is fixed (which date of issuance shall be the record date
for such issuance if a record date therefor is fixed); and, in the event that
such shares or options, rights or warrants are not so issued, such Conversion
Price shall again be adjusted to be such Conversion Price which would then be in
effect if the date of such issuance had not been fixed.
(c) In the case of (i) any reclassification of the Common Stock of
the Borrower, or (ii) a consolidation, merger or combination involving the
Borrower or a sale or conveyance to another Person of the property and assets of
the Borrower as an entirety or substantially as an entirety, in each case as a
result of which holders of Common Stock shall be entitled to receive stock,
other securities, other property or assets (including cash) with respect to or
in exchange for such Common Stock, the Lenders will generally be entitled
thereafter to convert such Loans for any kind and amount of shares of stock,
other securities or other property or assets (including cash) which they would
have owned or been entitled to receive upon such reclassification,
consolidation, merger, combination, sale or conveyance had such Loans been
converted into Common Stock immediately prior to such reclassification,
consolidation, merger, combination, sale or conveyance assuming that a Lender
would not
45
<PAGE>
have exercised any rights of election as to the stock, other securities or other
property or assets (including cash) receivable in connection therewith. In the
event that holders of Common Stock shall have the right to choose between or
among two or more alternatives of stock, other securities, other property or
assets (including cash) in exchange for their Common Stock, the Lenders, upon
conversion of the Loans, shall have the right to choose between or among the
same two or more alternatives; provided that, in the event that the
--------
holders of Common Stock shall be subject to restrictions on the percentage of
one or more of the alternatives that they may receive in exchange for their
Common Stock (irrespective of whether the restrictions are on a per share or a
per class basis), each Lender shall be subject to the same restrictions with
respect to the conversion of each Loan on a per Loan basis.
(d) In case the Borrower shall pay a dividend or make a distribution
on the Common Stock exclusively in Common Stock or securities convertible or
exchangeable for Common Stock, the Conversion Price in effect at the opening of
business of the day following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination and the denominator shall
be the sum of such number of shares and the total number or shares (and/or
shares issuable upon any such conversion or exchange) constituting such dividend
or other distribution, such reduction to become effective immediately after the
opening of business on the day following the date fixed for such determination.
For the purposes of this subparagraph (d), the number of shares of Common Stock
at any time outstanding shall not include shares held in the treasury of the
Borrower. In the event that such dividend or distribution is not so paid or
made, the Conversion Price shall again be adjusted to be the Conversion Price
which would then be in effect if such dividend or distribution had not occurred.
(e) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in effect
at the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately reduced and, conversely,
in case outstanding shares of Common Stock shall each be combined into a smaller
number of shares of Common Stock, the Conversion Price in effect at the opening
of business on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination becomes
effective.
(f) Subject to the last sentence of this subparagraph (f), in case
the Borrower shall, by dividend or otherwise, distribute to all holders of its
Common Stock evidences of its indebtedness, shares of any class or series of
Capital Stock, cash or assets (including securities, but excluding any rights or
warrants referred to in subparagraph (c) of this Section 8.5, any dividend or
distribution paid exclusively in cash and any dividend or distribution referred
to in subparagraph (c) of this Section 8.5), the Conversion Price shall be
reduced so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the effectiveness of the
Conversion Price reduction contemplated by this
46
<PAGE>
subparagraph (f) by a fraction of which the numerator shall be the current
market price per share (determined as provided in subparagraph (h) of this
Section 8.5) of the Common Stock on the date fixed for the determination of
stockholders entitled to receive such distribution (the "Reference Date") less
--------------
the fair market value (as determined good faith by the Board of
Directors of the Borrower, whose determination shall be conclusive and described
in a resolution of the Board of Directors), on the Reference Date, of the
portion of the evidences of Indebtedness, shares of Capital Stock, cash and
assets so distributed applicable to one share of Common Stock and the
denominator shall be such current market price per share of the Common Stock,
such reduction to become effective immediately prior to the opening of business
on the day following the Reference Date. In the event that such dividend or
distribution is not so paid or made, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such
dividend or distribution had not occurred. For purposes of this subparagraph
(f), any dividend or distribution that includes shares of Common Stock or rights
or warrants to subscribe for or purchase shares of Common Stock shall be deemed
instead to be (1) a dividend or distribution of the evidences of Indebtedness,
shares of Capital Stock, cash or assets other than such shares of Common Stock
or, such rights or warrants (making any Conversion Price reduction required by
this subparagraph (f) immediately followed by (2) a dividend or distribution of
such shares of Common Stock or such rights or warrants (making any further
Conversion Price reduction required by subparagraph (c) or (d) of this Section
8.5), except any shares of Common Stock included in such dividend or
distribution shall not be deemed "outstanding at the close of business on the
date fixed for such determination" within the meaning of subparagraph (d) of
this Section 8.5.
(g) In case a tender or exchange offer (other than an odd-lot offer)
made by the Borrower or any Subsidiary of the Borrower for all or any portion of
the Borrower's Common Stock shall expire and such tender or exchange offer shall
involve the payment by the Borrower or such Subsidiary of consideration per
share of Common Stock having a fair market value (as determined in good faith by
the Board of Directors, whose determination shall be conclusive and described in
a resolution of: the Board of Directors) at the last time (the "Expiration
----------
Time") tenders or exchanges may be made pursuant to such tender or exchange
- ----
offer (as it shall have been amended) that exceeds 110% of the current market
price per share (determined as provided in subparagraph (h) of this Section 8.5)
of the Common Stock on the Trading Day next succeeding the Expiration Time, the
Conversion Price shall be reduced so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the effectiveness of the Conversion Price reduction contemplated by this
subparagraph (g) by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding (including any tendered or exchanged shares)
at the Expiration Time multiplied by the current market price per share
(determined as provided in subparagraph (h) of this Section 8.5) of the Common
Stock on the Trading Day next succeeding the Expiration Time and the denominator
shall be the sum of (x) the fair market value (determined as aforesaid) of the
aggregate consideration payable to stockholders based on the acceptance (up to
any maximum specified in the terms of the tender or exchange offer) of all
shares validly tendered or exchanged and not withdrawn as of the Expiration Time
(the shares deemed so accepted, up to any such maximum, being referred to as the
"Purchased
---------
47
<PAGE>
Shares") and (y) the product of the number of shares of Common Stock
- ------
outstanding (less any Purchase Shares) at the Expiration Time and the current
market price per share (determined as provided in subparagraph (h) of this
Section 8.5) of the Common Stock on the Trading Day next succeeding the
Expiration Time, such reduction to become effective immediately prior to the
opening of business on the day following the Expiration Time.
(h) For the purpose of any computation under subparagraphs (b), (f),
and (g) of this Section 8.5, the current market price per share of Common Stock
on any date in question shall be deemed to be the average of the daily Closing
Prices for the ten consecutive Trading Days prior to the earlier of the day in
question and, if applicable, the day before the "ex" date with respect to the
issuance or distribution requiring such computation; provided, however, that if
--------
another event occurs that would require an adjustment pursuant to subparagraphs
(b) through (h) of this Section 8.5, inclusive, the Board of Directors may make
such adjustments to the Closing Prices during such five Trading Day period as it
deems appropriate to effectuate the intent of the adjustments in this Section
8.5, in which case any such determination by the Board of Directors shall be set
forth in a resolution and shall be conclusive. For purposes of this paragraph,
the term "ex" date, (1) when used with respect to any issuance or distribution,
means the first date on which the Common Stock is quoted regular way on a
Qualifying Stock Exchange or on such successor securities exchange on which the
Common Stock may be quoted or listed or in the relevant market from which the
Closing Prices were obtained without the right to receive such issuance or-
distribution, and (2) when used with respect to any tender or exchange offer
means the first date on which the Common Stock is quoted regular way on such
securities exchange or in such market after the Expiration Time of such offer.
(i) The Borrower may make such reductions in the Conversion Price, in
addition to those required by subparagraphs (c), (d), (e), (f) and (g) of this
Section 8.5, as it considers to be advisable to avoid or diminish any income tax
to holders of Common Stock or rights to purchase Common Stock resulting from any
dividend or distribution of stock (or rights to acquire stock) or from any event
treated as such for income tax purposes.
(j) The Borrower from time to time may, to the extent permitted by
law, reduce the Conversion Price by any amount for any period of at least 20
days (provided such reduction is irrevocable during the 20-day period), in which
case the Borrower shall give at least 15 days notice of such reduction, if the
Board of Directors of the Borrower has made a determination that such reduction
would be in the best interests of the Borrower, which determination shall be
conclusive. The Borrower may, at its option, make such reductions in the
Conversion Price, in addition to those set forth above, as the Board of
Directors of the Borrower deems advisable to avoid or diminish any income tax to
holders of Common Stock resulting from any dividend or distribution of stock (or
rights to acquire stock) or from any event treated as such for income tax
purposes.
(l) No adjustment in the Conversion Price will be required unless
such adjustment would require a change of at least 1% in the Conversion Price
then in effect; provided that any adjustment that would otherwise be required to
be made shall be carried
48
<PAGE>
forward and taken into account in any subsequent adjustment. Except as stated
above, the Conversion Price will not be adjusted for the issuance of Common
Stock or any securities convertible into or exchangeable for Common Stock or
carrying the right to purchase any of the foregoing.
(m) Nothing in this Section 8.5 or otherwise in this Section 8 shall
be construed to derogate any restriction or limitation contained in any Loan
Document imposed on any transaction of the types described in this Section 8.5,
including without limitation the restrictions set forth in Sections 6.2, 6.5,
6.6, 6.8 and 6.19 hereof.
(n) Notwithstanding anything to the contrary set forth in this
Section 8, the Conversion Price shall not be required to be adjusted solely as a
result of the issuance of the Convertible PIK Preferred Stock on the terms set
forth on Schedule 1.1(b).
8.6 Stamp and Other Duties and Exchange Costs.
-----------------------------------------
Payment of all stamp, transfer and registration duties (if any) and
any brokers' commission and stock exchange transaction charges and any other tax
thereon arising on exercise of Conversion Rights and/or on the transfer or
delivery of shares of Common Stock by the Borrower (or the Agent) to or to the
order of the Agent or the relevant Lender in connection therewith, payable in or
imposed by the United States, any state or other political sub-division thereof
and any other jurisdiction in which the register in the respect of any
securities is located will be made or procured by the Borrower. If the Borrower
shall fail to pay any such duties or costs, the relevant Lender shall be
entitled to tender and pay the same. The Borrower shall promptly reimburse each
Lender in respect of the payment of such duties or costs and any penalties paid
in respect thereof. A Lender exercising Conversion Rights must pay to the Agent
any such duties or costs arising in any other circumstances.
8.7 Reservation of Shares; Shares to be Fully Paid; Listing of Shares
-----------------------------------------------------------------
of Common Stock.
- ----------------
(a) The Borrower shall provide, free from preemptive rights, out of
its authorized but unissued Common Stock held in treasury, sufficient shares to
provide for the conversion of the Loans from time to time as such Loans are
converted as provided herein.
(b) The Borrower covenants that all shares of Common Stock issued
upon conversion of Loans will be fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue thereof.
(c) The Borrower further covenants that promptly after the shares of
Common Stock shall have been listed on the New York Stock Exchange, the American
Stock Exchange, the NASDAQ National Market or any other national securities
exchange or automated quotation system the Borrower will, to the extent
permitted by the rules of such exchange or automated quotation system, list and
keep listed, so long as the shares of Common Stock shall be so listed on such
exchange or automated quotation system, all shares of Common Stock issuable upon
conversion of the Loans.
49
<PAGE>
8.8 Responsibility of the Agent.
---------------------------
The Agent shall not be accountable with respect to the validity or
value (or the kind or amount) of any shares Common Stock, or of any securities
or property, which may at any time be issued or delivered upon the conversion of
any Loan; and the Agent makes no representations with respect thereto, and is
entitled to rely conclusively on the Borrower therefor. Subject to the other
provisions of this Agreement, the Agent shall not be responsible for any failure
of the Borrower to issue, transfer or deliver any shares of Common Stock or
stock certificates or other securities or property or cash upon the surrender of
any Note for the purpose of conversion or to comply with any of the duties,
responsibilities or covenants of the Borrower contained in this Section 8.
Without limiting the generality of the foregoing, the Agent shall be under no
responsibility to determine the correctness of any provisions contained in any
amendment entered into pursuant to Section 8.5 relating either to the kind or
amount of shares of stock or securities or property (including cash) receivable
by Lenders upon the conversion of their Notes after any event referred to in
such Section 8.5 or to any adjustment to be made with respect thereto, but,
subject to the other provisions of this Agreement may accept as conclusive
evidence of the correctness of any such provisions, and shall be protected in
relying upon, the certificate of a Responsible Officer (which the Borrower shall
be obligated to file with the Agent prior to the execution of any such
amendment) with respect thereto.
8.9 Notice to Lenders Prior to Certain Actions.
------------------------------------------
In case:
(a) of any reclassification of the Common Stock of the Borrower
(other than a subdivision or combination of its outstanding Common Stock, or
a change in par value, or from par value to no par value, or from no par
value to par value), or of any consolidation or merger to which the Borrower
is a party and for which approval of any stockholders of the Borrower is
required, or of the sale or transfer of all or substantially all of the
assets of the Borrower; or
(b) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Borrower;
the Borrower shall cause to be filed with the Agent and to be mailed to each
Lender at its address appearing on the Register, as promptly as possible but in
any event at least 15 days prior to the applicable date hereinafter specified, a
notice stating the date on which such reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding-up is expected to become
effective or occur, and the date as of which it is expected that holders of
shares of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up. Failure to give such notice, or any defect therein,
shall not affect the legality or validity of such dividend, distribution,
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up.
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SECTION 9. THE AGENT
9.1 Appointment. Each Lender hereby irrevocably designates and
-----------
appoints the Agent as the agent of such Lender under this Agreement and the
other Loan Documents, and each such Lender irrevocably authorizes the Agent, in
such capacity, to take such action on its behalf under the provisions of this
Agreement and the other Loan Documents and to exercise such powers and perform
such duties as are expressly delegated to the Agent by the terms of this
Agreement and the other Loan Documents, together with such other powers as are
reasonably incidental thereto. Notwithstanding any provision to the contrary
elsewhere in this Agreement, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the Agent.
9.2 Delegation of Duties. The Agent may execute any of its duties
--------------------
under this Agreement and the other Loan Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agents or attorneys in-fact selected by it with
reasonable care.
9.3 Exculpatory Provisions. Neither the Agent nor any of its
----------------------
officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be
(i) liable for any action lawfully taken or omitted to be taken by it or such
Person under or in connection with this Agreement or any other Loan Document
(except for its or such Person's own gross negligence or willful misconduct) or
(ii) responsible in any manner to any of the Lenders for any recitals,
statements, representations or warranties made by the Borrower or any officer
thereof contained in this Agreement or any other Loan Document or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Agent under or in connection with, this Agreement or any
other Loan Document or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Loan Document or
for any failure of the Borrower to perform its obligations hereunder or
thereunder. The Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Borrower.
9.4 Reliance by Agent . The Agent shall be entitled to rely, and
-----------------
shall be fully protected in relying, upon any Note, writing, resolution, notice,
consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or
teletype message, statement, order or other document or conversation believed by
it to be genuine and correct and to have been signed, sent or made by the proper
Person or Persons and upon advice and statements of legal counsel (including,
without limitation, counsel to the Borrower or any other Loan Party),
independent accountants and other experts selected by the Agent. The Agent may
deem and treat the payee of any Note as the owner thereof for all purposes
unless a written notice of assignment, negotiation or transfer thereof shall
have been filed with the Agent. The Agent
51
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shall be fully justified in failing or refusing to take any action under this
Agreement or any other Loan Document unless it shall first receive such advice
or concurrence of the Required Lenders as it deems appropriate or it shall first
be indemnified to its satisfaction by the Lenders against any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action. The Agent shall in all cases be fully protected in acting,
or in refraining from acting, under this Agreement and the other Loan Documents
in accordance with a request of the Required Lenders, and such request and any
action taken or failure to act pursuant thereto shall be binding upon all the
Lenders and all future holders of the Loans.
9.5 Notice of Default. The Agent shall not be deemed to have
-----------------
knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Agent has received notice from a Lender or the Borrower
referring to this Agreement, describing such Default or Event of Default and
stating that such notice is a "notice of default". In the event that the Agent
receives such a notice, the Agent shall give notice thereof to the Lenders. The
Agent shall take such action with respect to such Default or Event of Default as
shall be reasonably directed by the Required Lenders; provided that unless and
--------
until the Agent shall have received such directions, the Agent may (but shall
not be obligated to) take such action, or refrain from taking such action, with
respect to such Default or Event of Default as it shall deem advisable in the
best interests of the Lenders.
9.6 Non-Reliance on Agent and Other Lenders. Each Lender expressly
---------------------------------------
acknowledges that neither the Agent nor any of its officers, directors,
employees, agents, attorneys-in-fact or Affiliates has made any representations
or warranties to it and that no act by the Agent hereinafter taken, including
any review of the affairs of the Borrower or any other Loan Party, shall be
deemed to constitute any representation or warranty by the Agent to any Lender.
Each Lender represents to the Agent that it has, independently and without
reliance upon the Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, operations, property, financial and other
condition and creditworthiness of the Borrower and the other Loan Parties and
made its own decision to make its Loans hereunder and enter into this Agreement.
Each Lender also represents that it will, independently and without reliance
upon the Agent or any other Lender, and based on such documents and information
as it shall deem appropriate at the time, continue to make its own credit
analysis, appraisals and decisions in taking or not taking action under this
Agreement and the other Loan Documents, and to make such investigation as it
deems necessary to inform itself as to the business, operations, property,
financial and other condition and creditworthiness of the Borrower. Except for
notices, reports and other documents expressly required to be furnished to the
Lenders by the Agent hereunder or under the other Loan Documents, the Agent
shall not have any duty or responsibility to provide any Lender with any credit
or other information concerning the business, operations, property, condition
(financial or otherwise), prospects or creditworthiness of the Borrower or any
other Loan Party which may come into the possession of the Agent or any of its
officers, directors, employees, agents, attorneys-in-fact or Affiliates.
9.7 Indemnification. The Lenders agree to indemnify the Agent in
---------------
its capacity as such (to the extent not reimbursed by the Borrower and without
limiting the
52
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obligation of the Borrower to do so), ratably according to their respective
Credit Exposure Percentages in effect on the date on which indemnification is
sought, from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind whatsoever which may at any time (including, without limitation, at any
time following the payment of the Loans)be imposed on, incurred by or asserted
against the Agent in any way relating to or arising out of, the Commitments,
this Agreement, any of the other Loan Documents or any documents contemplated by
or referred to herein or therein or the transactions contemplated hereby or
thereby or any action taken or omitted by the Agent under or in connection with
any of the foregoing; provided that no Lender shall be liable for the payment of
--------
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting solely
from the Agent's gross negligence or willful misconduct. The agreements in this
Section shall survive the payment of the Loans and all other amounts payable
hereunder.
9.8 Agent in Its Individual Capacity. The Agent and its Affiliates
--------------------------------
may make loans to, accept deposits from and generally engage in any kind of
business with the Borrower and the other Loan Parties as though the Agent were
not the Agent hereunder and under the other Loan Documents. With respect to the
Loans made by it, the Agent shall have the same rights and powers under this
Agreement and the other Loan Documents as any Lender and may exercise the same
as though it were not the Agent, and the terms "Lender" and "Lenders" shall
------ -------
include the Agent in its individual capacity.
9.9 Successor Agent. The Agent may resign as Agent upon 10 days'
---------------
notice to the Lenders. If the Agent shall resign as Agent under this Agreement
and the other Loan Documents, then the Required Lenders shall appoint from among
the Lenders a successor agent for the Lenders, which successor agent shall be
approved by the Borrower, whereupon such successor agent shall succeed to the
rights, powers and duties of the Agent, and the term "Agent" shall mean such
-----
successor agent effective upon such appointment and approval, and the former
Agent's rights, powers and duties as Agent shall be terminated, without any
other or further act or deed on the part of such former Agent or any of the
parties to this Agreement or any holders of the Loans. After any retiring
Agent's resignation as Agent, the provisions of this Section 9 shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Agent under this Agreement and the other Loan Documents.
SECTION 10. MISCELLANEOUS
10.1 Amendments and Waivers. Neither this Agreement nor any other
----------------------
Loan Document, nor any terms hereof or thereof may be amended, supplemented or
modified except in accordance with the provisions of this Section 10.1. The
Required Lenders may, or, with the written consent of the Required Lenders, the
Agent may, from time to time, (a) enter into with the Borrower written
amendments, supplements or modifications hereto and to the other Loan Documents
for the purpose of adding any provisions to this Agreement or the other Loan
Documents or changing in any manner the rights of the Lenders or of the Borrower
hereunder or thereunder or (b) waive, on such terms and conditions as the
Required Lenders or the
53
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Agent, as the case may be, may specify in such instrument, any of the
requirements of this Agreement or the other Loan Documents or any Default or
Event of Default and its consequences; provided, however, that no such waiver
-----------------
and no such amendment, supplement or modification shall (i) reduce the amount or
extend the scheduled date of maturity of any Loan or of any installment thereof,
or reduce the stated rate of any interest or fee payable hereunder or extend the
scheduled date of any payment thereof or increase the amount or extend the
expiration date of any Lender's Commitment, in each case without the consent of
each Lender affected thereby, or (ii) amend, modify or waive any provision of
this Section 10.1 or reduce the percentage specified in the definition of
Required Lenders, or consent to the assignment or transfer by the Borrower of
any of its rights and obligations under this Agreement and the other Loan
Documents or release all or substantially all of the Collateral or release all
or substantially all of the Subsidiary Guarantors from their obligations under
the Subsidiaries Guarantee, in each case without the written consent of all the
Lenders, or (iii) amend, modify or waive any provision of Section 9 without the
written consent of the then Agent. Any such waiver and any such amendment,
supplement or modification shall apply equally to each of the Lenders and shall
be binding upon the Borrower, the Lenders, the Agent and all future holders of
the Loans. In the case of any waiver, the Borrower, the Lenders and the Agent
shall be restored to their former positions and rights hereunder and under the
other Loan Documents, and any Default or Event of Default waived shall be deemed
to be cured and not continuing; but no such waiver shall extend to any
subsequent or other Default or Event of Default or impair any right consequent
thereon.
10.2 Notices. All notices, requests and demands to or upon the
-------
respective parties hereto to be effective shall be in writing (including by
facsimile transmission) and, unless otherwise expressly provided herein, shall
be deemed to have been duly given or made (a) in the case of delivery by hand,
when delivered, (b) in the case of delivery by mail, three days after being
deposited in the mails, postage prepaid, or (c) in the case of delivery by
facsimile transmission, when sent and receipt has been electronically confirmed,
addressed as follows in the case of the Borrower and the Agent, and as set forth
in Schedule I in the case of the other parties hereto, or to such other address
as may be hereafter notified by the respective parties hereto:
The Borrower: Healthcor Holdings, Inc.
8510 North Central Expressway, Suite M-2000
Dallas, Texas 75206
Attention: __________________________
Fax: ______________________________
with a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1700 Pacific Ave., Suite 4100
Dallas, Texas 75201
Attention: J. Kenneth Menges, Jr., P.C.
The Agent: Credit Suisse First Boston Management Corporation
11 Madison Avenue, 4th Floor
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<PAGE>
New York, New York 10038
Attention: Alex Lagetko
Fax: 212-325-8290
Funding Account: Citibank, N.A.
ABA #021000089
Account: Credit Suisse First Boston
Account #09253506
Attn: Demetri Catis, CSFB, 212-322-1365
provided that any notice, request or demand to or upon the Agent or the Lenders
- --------
pursuant to Section 2.3, 2.5 or 2.8(b) shall not be effective until received.
10.3 No Waiver; Cumulative Remedies. No failure to exercise and no
------------------------------
delay in exercising, on the part of the Agent or any Lender, any right, remedy,
power or privilege hereunder or under the other Loan Documents shall operate as
a waiver thereof; nor shall any single or partial exercise of any right, remedy,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, remedy, power or privilege. The rights,
remedies, powers and privileges herein provided are cumulative and not exclusive
of any rights, remedies, powers and privileges provided by law.
10.4 Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made hereunder, in the other Loan Documents and
in any document, certificate or statement delivered pursuant hereto or in
connection herewith shall survive the execution and delivery of this Agreement
and the making of the Loans hereunder.
10.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay
-----------------------------
or reimburse the Agent for all its out-of-pocket costs and expenses incurred in
connection with the development, preparation and execution of, and any
amendment, supplement or modification to, this Agreement and the other Loan
Documents and any other documents prepared in connection herewith or therewith,
and the consummation and administration of the transactions contemplated hereby
and thereby, including, without limitation, the reasonable fees and
disbursements of counsel to the Agent, (b) to pay or reimburse each Lender and
the Agent for all its costs and expenses incurred in connection with the
enforcement or preservation of any rights under this Agreement, the other Loan
Documents and any such other documents, including, without limitation, the fees
and disbursements of counsel (including the allocated fees and expenses of in-
house counsel) to each Lender and of counsel to the Agent, (c) to pay,
indemnify, and hold each Lender and the Agent harmless from, any and all
recording and filing fees and any and all liabilities with respect to, or
resulting from any delay in paying, stamp, excise and other taxes, if any, which
may be payable or determined to be payable in connection with the execution and
delivery of, or consummation or administration of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Agreement, the other Loan Documents and
any such other documents, and (d) to pay, indemnify, and hold each Lender and
the Agent harmless from and against any and all other liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever
55
<PAGE>
with respect to the execution, delivery, enforcement, performance and
administration of this Agreement, the other Loan Documents, the Exchange Offer,
the Recapitalization or the use of the proceeds of the Loans and any such other
documents, including, without limitation, any of the foregoing relating to the
violation of, noncompliance with or liability under, any Environmental Law
applicable to the operations of the Borrower, any of its Subsidiaries, the
Parent or any of the Properties (all the foregoing in this clause (d),
collectively, the "indemnified liabilities"), provided, that the Borrower shall
----------------------- --------
have no obligation hereunder to the Agent or any Lender with respect to
indemnified liabilities arising from (i) the gross negligence or willful
misconduct of the Agent or any such Lender or (ii) legal proceedings commenced
against the Agent or any such Lender by any security holder or creditor thereof
arising out of and based upon rights afforded any such security holder or
creditor solely in its capacity as such. The agreements in this Section shall
survive repayment of the Loans and all other amounts payable hereunder.
10.6 Successors and Assigns; Participations and Assignments.
------------------------------------------------------
(a) This Agreement shall be binding upon and inure to the benefit of
the Borrower, the Lenders, the Agent and their respective successors and
assigns, except that the Borrower may not assign or transfer any of its rights
or obligations under this Agreement without the prior written consent of each
Lender.
(b) Any Lender may, in the ordinary course of its commercial banking
business and in accordance with applicable law, at any time sell to one or more
banks or other entities ("Participants") participating interests in any Loan
------------
owing to such Lender, any Commitment of such Lender or any other interest of
such Lender hereunder and under the other Loan Documents. In the event of any
such sale by a Lender of a participating interest to a Participant, such
Lender's obligations under this Agreement to the other parties to this Agreement
shall remain unchanged, such Lender shall remain solely responsible for the
performance thereof, such Lender shall remain the holder of any such Loan for
all purposes under this Agreement and the other Loan Documents, and the Borrower
and the Agent shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement and
the other Loan Documents. The Borrower agrees that if amounts outstanding under
this Agreement are due or unpaid, or shall have been declared or shall have
become due and payable upon the occurrence of an Event of Default, each
Participant shall, to the maximum extent permitted by applicable law, be deemed
to have the right of setoff in respect of its participating interest in amounts
owing under this Agreement to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under this
Agreement, provided that, in purchasing such participating interest, such
--------
Participant shall be deemed to have agreed to share with the Lenders the
proceeds thereof as provided in Section 10.7(a) as fully as if it were a Lender
hereunder. The Borrower also agrees that each Participant shall be entitled to
the benefits of Sections 2.9 and 2.10 with respect to its participation in the
Commitments and the Loans outstanding from time to time as if it was a Lender;
provided that, in the case of Section 2.10, such Participant shall have complied
- --------
with the requirements of said Section and provided, further, that no Participant
-------- -------
shall be entitled to receive any greater amount pursuant to any such Section
than the transferor Lender would have been entitled to receive in respect of the
amount of the participation transferred by such transferor
56
<PAGE>
Lender to such Participant had no such transfer occurred.
(c) Any Lender may, in accordance with applicable law, at any time
and from time to time assign to any Lender or any affiliate thereof or, with the
consent of the Agent (which shall not be unreasonably withheld), to an
additional bank or financial institution ("an Assignee") all or any part of its
--------
rights and obligations under this Agreement and the other Loan Documents
pursuant to an Assignment and Acceptance, substantially in the form of Exhibit
J, with appropriate completions (an "Assignment and Acceptance"), executed by
-------------------------
such Assignee, such assigning Lender (and, in the case of an Assignee that is
not then a Lender or an affiliate thereof, by the Agent) and delivered to the
Agent for its acceptance and recording in the Register. Upon such execution,
delivery, acceptance and recording, from and after the effective date determined
pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be
a party hereto and, to the extent provided in such Assignment and Acceptance,
have the rights and obligations of a Lender hereunder with Commitments as set
forth therein, and (y) the assigning Lender thereunder shall, to the extent
provided in such Assignment and Acceptance, be released from its obligations
under this Agreement (and, in the case of an Assignment and Acceptance covering
all or the remaining portion of an assigning Lender's rights and obligations
under this Agreement, such assigning Lender shall cease to be a party hereto).
(d) The Agent, on behalf of the Borrower, shall maintain at the
address of the Agent referred to in Section 10.2 a copy of each Assignment and
Acceptance delivered to it and a register (the "Register") for the recordation
--------
of the names and addresses of the Lenders and the Commitment of, and principal
amount of the Loans owing to, each Lender from time to time. The entries in the
Register shall be conclusive, in the absence of manifest error, and the
Borrower, the Agent and the Lenders may (and, in the case of any Loan or other
obligation hereunder not evidenced by a Note, shall) treat each Person whose
name is recorded in the Register as the owner of a Loan or other obligation
hereunder as the owner thereof for all purposes of this Agreement and the other
Loan Documents, notwithstanding any notice to the contrary. Any assignment of
any Loan or other obligation hereunder not evidenced by a Note shall be
effective only upon appropriate entries with respect thereto being made in the
Register. The Register shall be available for inspection by the Borrower or any
Lender at any reasonable time and from time to time upon reasonable prior
notice.
(e) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an Assignee (and, in the case of an Assignee that is not
then a Lender or an affiliate thereof, by the Agent) together with payment to
the Agent of a registration and processing fee of $3,500, the Agent shall (i)
promptly accept such Assignment and Acceptance and (ii) on the effective date
determined pursuant thereto record the information contained therein in the
Register and give notice of such acceptance and recordation to the Lenders and
the Borrower.
(f) The Borrower authorizes each Lender to disclose to any
Participant or Assignee (each, a "Transferee") and any prospective Transferee,
subject to the provisions of
57
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Section 10.16, any and all financial information in such Lender's possession
concerning the Borrower and its Affiliates which has been delivered to such
Lender by or on behalf of the Borrower pursuant to this Agreement or which has
been delivered to such Lender by or on behalf of the Borrower in connection with
such Lender's credit evaluation of the Borrower and its Affiliates prior to
becoming a party to this Agreement.
(g) For avoidance of doubt, the parties to this Agreement acknowledge
that the provisions of this Section concerning assignments of Loans and Notes
relate only to absolute assignments and that such provisions do not prohibit
assignments creating security interests, including, without limitation, any
pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank
in accordance with applicable law.
10.7 Adjustments; Set-off. (a) If any Lender (a "benefited
-------------------- ---------
Lender") shall at any time receive any payment of all or part of its Loans, or
interest thereon, or receive any collateral in respect thereof (whether
voluntarily or involuntarily, by set-off, pursuant to events or proceedings of
the nature referred to in Section 7(f), or otherwise), in a greater proportion
than any such payment to or collateral received by any other Lender, if any, in
respect of such other Lender's Loans, or interest thereon, such benefited Lender
shall purchase for cash from the other Lenders a participating interest in such
portion of each such other Lender's Loan, or shall provide such other Lenders
with the benefits of any such collateral, or the proceeds thereof, as shall be
necessary to cause such benefited Lender to share the excess payment or benefits
of such collateral or proceeds ratably with each of the Lenders; provided,
--------
however, that if all or any portion of such excess payment or benefits is
- -------
thereafter recovered from such benefited Lender, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest. The Borrower agrees that each Lender so
purchasing a portion of another Lender's Loan may exercise all rights of payment
(including, without limitation, rights of set-off) with respect to such portion
as fully as if such Lender were the direct holder of such portion.
(b) In addition to any rights and remedies of the Lenders provided by
law, each Lender shall have the right, without prior notice to the Borrower, any
such notice being expressly waived by the Borrower to the extent permitted by
applicable law, upon any amount becoming due and payable by the Borrower
hereunder (whether at the stated maturity, by acceleration or otherwise) to set-
off and appropriate and apply against such amount any and all deposits (general
or special, time or demand, provisional or final), in any currency, and any
other credits, indebtedness or claims, in any currency, in each case whether
direct or indirect, absolute or contingent, matured or unmatured, at any time
held or owing by such Lender or any branch or agency thereof to or for the
credit or the account of the Borrower. Each Lender agrees promptly to notify
the Borrower and the Agent after any such set-off and application made by such
Lender, provided that the failure to give such notice shall not affect the
--------
validity of such set-off and application.
10.8 Counterparts. This Agreement may be executed by one or more
------------
of the parties to this Agreement on any number of separate counterparts
(including by facsimile transmission of signature pages hereto), and all of said
counterparts taken together shall be
58
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deemed to constitute one and the same instrument. A set of the copies of this
Agreement signed by all the parties shall be lodged with the Borrower and the
Agent.
10.9 Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10.10 Integration. This Agreement and the other Loan Documents
-----------
represent the agreement of the Borrower, the Agent and the Lenders with respect
to the subject matter hereof, and there are no promises, undertakings,
representations or warranties by the Agent or any Lender relative to subject
matter hereof not expressly set forth or referred to herein or in the other Loan
Documents.
10.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
-------------
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
10.12 Submission To Jurisdiction; Waiver. The Borrower hereby
-----------------------------------
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which
it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the courts of
the State of New York, the courts of the United States of America for the
Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to the
Borrower at its address set forth in Section 10.2 or at such other address
of which the Agent shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction; and
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(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to
in this Section any special, exemplary, punitive or consequential damages.
10.13 Acknowledgments. The Borrower hereby acknowledges that:
---------------
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents;
(b) neither the Agent nor any Lender has any fiduciary relationship
with or duty to the Borrower arising out of or in connection with this
Agreement or any of the other Loan Documents, and the relationship between
the Borrower and the other Loan Parties, on one hand, and Agent and
Lenders, on the other hand, in connection herewith or therewith is solely
that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents
or otherwise exists by virtue of the transactions contemplated hereby among the
Lenders or among the Borrower and the Lenders.
10.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE AGENT AND THE
---------------------
LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND
FOR ANY COUNTERCLAIM THEREIN.
10.15 Confidentiality. Each Lender agrees to keep confidential all
---------------
non-public information provided to it by the Borrower pursuant to this Agreement
that is designated by the Borrower in writing as confidential]; provided that
--------
nothing herein shall prevent any Lender from disclosing any such information (i)
to the Agent or any other Lender, (ii) to any Transferee which agrees to comply
with the provisions of this Section 10.15, (iii) to its employees, directors,
agents, attorneys, accountants and other professional advisors, (iv) upon the
request or demand of any examiner or other Governmental Authority having
jurisdiction over such Lender, (v) in response to any order of any court or
other Governmental Authority or as may otherwise be required pursuant to any
Requirement of Law, (vi) which has been publicly disclosed other than in breach
of this Agreement, or (vii) in connection with the exercise of any remedy
hereunder.
10.16 Limitation on Interest. It is the intention of the parties
----------------------
hereto and to the Subsidiaries Guarantee to comply with all applicable usury
laws, whether now existing or hereafter enacted. Accordingly, notwithstanding
any provision to the contrary in this Loan Agreement, the Note, the other Loan
Documents or any other document evidencing, securing, guaranteeing or otherwise
pertaining to indebtedness of the Borrower or the Subsidiary Guarantors to the
Agent or the Lenders, in no contingency or event whatsoever, whether by
acceleration of the maturity of indebtedness of the Borrower or the Subsidiary
Guarantors to the Agent or the Lenders or otherwise, shall the interest
contracted for, charged or received by the Agent or the Lenders exceed the
maximum amount permissible under applicable law. If
60
<PAGE>
from any circumstances whatsoever fulfillment of any provisions of this Loan
Agreement, the Note, the other Loan Documents or of any other document
evidencing, securing, guaranteeing or otherwise pertaining to indebtedness of
the Borrower or the Subsidiary Guarantors to the Agent or the Lender, at the
time performance of such provision shall be due, shall involve transcending the
limit of validity prescribed by law, then, ipso facto, the obligation to be
fulfilled shall be reduced to the limit of such validity, and if from any such
circumstances the Agent or the Lenders shall ever receive anything of value as
interest or deemed interest by applicable law under this Loan Agreement, the
Note, the other Loan Documents or any other document evidencing, securing,
guaranteeing or otherwise pertaining to indebtedness of the Borrower or the
Subsidiary Guarantors to the Agent or the Lenders or otherwise an amount that
would exceed the highest lawful amount, such amount that would be excessive
interest shall be applied to the reduction of the principal amount owing in
connection with this Loan Agreement or on account of any other indebtedness of
the Borrower or the Subsidiary Guarantors to the Agent or the Lender, and not to
the payment of interest, or if such excessive interest exceeds the unpaid
balance of principal owing in connection with this Loan Agreement and such other
indebtedness, such excess shall be refunded to the Borrower or the Subsidiary
Guarantors. In determining whether or not the interest paid or payable with
respect to indebtedness of the Borrower or the Subsidiary Guarantors to the
Agent or the Lender, under any specific contingency, exceeds the maximum
nonusurious rate permitted under applicable law, the Borrower or the Subsidiary
Guarantors and the Agent or the Lender shall, to the maximum extent permitted by
applicable law, (a) characterize any non-principal payment as an expense, fee or
premium rather than as interest, (b) exclude voluntary prepayments and the
effects thereof, (c) amortize, prorate, allocate and spread the total amount of
interest throughout the full term of such indebtedness so that the actual rate
of interest on account of such indebtedness does not exceed the maximum amount
permitted by applicable law, and/or (d) allocate interest between portions of
such indebtedness, to the end that no such portion shall bear interest at a rate
greater than that permitted by law. The terms and provisions of this paragraph
shall control and supersede every other conflicting provision of this Loan
Agreement, the Note and the other Loan Documents.
[Signature Pages Follow]
61
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
HEALTHCOR HOLDINGS, INC.
By:
---------------------------------------------
Title:
CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION,
as Agent and as a Lender
By:
---------------------------------------------
Title:
62
<PAGE>
ELLIOT ASSOCIATES, L.P.
as a Lender
By:
---------------------------------------------
Title:
63
<PAGE>
EXHIBIT G
CERTIFICATE
Reference is hereby made to the Convertible Loan Agreement, dated as
of December 23, 1998, among Healthcor Holdings, Inc., the lenders parties
thereto, and Credit Suisse First Boston Management Corporation as agent (as
amended, restated, supplemented or otherwise modified from time to time, the
"Agreement"). Pursuant to the provisions of Section 2.10(b)(i)(B) of the
- ----------
Agreement, the undersigned hereby certifies that it is not a "bank" as such term
is defined in Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as
amended.
[NAME OF LENDER]
By:
---------------------------------------------
Title:
Date: , 19__
--------
Schedule 1.1(a)
MILESTONES
1. The Borrower shall, within twenty Business Days after the Closing
Date, prepare and file with the Securities and Exchange Commission
("Commission") a registration statement under the Securities Act of 1933, as
----------
amended (the "Securities Act"), to effect the registration of the offer of the
--------------
Split Rate Subordinated Notes and Convertible PIK Preferred Stock (collectively,
the "New Securities") under the Exchange Offer.
--------------
2. The Borrower shall use its best efforts to have the Registration
Statement declared effective under the Securities Act within 45 days after such
filing and maintain the effectiveness of the Registration Statement for such
period of time as is necessary to effect the offer and sale of the New
Securities.
3. The Borrower shall use its best efforts to obtain, prior to the
effective date of the Registration Statement, all necessary state securities law
or "Blue Sky" permits or approvals in connection with the issuance of the New
Securities in the Exchange Offer.
4. The Borrower shall advise the Agent (promptly after it receives
notice thereof) of the time when the Registration Statement has become
effective, of any supplement or amendment that has been filed, of the issuance
of any stop order, of the suspension of the qualification of the New Securities
for offering or sale in any jurisdiction, or of any request by the Commission
for amendment of the Registration Statement or for additional information.
64
<PAGE>
Schedule 1.1(b)
TERMS OF CONVERTIBLE PIK PREFERRED STOCK
See Attached
65
<PAGE>
Schedule 1.1(c)
TERMS OF SPLIT RATE SUBORDINATED NOTES
See Attached
66
<PAGE>
Schedule 8.1
STOCK LEGEND
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED,
QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. NEITHER THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY
AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES.
67
<PAGE>
AMENDMENT
AMENDMENT, dated as of February 22, 1999 (this "Amendment"), to the
---------
Convertible Loan Agreement, dated as of December 23, 1999 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Loan
----
Agreement"), among HEALTHCOR HOLDINGS, INC., (the "Borrower"), the several
--------
lenders from time to time parties thereto (the "Lenders") and CREDIT SUISSE
-------
FIRST BOSTON MANAGEMENT CORPORATION, as agent (in such capacity, the "Agent")
-----
for the Lenders.
RECITALS
Pursuant to the Post-Closing Agreement, dated as of December 23, 1999,
between Borrower and Agent on behalf of the Lenders, the Borrower agreed to
negotiate with the Agent and the Lenders to develop, execute, and deliver an
amendment to the Loan Agreement clarifying the provisions of Section 6.1(a) of
the Loan Agreement, adding new covenants to Section 6.1, and adding certain
additional financial performance covenants. The Borrower and the Agent on behalf
of the Lenders have agreed to the terms of such amendment as set forth in this
Amendment.
The Borrower has requested that the Lenders lend to the Borrower an
additional $900,000 pursuant to the Loan Agreement, as amended by this
Amendment, and the Lenders have agreed to do so, but only on the terms and
subject to the conditions set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Agent hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Loan Agreement are used herein as therein defined.
2. Amendments.
----------
(a) Section 1.1 of the Loan Agreement is hereby amended by amending the
following definitions in their entirety to read as follows:
"Commitment": as to any Lender, collectively, such Lender's Initial
----------
Commitment and Supplemental Commitment.
"Loan": collectively, the Initial Loan and the Supplemental Loan.
----
(b) Section 1.1 of the Loan Agreement is hereby amended by adding the
following new definitions thereto in the appropriate alphabetical order:
<PAGE>
"Cash Uses": for any period, the aggregate cash payments in
---------
respect of direct salaries, other direct costs, indirect salaries,
other indirect costs, third payroll, interest expense in respect of
Indebtedness and other amounts owing pursuant to the HCFP Loan
Documents, interest expense on Financing Leases, interest expense on
the Loan, and other cash expenses, in each case as such amounts would
be shown on a statement of cash flows of the Borrower and its
consolidated Subsidiaries prepared for such period in accordance with
GAAP.
"Consolidated EBITDA": for any period, the sum for such period
-------------------
of (a) Consolidated Net Income for such period, (b) to the extent
deducted in calculating Consolidated Net Income, the sum of provisions
for such period for income taxes, interest expense, and depreciation
and amortization expense, (c) to the extent deducted in calculating
Consolidated Net Income, amounts deducted in such period in respect of
non-cash expenses in accordance with GAAP, and (d) to the extent
deducted in calculating Consolidated Net Income, the amount of any
aggregate net loss (or minus the amount of any gain) during such
period arising from the sale, exchange or other disposition of capital
assets; provided, that Consolidated EBITDA shall in any event exclude,
--------
from and after the Closing Date the amount of any non-cash income
recognized during any period for which Consolidated EBITDA is
determined.
"Consolidated Net Income": for any period, the consolidated net
-----------------------
income (or deficit) of the Borrower and its Subsidiaries for such
period (taken as a cumulative whole), determined on a consolidated
basis in accordance with GAAP; provided that there shall be excluded
--------
from Consolidated Net Income (a) the income (or deficit) of any Person
accrued prior to the date it becomes a Subsidiary or is merged into or
consolidated with the Borrower or any Subsidiary, (b) the income (or
deficit) of any Person (other than a Subsidiary) in which the Borrower
or any Subsidiary has an ownership interest, except to the extent that
any such income has been actually received by the Borrower or such
Subsidiary in the form of dividends or similar distributions, (c) the
undistributed earnings of any Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Subsidiary is not at the time permitted by the terms of any
Contractual Obligation or Requirement of Law applicable to such
Subsidiary, (d) any restoration to income of any contingency reserve,
except to the extent that provision for such reserve was made out of
income accrued during such period, (e) any aggregate net gain (but not
any aggregate net loss) during such period arising from the sale,
exchange or other disposition of capital assets (such term to include
all fixed assets, whether tangible or intangible, all inventory sold
in conjunction with the disposition of fixed assets and all
securities), (f) any write-up of any asset, (g) any net gain from the
collection of the proceeds of life insurance policies, (h) any gain
arising from the acquisition of any securities, or the extinguishment,
under GAAP, of any Indebtedness, of the Borrower or any Subsidiary,
(i) in the case of a successor to the Borrower by consolidation or
merger or as a transferee of its assets, any,
-2-
<PAGE>
earnings of the successor corporation prior to such consolidation,
merger or transfer of assets, (j) any deferred credit representing the
excess of equity in any Subsidiary at the date of acquisition over the
cost of the investment in such Subsidiary, (k) any non-cash
compensation expense in connection with the issuance of employee stock
options, and (l) any extraordinary or nonrecurring gain (but not
loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain.
"Initial Commitment": as to any Lender, its obligation to make
------------------
an Initial Loan to the Borrower on the Closing Date pursuant to
Section 2.1(a) in the amount set forth opposite such Lender's name on
Schedule I under the caption "Initial Loan".
"Initial Loan": as to any Lender, the term loan made by such
------------
Lender on the Closing Date pursuant to the Initial Commitment of such
Lender.
"Supplemental Closing Date": the date on which the conditions
-------------------------
precedent to the effectiveness of this Amendment set forth in Section
3 of this Amendment shall have been satisfied or waived.
"Supplemental Commitment": as to any Lender, its obligation to
-----------------------
make a Supplemental Loan to the Borrower pursuant to Section 2.1(b) in
the amount set forth opposite such Lender's name on Schedule I under
the caption "Supplemental Loan".
"Supplemental Note Endorsement": with respect to the Note of
-----------------------------
each Lender, the promissory note endorsement made by the Borrower,
substantially in the form of Exhibit A-1 to this Amendment, modifying
the Note of such Lender (as in effect prior to the Supplemental
Closing Date) to take account of the Supplemental Commitment of such
Lender.
"Supplemental Loan": as to any Lender, the term loan made by
-----------------
such Lender on the Supplemental Closing Date pursuant to the
Supplemental Commitment of such Lender.
(c) Section 2.1 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.1 to
read as follows:
"2.1 Commitments. (a) Each Lender made an Initial Loan to the
-----------
Borrower on the Closing Date in an amount equal to the amount of the
Initial Commitment of such Lender.
(b) Subject to the terms and conditions hereof, each Lender severally
agrees to make a Supplemental Loan to the Borrower on the Supplemental
Closing Date in an amount not to exceed the amount of the Supplemental
Commitment of such Lender then in effect; provided that the Supplemental
--------
Commitments shall terminate at 3:00 p.m.,
-3-
<PAGE>
New York City time, on February 22, 1999, if the Supplemental Loans have
not been made prior to that time.
(d) Section 2.2 of the Loan Agreement is hereby amended by deleting the
parenthetical phrase "(a "Note")" and substituting in lieu thereof the phrase
----
"(as supplemented by a Supplemental Note Endorsement, a "Note")".
----
(e) Section 2.3 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.3 to
read as follows:
"2.3 Procedure for Borrowing. The Borrower shall give the Agent
-----------------------
irrevocable notice (which notice must be received by the Agent prior to
10:00 a.m., New York City time on the Closing Date or Supplemental Closing
Date, as applicable, requesting that the Lenders make Initial Loans on the
Closing Date or Supplemental Loans on the Supplemental Closing Date, as
applicable, and specifying (i) the Closing Date or the Supplemental Closing
Date, as applicable, and (ii) the amount to be borrowed. Not later than
11:00 a.m. on the Closing Date or the Supplemental Closing Date, as
applicable, each Lender shall make available to the Agent at its office or
to the account maintained by it, as specified in Section 10.2, the amount
of such Lender's Initial Loan or Supplemental Loan, as applicable, in
immediately available funds. The Agent shall on such date make available to
the Borrower the aggregate of the amounts made available to the Agent by
the Lenders, to such account of the Borrower as may be specified by the
Borrower in writing to the Agent.
(f) The Loan Agreement is hereby amended by adding a new Section 2.12 to
read as follows:
"2.12 Use of Supplemental Loan Proceeds. The Borrower shall use
---------------------------------
the proceeds of the Supplemental Loan disbursed to it solely for the
purposes set forth on Schedule 2.12 hereto."
(g) The Loan Agreement is hereby amended by adding a new Section 2.13 to
read as follows:
"2.13 Return of Supplemental Loan Proceeds. In the event the Borrower
------------------------------------
has not retained The Palmeri Company by February 25, 1999, the Borrower
shall, on such date, return to the Agent, for the ratable account of the
Lenders who made a Supplemental Loan, $300,000 in immediately available
funds to such account of the Agent as may be specified by the Agent in
writing to the Borrower."
(h) The Loan Agreement is hereby amended by deleting Section 6.1(a) in its
entirety and substituting in lieu thereof the following new Section 6.1(a):
"(a) Minimum Cash Collections on Accounts Receivable. Permit
-----------------------------------------------
the cash collections on accounts receivable of the Borrower and its
consolidated
-4-
<PAGE>
Subsidiaries during any fiscal quarter set forth below to be less than
the amount set forth opposite such fiscal quarter below:
<TABLE>
<CAPTION>
Quarter Ending Amount
-------------- ------
<S> <C>
3/31/99 $21,982,000
6/30/99 $23,397,000
9/30/99 $22,147,000
12/31/99 $20,781,000
</TABLE>
(i) The Loan Agreement is hereby amended by deleting Section 6.1(b) in its
entirety and substituting in lieu thereof the following new Section 6.1(b):
"(b) Maximum Cash Uses. Permit the Cash Uses of the Borrower
-----------------
and its consolidated Subsidiaries to exceed during any fiscal quarter
set forth below the amount set forth opposite such fiscal quarter
below:
<TABLE>
<CAPTION>
Quarter Ending Amount
-------------- ------
<S> <C>
3/31/99 $21,720,000
6/30/99 $20,128,000
9/30/99 $21,674,000
12/31/99 $20,288,000
</TABLE>
(j) The Loan Agreement is hereby amended by adding to Section 6.1 thereof
the following new subsection 6.1(d):
"(d) Minimum Consolidated EBITDA. Permit the Consolidated
---------------------------
EBITDA of the Borrower and its Subsidiaries for any fiscal quarter set
forth below to be less than the amount set forth opposite such fiscal
quarter below:
<TABLE>
<CAPTION>
Quarters Ending Amount
--------------- ------
<S> <C>
3/31/99 $ 1,528,000
6/30/99 $ 3,796,000
9/30/99 $ 2,843,000
12/31/99 $ 4,833,000"
</TABLE>
-5-
<PAGE>
(k) Section 6.2 of the Loan Agreement is hereby amended by deleting the
word "and" at the end of clause (f) thereof, by deleting "." at the end of
clause (g) thereof and substituting in lieu thereof the phrase "; and", and by
adding at the end thereof the following new subsection:
"(h) Indebtedness of the Borrower and any of its Subsidiaries
incurred pursuant to short-term credit facilities solely for working
capital purposes, provided that the aggregate outstanding amount of
--------
such Indebtedness, together with Indebtedness permitted to be
outstanding pursuant to Sections 6.2(a) and (d), shall not at any time
exceed $18,000,000."
(l) Section 6.3 of the Loan Agreement is hereby amended by deleting the
word "and" at the end of clause (h) thereof, by deleting "." at the end of
clause (i) thereof and substituting in lieu thereof the phrase "; and", and by
adding at the end thereof the following new subsection:
"(j) Liens securing Indebtedness incurred pursuant to Section
6.2(h)."
(m) The Loan Agreement is hereby amended by deleting Section 6.9 in its
entirety and substituting in lieu thereof the following new Section 6.9:
"6.9 Limitation on Capital Expenditures. Make or commit to make
----------------------------------
(by way of the acquisition of securities of a Person or otherwise) any
expenditure in respect of the purchase or other acquisition of fixed or
capital assets (excluding any such asset acquired in connection with
normal replacement and maintenance programs properly charged to current
operations) except for expenditures in the ordinary course of business
not exceeding, in the aggregate for the Borrower and its Subsidiaries,
$500,000 for each quarter during the term of this Agreement, provided
--------
that any portion of such amount if not so expended during the quarter
for which it is permitted may be carried forward to the immediately
following quarter."
(n) Schedule I is hereby amended by deleting such Schedule in its entirety
and substituting in lieu thereof Schedule I to this Amendment.
(o) The Loan Agreement is hereby amended by adding thereto Schedule 2.12 to
this Amendment.
3. Effectiveness. This Amendment shall become effective upon (a) receipt
-------------
by the Agent of evidence satisfactory to the Agent that this Amendment has been
executed and delivered by the Borrower, the Required Lenders and each of the
Subsidiary Guarantors and (b) for the account of each Lender having a
Supplemental Commitment, a Supplemental Note Endorsement of the Borrower
conforming to the requirements hereof and executed by a duly authorized officer
of the Borrower.
-6-
<PAGE>
4. Representations and Warranties. To induce the Agent and the Lenders to
------------------------------
enter into this Amendment and to lend the amount of the Supplemental Loan, the
Borrower hereby represents and warrants to the Agent and the Lenders that, after
giving effect to the amendments provided for herein, the representations and
warranties contained in the Loan Agreement and the other Loan Documents will be
true and correct in all material respects as if made on and as of the date
hereof and that no Default or Event of Default will have occurred and be
continuing.
5. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Supplemental Note Endorsement, the Loan Agreement, the Notes and the other Loan
Documents shall remain in full force and effect in accordance with their
respective terms, without any waiver, amendment or modification of any provision
thereof.
6. Counterparts. This Amendment may be executed by one or more of the
------------
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. Expenses. The Borrower agrees to pay and reimburse the Agent for all
--------
of the out-of-pocket costs and expenses incurred by the Agent in connection with
the preparation, execution and delivery of this Amendment, including, without
limitation, the fees and disbursements of Cadwalader, Wickersham & Taft, counsel
to the Agent.
8. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
--------------
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.
HEALTHCOR HOLDINGS, INC.
By:_______________________________
Title:
CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION,
as Agent
By:_______________________________
Title:
-8-
<PAGE>
The undersigned Lenders hereby consent and agree to the foregoing
Amendment:
CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION
By:_______________________________
Title:
ELLIOTT ASSOCIATES, L.P.
By:_______________________________
Title:
-9-
<PAGE>
The undersigned guarantors hereby consent and agree to the foregoing
Amendment:
HEALTHCOR, INC.
By:_______________________________
Title:
HEALTHCOR OXYGEN & MEDICAL
EQUIPMENT, INC.
By:_______________________________
Title:
HEALTHCOR PHARMACY, INC.
By:_______________________________
Title:
PHHN, INC.
By:_______________________________
Title:
HEALTHCOR REHABILITATION SERVICES,
INC.
By:_______________________________
Title:
-10-
<PAGE>
HC PERSONNEL RESOURCES, INC.
By:_______________________________
Title:
CARENETWORK, INC.
By:_______________________________
Title:
-11-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
LENDERS, COMMITMENTS AND APPLICABLE LENDING OFFICES
- ---------------------------------------------------------------------------------------------------------------------------
Initial Loan Supplemental Loan
Lender and Lending Offices
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Credit Suisse First Boston Management $5,000,000 $900,000
Corporation
Applicable Lending Offices:
11 Madison Avenue
4th Floor
New York, New York 10038
Attention: Alex Lagetko
Telephone: 212-325-3810
Telecopy: 212-325-8290
- ---------------------------------------------------------------------------------------------------------------------------
Elliott Associates, L.P. $ 1,000,000 $ 0
Applicable Lending Offices:
712 5th Avenue, 35th Floor
New York, New York 10019
Attention: Richard Mansouri
Telephone: 212-506-2999
Telecopy: 212-974-2092
- ---------------------------------------------------------------------------------------------------------------------------
Total: $6,000,000.00 $900,000.00
============= ===========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-12-
<PAGE>
SCHEDULE 2.12
USE OF PROCEEDS FROM SUPPLEMENTAL LOAN
1. $600,000 to cover overfunding under the HCFP Loan Agreement.
2. $300,000 to cover the retention fee of The Palmieri Company, subject to
receipt by the Borrower of approval of its Board of Directors for such retention
and expenditure.
<PAGE>
SECOND AMENDMENT
SECOND AMENDMENT, dated as of March 2, 1999 (this "Second Amendment"), to
----------------
the Convertible Loan Agreement, dated as of December 23, 1998 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Loan
----
Agreement"), among HEALTHCOR HOLDINGS, INC., (the "Borrower"), the several
--------
lenders from time to time parties thereto (the "Lenders") and CREDIT SUISSE
-------
FIRST BOSTON MANAGEMENT CORPORATION, as agent (in such capacity, the "Agent")
-----
for the Lenders.
RECITALS
WHEREAS pursuant to the Amendment to the Loan Agreement, dated as of
February 22, 1999, among the Borrower, the Lenders, and the Agent, the Loan
Agreement was amended to increase the Loan made thereunder by $900,000.
WHEREAS the Borrower has informed the Agent and the Lenders that it has
retained CKM LLC ("CKM") for the purposes of selling, in a single transaction
---
or series of transactions, all or substantially all of the assets of the
Borrower (each such transaction, a "Sale") and that CKM has, is, and will be
----
providing the Borrower with such services as necessary to effectuate one or more
Sales.
WHEREAS the Borrower has requested that the Lenders lend to the Borrower an
additional $2,000,000 pursuant to the Loan Agreement, as amended by this Second
Amendment, and the Lenders have agreed to do so, but only on the terms and
subject to the conditions set forth in this Second Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Agent hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Loan Agreement are used herein as therein defined.
2. Amendments.
----------
(a) The definition "Consolidated EBITDA" in Section 1.1 of the Loan
Agreement is hereby amended by deleting clause (d) thereof in its entirety and
substituting in lieu thereof the following new clause (d):
"(d) the amount of any aggregate net after-tax loss (or minus the
amount of any after-tax gain) during such period arising from the sale,
exchange or other disposition of capital assets outside the ordinary course
of business;"
<PAGE>
(b) Section 1.1 of the Loan Agreement is hereby amended by amending the
following definitions in their entirety to read as follows:
"Commitment": as to any Lender, collectively, such Lender's Initial
----------
Commitment, Supplemental Commitment, and Second Supplemental Commitment.
"Consolidated Net Income": for any period, the consolidated net
-----------------------
income (or deficit) of the Borrower and its Subsidiaries for such period
(taken as a cumulative whole), determined on a consolidated basis in
accordance with GAAP; provided that there shall be excluded from
--------
Consolidated Net Income (a) the income (or deficit) of any Person accrued
prior to the date it becomes a Subsidiary or is merged into or consolidated
with the Borrower or any Subsidiary, (b) the income (or deficit) of any
Person (other than a Subsidiary) in which the Borrower or any Subsidiary
has an ownership interest, except to the extent that any such income has
been actually received by the Borrower or such Subsidiary in the form of
dividends or similar distributions, (c) the undistributed earnings of any
Subsidiary to the extent that the declaration or payment of dividends or
similar distributions by such Subsidiary is not at the time permitted by
the terms of any Contractual Obligation or Requirement of Law applicable to
such Subsidiary, (d) any write-up of any asset, (e) any net gain from the
collection of the proceeds of life insurance policies, (f) any gain arising
from the acquisition of any securities, or the extinguishment, under GAAP,
of any Indebtedness, of the Borrower or any Subsidiary, (g) in the case of
a successor to the Borrower by consolidation or merger or as a transferee
of its assets, any earnings of the successor corporation prior to such
consolidation, merger or transfer of assets, (h) any deferred credit
representing the excess of equity in any Subsidiary at the date of
acquisition over the cost of the investment in such Subsidiary, (i) any
non-cash compensation expense in connection with the issuance of employee
stock options, and (j) any extraordinary or nonrecurring gain (but not
loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain.
"Loan": collectively, the Initial Loan, the Supplemental Loan, and the
----
Second Supplemental Loan.
(c) Section 1.1 of the Loan Agreement is hereby amended by adding the
following new definitions thereto in the appropriate alphabetical order:
"Second Supplemental Closing Date": the date on which the
--------------------------------
conditions precedent to the effectiveness of this Second Amendment set
forth in Section 3 of this Second Amendment shall have been satisfied
or waived.
"Second Supplemental Commitment": as to any Lender, its
------------------------------
obligation to make a Second Supplemental Loan to the Borrower pursuant
to Section 2.1(b) in the amount set forth opposite such Lender's name
on Schedule I under the caption "Second Supplemental Loan".
-2-
<PAGE>
"Second Supplemental Note Endorsement": with respect to the Note
------------------------------------
of each Lender, the promissory note endorsement made by the Borrower,
substantially in the form of Exhibit A to this Second Amendment,
modifying the Note of such Lender (as in effect prior to the Second
Supplemental Closing Date) to take account of the Second Supplemental
Commitment of such Lender.
"Second Supplemental Loan": as to any Lender, the term loan made
------------------------
by such Lender on the Second Supplemental Closing Date pursuant to the
Second Supplemental Commitment of such Lender.
(d) Section 2.1 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.1 to
read as follows:
"2.1 Commitments. (a) Each Lender made an Initial Loan to the
-----------
Borrower on the Closing Date in an amount equal to the amount of the
Initial Commitment of such Lender. Each Lender made a Supplemental Loan to
the Borrower on the Supplemental Closing Date in an amount equal to the
amount of the Supplemental Commitment of such Lender.
(b) Subject to the terms and conditions hereof, each Lender severally
agrees to make a Second Supplemental Loan to the Borrower on the Second
Supplemental Closing Date in an amount not to exceed the amount of the
Second Supplemental Commitment of such Lender then in effect; provided that
--------
the Second Supplemental Commitments shall terminate at 3:00 p.m., New York
City time, on March 2, 1999, if the Second Supplemental Loans have not been
made prior to that time.
(e) Section 2.2 of the Loan Agreement is hereby amended by deleting the
parenthetical phrase "(as supplemented by a Supplemental Note Endorsement, a
"Note")" and substituting in lieu thereof the phrase "(such promissory note, as
- -----
the same may be supplemented from time to time (including by a Supplemental Note
Endorsement and a Second Supplemental Note Endorsement), a "Note").
----
(f) Section 2.3 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.3 to
read as follows:
"2.3 Procedure for Borrowing. The Borrower shall give the Agent
-----------------------
irrevocable notice (which notice must be received by the Agent prior to
10:00 a.m., New York City time) on the Closing Date, the Supplemental
Closing Date, or the Second Supplemental Closing Date, as applicable,
requesting that the Lenders make Initial Loans on the Closing Date,
Supplemental Loans on the Supplemental Closing Date, or Second Supplemental
Loans on the Second Supplemental Closing, as applicable, and specifying (i)
the Closing Date, the Supplemental Closing Date, or the Second Supplemental
Closing Date, as applicable, and (ii) the amount to be borrowed. Not later
than 11:00 a.m. on the Closing Date, the Supplemental Closing Date, or the
Second Supplemental Closing Date, as applicable, each Lender shall make
available to the Agent at its office or to the account maintained by it, as
specified in Section 10.2,
-3-
<PAGE>
the amount of such Lender's Initial Loan, Supplemental Loan, or Second
Supplemental Loan, as applicable, in immediately available funds. The Agent
shall on such date make available to the Borrower the aggregate of the
amounts made available to the Agent by the Lenders, to such account of the
Borrower as may be specified by the Borrower in writing to the Agent.
(g) Section 2.12 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.12 to
read as follows:
"2.12 Use of Loan Proceeds. (a) The Borrower shall use the proceeds
--------------------
of the Supplemental Loan disbursed to it solely for the purposes set forth
on Schedule 2.12 hereto.
(b) Within one (1) Business Day after the Second Supplemental Closing
Date, the Borrower shall deliver to the Agent, in form and substance
satisfactory to the Agent, a writing setting forth the uses of the proceeds
of the Second Supplemental Loan and shall use such proceeds only for the
purposes and in accordance with the amounts specified therein.
(h) Section 5.12 of the Loan Agreement is hereby amended in its entirety
and substituting in lieu thereof a new Section 5.12 to read as follows:
"5.12 Amendment of 11% Senior Note Indenture. In connection with the
--------------------------------------
11% Senior Notes, the Borrower shall have consummated, within 10 Business
Days after the Second Supplemental Closing Date, with the trustee (the
"Trustee") under the 11% Senior Note Indenture, an amendment to the 11%
--------
Senior Note Indenture on the terms set forth on Schedule 5.12 hereto and
such other terms and conditions as the Borrower, the requisite holders of
the 11% Senior Notes, if applicable, the Trustee, and the Agent may
reasonably agree upon."
(i) Schedule I is hereby amended by deleting such Schedule in its entirety
and substituting in lieu thereof Schedule I to this Second Amendment.
(j) Schedule 1.1(a) is hereby amended by deleting such Schedule in its
entirety and substituting in lieu thereof Schedule 1.1(a) to this Second
Amendment.
(k) The Loan Agreement is hereby amended by adding thereto Schedule 5.12 of
this Second Amendment.
3. Effectiveness. This Second Amendment shall become effective upon:
-------------
(a) receipt by the Agent of evidence satisfactory to the Agent that this
Second Amendment has been executed and delivered by the Borrower, the Required
Lenders and each of the Subsidiary Guarantors;
-4-
<PAGE>
(b) for the account of each Lender having a Second Supplemental Commitment,
a Second Supplemental Note Endorsement of the Borrower conforming to the
requirements hereof and executed by a duly authorized officer of the Borrower;
(c) receipt by the Agent of a true and correct copy of Amendment No. 4 to
Loan and Security Agreement, dated as of March 1, 1999, between HCFP and the
Borrower, duly executed by the parties thereto and certified as to authenticity
by the Borrower.
4. Representations and Warranties. To induce the Agent and the Lenders to
------------------------------
enter into this Second Amendment and to lend the amount of the Second
Supplemental Loan, the Borrower hereby represents and warrants to the Agent and
the Lenders that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the other
Loan Documents will be true and correct in all material respects as if made on
and as of the date hereof and that no Default or Event of Default will have
occurred and be continuing.
5. Release. For and in consideration of the agreements contained in this
-------
Second Amendment and other good and valuable consideration, the receipt and
sufficiency of all of which are hereby acknowledged, the Borrower and the
Subsidiary Guarantors hereby do release and forever discharge the Lenders and
the Agent and their respective directors, officers, employees, agents, and
attorneys, from any and all claims, damages, liabilities, actions, causes of
actions, and suits, of every kind and nature whatsoever, arising out of, or in
any way related to, the Loan Agreement, as amended hereby, the Note, the other
Loan Documents and all agreements, documents and instruments related to any of
the foregoing, whether now known or unknown, which the Borrower and the
Subsidiary Guarantors have, own or hold, or at any time previously had, owned or
held, or at any time in the future may have, own or hold.
6. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Second Supplemental Note Endorsement, the Loan Agreement, the Notes and the
other Loan Documents shall remain in full force and effect in accordance with
their respective terms, without any waiver, amendment or modification of any
provision thereof.
7. Counterparts. This Amendment may be executed by one or more of the
------------
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Agent for all
--------
of the out-of-pocket costs and expenses incurred by the Agent in connection with
the preparation, execution and delivery of this Amendment, including, without
limitation, the fees and disbursements of Cadwalader, Wickersham & Taft, counsel
to the Agent.
9. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
--------------
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
-5-
<PAGE>
[SIGNATURE PAGES FOLLOW]
-6-
<PAGE>
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS SECOND AMENDMENT TO
BE DULY EXECUTED AND DELIVERED AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN.
HEALTHCOR HOLDINGS, INC.
By:_______________________________
Title:
CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION,
as Agent
By:_______________________________
Title:
-7-
<PAGE>
The undersigned Lenders hereby consent and agree to the foregoing
Amendment:
CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION
By:_______________________________
Title:
ELLIOTT ASSOCIATES, L.P.
By:_______________________________
Title:
-8-
<PAGE>
The undersigned guarantors hereby consent and agree to the foregoing
Amendment:
HEALTHCOR, INC.
By:_______________________________
Title:
HEALTHCOR OXYGEN & MEDICAL
EQUIPMENT, INC.
By:_______________________________
Title:
HEALTHCOR PHARMACY, INC.
By:_______________________________
Title:
PHHN, INC.
By:_______________________________
Title:
HEALTHCOR REHABILITATION SERVICES,
INC.
By:_______________________________
Title:
-9-
<PAGE>
HC PERSONNEL RESOURCES, INC.
By:_______________________________
Title:
CARENETWORK, INC.
By:_______________________________
Title:
-10-
<PAGE>
SCHEDULE I
LENDERS, COMMITMENTS AND APPLICABLE LENDING OFFICES
<TABLE>
<CAPTION>
INITIAL LOAN SUPPLEMENTAL LOAN SECOND SUPPLEMENTAL LOAN
LENDER AND LENDING OFFICES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Credit Suisse First Boston Management $ 5,000,000 $ 900,000 $2,000,000
Corporation
Applicable Lending Offices:
11 Madison Avenue
4TH Floor
New York, New York 10038
Attention: Alex Lagetko
Telephone: 212-325-3810
Telecopy: 212-325-8290
- ---------------------------------------------------------------------------------------------------------------------
Elliott Associates, L.P. $ 1,000,000 $ 0 $ 0
Applicable Lending Offices:
712 5TH Avenue, 35TH Floor
New York, New York 10019
Attention: Richard Mansouri
Telephone: 212-506-2999
Telecopy: 212-974-2092
- ---------------------------------------------------------------------------------------------------------------------
Total: $6,000,000.00 $900,000.00 $2,000,000
============= =========== ==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-11-
<PAGE>
Schedule 1.1(A)
MILESTONES
Within 10 Business Days after the Second Supplemental Closing Date, the
Borrower shall execute and deliver to the trustee (the "Trustee") under the 11%
-------
Senior Note Indenture an amendment to the 11% Senior Note Indenture on the terms
set forth on Schedule 5.12 hereto and such other terms and conditions as the
Borrower, the requisite holders of the 11% Senior Notes, if applicable, the
Trustee, and the Agent may reasonably agree upon.
-12-
<PAGE>
Schedule 5.12
TERMS OF AMENDMENT TO 11% SENIOR NOTE INDENTURE
(1) Substantially all of the assets of the Borrower and its Subsidiaries,
including accounts receivable and inventory, and including a pledge of all the
shares of the Company's subsidiaries, will secure repayment of the 11% Senior
Notes, subject only to the prior liens of HCFP under the HCFP Loan Documents and
the Agent under the Loan Agreement;
(2) proceeds of sale of assets or stock, including a sale of all or
substantially all of the Borrower (i.e., all sales other than sales of inventory
in the ordinary course) less costs of sale will be offered to the Noteholders in
redemption of the 11% Senior Notes;
(3) add or modify financial and other covenants (including limitations on
additional indebtedness, limitations on acquisitions, limitations on restricted
payments, minimum consolidated EBITDA and Debt-to-EBITDA ratio, limitations on
capital expenditures, limitation on capital lease obligations and limitations on
company's entering into certain lines of business) on substantially the terms of
covenants in draft indenture for proposed split rate senior subordinated notes,
circulated to the Borrower and the Borrower's counsel, among other parties, by
the Agent's counsel on or about 2/19/99; and
(4) CSFB and Elliott will agree to forbear from declaring a default under the
11% Senior Note Indenture for a 30-day period following the date of the
amendment, subject to further extensions. [Note: This agreement will be
implemented in connection with, rather than as a part of, the amendment to the
11% Senior Note Indenture.]
-13-
<PAGE>
Exhibit A
FORM OF SECOND SUPPLEMENTAL NOTE ENDORSEMENT
March 2, 1999
New York, New York
The undersigned Borrower hereby agrees with CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION (the "Lender") that the Note of the Borrower, dated
------
December 23, 1998, in the original principal amount of $5,900,000.00 (the
"Note"), to which this Second Supplemental Note Endorsement is attached, is
----
hereby amended by (a) deleting the amount "$5,900,000.00" where it first occurs
in the Note and substituting in lieu thereof the amount "$7,900,000.00", and (b)
deleting the first paragraph of the Note and substituting in lieu thereof the
following paragraph:
"FOR VALUE RECEIVED, the undersigned HEALTHCOR HOLDINGS, INC., a
Delaware corporation (the "Borrower"), hereby unconditionally promises to
--------
pay to the order of CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION (the
"Lender"), at the office of Credit Suisse First Boston Management
------
Corporation located at 11 Madison Avenue, New York, New York 10038, in
lawful money of the United States of America and in immediately funds, the
principal amount of SEVEN MILLION NINE HUNDRED THOUSAND DOLLARS
($7,900,000.00). The principal amount of this Note shall be payable in a
single installment payable on the Maturity Date."
This Second Supplemental Note Endorsement is given as a rearrangement
and amendment of the obligations of the Borrower to the Lender under the Note
and is not given in substitution therefor or extinguishment thereof. Except as
expressly amended by this Second Supplemental Note Endorsement, all of the terms
and conditions of the Note shall continue in full force and effect. This Second
Supplemental Note Endorsement shall constitute part of the Note and the Lender
is hereby authorized to attach this Second Supplemental Note Endorsement to the
Note and to insert the following legend on the face of the Note: "This Note has
been amended pursuant to the Second Supplemental Note Endorsement dated March 2,
1999."
Borrower: HEALTHCOR HOLDINGS, INC.
--------
By:
------------------------------
Name:
Title:
-14-
<PAGE>
Lender: CREDIT SUISSE FIRST BOSTON
------ MANAGEMENT CORPORATION
By:
------------------------------
Name:
Title:
-15-
<PAGE>
THIRD AMENDMENT
THIRD AMENDMENT, dated as of March 15, 1999 (this "Third Amendment"), to
---------------
the Convertible Loan Agreement, dated as of December 23, 1998 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Loan
----
Agreement"), among HEALTHCOR HOLDINGS, INC., (the "Borrower"), the several
--------
lenders from time to time parties thereto (the "Lenders") and CREDIT SUISSE
-------
FIRST BOSTON MANAGEMENT CORPORATION, as agent (in such capacity, the "Agent")
-----
for the Lenders.
RECITALS
WHEREAS pursuant to the Loan Agreement, the Lenders made the Loan in the
amount of $6,000,000 thereunder;
WHEREAS pursuant to the Amendment to the Loan Agreement, dated as of
February 22, 1999, among the Borrower, the Lenders, and the Agent, the Loan
Agreement was amended to increase the Loan made thereunder by $900,000;
WHEREAS pursuant to the Second Amendment to the Loan Agreement, dated as of
March 2, 1999, among the Borrower, the Lenders, and the Agent, the Loan
Agreement was amended to increase the Loan made thereunder by an additional
$2,000,000;
WHEREAS the Borrower has informed the Agent and the Lenders that it has
retained CKM LLC ("CKM") for the purposes of selling, in a single transaction
---
or series of transactions, all or substantially all of the assets of the
Borrower (each such transaction, a "Sale") and that CKM has, is, and will be
----
providing the Borrower with such services as necessary to effectuate one or more
Sales;
WHEREAS the Borrower has requested that the Lenders lend to the Borrower an
additional $2,000,000 pursuant to the Loan Agreement, as amended by this Third
Amendment, and the Lenders have agreed to do so, but only on the terms and
subject to the conditions set forth in this Third Amendment;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Agent hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Loan Agreement are used herein as therein defined.
2. Amendments.
----------
(a) Section 1.1 of the Loan Agreement is hereby amended by amending the
following definitions in their entirety to read as follows:
<PAGE>
"Commitment": as to any Lender, collectively, such Lender's Initial
----------
Commitment, Supplemental Commitment, Second Supplemental Commitment, and
Third Supplemental Commitment.
"Loan": collectively, the Initial Loan, the Supplemental Loan, the
----
Second Supplemental Loan, and the Third Supplemental Loan.
(b) Section 1.1 of the Loan Agreement is hereby amended by adding the
following new definitions thereto in the appropriate alphabetical order:
"Third Supplemental Closing Date": the date on which the
-------------------------------
conditions precedent to the effectiveness of the Third Amendment set
forth in Section 3 of the Third Amendment shall have been satisfied or
waived.
"Third Supplemental Commitment": as to any Lender, its
-----------------------------
obligation to make a Third Supplemental Loan to the Borrower pursuant
to Section 2.1(b) in the amount set forth opposite such Lender's name
on Schedule I under the caption "Third Supplemental Loan".
"Third Supplemental Note Endorsement": with respect to the Note
-----------------------------------
of each Lender, the promissory note endorsement made by the Borrower,
substantially in the form of Exhibit A to this Third Amendment,
modifying the Note of such Lender (as in effect prior to the Third
Supplemental Closing Date) to take account of the Third Supplemental
Commitment of such Lender.
"Third Supplemental Loan": as to any Lender, the term loan made
-----------------------
by such Lender on the Third Supplemental Closing Date pursuant to the
Third Supplemental Commitment of such Lender.
(c) Section 2.1 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.1 to
read as follows:
"2.1 Commitments. (a) Each Lender made an Initial Loan to the
-----------
Borrower on the Closing Date in an amount equal to the amount of the
Initial Commitment of such Lender. Each Lender made a Supplemental Loan to
the Borrower on the Supplemental Closing Date in an amount equal to the
amount of the Supplemental Commitment of such Lender. Each Lender made a
Second Supplemental Loan to the Borrower on the Second Supplemental Closing
Date in an amount equal to the amount of the Second Supplemental Commitment
of such Lender.
(b) Subject to the terms and conditions hereof, each Lender severally
agrees to make a Third Supplemental Loan to the Borrower on the Third
Supplemental Closing Date in an amount not to exceed the amount of the
Third Supplemental Commitment of such Lender then in effect; provided that
--------
the Third Supplemental Commitments shall terminate at 3:00 p.m., New York
City time, on March 15, 1999, if the Third Supplemental Loans have not been
made prior to that time.
-2-
<PAGE>
(d) Section 2.2 of the Loan Agreement is hereby amended by deleting the
parenthetical phrase "(such promissory note, as the same may be supplemented
from time to time (including by a Supplemental Note Endorsement and a Second
Supplemental Note Endorsement), a "Note")" and substituting in lieu thereof the
----
phrase "(such promissory note, as the same may be supplemented from time to time
(including by a Supplemental Note Endorsement a Second Supplemental Note
Endorsement and a Third Supplemental Note Endorsement), a "Note").
----
(e) Section 2.3 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.3 to
read as follows:
"2.3 Procedure for Borrowing. The Borrower shall give the Agent
-----------------------
irrevocable notice (which notice must be received by the Agent prior to
10:00 a.m., New York City time) on the Closing Date, the Supplemental
Closing Date, the Second Supplemental Closing Date, or the Third
Supplemental Closing Date, as applicable, requesting that the Lenders make
Initial Loans on the Closing Date, Supplemental Loans on the Supplemental
Closing Date, Second Supplemental Loans on the Second Supplemental Closing
Date, or Third Supplemental Loans on the Third Supplemental Closing Date,
as applicable, and specifying (i) the Closing Date, the Supplemental
Closing Date, the Second Supplemental Closing Date, or the Third
Supplemental Closing Date, as applicable, and (ii) the amount to be
borrowed. Not later than 11:00 a.m. on the Closing Date, the Supplemental
Closing Date, the Second Supplemental Closing Date, or the Third
Supplemental Closing Date, as applicable, each Lender shall make available
to the Agent at its office or to the account maintained by it, as specified
in Section 10.2, the amount of such Lender's Initial Loan, Supplemental
Loan, Second Supplemental Loan, or Third Supplemental Loan, as applicable,
in immediately available funds. The Agent shall on such date make
available to the Borrower the aggregate of the amounts made available to
the Agent by the Lenders, to such account of the Borrower as may be
specified by the Borrower in writing to the Agent.
(f) Section 2.12 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.12 to
read as follows:
"2.12 Use of Loan Proceeds. (a) The Borrower shall use the proceeds
--------------------
of the Supplemental Loan and the Second Supplemental Loan solely for the
purposes set forth on Schedule 2.12 hereto.
(b) Within one (1) Business Day after the Third Supplemental Closing
Date, the Borrower shall deliver to the Agent, in form and substance
satisfactory to the Agent, a schedule setting forth the uses of the
proceeds of the Third Supplemental Loan and shall use such proceeds only
for the purposes and in accordance with the amounts specified therein.
(g) Schedule I is hereby amended by deleting such Schedule in its entirety
and substituting in lieu thereof Schedule I to this Third Amendment.
-3-
<PAGE>
(h) Schedule 2.12 is hereby amended by deleting such Schedule in its
entirety and substituting in lieu thereof Schedule 2.12 to this Third Amendment.
3. Effectiveness. This Third Amendment shall become effective upon:
-------------
(a) receipt by the Agent of evidence satisfactory to the Agent that this
Third Amendment has been executed and delivered by the Borrower, the Required
Lenders and each of the Subsidiary Guarantors; and
(b) for the account of each Lender having a Third Supplemental Commitment,
a Third Supplemental Note Endorsement of the Borrower conforming to the
requirements hereof and executed by a duly authorized officer of the Borrower.
4. Representations and Warranties. To induce the Agent and the Lenders to
------------------------------
enter into this Third Amendment and to lend the amount of the Third Supplemental
Loan, the Borrower hereby represents and warrants to the Agent and the Lenders
that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the other
Loan Documents will be true and correct in all material respects as if made on
and as of the date hereof and that no Default or Event of Default will have
occurred and be continuing.
5. Release. For and in consideration of the agreements contained in this
-------
Third Amendment and other good and valuable consideration, the receipt and
sufficiency of all of which are hereby acknowledged, the Borrower and the
Subsidiary Guarantors hereby do release and forever discharge the Lenders and
the Agent and their respective directors, officers, employees, agents, and
attorneys, from any and all claims, damages, liabilities, actions, causes of
actions, and suits, of every kind and nature whatsoever, arising out of, or in
any way related to, the Loan Agreement, as amended hereby, the Note, the other
Loan Documents and all agreements, documents and instruments related to any of
the foregoing, whether now known or unknown, which the Borrower and the
Subsidiary Guarantors have, own or hold, or at any time previously had, owned or
held, or at any time in the future may have, own or hold.
6. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Third Supplemental Note Endorsement, the Loan Agreement, the Notes and the other
Loan Documents shall remain in full force and effect in accordance with their
respective terms, without any waiver, amendment or modification of any provision
thereof.
7. Counterparts. This Third Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Agent for all
--------
of the out-of-pocket costs and expenses incurred by the Agent in connection with
the preparation, execution and delivery of this Amendment, including, without
limitation, the fees and disbursements of Cadwalader, Wickersham & Taft, counsel
to the Agent.
-4-
<PAGE>
9. Applicable Law. THIS THIRD AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be duly executed and delivered as of the day and year first above written.
HEALTHCOR HOLDINGS, INC.
By:_______________________________
Title:
CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION,
as Agent
By:_______________________________
Title:
<PAGE>
The undersigned Lenders hereby consent and agree to the foregoing
Amendment:
CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION
By:_______________________________
Title:
ELLIOTT ASSOCIATES, L.P.
By:_______________________________
Title:
-7-
<PAGE>
The undersigned guarantors hereby consent and agree to the foregoing
Amendment:
HEALTHCOR, INC.
By:_______________________________
Title:
HEALTHCOR OXYGEN & MEDICAL
EQUIPMENT, INC.
By:_______________________________
Title:
HEALTHCOR PHARMACY, INC.
By:_______________________________
Title:
PHHN, INC.
By:_______________________________
Title:
HEALTHCOR REHABILITATION SERVICES,
INC.
By:_______________________________
Title:
-8-
<PAGE>
HC PERSONNEL RESOURCES, INC.
BY:_______________________________
TITLE:
CARENETWORK, INC.
BY:_______________________________
TITLE:
-9-
<PAGE>
SCHEDULE I
LENDERS, COMMITMENTS AND APPLICABLE LENDING OFFICES
<TABLE>
<CAPTION>
Initial Loan Supplemental Loan Second Supplemental Third Supplemental
Lender and Lending Offices Loan Loan
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit Suisse First Boston Management $5,000,000 $ 900,000 $2,000,000 $2,000,000
Corporation
Applicable Lending Offices:
11 Madison Avenue
4th Floor
New York, New York 10038
Attention: Alex Lagetko
Telephone: 212-325-3810
Telecopy: 212-325-8290
- ------------------------------------------------------------------------------------------------------------------------------
Elliott Associates, L.P. $1,000,000 $ 0 $ 0 $ 0
Applicable Lending Offices:
712 5th Avenue, 35th Floor
New York, New York 10019
Attention: Richard Mansouri
Telephone: 212-506-2999
Telecopy: 212-974-2092
- ------------------------------------------------------------------------------------------------------------------------------
Total: $6,000,000.00 $900,000.00 $2,000,000 $2,000,000
============= =========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 2.12
USE OF LOAN PROCEEDS
I. USE OF SUPPLEMENTAL LOAN PROCEEDS
(a) $600,000 to cover overfunding under the HCFP Loan Agreement.
(b) $300,000 to cover the retention fee of The Palmieri Company, subject
to receipt by the Borrower of approval of its Board of Directors for
such retention and expenditure.
II. USE OF SECOND SUPPLEMENTAL LOAN PROCEEDS
<TABLE>
<CAPTION>
<S> <C>
Expense Reports $272,510
Insurance $ 49,733
IT $ 85,800
Leases $700,955
Notes $212,941
Office Supplies $ 15,079
Professional $146,245
Settlements $ 0
Suppliers $819,785
Service Providers $ 53,967
Temp. Services and Related $ 9,500
Utilities $ 20,000
Miscellaneous $ 21,046
HHCA $ 0
Payroll and related $ 0
</TABLE>
-11-
<PAGE>
FORM OF THIRD SUPPLEMENTAL NOTE ENDORSEMENT
March 15, 1999
New York, New York
The undersigned Borrower hereby agrees with CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION (the "Lender") that the Note (as amended, modified, or
------
supplemented prior to the date hereof) of the Borrower, dated December 23, 1998,
in the original principal amount of $7,900,000.00 (the "Note"), to which this
----
Third Supplemental Note Endorsement is attached, is hereby amended by (a)
deleting the amount "$7,900,000.00" where it first occurs in the Note and
substituting in lieu thereof the amount "$9,900,000.00", and (b) deleting the
first paragraph of the Note and substituting in lieu thereof the following
paragraph:
"FOR VALUE RECEIVED, the undersigned HEALTHCOR HOLDINGS, INC., a
Delaware corporation (the "Borrower"), hereby unconditionally promises to
--------
pay to the order of CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION (the
"Lender"), at the office of Credit Suisse First Boston Management
------
Corporation located at 11 Madison Avenue, New York, New York 10038, in
lawful money of the United States of America and in immediately available
funds, the principal amount of NINE MILLION NINE HUNDRED THOUSAND DOLLARS
($9,900,000.00). The principal amount of this Note shall be payable in a
single installment payable on the Maturity Date."
This Third Supplemental Note Endorsement is given as a rearrangement
and amendment of the obligations of the Borrower to the Lender under the Note
and is not given in substitution therefor or extinguishment thereof. Except as
expressly amended by this Third Supplemental Note Endorsement, all of the terms
and conditions of the Note shall continue in full force and effect. This Third
Supplemental Note Endorsement shall constitute part of the Note and the Lender
is hereby authorized to attach this Third Supplemental Note Endorsement to the
Note and to insert the following legend on the face of the Note: "This Note has
been amended pursuant to the Third Supplemental Note Endorsement dated March 15,
1999."
Borrower:
--------
HEALTHCOR HOLDINGS, INC.
By: ______________________________
Name:
Title:
<PAGE>
Lender: CREDIT SUISSE FIRST BOSTON
------ MANAGEMENT CORPORATION
By: ______________________________
Name:
Title:
-2-
<PAGE>
FOURTH AMENDMENT
FOURTH AMENDMENT, dated as of March 30, 1999 (this "Fourth Amendment"), to
----------------
the Convertible Loan Agreement, dated as of December 23, 1998 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Loan
----
Agreement"), among HEALTHCOR HOLDINGS, INC., (the "Borrower"), the several
--------
lenders from time to time parties thereto (the "Lenders") and CREDIT SUISSE
-------
FIRST BOSTON MANAGEMENT CORPORATION, as agent (in such capacity, the "Agent")
-----
for the Lenders.
RECITALS
WHEREAS pursuant to the Loan Agreement, the Lenders made the Loan in the
amount of $6,000,000 thereunder;
WHEREAS pursuant to the Amendment to the Loan Agreement, dated as of
February 22, 1999, among the Borrower, the Lenders, and the Agent, the Loan
Agreement was amended to increase the Loan made thereunder by $900,000;
WHEREAS pursuant to the Second Amendment to the Loan Agreement, dated as of
March 2, 1999, among the Borrower, the Lenders, and the Agent, the Loan
Agreement was amended to increase the Loan made thereunder by an additional
$2,000,000;
WHEREAS pursuant to the Third Amendment to the Loan Agreement, dated as of
March 15, 1999 among the Borrower, the Lenders, and the Agent, the Loan
Agreement was amended to increase the Loan made thereunder by an additional
$2,000,000;
WHEREAS the Borrower has informed the Agent and the Lenders that it has
retained CKM LLC ("CKM") for the purposes of selling, in a single transaction
---
or series of transactions, all or substantially all of the assets of the
Borrower (each such transaction, a "Sale") and that CKM has, is, and will be
----
providing the Borrower with such services as necessary to effectuate one or more
Sales;
WHEREAS the Borrower has requested that the Lenders lend to the Borrower an
additional $2,000,000 pursuant to the Loan Agreement, as amended by this Fourth
Amendment, and the Lenders have agreed to do so, but only on the terms and
subject to the conditions set forth in this Fourth Amendment;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Agent hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the Loan
- -- -------------
Agreement are used herein as therein defined.
2. Amendments.
<PAGE>
(a) Section 1.1 of the Loan Agreement is hereby amended by amending the
following definitions in their entirety to read as follows:
"Commitment": as to any Lender, collectively, such Lender's Initial
----------
Commitment, Supplemental Commitment, Second Supplemental Commitment, Third
Supplemental Commitment, and Fourth Supplemental Commitment.
"Loan": collectively, the Initial Loan, the Supplemental Loan, the
----
Second Supplemental Loan, the Third Supplemental Loan, and the Fourth
Supplemental Loan.
(b) Section 1.1 of the Loan Agreement is hereby amended by adding the
following new definitions thereto in the appropriate alphabetical order:
"Fourth Supplemental Closing Date": the date on which the
--------------------------------
conditions precedent to the effectiveness of the Fourth Amendment set
forth in Section 3 of the Fourth Amendment shall have been satisfied
or waived.
"Fourth Supplemental Commitment": as to any Lender, its
------------------------------
obligation to make a Fourth Supplemental Loan to the Borrower pursuant
to Section 2.1(b) in the amount set forth opposite such Lender's name
on Schedule I under the caption "Fourth Supplemental Loan".
"Fourth Supplemental Note Endorsement": with respect to the Note
------------------------------------
of each Lender, the promissory note endorsement made by the Borrower,
substantially in the form of Exhibit A to this Fourth Amendment,
modifying the Note of such Lender (as in effect prior to the Fourth
Supplemental Closing Date) to take account of the Fourth Supplemental
Commitment of such Lender.
"Fourth Supplemental Loan": as to any Lender, the term loan made
------------------------
by such Lender on the Fourth Supplemental Closing Date pursuant to the
Fourth Supplemental Commitment of such Lender.
(c) Section 2.1 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.1 to
read as follows:
"2.1 Commitments. (a) Each Lender made an Initial Loan to the
-----------
Borrower on the Closing Date in an amount equal to the amount of the
Initial Commitment of such Lender. Each Lender made a Supplemental Loan to
the Borrower on the Supplemental Closing Date in an amount equal to the
amount of the Supplemental Commitment of such Lender. Each Lender made a
Second Supplemental Loan to the Borrower on the Second Supplemental Closing
Date in an amount equal to the amount of the Second Supplemental Commitment
of such Lender. Each Lender made a Third Supplemental Loan to the Borrower
on the Third Supplemental Closing Date in an amount equal to the amount of
the Third Supplemental Commitment of such Lender.
(b) Subject to the terms and conditions hereof, each Lender severally
agrees to make a Fourth Supplemental Loan to the Borrower on the Fourth
Supplemental Closing Date in an amount not to exceed the amount of the
Fourth Supplemental Commitment of
<PAGE>
such Lender then in effect; provided that the Fourth Supplemental
--------
Commitments shall terminate at 3:00 p.m., New York City time, on March 30,
1999, if the Fourth Supplemental Loans have not been made prior to that
time.
(d) Section 2.2 of the Loan Agreement is hereby amended by deleting the
parenthetical phrase "(such promissory note, as the same may be supplemented
from time to time (including by a Supplemental Note Endorsement, a Second
Supplemental Note Endorsement and a Third Supplemental Note Endorsement), a
"Note") and substituting in lieu thereof the phrase "(such promissory note, as
----
the same may be supplemented from time to time (including by a Supplemental Note
Endorsement, a Second Supplemental Note Endorsement, a Third Supplemental Note
Endorsement, and a Fourth Supplemental Note Endorsement), a "Note").
----
(e) Section 2.3 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.3 to
read as follows:
"2.3 Procedure for Borrowing. The Borrower shall give the Agent
-----------------------
irrevocable notice (which notice must be received by the Agent prior to
10:00 a.m., New York City time) on the Closing Date, the Supplemental
Closing Date, the Second Supplemental Closing Date, the Third Supplemental
Closing Date, or the Fourth Supplemental Closing Date, as applicable,
requesting that the Lenders make Initial Loans on the Closing Date,
Supplemental Loans on the Supplemental Closing Date, Second Supplemental
Loans on the Second Supplemental Closing Date, Third Supplemental Loans on
the Third Supplemental Closing Date, or Fourth Supplemental Loans on the
Fourth Supplemental Closing Date, as applicable, and specifying (i) the
Closing Date, the Supplemental Closing Date, the Second Supplemental
Closing Date, the Third Supplemental Closing Date, or the Fourth
Supplemental Closing Date, as applicable, and (ii) the amount to be
borrowed. Not later than 11:00 a.m. on the Closing Date, the Supplemental
Closing Date, the Second Supplemental Closing Date, the Third Supplemental
Closing Date, or the Fourth Supplemental Closing Date, as applicable, each
Lender shall make available to the Agent at its office or to the account
maintained by it, as specified in Section 10.2, the amount of such Lender's
Initial Loan, Supplemental Loan, Second Supplemental Loan, Third
Supplemental Loan, or Fourth Supplemental Loan, as applicable, in
immediately available funds. The Agent shall on such date make available
to the Borrower the aggregate of the amounts made available to the Agent by
the Lenders, to such account of the Borrower as may be specified by the
Borrower in writing to the Agent.
(f) Section 2.12 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.12 to
read as follows:
"2.12 Use of Loan Proceeds. The Borrower shall use the proceeds of
--------------------
the Supplemental Loan, the Second Supplemental Loan, the Third Supplemental
Loan, and the Fourth Supplemental Loan, solely for the purposes set forth
on Schedule 2.12 hereto.
(g) Schedule I is hereby amended by deleting such Schedule in its entirety
and substituting in lieu thereof Schedule I to this Fourth Amendment.
<PAGE>
(h) Schedule 2.12 is hereby amended by deleting such Schedule in its
entirety and substituting in lieu thereof Schedule 2.12 to this Fourth
Amendment.
3. Effectiveness. This Fourth Amendment shall become effective upon:
-------------
(a) receipt by the Agent of evidence satisfactory to the Agent that this
Fourth Amendment has been executed and delivered by the Borrower, the Required
Lenders and each of the Subsidiary Guarantors; and
(b) for the account of each Lender having a Fourth Supplemental
Commitment, a Fourth Supplemental Note Endorsement of the Borrower conforming to
the requirements hereof and executed by a duly authorized officer of the
Borrower.
4. Representations and Warranties. To induce the Agent and the Lenders to
------------------------------
enter into this Fourth Amendment and to lend the amount of the Fourth
Supplemental Loan, the Borrower hereby represents and warrants to the Agent and
the Lenders that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the other
Loan Documents will be true and correct in all material respects as if made on
and as of the date hereof and that no Default or Event of Default will have
occurred and be continuing.
5. Release. For and in consideration of the agreements contained in this
-------
Fourth Amendment and other good and valuable consideration, the receipt and
sufficiency of all of which are hereby acknowledged, the Borrower and the
Subsidiary Guarantors hereby do release and forever discharge the Lenders and
the Agent and their respective directors, officers, employees, agents, and
attorneys, from any and all claims, damages, liabilities, actions, causes of
actions, and suits, of every kind and nature whatsoever, arising out of, or in
any way related to, the Loan Agreement, as amended hereby, the Note, the other
Loan Documents and all agreements, documents and instruments related to any of
the foregoing, whether now known or unknown, which the Borrower and the
Subsidiary Guarantors have, own or hold, or at any time previously had, owned or
held, or at any time in the future may have, own or hold.
6. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Fourth Supplemental Note Endorsement, the Loan Agreement, the Notes and the
other Loan Documents shall remain in full force and effect in accordance with
their respective terms, without any waiver, amendment or modification of any
provision thereof.
7. Counterparts. This Fourth Amendment may be executed by one or more
------------
of the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Agent for all
--------
of the out-of-pocket costs and expenses incurred by the Agent in connection with
the preparation, execution and delivery of this Fourth Amendment, including,
without limitation, the fees and disbursements of Cadwalader, Wickersham & Taft,
counsel to the Agent.
<PAGE>
9. Applicable Law. THIS FOURTH AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to
be duly executed and delivered as of the day and year first above written.
HEALTHCOR HOLDINGS, INC.
By:_______________________________
Title:
CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION,
as Agent
By:_______________________________
Title:
<PAGE>
The undersigned Lenders hereby consent and agree to the foregoing Fourth
Amendment:
CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION
By:_______________________________
Title:
ELLIOTT ASSOCIATES, L.P.
By:_______________________________
Title:
<PAGE>
The undersigned guarantors hereby consent and agree to the foregoing Fourth
Amendment:
HEALTHCOR, INC.
By:_______________________________
Title:
HEALTHCOR OXYGEN & MEDICAL EQUIPMENT, INC.
By:_______________________________
Title:
HEALTHCOR PHARMACY, INC.
By:_______________________________
Title:
PHHN, INC.
By:_______________________________
Title:
HEALTHCOR REHABILITATION SERVICES, INC.
By:_______________________________
Title:
<PAGE>
HC PERSONNEL RESOURCES, INC.
By:_______________________________
Title:
CARENETWORK, INC.
By:_______________________________
Title:
<PAGE>
Schedule I
LENDERS, COMMITMENTS AND APPLICABLE LENDING OFFICES
<TABLE>
<CAPTION>
Second Third
Initial Loan Supplemental Supplemental Supplemental
Lender and Lending Offices Loan Loan Loan
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit Suisse First Boston Management $ 5,000,000 $ 900,000 $2,000,000 $2,000,000
Corporation
Applicable Lending Offices:
11 Madison Avenue
4th Floor
New York, New York 10038
Attention: Alex Lagetko
Telephone: 212-325-3810
Telecopy: 212-325-8290
- --------------------------------------------------------------------------------------------------------------------------
Elliott Associates, L.P. $ 1,000,000 $ 0 $ 0 $ 0
Applicable Lending Offices:
712 5th Avenue, 35th Floor
New York, New York 10019
Attention: Richard Mansouri
Telephone: 212-506-2999
Telecopy: 212-974-2092
- --------------------------------------------------------------------------------------------------------------------------
Total: $6,000,000.00 $900,000.00 $2,000,000 $2,000,000
============= =========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------
Fourth
Supplemental
Lender and Lending Offices Loans
- -----------------------------------------------------------------
Credit Suisse First Boston Management $2,000,000
Corporation
Applicable Lending Offices:
11 Madison Avenue
4th Floor
New York, New York 10038
Attention: Alex Lagetko
Telephone: 212-325-3810
Telecopy: 212-325-8290
- -----------------------------------------------------------------
Elliott Associates, L.P. $ 0
Applicable Lending Offices:
712 5th Avenue, 35th Floor
New York, New York 10019
Attention: Richard Mansouri
Telephone: 212-506-2999
Telecopy: 212-974-2092
- -----------------------------------------------------------------
Total: $2,000,000
==========
</TABLE>
<PAGE>
Schedule 2.12
USE OF LOAN PROCEEDS
I. USE OF SUPPLEMENTAL LOAN PROCEEDS
(a) $600,000 to cover overfunding under the HCFP Loan Agreement.
(b) $300,000 to cover the retention fee of The Palmieri Company, subject to
receipt by the Borrower of approval of its Board of Directors for such
retention and expenditure.
II. USE OF SECOND SUPPLEMENTAL LOAN PROCEEDS
The Borrower shall apply all of the proceeds from the Second Supplemental
Loan solely towards the payment of the following expenses:
<TABLE>
<CAPTION>
<S> <C>
Expense Reports $272,510
Insurance $ 49,733
IT $ 85,800
Leases $700,955
Notes $212,941
Office Supplies $ 15,079
Professional $146,245
Settlements $ 0
Suppliers $819,785
Service Providers $ 53,967
Temp. Services and Related $ 9,500
Utilities $ 20,000
Miscellaneous $ 21,046
HHCA $ 0
Payroll and related $ 0
</TABLE>
III. USE OF THIRD SUPPLEMENTAL LOAN PROCEEDS
The Borrower shall apply all of the proceeds from the Third Supplemental
Loan solely towards the payment of the following expenses:
<TABLE>
<CAPTION>
<S> <C>
Expense Reports $ 30,000
Insurance $ 0
IT $ 40,000
Leases $ 899,177
Notes $ 146,222
Office Supplies $ 5,000
Professional $ 354,000
Settlements $ 33,700
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Suppliers $1,028,525
Service Providers $ 86,800
Temp Services and Related $ 16,000
Utilities $ 164,800
Miscellaneous $ 170,130
HHCA $ 125,000
Payroll and Related $1,500,000
</TABLE>
IV. USE OF FOURTH SUPPLEMENTAL LOAN PROCEEDS
The Borrower shall all apply all of the proceeds from the Fourth
Supplemental Loan solely towards the following expenses:
See Attached
<PAGE>
FORM OF FOURTH SUPPLEMENTAL NOTE ENDORSEMENT
March 30, 1999
New York, New York
The undersigned Borrower hereby agrees with CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION (the "Lender") that the Note (as amended, modified, or
------
supplemented prior to the date hereof) of the Borrower, dated December 23, 1998,
in the original principal amount of $9,900,000.00 (the "Note"), to which this
----
Fourth Supplemental Note Endorsement is attached, is hereby amended by (a)
deleting the amount "$9,900,000.00" where it first occurs in the Note and
substituting in lieu thereof the amount "$11,900,000.00", and (b) deleting the
first paragraph of the Note and substituting in lieu thereof the following
paragraph:
"FOR VALUE RECEIVED, the undersigned HEALTHCOR HOLDINGS, INC., a
Delaware corporation (the "Borrower"), hereby unconditionally promises to
--------
pay to the order of CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION (the
"Lender"), at the office of Credit Suisse First Boston Management
------
Corporation located at 11 Madison Avenue, New York, New York 10038, in
lawful money of the United States of America and in immediately available
funds, the principal amount of ELEVEN MILLION NINE HUNDRED THOUSAND DOLLARS
($11,900,000.00). The principal amount of this Note shall be payable in a
single installment payable on the Maturity Date."
This Fourth Supplemental Note Endorsement is given as a rearrangement and
amendment of the obligations of the Borrower to the Lender under the Note and is
not given in substitution therefor or extinguishment thereof. Except as
expressly amended by this Fourth Supplemental Note Endorsement, all of the terms
and conditions of the Note shall continue in full force and effect. This Fourth
Supplemental Note Endorsement shall constitute part of the Note and the Lender
is hereby authorized to attach this Fourth Supplemental Note Endorsement to the
Note and to insert the following legend on the face of the Note: "This Note has
been amended pursuant to the Fourth Supplemental Note Endorsement dated March
30, 1999."
Borrower:
--------
HEALTHCOR HOLDINGS, INC.
By: ______________________________
Name:
Title:
<PAGE>
Lender: CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION
------
By: ______________________________
Name:
Title:
<PAGE>
Execution Copy
FIFTH AMENDMENT
FIFTH AMENDMENT, dated as of April 13, 1999 (this "Fifth Amendment"), to
---------------
the Convertible Loan Agreement, dated as of December 23, 1998 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Loan
----
Agreement"), among HEALTHCOR HOLDINGS, INC., (the "Borrower"), the several
--------
lenders from time to time parties thereto (the "Lenders") and CREDIT SUISSE
-------
FIRST BOSTON MANAGEMENT CORPORATION, as agent (in such capacity, the "Agent")
-----
for the Lenders.
RECITALS
WHEREAS pursuant to the Loan Agreement, the Lenders made the Loan in the
amount of $6,000,000 thereunder;
WHEREAS pursuant to the Amendment to the Loan Agreement, dated as of
February 22, 1999, among the Borrower, the Lenders, and the Agent, the Loan
Agreement was amended to increase the Loan made thereunder by $900,000;
WHEREAS pursuant to the Second Amendment to the Loan Agreement, dated as of
March 2, 1999, among the Borrower, the Lenders, and the Agent, the Loan
Agreement was amended to increase the Loan made thereunder by an additional
$2,000,000;
WHEREAS pursuant to the Third Amendment to the Loan Agreement, dated as of
March 15, 1999 among the Borrower, the Lenders, and the Agent, the Loan
Agreement was amended to increase the Loan made thereunder by an additional
$2,000,000;
WHEREAS pursuant to the Fourth Amendment to the Loan Agreement, dated as of
March 30, 1999, among the Borrower, the Lenders, and the Agent, the Loan
Agreement was amended to increase the Loan made thereunder by an additional
$2,000,000;
WHEREAS the Borrower has informed the Agent and the Lenders that it has
retained CKM LLC ("CKM") for the purposes of selling, in a single transaction
---
or series of transactions, all or substantially all of the assets of the
Borrower (each such transaction, a "Sale") and that CKM has, is, and will be
----
providing the Borrower with such services as necessary to effectuate one or more
Sales;
WHEREAS the Borrower has requested that the Lenders lend to the Borrower an
additional $1,200,000 pursuant to the Loan Agreement, as amended by this Fifth
Amendment, and the Lenders have agreed to do so, but only on the terms and
subject to the conditions set forth in this Fifth Amendment;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Agent hereby agree as follows:
<PAGE>
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Loan Agreement are used herein as therein defined.
2. Amendments.
(a) Section 1.1 of the Loan Agreement is hereby amended by amending the
following definitions in their entirety to read as follows:
"Commitment": as to any Lender, collectively, such Lender's Initial
----------
Commitment, Supplemental Commitment, Second Supplemental Commitment, Third
Supplemental Commitment, Fourth Supplemental Commitment, and Fifth
Supplemental Commitment.
"Loan": collectively, the Initial Loan, the Supplemental Loan, the
----
Second Supplemental Loan, the Third Supplemental Loan, the Fourth
Supplemental Loan, and the Fifth Supplemental Loan.
(b) Section 1.1 of the Loan Agreement is hereby amended by adding the
following new definitions thereto in the appropriate alphabetical order:
"Fifth Supplemental Closing Date": the date on which the
-------------------------------
conditions precedent to the effectiveness of the Fifth Amendment set
forth in Section 3 of the Fifth Amendment shall have been satisfied or
waived.
"Fifth Supplemental Commitment": as to any Lender, its
-----------------------------
obligation to make a Fifth Supplemental Loan to the Borrower pursuant
to Section 2.1(b) in the amount set forth opposite such Lender's name
on Schedule I under the caption "Fifth Supplemental Loan".
"Fifth Supplemental Note Endorsement": with respect to the Note
-----------------------------------
of each Lender, the promissory note endorsement made by the Borrower,
substantially in the form of Exhibit A to this Fifth Amendment,
modifying the Note of such Lender (as in effect prior to the Fifth
Supplemental Closing Date) to take account of the Fifth Supplemental
Commitment of such Lender.
"Fifth Supplemental Loan": as to any Lender, the term loan made
-----------------------
by such Lender on the Fifth Supplemental Closing Date pursuant to the
Fifth Supplemental Commitment of such Lender.
(c) Section 2.1 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.1 to
read as follows:
"2.1 Commitments. (a) Each Lender made an Initial Loan to the
-----------
Borrower on the Closing Date in an amount equal to the amount of the
Initial Commitment of such Lender. Each Lender made a Supplemental Loan to
the Borrower on the Supplemental Closing Date in an amount equal to the
amount of the Supplemental Commitment of such Lender. Each Lender made a
Second Supplemental Loan to the Borrower on the Second Supplemental Closing
Date in an amount equal to the amount of the Second
-2-
<PAGE>
Supplemental Commitment of such Lender. Each Lender made a Third
Supplemental Loan to the Borrower on the Third Supplemental Closing Date in
an amount equal to the amount of the Third Supplemental Commitment of such
Lender. Each Lender made a Fourth Supplemental Loan to the Borrower on the
Fourth Supplemental Closing Date in an amount equal to the amount of the
Fourth Supplemental Commitment of such Lender.
(b) Subject to the terms and conditions hereof, each Lender severally
agrees to make a Fifth Supplemental Loan to the Borrower on the Fifth
Supplemental Closing Date in an amount not to exceed the amount of the
Fifth Supplemental Commitment of such Lender then in effect; provided that
--------
the Fifth Supplemental Commitments shall terminate at 3:00 p.m., New York
City time, on April 13, 1999, if the Fifth Supplemental Loans have not been
made prior to that time.
(d) Section 2.2 of the Loan Agreement is hereby amended by deleting the
parenthetical phrase "(such promissory note, as the same may be supplemented
from time to time (including by a Supplemental Note Endorsement, a Second
Supplemental Note Endorsement, a Third Supplemental Note Endorsement, and a
Fourth Supplemental Note Endorsement), a "Note") and substituting in lieu
----
thereof the phrase "(such promissory note, as the same may be supplemented from
time to time (including by a Supplemental Note Endorsement, a Second
Supplemental Note Endorsement, a Third Supplemental Note Endorsement, a Fourth
Supplemental Note Endorsement, and a Fifth Supplemental Note Endorsement), a
"Note").
----
(e) Section 2.3 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.3 to
read as follows:
"2.3 Procedure for Borrowing. The Borrower shall give the Agent
-----------------------
irrevocable notice (which notice must be received by the Agent prior to
10:00 a.m., New York City time) on the Closing Date, the Supplemental
Closing Date, the Second Supplemental Closing Date, the Third Supplemental
Closing Date, the Fourth Supplemental Closing Date, or the Fifth
Supplemental Closing Date, as applicable, requesting that the Lenders make
Initial Loans on the Closing Date, Supplemental Loans on the Supplemental
Closing Date, Second Supplemental Loans on the Second Supplemental Closing
Date, Third Supplemental Loans on the Third Supplemental Closing Date,
Fourth Supplemental Loans on the Fourth Supplemental Closing Date, or Fifth
Supplemental Loans on the Fifth Supplemental Closing Date, as applicable,
and specifying (i) the Closing Date, the Supplemental Closing Date, the
Second Supplemental Closing Date, the Third Supplemental Closing Date, the
Fourth Supplemental Closing Date, or the Fifth Supplemental Closing Date,
as applicable, and (ii) the amount to be borrowed. Not later than 11:00
a.m. on the Closing Date, the Supplemental Closing Date, the Second
Supplemental Closing Date, the Third Supplemental Closing Date, the Fourth
Supplemental Closing Date, or the Fifth Supplemental Closing Date, as
applicable, each Lender shall make available to the Agent at its office or
to the account maintained by it, as specified in Section 10.2, the amount
of such Lender's Initial Loan, Supplemental Loan, Second Supplemental Loan,
Third Supplemental Loan, Fourth Supplemental Loan, or Fifth Supplemental
Loan as applicable, in immediately available funds. The Agent shall on
such date make available to the Borrower the aggregate of the
<PAGE>
amounts made available to the Agent by the Lenders, to such account of the
Borrower as may be specified by the Borrower in writing to the Agent.
(f) Section 2.12 of the Loan Agreement is hereby amended by deleting such
Section in its entirety and substituting in lieu thereof a new Section 2.12 to
read as follows:
"2.12 Use of Loan Proceeds. The Borrower shall use the proceeds of
--------------------
the Supplemental Loan, the Second Supplemental Loan, the Third Supplemental
Loan, the Fourth Supplemental Loan, and the Fifth Supplemental Loan solely
for the purposes set forth on Schedule 2.12 hereto.
(g) Schedule I is hereby amended by deleting such Schedule in its entirety
and substituting in lieu thereof Schedule I to this Fifth Amendment.
(h) Schedule 2.12 is hereby amended by deleting such Schedule in its
entirety and substituting in lieu thereof Schedule 2.12 to this Fifth Amendment.
3. Effectiveness. This Fifth Amendment shall become effective upon:
-------------
(a) receipt by the Agent of evidence satisfactory to the Agent that this
Fourth Amendment has been executed and delivered by the Borrower, the Required
Lenders and each of the Subsidiary Guarantors; and
(b) for the account of each Lender having a Fifth Supplemental Commitment,
a Fifth Supplemental Note Endorsement of the Borrower conforming to the
requirements hereof and executed by a duly authorized officer of the Borrower.
4. Representations and Warranties. To induce the Agent and the Lenders to
------------------------------
enter into this Fifth Amendment and to lend the amount of the Fifth Supplemental
Loan, the Borrower hereby represents and warrants to the Agent and the Lenders
that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the other
Loan Documents will be true and correct in all material respects as if made on
and as of the date hereof and that no Default or Event of Default will have
occurred and be continuing.
5. Release. For and in consideration of the agreements contained in this
-------
Fifth Amendment and other good and valuable consideration, the receipt and
sufficiency of all of which are hereby acknowledged, the Borrower and the
Subsidiary Guarantors hereby do release and forever discharge the Lenders and
the Agent and their respective directors, officers, employees, agents, and
attorneys, from any and all claims, damages, liabilities, actions, causes of
actions, and suits, of every kind and nature whatsoever, arising out of, or in
any way related to, the Loan Agreement, as amended hereby, the Note, the other
Loan Documents and all agreements, documents and instruments related to any of
the foregoing, whether now known or unknown, which the Borrower and the
Subsidiary Guarantors have, own or hold, or at any time previously had, owned or
held, or at any time in the future may have, own or hold.
6. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Fifth Supplemental Note Endorsement, the Loan Agreement, the Notes and the other
Loan Documents
-4-
<PAGE>
shall remain in full force and effect in accordance with their respective terms,
without any waiver, amendment or modification of any provision thereof.
7. Counterparts. This Fifth Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Agent for all
--------
of the out-of-pocket costs and expenses incurred by the Agent in connection with
the preparation, execution and delivery of this Fifth Amendment, including,
without limitation, the fees and disbursements of Cadwalader, Wickersham & Taft,
counsel to the Agent.
9. Applicable Law. THIS FIFTH AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to
be duly executed and delivered as of the day and year first above written.
HEALTHCOR HOLDINGS, INC.
By:_______________________________
Title:
CREDIT SUISSE FIRST BOSTON MANAGEMENT
CORPORATION,
as Agent
By:_______________________________
Title:
-6-
<PAGE>
The undersigned Lenders hereby consent and agree to the foregoing Fifth
Amendment:
CREDIT SUISSE FIRST BOSTON MANAGEMENT
CORPORATION
By:_______________________________
Title:
ELLIOTT ASSOCIATES, L.P.
By:_______________________________
Title:
-7-
<PAGE>
The undersigned guarantors hereby consent and agree to the foregoing Fifth
Amendment:
-8-
<PAGE>
HEALTHCOR, INC.
By:_______________________________
Title:
HEALTHCOR OXYGEN & MEDICAL
EQUIPMENT, INC.
By:_______________________________
Title:
HEALTHCOR PHARMACY, INC.
By:_______________________________
Title:
PHHN, INC.
By:_______________________________
Title:
HEALTHCOR REHABILITATION
SERVICES, INC.
By:_______________________________
Title:
HC PERSONNEL RESOURCES, INC.
By:_______________________________
Title:
CARENETWORK, INC.
By:_______________________________
Title:
-9-
<PAGE>
Schedule I
LENDERS, COMMITMENTS AND APPLICABLE LENDING OFFICES
<TABLE>
<CAPTION>
Second Third Fourth Fifth
Initial Loan Supplemental Supplemental Supplemental Supplemental Supplemental
Lender and Lending Offices Loan Loan Loan Loans Loans
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Credit Suisse First Boston Management $5,000,000 $900,000 $2,000,000 $2,000,000 $2,000,000 $1,200,000
Corporation
Applicable Lending Offices:
11 Madison Avenue
4th Floor
New York, New York 10038
Attention: Alex Lagetko
Telephone: 212-325-3810
Telecopy: 212-325-8290
- -----------------------------------------------------------------------------------------------------------------------------------
Elliott Associates, L.P. $1,000,000 $0 $0 $0 $0 $0
Applicable Lending Offices:
712 5th Avenue, 35th Floor
New York, New York 10019
Attention: Richard Mansouri
Telephone: 212-506-2999
Telecopy: 212-974-2092
- -----------------------------------------------------------------------------------------------------------------------------------
Total: $6,000,000.00 $900,000.00 $2,000,000 $2,000,000 $2,000,000 $1,200,000
============= =========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE>
Schedule 2.12
USE OF LOAN PROCEEDS
I. USE OF SUPPLEMENTAL LOAN PROCEEDS
(a) $600,000 to cover overfunding under the HCFP Loan Agreement.
(b) $300,000 to cover the retention fee of The Palmieri Company, subject to
receipt by the Borrower of approval of its Board of Directors for such retention
and expenditure.
II. USE OF SECOND SUPPLEMENTAL LOAN PROCEEDS
The Borrower shall apply all of the proceeds from the Second Supplemental
Loan solely towards the payment of the following expenses:
<TABLE>
<CAPTION>
<S> <C>
Expense Reports $272,510
Insurance $ 49,733
IT $ 85,800
Leases $700,955
Notes $212,941
Office Supplies $ 15,079
Professional $146,245
Settlements $ 0
Suppliers $819,785
Service Providers $ 53,967
Temp. Services and Related $ 9,500
Utilities $ 20,000
Miscellaneous $ 21,046
HHCA $ 0
Payroll and related $ 0
</TABLE>
III. USE OF THIRD SUPPLEMENTAL LOAN PROCEEDS
The Borrower shall apply all of the proceeds from the Third Supplemental
Loan solely towards the payment of the following expenses:
<TABLE>
<CAPTION>
<S> <C>
Expense Reports $ 30,000
Insurance $ 0
IT $ 40,000
Leases $ 899,177
Notes $ 146,222
Office Supplies $ 5,000
Professional $ 354,000
Settlements $ 33,700
Suppliers $1,028,525
Service Providers $ 86,800
</TABLE>
-11-
<PAGE>
<TABLE>
<S> <C>
Temp Services and Related $ 16,000
Utilities $ 164,800
Miscellaneous $ 170,130
HHCA $ 125,000
Payroll and Related $1,500,000
</TABLE>
IV. USE OF FOURTH SUPPLEMENTAL LOAN PROCEEDS
The Borrower shall all apply all of the proceeds from the Fourth
Supplemental Loan solely towards the following expenses:
See Attached
V. USE OF FIFTH SUPPLEMENTAL LOAN PROCEEDS
See Attached
-12-
<PAGE>
FORM OF FIFTH SUPPLEMENTAL NOTE ENDORSEMENT
April 13, 1999
New York, New York
The undersigned Borrower hereby agrees with CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION (the "Lender") that the Note (as amended, modified, or
------
supplemented prior to the date hereof) of the Borrower, dated December 23, 1998,
in the original principal amount of $11,900,000.00 (the "Note"), to which this
----
Fifth Supplemental Note Endorsement is attached, is hereby amended by (a)
deleting the amount "$11,900,000.00" where it first occurs in the Note and
substituting in lieu thereof the amount "$13,100,000.00", and (b) deleting the
first paragraph of the Note and substituting in lieu thereof the following
paragraph:
"FOR VALUE RECEIVED, the undersigned HEALTHCOR HOLDINGS, INC., a
Delaware corporation (the "Borrower"), hereby unconditionally promises to
--------
pay to the order of CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION (the
"Lender"), at the office of Credit Suisse First Boston Management
------
Corporation located at 11 Madison Avenue, New York, New York 10038, in
lawful money of the United States of America and in immediately available
funds, the principal amount of THIRTEEN MILLION ONE HUNDRED THOUSAND
DOLLARS ($13,100,000.00). The principal amount of this Note shall be
payable in a single installment payable on the Maturity Date."
This Fifth Supplemental Note Endorsement is given as a rearrangement and
amendment of the obligations of the Borrower to the Lender under the Note and is
not given in substitution therefor or extinguishment thereof. Except as
expressly amended by this Fifth Supplemental Note Endorsement, all of the terms
and conditions of the Note shall continue in full force and effect. This Fifth
Supplemental Note Endorsement shall constitute part of the Note and the Lender
is hereby authorized to attach this Fifth Supplemental Note Endorsement to the
Note and to insert the following legend on the face of the Note: "This Note has
been amended pursuant to the Fifth Supplemental Note Endorsement dated April 13,
1999."
Borrower:
HEALTHCOR HOLDINGS, INC.
By: ______________________________
Name:
Title:
<PAGE>
Lender: CREDIT SUISSE FIRST BOSTON
MANAGEMENT CORPORATION
By: ______________________________
Name:
Title:
-2-
<PAGE>
EMPLOYMENT TERMINATION AGREEMENT
EMPLOYMENT TERMINATION AGREEMENT (this "Agreement"), dated as of February
25, 1999, by and between HealthCor Holdings, Inc., a Delaware corporation (the
"Company") and S. Wayne Bazzle ("Employee").
R E C I T A L S:
A. The Company and Employee are parties to that certain Employment
Agreement dated January 8, 1999 (the "Employment Agreement").
B. The Company and Employee desire to terminate Employee's employment with
the Company and to terminate the Employment Agreement, subject to the terms and
conditions hereof.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the receipt and sufficiency of which are hereby acknowledged,
the Company and Employee hereby agree as follows:
1. Termination of Employment; Resignation. Employee hereby tenders, and
--------------------------------------
the Company hereby accepts, Employee's resignation from employment with the
Company. The provisions of this Section 1 shall be effective as of the date
hereof and the parties hereto hereby waive all applicable notices and waiting
periods for the termination of employment. Employee also hereby tenders his
resignation from all positions with the Company and its subsidiaries, including
membership on the board of directors of the Company and any of its subsidiaries.
2. Termination of Employment Agreement. The Employment Agreement is
-----------------------------------
hereby terminated and cancelled. Except as expressly provided herein, no
provision of the Employment Agreement shall survive or be of any force or effect
after the date hereof, including, but not limited to, those provisions of the
Employment Agreement regarding its termination.
3. Benefits. In conjunction with Employee's resignation and the
--------
termination of the Employment Agreement, all benefits, payments, allowances and
other rights granted or paid by, from, or on behalf of, the Company to, or for
the benefit of, Employee, direct or indirect, under the Employment Agreement or
otherwise, shall continue until April 30, 1999 and shall thereupon terminate;
provided, however, that the Company shall continue to provide health insurance
benefits to Employee in accordance with the Company's policy and practice prior
to February 25, 1999, at the cost of the Company, for a period of 18 months from
March 1, 1999.
4. Release and Waiver.
------------------
(a) In consideration of the agreements of the Company hereunder, the
Employee hereby acknowledges and agrees to release the Company of
all duties, obligations or liabilities arising under the
Employment Agreement. The Employee, on behalf of him and his
predecessors, successors,
<PAGE>
affiliates, assigns, agents, attorneys, heirs, executors,
representatives and any other person or entity who has or could
potentially derive rights through him/her, hereby irrevocably and
unconditionally releases, waives, acquits and forever discharges,
and agrees to indemnify, defend and hold harmless, the Company and
its affiliates, predecessors, successors, assigns, stockholders,
officers, employees, directors, agents, attorneys and other
representatives, whether past, present or future, from and against
any and all claims, demands, costs, contracts, liabilities,
objections, suits, damages, losses, actions and causes of action
of any nature, type or description, whether at law or in equity,
in contract or tort, or otherwise, known or unknown, or suspected
or unsuspected, that Employee ever had or now has or may claim to
have against the Company, except for claims arising out of this
Agreement.
(b) In consideration of the Employee's agreements hereunder, the
Company hereby acknowledges and agrees to release Employee of all
duties, obligations or liabilities arising under the Employment
Agreement. The Company, on behalf of itself and its predecessors,
successors, affiliates, assigns, agents, stockholders, officers,
employees, directors, attorneys, representatives and any other
person or entity who has or could potentially derive rights
through it, hereby irrevocably and unconditionally releases,
waives, acquits and forever discharges, and agrees to indemnify,
defend and hold harmless, the Employee and his affiliates,
predecessors, successors, assigns, heirs, executors, agents,
attorneys and other representatives, whether past, present or
future, from and against any and all claims, demands, costs,
contracts, liabilities, objections, suits, damages, losses,
actions and causes of action of any nature, type or description,
whether at law or in equity, in contract or tort, or otherwise,
known or unknown, or suspected or unsuspected, that the Company
ever had or now has or may claim to have against Employee, except
for claims arising out of fraud and this Agreement.
5. Nonsolicitation.
(a) Employee hereby agrees that at any time prior to April 30, 2000,
Employee shall not, directly or indirectly,
(i) solicit any current employee, agent or representative to
terminate his or her relationship with the Company; or
(ii) solicit any current customers, dealers, distributors, vendors
or sources of supply to terminate or adversely change their
relationship with the Company.
(b) The Company shall have the right, subject to applicable law, to
inform any other third party that the Company reasonably believes
to be, or to be
<PAGE>
contemplating, participating with Employee or receiving from
Employee assistance in violation of this Agreement, of the terms
of this Agreement and of the rights of the Company hereunder, and
that participation by any such third party with Employee in
activities in violation of this Section 5 may give rise to claims
by the Company against such third party.
6. Confidential Information. Employee shall not, directly or indirectly,
------------------------
reveal, divulge, disclose or otherwise make known to any person, firm or
corporation, any information ("Confidential Information") concerning any matters
affecting or relating to the business of the Company or its affiliates,
including, but not limited to, their manner of operation, any of their
customers, any confidential or proprietary records, customer lists, data, trade
secrets, plans, processes, specifications or opportunities which are the
property of the Company or its affiliates or were learned by Employee in the
course of his relationship with the Company, unless (i) such information has
become publicly available through no act or omission to act on the part of
Employee; (ii) such information was disclosed to Employee by third parties under
no duty of confidentiality to the Company or its affiliates; or (iii) Employee
is required to disclose such Confidential Information by subpoena or under the
order of a court of law. Employee shall give all physical manifestations of
Confidential Information and confidential or proprietary information of the
Company and its affiliates in his control or possession to the Company within
five days after the date hereof. Employee acknowledges all such items are and
remain the sole property of the Company.
7. Payments. In consideration for the termination of the Employment
Agreement and the covenants of the Employee contained herein, the Company agrees
to continue the current salary (calculated on a monthly basis to be Employee's
annual salary divided by 12) of Employee until April 30, 1999, payable at such
times as the Company regularly pays its executive officers. During such period,
upon reasonable prior notice, Employee shall be available during regular
business hours, except for any accrued vacation unpaid after giving effect to
the payment of the two weeks vacation provided for below (provided Employee will
be available for consultation by telephone during any such period), and shall
use his best reasonable efforts to assist Company management in the affairs and
operations of the Company, including review of periodic reports and filings
relating to periods ending prior to the date hereof. The Company also agrees to
pay Employee a sum equal to $144,510 on or before March 3, 1999 and to pay
Employee an additional $144,510 six (6) months from the date hereof. Any payment
required hereunder shall be subject to deductions for such items as required
under any applicable federal or state law, including without limitation,
federal, state and city withholding tax, Medicare and F.I.C.A. The Company
further agrees to pay to Employee two weeks of his accrued but unused vacation
time, calculated as of April 30, 1999. No payment will be made for any accrued
but unpaid sick days. The Company further agrees to transfer the property listed
on Exhibit A attached hereto to the Employee and to allow Employee to remove
such items from the Company. The Company agrees to treat all payments of
compensation hereunder as consulting fees for tax purposes, to the extent it may
lawfully do so, and it is tax efficient to Employee.
8. Consulting Services. During the period commencing May 1, 1999 and ending
-------------------
October 31, 1999, Employee agrees to provide consulting services upon the prior
request of, and subject to reasonable notice from, the Company. Such consulting
services shall be rendered in
<PAGE>
Dallas, Texas at the headquarters of the Company. In addition to the consulting
payments in Section 7 above, the Company agrees to pay Employee the sum of
$187.50 per hour for each hour such consulting services are rendered.
9. Relief. Employee acknowledges and agrees that damages at law would be
------
insufficient for breach of any of Employee's covenants in Sections 4, 5, and 6
of this Agreement. Accordingly, Employee agrees that in the event of a breach or
threatened breach by Employee any such provisions, the Company shall be entitled
to equitable relief in the form of an injunction to prevent irreparable injury.
10. Reformation. If any provision of this Agreement is held to be
-----------
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, in lieu of such illegal, invalid or unenforceable provision,
there shall be added automatically as a part of this Agreement a provision as
similar in terms to such illegal, invalid or unenforceable provision as may be
possible and be legal, valid and enforceable.
11. Further Assurances. From time to time, upon request, Employee and the
------------------
Company shall, without further consideration, execute, deliver and acknowledge
all such further documents, instruments, releases, motions and orders as the
Company or Employee may reasonably require more effectively to evidence or
effectuate the transactions contemplated herein.
12. Waiver. The failure of any party to insist, in any one or more
------
instances, upon performance of any of the terms, covenants or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right or
claim granted or arising hereunder or of the future performance of any such
term, covenant, or condition, and such failure shall in no way affect the
validity of this Agreement or the rights and obligations of the parties hereto.
13. LAW GOVERNING. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAWS RULES OR CHOICE OF LAWS RULES THEREOF.
14. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the parties hereto and their respective representatives, heirs,
executors, successors and permitted assigns. The parties hereto shall not be
permitted to assign any of their respective rights or obligations under this
Agreement without the prior written consent of the other party hereto; provided,
however, that the Company shall be permitted to assign its rights under this
Agreement without the prior written consent of Employee in connection with the
sale of all or substantially all of the Company's business (whether by asset
sale, sale of capital stock, merger or otherwise).
15. Press Release. The Company and Employee agree that the press release
-------------
attached as Exhibit B hereto shall be the only communication issued to the
public in connection with the matters contemplated by this Agreement, subject to
compliance with applicable federal and state securities law.
<PAGE>
16. Amendments. This Agreement may not be modified, amended or
----------
supplemented except by an agreement in writing signed by all parties.
17. Entire Agreement. This Agreement contains the entire understanding
----------------
and agreement between the parties concerning the subject matter hereof and,
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the parties with respect to such
subject matter, including, but not limited to, the Employment Agreement.
18. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same instrument.
19. American Express Credit Card. Employee will cancel his Company
----------------------------
American Express credit card account as soon as practicable. Company shall pay
all Company charges thereon, and Employee shall pay all personal charges
thereon.
20. Business Expenses. Employee will submit all outstanding business
-----------------
expense vouchers as soon as practicable, and company will pay or reimburse
Employee for all reasonable business expenses.
21. Attorney Fees. The Company will pay Employee's legal fees not to
-------------
exceed $3,500 for Employee and Employee's spouse in the aggregate.
22. Insurance and Indemnity. The Company will use its best efforts to
-----------------------
maintain the current officers and directors insurance coverage as long as it is
reasonably available at a reasonable price, and in the event it expires or is
cancelled, the Company will use its best efforts to buy a tail insurance policy
as long as it is reasonably available at a reasonable price with the objective
of maintaining the same insurance coverage for Employee as for the rest of the
Board. The Company agrees to maintain whatever indemnity provisions are now
existing in its charter and bylaws for the benefit of Employee for six (6)
years. The Company and the Employee understand and agree that this Agreement
shall not be construed as a waiver, release or discharge of the rights and
obligations they have under Executive Liability and Indemnification Policy No.
8146-13-49D, including, but not limited to, coverage for Civil Action No. 3:98-
CV-0744-L, styled Allen Bunting, et al. vs. HealthCor Holdings, Inc., et al.,
and pending in the United States District Court for the Northern District of
Texas.
<PAGE>
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement
as of the date first above written.
HealthCor Holdings, Inc.
By:
----------------------------
Name:
-----------------------
Title:
----------------------
----------------------------
S. Wayne Bazzle
<PAGE>
Exhibit 10.14
EMPLOYMENT TERMINATION AGREEMENT
EMPLOYMENT TERMINATION AGREEMENT (this "Agreement"), dated as of February
25, 1999, by and between HealthCor Holdings, Inc., a Delaware corporation (the
"Company") and Cheryl C. Bazzle ("Employee").
R E C I T A L S:
A. The Company and Employee are parties to that certain Employment
Agreement dated January 8, 1999 (the "Employment Agreement").
B. The Company and Employee desire to terminate Employee's employment with
the Company and to terminate the Employment Agreement, subject to the terms and
conditions hereof.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the receipt and sufficiency of which are hereby acknowledged,
the Company and Employee hereby agree as follows:
1. Termination of Employment; Resignation. Employee hereby tenders, and
--------------------------------------
the Company hereby accepts, Employee's resignation from employment with the
Company. The provisions of this Section 1 shall be effective as of the date
hereof and the parties hereto hereby waive all applicable notices and waiting
periods for the termination of employment. Employee also hereby tenders her
resignation from all positions with the Company and its subsidiaries, including
membership on the board of directors of the Company and any of its subsidiaries.
2. Termination of Employment Agreement. The Employment Agreement is
-----------------------------------
hereby terminated and cancelled. Except as expressly provided herein, no
provision of the Employment Agreement shall survive or be of any force or effect
after the date hereof, including, but not limited to, those provisions of the
Employment Agreement regarding its termination.
3. Benefits. In conjunction with Employee's resignation and the
--------
termination of the Employment Agreement, all benefits, payments, allowances and
other rights granted or paid by, from, or on behalf of, the Company to, or for
the benefit of, Employee, direct or indirect, under the Employment Agreement or
otherwise, shall continue until April 30, 1999 and shall thereupon terminate;
provided, however, that the Company shall continue to provide health insurance
benefits to Employee in accordance with the Company's policy and practice prior
to February 25, 1999, at the cost of the Company, for a period of 18 months from
March 1, 1999.
4. Release and Waiver.
------------------
(a) In consideration of the agreements of the Company hereunder, the
Employee hereby acknowledges and agrees to release the Company of
all duties, obligations or liabilities arising under the
Employment Agreement. The Employee, on behalf of herself and her
predecessors, successors,
<PAGE>
affiliates, assigns, agents, attorneys, heirs, executors,
representatives and any other person or entity who has or could
potentially derive rights through her, hereby irrevocably and
unconditionally releases, waives, acquits and forever discharges,
and agrees to indemnify, defend and hold harmless, the Company and
its affiliates, predecessors, successors, assigns, stockholders,
officers, employees, directors, agents, attorneys and other
representatives, whether past, present or future, from and against
any and all claims, demands, costs, contracts, liabilities,
objections, suits, damages, losses, actions and causes of action
of any nature, type or description, whether at law or in equity,
in contract or tort, or otherwise, known or unknown, or suspected
or unsuspected, that Employee ever had or now has or may claim to
have against the Company, except for claims arising out of this
Agreement.
(b) In consideration of the Employee's agreements hereunder, the
Company hereby acknowledges and agrees to release Employee of all
duties, obligations or liabilities arising under the Employment
Agreement. The Company, on behalf of itself and its predecessors,
successors, affiliates, assigns, agents, stockholders, officers,
employees, directors, attorneys, representatives and any other
person or entity who has or could potentially derive rights
through it, hereby irrevocably and unconditionally releases,
waives, acquits and forever discharges, and agrees to indemnify,
defend and hold harmless, the Employee and her affiliates,
predecessors, successors, assigns, heirs, executors, agents,
attorneys and other representatives, whether past, present or
future, from and against any and all claims, demands, costs,
contracts, liabilities, objections, suits, damages, losses,
actions and causes of action of any nature, type or description,
whether at law or in equity, in contract or tort, or otherwise,
known or unknown, or suspected or unsuspected, that the Company
ever had or now has or may claim to have against Employee, except
for claims arising out of fraud and this Agreement.
5. Nonsolicitation.
(a) Employee hereby agrees that at any time prior to April 30, 2000,
Employee shall not, directly or indirectly,
(i) solicit any current employee, agent or representative to
terminate his or her relationship with the Company; or
(ii) solicit any current customers, dealers, distributors, vendors
or sources of supply to terminate or adversely change their
relationship with the Company.
(b) The Company shall have the right, subject to applicable law, to
inform any other third party that the Company reasonably believes
to be, or to be
<PAGE>
contemplating, participating with Employee or receiving from
Employee assistance in violation of this Agreement, of the terms
of this Agreement and of the rights of the Company hereunder, and
that participation by any such third party with Employee in
activities in violation of this Section 5 may give rise to claims
by the Company against such third party.
6. Confidential Information. Employee shall not, directly or indirectly,
------------------------
reveal, divulge, disclose or otherwise make known to any person, firm or
corporation, any information ("Confidential Information") concerning any matters
affecting or relating to the business of the Company or its affiliates,
including, but not limited to, their manner of operation, any of their
customers, any confidential or proprietary records, customer lists, data, trade
secrets, plans, processes, specifications or opportunities which are the
property of the Company or its affiliates or were learned by Employee in the
course of her relationship with the Company, unless (i) such information has
become publicly available through no act or omission to act on the part of
Employee; (ii) such information was disclosed to Employee by third parties under
no duty of confidentiality to the Company or its affiliates; or (iii) Employee
is required to disclose such Confidential Information by subpoena or under the
order of a court of law. Employee shall give all physical manifestations of
Confidential Information and confidential or proprietary information of the
Company and its affiliates in her control or possession to the Company within
five days after the date hereof. Employee acknowledges all such items are and
remain the sole property of the Company.
7. Payments. In consideration for the termination of the Employment
--------
Agreement and the covenants of the Employee contained herein, the Company agrees
to continue the current salary (calculated on a monthly basis to be Employee's
annual salary divided by 12) of Employee until April 30, 1999, payable at such
times as the Company regularly pays its executive officers. During such period,
upon reasonable prior notice, Employee shall be available during regular
business hours, except for any accrued vacation unpaid after giving effect to
the payment of the two weeks vacation provided for below (provided Employee will
be available for consultation by telephone during any such period), and shall
use her best reasonable efforts to assist Company management in the affairs and
operations of the Company, including review of periodic reports and filings
relating to periods ending prior to the date hereof. The Company also agrees to
pay Employee a sum equal to $118,002 on or before March 3, 1999 and to pay
Employee an additional $118,002 six (6) months from the date hereof. Any payment
required hereunder shall be subject to deductions for such items as required
under any applicable federal or state law, including without limitation,
federal, state and city withholding tax, Medicare and F.I.C.A. The Company
further agrees to pay to Employee two weeks of her accrued but unused vacation
time, calculated as of April 30, 1999. No payment will be made for any accrued
but unpaid sick days. The Company further agrees to transfer the property listed
on Exhibit A attached hereto to the Employee and to allow Employee to remove
such items from the Company. The Company agrees to treat all payments of
compensation hereunder as consulting fees for tax purposes, to the extent it may
lawfully do so, and it is tax efficient to Employee.
8. Consulting Services. During the period commencing May 1, 1999 and
-------------------
ending October 31, 1999, Employee agrees to provide consulting services upon the
prior request of, and subject to reasonable notice from, the Company. Such
consulting services shall be rendered in
<PAGE>
Dallas, Texas at the headquarters of the Company. In addition to the consulting
payments in Section 7 above, the Company agrees to pay Employee the sum of
$187.50 per hour for each hour such consulting services are rendered.
9. Relief. Employee acknowledges and agrees that damages at law would be
------
insufficient for breach of any of Employee's covenants in Sections 4, 5, and 6
of this Agreement. Accordingly, Employee agrees that in the event of a breach or
threatened breach by Employee any such provisions, the Company shall be entitled
to equitable relief in the form of an injunction to prevent irreparable injury.
10. Reformation. If any provision of this Agreement is held to be
-----------
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, in lieu of such illegal, invalid or unenforceable provision,
there shall be added automatically as a part of this Agreement a provision as
similar in terms to such illegal, invalid or unenforceable provision as may be
possible and be legal, valid and enforceable.
11. Further Assurances. From time to time, upon request, Employee and the
------------------
Company shall, without further consideration, execute, deliver and acknowledge
all such further documents, instruments, releases, motions and orders as the
Company or Employee may reasonably require more effectively to evidence or
effectuate the transactions contemplated herein.
12. Waiver. The failure of any party to insist, in any one or more
------
instances, upon performance of any of the terms, covenants or conditions of
this Agreement shall not be construed as a waiver or a relinquishment of any
right or claim granted or arising hereunder or of the future performance of any
such term, covenant, or condition, and such failure shall in no way affect the
validity of this Agreement or the rights and obligations of the parties hereto.
13. LAW GOVERNING. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAWS RULES OR CHOICE OF LAWS RULES THEREOF.
14. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the parties hereto and their respective representatives, heirs,
executors, successors and permitted assigns. The parties hereto shall not be
permitted to assign any of their respective rights or obligations under this
Agreement without the prior written consent of the other party hereto; provided,
however, that the Company shall be permitted to assign its rights under this
Agreement without the prior written consent of Employee in connection with the
sale of all or substantially all of the Company's business (whether by asset
sale, sale of capital stock, merger or otherwise).
15. Press Release. The Company and Employee agree that the press release
-------------
attached as Exhibit B hereto shall be the only communication issued to the
public in connection with the matters contemplated by this Agreement, subject to
compliance with applicable federal and state securities law.
<PAGE>
16. Amendments. This Agreement may not be modified, amended or
----------
supplemented except by an agreement in writing signed by all parties.
17. Entire Agreement. This Agreement contains the entire understanding
----------------
and agreement between the parties concerning the subject matter hereof and,
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the parties with respect to such
subject matter, including, but not limited to, the Employment Agreement.
18. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same instrument.
19. American Express Credit Card. Employee will cancel her Company
----------------------------
American Express credit card account as soon as practicable. Company shall pay
all Company charges thereon, and Employee shall pay all personal charges
thereon.
20. Business Expenses. Employee will submit all outstanding business
-----------------
expense vouchers as soon as practicable, and company will pay or reimburse
Employee for all reasonable business expenses.
21. Attorney Fees. The Company will pay Employee's legal fees not to
-------------
exceed $3,500 for Employee and Employee's spouse in the aggregate.
22. Insurance and Indemnity. The Company will use its best efforts to
-----------------------
maintain the current officers and directors insurance coverage as long as it is
reasonably available at a reasonable price, and in the event it expires or is
cancelled, the Company will use its best efforts to buy a tail insurance policy
as long as it is reasonably available at a reasonable price with the objective
of maintaining the same insurance coverage for Employee as for the rest of the
Board. The Company agrees to maintain whatever indemnity provisions are now
existing in its charter and bylaws for the benefit of Employee for six (6)
years. The Company and the Employee understand and agree that this Agreement
shall not be construed as a waiver, release or discharge of the rights and
obligations they have under Executive Liability and Indemnification Policy No.
8146-13-49D, including, but not limited to, coverage for Civil Action No. 3:98-
CV-0744-L, styled Allen Bunting, et al. vs. HealthCor Holdings, Inc., et al.,
and pending in the United States District Court for the Northern District of
Texas.
<PAGE>
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement
as of the date first above written.
HealthCor Holdings, Inc.
By: _____________________________
Name:________________________
Title:_______________________
_____________________________
Cheryl C. Bazzle
<PAGE>
A
Tatum CFO Partners
Proposal
- Prepared for -
HealthCor Holdings, Inc.
January 1, 1999
<PAGE>
Tatum CFO Retainer Agreement
- -------------------------------------------------------------------------------
This agreement will refer to the following Parties accordingly: HealthCor
Holdings, Inc., - "The Company", and Tatum CFO Partners, LLP. - "Tatum CFO".
I. Retainer Fee
. The Company will pay Tatum CFO a retainer equal to $4,000 per month.
II. Excess Hours
. No additional compensation for hours worked in excess of 40 per week.
III. Bonus
. None.
IV. Payment Terms and Conditions
. The monthly Retainer Fee will be paid to Tatum CFO as long as one of its
Partner is receiving W-2 compensation.
. Company will pay Tatum CFO within 15 days of the invoice date.
V. General Terms and Conditions
. This agreement is cancelable by either party with 30 days written notice.
. The Governing Laws of Texas apply in the interpretation of this Agreement
. Tatum CFO agrees that any proprietary information gained while engaged will
only be used to further the mission of the Company. Hence, such information
will otherwise be kept in strict confidence both during engagement and after
such engagement terminates.
. All Company information, projections and forecasts reflect solely the
assertions of management. Tatum CFO Partners makes no representations as to
the accuracy of such information. Tatum CFO Partners does not directly
provide services to the Company. Tatum CFO Partners provides services
directly to its Partners through its partnership meetings and through CFO
LinkTM in order that the individual Partners can serve their employers
better. With regard to the individual Partners relationship to the company,
each works under the exclusive authority and management of the Employer.
VI. Acknowledgment and Acceptance
I have read and understand the scope of services, deliverables, and fees as
described in this proposal. On behalf of HealthCor Holdings, Inc. I hereby agree
to the terms of this proposal with respect to Tatum CFO Partners, LLP.
Accepted this 1st day of January, 1999.
HealthCor Holdings, Inc.
s/ S. Wayne Bazzle
- ------------------
Signature
S. Wayne Bazzle
Chairman
<PAGE>
The Employment Agreement
- -------------------------------------------------------------------------------
The agreement will refer to the following Parties accordingly: HealthCor
Holdings, Inc., "The Company", and Michael D. Ayres - "Employee".
I. CFO Salary
. A salary equal to $7,500 per bi-weekly pay period will be paid Employee to
provide services to the Company five days a week.
. Employee will be reimbursed all living expenses while located in Dallas,
TX.
. Preapproved travel and out-of-pocket expenses will be reimbursed by the
Company.
II. Payment Terms
. Employee will be paid consistent with the timing and method of other
Company employees.
. Employee's salary will be prorated if this agreement does not begin on the
first day of the month.
III. General Terms and Conditions
. With regards to the Employee's relationship to the Company, the Employee
works under the exclusive legal authority and management of the Company and
not Tatum CFO Partners.
. Employee elects not to participate in any employee benefits unless
specifically set forth within this proposed agreement(s).
. After nine months of employment, the Employee will receive severance equal
to one month's salary. After eighteen months, the Employee will receive
severance equal to two months salary.
. Employee will adopt a vacation policy consistent with a reasonable company
policy as it applies to senior management.
. Employee will in the capacity of Chief Financial Officer as an officer of
the corporation.
IV. Acknowledgment and Acceptance
I have read and understand the scope of services, deliverables, and fees as
described in this proposal. On behalf of HealthCor Holdings, Inc. I hereby
agree to the terms of this proposal with respect to Michael D. Ayres.
Accepted this 1st day of January 1999.
HealthCor Holdings, Inc.
s/ S. Wayne Bazzel
- ------------------
Signature
S. Wayne Bazzle
Chairman
<PAGE>
Exhibit 10.16
The Palmieri Company
April 12, 1999
HealthCor Holdings, Inc.
8150 North Central Expressway
Suite M-2000
Dallas, TX 75206
Gentlemen:
This letter outlines the understanding between The Palmieri Company, a
California corporation ("TPCO") and HealthCor Holdings, Inc., a Delaware
corporation (the "Company") for the engagement of TPCO to provide consulting
services to the Company. This agreement supercedes that certain consulting
agreement entered into between the parties on February 23, 1999.
Services
--------
Victor H. Palmieri and Richard E. Fasold shall, on request of the Company,
provide consultation with and assistance to management as required with
particular emphasis on accomplishing one or more transactions involving the sale
of the Company, its lines of business or other assets prior to June 30, 1999.
Compensation
------------
As compensation for the services to be rendered by Palmieri and Fasold
hereunder, TPCO shall be paid on the basis of the following daily rates:
Victor H. Palmieri- $5,000/day
Richard E. Fasold- $3,000/day
plus expenses at 17.5%.
Relationship of the Parties
---------------------------
The parties intend that an independent contractor relationship will be created
by this agreement. TPCO is not to be considered an employee or agent of the
Company and the employees of TPCO are not entitled to any of the benefits that
the Company provides for the Company's employees.
The Company also agrees not to solicit, recruit or hire any employees or agents
of TPCO for a period of two years subsequent to the completion and/or
termination of this agreement.
Confidentiality
---------------
TPCO agrees to keep confidential all information obtained from the Company.
TPCO agrees that neither it nor its directors, officers, principals, employees,
agents or attorneys will disclose to
<PAGE>
any other person or entity, or use for any purpose other than specified herein,
any information pertaining to the Company or any affiliate thereof which is
either non-public, confidential or proprietary in nature ("Information") which
it obtains or is given access to during the performance of the services provided
hereunder. TPCO may make reasonable disclosures of Information to third parties
in connection with their performance of their obligations and assignments
hereunder. In addition, TPCO will have the right to disclose to others in the
normal course of business its involvement with the Company.
Information includes data, plans, reports, schedules, drawings, accounts,
records, calculations, specifications, flow sheets, computer programs, source or
object codes, results, models, or any work product relating to the business of
the Company, its subsidiaries, distributors, affiliates, vendors, customers,
employees, contractors and consultants.
The Company acknowledges that all advice (written or oral) given by TPCO to the
Company in connection with TPCO's engagement is intended solely for the benefit
and use of the Company (limited to its management) in considering the
transactions to which it relates. The Company agrees that no such advice shall
be used for any other purpose or reproduced, disseminated, quoted or referred to
any time in any manner or for any purpose other than accomplishing the tasks and
programs referred herein or in discussions with the Company's lenders or debt
holders, without TPCO's prior approval (which shall not be unreasonably
withheld) except as required by a court of competent jurisdiction. This
agreement will survive the termination of the engagement.
Indemnification of TPCO
-----------------------
The Company agrees to indemnify, hold harmless, and defend TPCO, Palmieri and
Fasold, from and against all claims, liabilities, loss or damage and reasonable
expenses as incurred, including reasonable legal fees and disbursements of
counsel, relating to or arising out of the engagement, including any legal
proceeding in which TPCO, Palmieri or Fasold may be required or agree to
participate but are otherwise not a named party. TPCO, Palmieri and Fasold may,
but are not required to, engage a firm of separate counsel of their choice in
connection with any of the matters to which this indemnification agreement
relates. This indemnification agreement does not apply to actions taken or
omitted to be taken by us in bad faith.
Indemnification of Officers
---------------------------
In addition to the foregoing indemnification, Palmieri and Fasold shall, along
with any other personnel who may serve as officers of the Company, be
individually covered by the same indemnification and directors' and officers'
liability insurance as is applicable to such other officers of the Company.
Termination and Survival
------------------------
The agreement may be terminated at any time by written notice by either party
effective to the last day of the succeeding month; provided, however, that
notwithstanding such termination TPCO will be entitled to any fees and expenses
under the provisions of the agreement. Such payment obligation shall inure to
the benefit of any successor or assignee of TPCO. Provided further, this
agreement will immediately terminate at such time as the Company is unable to
meet payroll as evidenced by written notice from TPCO.
<PAGE>
The obligations of the parties under the Indemnification of TPCO,
Indemnification of Officers, and Confidentiality sections of this agreement
shall survive the termination of the agreement as well as the other sections of
this agreement which expressly provide that they shall survive termination of
this agreement.
Governing Law
-------------
This letter agreement is governed by and construed in accordance with the laws
of the State of New York with respect to contracts made and to be performed
entirely therein and without regard to choice of law or principals thereof.
Conflicts
---------
We know of no fact or situation which would represent a conflict of interest for
us with regard to the Company.
Severability
------------
If any portion of the letter agreement shall be determined to be invalid or
unenforceable, we each agree that the remainder shall be valid and enforceable
to the maximum extent possible.
Entire Agreement
----------------
All of the above contains the entire understanding of the parties relating to
the services to be rendered by TPCO and may not be amended or modified in any
respect except in writing signed by the parties.
Notices
-------
All notices required or permitted to be delivered under this letter agreement
shall be sent, if to us, to the address set forth at the head of this letter, to
the attention of Victor H. Palmieri, and if to you, to the address for you set
forth above, to the attention of your General Counsel, or to such other name or
address as may be given in writing to the other party. All notices under the
agreement shall be sufficient if delivered by facsimile or overnight mail. Any
notice shall be deemed to be given only upon actual receipt.
If these terms meet with your approval, please sign and return the enclosed copy
of this proposal.
We look forward to working with you.
Sincerely yours,
THE PALMIERI COMPANY
_______________________________
Victor H. Palmieri
Chairman and Chief Executive Officer
<PAGE>
Acknowledged and Agreed to:
HEALTHCOR HOLDINGS, INC.
__________________________________
By: ______________________________
Its: _____________________________
Dated: ___________________________
<PAGE>
January 1, 1999
Mr. S. Wayne Bazzle
Chairman and Chief Executive Officer
HealthCor Holdings, Inc.
8150 North Central Expressway, Suite M2000
Dallas, Texas 75206
Dear Mr. Bazzle:
This letter confirms (the "Agreement") our understanding that HealthCor
Holdings, Inc. (together with its subsidiaries and affiliates, the "Company")
has engaged CKM Capital LLC ("CKM") to act as financial advisor and agent to the
Company in connection with a person, a group of persons, partnership, joint
venture, corporation or other entity (each, together with its affiliates, a
"Prospective Buyer") who would who would be interested in entering a Transaction
with the Company. A transaction shall mean (a) any merger, consolidation,
recapitalization, business combination or other transaction to which the Company
is acquired by, or combined with, a Prospective Party or (b) the acquisition,
directly or indirectly, by a Prospective Buyer, in a single transaction or a
series of transactions, of (i) all or substantially all of the assets of
operations of the Company (collectively, the "Transaction") (c) the private
placement or raising (the "Financing"): (i) a term loan ("Loan"); (ii)
subordinated notes ("Subordinated Notes"); and (iii) equity ("Equity"),
(collectively, the Subordinated Notes and the Equity, the "Securities") on a
best efforts basis on terms satisfactory to the Company.
The Securities if issued will not be registered under the Securities Act of
1933 (the "Act"), as amended except pursuant to an exemption from or in a
transaction not subject to, the registration requirements of the Act and
applicable state securities laws. Accordingly, the Securities will be offered
and sold only (a) within the United States to (i) "Qualified Institutional
Buyers" (as defined in Rule 144A under the Act) in compliance with Rule 144A and
(ii) to a limited number of other institutional "Accredited Investors" (as
defined in rule 501(a) (1), (2), (3) or (7) under the Act) that execute and
deliver a letter containing certain representations and agreements and (b)
outside the United States in compliance with regulations under the Act.
Section 1. Services to be Rendered. In connection with the Transaction
-----------------------
and/or Financing, CKM will perform the following financial advisory services:
(i) assist in the preparation of materials with respect to the Securities
describing the Company and its operations, historical performance and future
prospects (the "Private Offering Materials"); (ii) contact selected qualified
purchasers of the Securities and Loan (the "Purchasers") with respect to the
proposed Transaction and/or Financing of the Company; (iii) assist in
structuring the proposed Transaction and/or Financing; (iv) develop Transaction
and/or Financing proposals; and (v) assist the Company in negotiating the
financial aspects of the proposed Transaction and/or Financing. Nothing
contained herein constitutes a commitment on the part of CKM to purchase any
securities.
<PAGE>
January 1, 1999
Mr. S. Wayne Bazzle
Page 2
In addition, CKM will render an opinion to the Board of Directors of the
Company as to the fairness of any Transaction, from a financial point of view,
to the public shareholders of the Company (the "Opinion").
Section 2. Compensation. (a) As compensation for services to be provided
------------
by CKM hereunder, the Company agrees to pay to CKM 1.00% of the total
consideration paid by a purchaser in the Transaction (the "Transaction Fee") in
respect of (i) assets or operations of the Company or (ii) Company Securities
plus the amount of indebtedness of the Company which is directly or indirectly
(by operation of law or otherwise) assumed, repaid or otherwise discharged in
the Transaction (including without limitation, indebtedness secured by assets of
the Company).
(b) In the event the Company consummates the Financing, in connection with
or separately of the Transaction, CKM shall be paid a Financing Fee ("Financing
Fee") equal to 1.5% of the gross proceeds of any Loan raised ("Loan Fee"), 3.5%
of the gross proceeds of any subordinated notes sold (the "Debt Placement Fee"),
and 6.0% of the gross proceeds of any equity sold (the "Equity Placement Fee,"
collectively, the Loan Fee, the Debt Placement Fee, and the Equity Placement
Fee, the "Financing Fee") upon consummation of the proposed Financing. The
Financing Fee and the Transaction Fee shall be paid in cash. Nothing previously
agreed to (including the terms of the engagement letter dated October 21, 1998
between HealthCor and CKM ("October Agreement")) shall reduce the Transaction
Fee and or Financing Fees payable under this Agreement. Nothing in this
Agreement shall reduce the Recapitalization and Financing Fees, as defined in
the October Agreement, payable under the October Agreement. In no event shall
the total fee earned by CKM in this Agreement exceed $4 million. In addition,
if the Opinion is rendered by a party other than CKM such fee shall be deducted,
not to exceed $300,000, from the Transaction Fee.
(c) Further, the Company will be responsible for all other reasonable
expenses incurred by the Company and associated with the placement of the
Financing including, its own accounting and legal fees, printing and travel
costs, and legal costs of the proposed Purchasers. The Company also agrees to
reimburse CKM promptly for all reasonable out-of-pocket expenses (including
without limitation any and all fees and expenses of CKM's counsel up to
$75,000). CKM will not engage other brokers or agents for the purpose of
assisting with the Financing without prior written approval of the Company.
The proposed Financing shall be deemed to have been consummated and the
Financing Fee provided hereunder shall become earned and payable upon the
funding from Purchasers, and such fees to be paid hereunder shall be paid on
closing. The Transaction shall be deemed to have been consummated and the
Transaction Fee provided hereunder shall become earned and payable upon
consummation of a Transaction approved by the Board of Directors of the Company.
The Company agrees to the Indemnification and other obligations set forth in
Schedule I hereto, which Schedule I is an integral part hereof and is hereby
incorporated herein by reference. Each party to this Agreement agrees to
promptly pay to the prevailing party all expenses, (including attorneys' fees
and expenses) in connection with the enforcement of this Agreement.
<PAGE>
January 1, 1999
Mr. S. Wayne Bazzle
Page 3
Without limiting anything else contained herein, no fee payable, including
the Loan Fee, the Debt Placement Fee, the Equity Placement Fee, and the
Transaction Fee to any other financial advisor by the Company or any other
entity shall reduce or otherwise affect the fees payable hereunder to CKM.
Section 3. Term of Engagement. This Agreement shall run for an initial
------------------
term (the "Initial Term") of twelve (12) months and may be terminated at any
time after the Initial Term by either party hereto upon 30 days' written notice
or may be extended by mutual agreement on subsequent twelve (12) month terms
(the "Extended Term") after the expiration of the Initial Term.
Upon any termination or expiration of this Agreement, CKM will be entitled
to prompt payment of all fees accrued prior to such termination or expiration
described above. Sections 2, 5, and 6 of this Agreement and the indemnity and
other provisions contained in Schedule I will also remain operative and in full
force and effect regardless of any termination or expiration of this Agreement.
If CKM is terminated after the Initial Term or the Extended Term, and CKM has
arranged the proposed Transaction and/or Financing, which was not consummated by
the Company, then CKM shall be entitled to payment of the Transaction Fee and/or
the Financing Fee(s) if a placement of the Securities, raising of the Loan, as
the case may be, is consummated within twelve (12) months of such termination or
expiration with any of the entities contacted by CKM ("Protected Buyers") during
the term(s) of this Agreement.
The names of the Protected Buyers shall be provided to the Company in
writing within five (5) days from the effective date of termination or
expiration of this Agreement.
Section 4. Cooperation. The Company shall furnish CKM with all financial
-----------
and other information and data as CKM believes appropriate in connection with
its activities on the Company's behalf, and shall provide CKM full access to its
officers, directors, employees and professional advisors.
In addition, the Company and CKM will jointly prepare Private Offering
Materials, if any, relating to the proposed Financing. The Company and its
counsel will be solely responsible for ensuring that the Financing and the
Private Offering Materials comply in all respects with the applicable law. The
Company authorizes CKM to transmit the Private Offering Materials to prospective
Purchasers approved by the Company and represent and warrant that the Private
Offering Materials, at all times through the closing, to the best of the
Company's knowledge, will not contain any untrue statement of material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading. The Company will also cause to be furnished to
CKM at the closing copies of such agreements, opinions, certificates and other
documents delivered at the closing as Purchasers may reasonably request. The
Company will promptly notify CKM if the Company learns of any material
inaccuracy or misstatement in, or material omission from, any information
theretofore delivered to CKM.
<PAGE>
January 1, 1999
Mr. S. Wayne Bazzle
Page 4
The Company recognizes and confirms that CKM, in connection with performing
its services hereunder, (i) will be relying without investigation upon
information that is available from public sources or supplied to it by or on
behalf of the Company or its advisors, (ii) shall not in any respect be
responsible for accuracy or completeness of, or have any obligation to verify
the same, (iii) will not conduct any appraisal of any assets of the Company, and
(iv) may require that the Private Offering Materials contain appropriate
disclaimers consistent with the foregoing. The Company has not taken, and will
not take, any action, directly or indirectly, so as to cause the Financing to
fail to be exempt from registration under the Act.
Section 5. Confidentiality. The Company agrees that any advice, written
---------------
or oral, provided by CKM pursuant to this Agreement will be treated by the
Company as confidential, will be used solely for the information and assistance
of the Company in connection with its consideration of a transaction of the type
referred to in the first paragraph of this Agreement and will not be used,
circulated, quoted or otherwise referred to for any other purpose, included in
or referred to, in whole or in part, in any or any other communication, whether
written or oral, prepared, issued or transmitted by the Company or any
affiliate, director, officer, employee agent or representative of any thereof,
without, in each instance, CKM's prior written consent; provided, however, that
the foregoing shall not apply to any information which the Company is required
to disclose by judicial or administrative process in connection with any action,
suit, proceeding, or claim, provided that the Company is given prior notice and
a reasonable opportunity to contest the applicability of or minimize the scope
of such required disclosure.
Further, in connection with this engagement of CKM, it is contemplated that
the Company may supply to CKM certain non-public or proprietary information
concerning the Company ("Confidential Information"). CKM shall use Confidential
Information solely for the purposes of rendering services pursuant and in
accordance with this engagement and shall not, without the prior written consent
of the Company, disclose any Confidential Information to any person, other than
its officers, directors, employees and outside advisors with a need to know,
provided, however, that the foregoing shall not apply to any information which
CKM is required to disclose by judicial or administrative process in connection
with any action, suit, proceeding or claim provided that the Company is given
prior notice and a reasonable opportunity to contest the applicability of or
minimize the scope of such required disclosure.
Section 6. Conflicts; Limitation. The Company acknowledges that CKM and
---------------------
its affiliates may have and may continue to have investment banking and other
relationships with parties other than the Company pursuant to which CKM may
acquire information of interest to the Company. CKM shall have no obligation to
disclose such information to the Company, or to use such information in
connection with any contemplated transaction. The Company recognizes that CKM
has been retained only by the Company, and that the Company's engagement of CKM
is not deemed to be on behalf of and is not intended to and does not confer
rights upon any stockholders, owner or partner of the Company or any officers,
agents, employees or representatives of either CKM or any of CKM's affiliates.
No one other than the Company is authorized to rely upon the engagement of CKM
hereunder or any statements, advice, opinions or conduct by CKM.
<PAGE>
January 1, 1999
Mr. S. Wayne Bazzle
Page 5
Section 7. Public Announcements. CKM shall have the right to place
--------------------
announcements and advertisements in financial and other newspapers and journals,
at its own expense, describing its services in connection with the Financing,
provided that CKM obtains the Company's prior written consent.
Section 8. Complete Agreement; Severability; Amendments; Assignment. This
--------------------------------------------------------
Agreement embodies the entire agreement and understanding between the parties
hereto and supersedes any prior agreements and understandings relating to the
subject matter hereof. If any provision of this Agreement is determined to be
invalid or unenforceable in any respect, such determination will not affect such
provision in any other respect or any other provision of this Agreement, which
will remain in full force and effect. This Agreement may not be amended or
otherwise modified or waived expect by an instrument in writing signed by both
CKM and the Company. This Agreement may not be assigned by either party without
the prior written consent of each party.
Section 9. Governing Law; Forum. This Agreement will be governed by, and
--------------------
construed in accordance with, the laws of the State of California applicable to
agreements made and to be performed entirely in such state.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to CKM the enclosed original copy of this Agreement.
Very truly yours,
CKM Capital LLC
By: _______________________________
Russell A. Belinsky
Managing Director
Agreed to and accepted as of the date
first written above.
HealthCor Holdings, Inc.
By: _______________________________
S. Wayne Bazzle
Chairman and Chief Executive Officer
<PAGE>
January 1, 1999
Mr. S. Wayne Bazzle
Page 6
HealthCor Holdings, Inc.
Schedule I
This Schedule I is a part of and is incorporated into that certain letter
agreement (the "Agreement"), dated January 1, 1999, by and between HealthCor
Holdings, Inc. (together with its subsidiaries and affiliates, the "Company"),
and CKM Capital LLC ("CKM"). Capitalized terms used herein and not defined
herein shall have the meaning assigned thereto in the Agreement.
The Company agrees, jointly and severally, to indemnify and hold harmless
CKM and its affiliates, the respective directors, officers, attorneys and other
agents, stockholders and employees of CKM and its affiliates and each other
person, if any, controlling CKM or any of its affiliates (CKM and each such
person and entity being referred to as an "Indemnified Person"), to the fullest
extent lawful, from and against any losses, claims, damages or liabilities or
actions (including without limitation shareholder actions and actions arising
from the use of information contained in any document associated with the
transaction or omissions from such materials) related to or arising out of this
engagement or any Indemnified Person's role in connection herewith, and will pay
(or, if paid by an Indemnified Person, reimburse such Indemnified Person) for
all reasonable fees and expenses (including without limitation reasonable
counsel fees) incurred by such Indemnified Person in connection with
investigating, preparing or defending any such action or claim, whether or not
in connection with pending or threatened litigation in which any Indemnified
Person is a party. The Company will not, however, be responsible for any claims,
liabilities, losses, damages or expenses that result from any compromise or
settlement not approved by the Company or that result primarily from the fraud,
willful misconduct or gross negligence of any Indemnified Person. The Company
also agrees that no Indemnified Person shall have any liability to the Company
for or in connection with this engagement, except for any such liability for
losses, claims, damages, liabilities or expenses incurred by the Company that
result from the fraud, willful misconduct or gross negligence of the Indemnified
Person or breach by the Indemnified Person of the Agreement. The foregoing
agreement shall be in addition to any rights that any Indemnified Person may
have at common law or otherwise, including without limitation any right to
contribution.
<PAGE>
January 1, 1999
Mr. S. Wayne Bazzle
Page 7
If any action or proceeding is brought against any Indemnified Person in
respect of which indemnity may be sought against the Company pursuant hereto, or
if any Indemnified Person receives notice from any potential litigant or a claim
which such person reasonably believes will result in the commencement of any
such action or proceeding, such Indemnified Person shall promptly notify the
Company in writing of the commencement of such action or proceeding, or of the
existence of any such claim, but the failure to so notify the Company of any
such action or proceeding shall not relieve the Company from any other
obligation or liability that the Company may have to any Indemnified Person,
except to the extent that the failure to so notify the Company prejudices the
Company. If any such action or proceeding shall be brought against any
Indemnified Person, the Company shall be entitled to assume the defense of such
action or proceeding with counsel of the Company's choice, or compromise or
settle such action or proceeding, at its expense (in which case the Company
shall not thereafter be responsible for the fees and expenses of any separate
counsel retained by such Indemnified Person); provided, however, that such
counsel shall be satisfactory to the Indemnified Person in the exercise of its
reasonable judgment. Notwithstanding the Company's election to assume the
defense of such action or proceeding, such Indemnified Person shall have the
right to employ separate counsel and to participate in the defense of such
action or proceeding, and the Company shall bear the reasonable fees, costs and
expenses of such separate counsel (and shall pay such fees, costs and expenses
at least quarterly), if (a) the use of counsel chosen by the Company to
represent such Indemnified Person would, in the reasonable judgment of the
Indemnified Person, present such counsel with a conflict of interest; (b) the
defendants in, or targets of, any such action or proceeding include both an
Indemnified Person and the Company, and such Indemnified Person shall have
reasonably concluded that there may be legal defenses available to it or to
other Indemnified Persons that are different from or additional to those
available to the Company (in which case the Company shall not have the right to
direct the defense of such action or proceeding on behalf of the Indemnified
Person); (c) the Company shall not have employed counsel reasonably satisfactory
to such Indemnified Person in the exercise of the Indemnified Person's
reasonable judgment to represent such Indemnified Person within a reasonable
time after notice of the institution of such action or proceeding; or (d) the
Company shall authorize such Indemnified Person to employ separate counsel at
the Company's expense.
CKM agrees to indemnify and hold harmless the Company, its directors,
officers, attorneys and other agents and employees, to the same extent as the
foregoing indemnity from the Company to CKM, but only with respect to
information relating to CKM furnished by CKM in writing for use in the Private
Offering Materials. In case any action or proceeding shall be brought against
the Company or its directors, officers, attorneys and other agents or employees,
in respect of which indemnity may be sought against CKM. CKM shall have the
rights and duties given the Company and the Company, its directors, officers,
attorneys and other agents and employees shall have the rights and duties given
to CKM, by the preceding paragraphs.
<PAGE>
January 1, 1999
Mr. S. Wayne Bazzle
Page 8
In order to provide for just and equitable contribution, if a claim for
indemnification hereunder is found unenforceable in a final judgment by a court
of competent jurisdiction (not subject to further appeal), even though the
express provisions hereof provide for indemnification in such case, then the
Company and CKM shall contribute to the losses, claims, damages, judgments,
liabilities or costs to which the Indemnified Person may be subject in
accordance with the relative benefits received by, and the relative fault of,
each in connection with the statements, acts or omissions that resulted in such
losses, claims, damages, judgments, liabilities or costs. The Company agrees
that a pro rata allocation would be unfair. No person found liable for a
fraudulent misrepresentation or omission shall be entitled to contribution from
any person who is not also found liable for such fraudulent misrepresentation or
omission. Notwithstanding the foregoing, CKM shall not be obligated to
contribute to any amount hereunder that exceeds the amount of fees received by
CKM for its services to the Company in connection with its engagement hereunder.
These indemnification, contribution and other provisions shall (i) remain
operative and in full force and effect regardless of any termination of, or
completion of the engagement by CKM; (ii) inure to the benefit of any
successors, assigns, heirs or personal representative of any Indemnified Person;
and (iii) be in addition to any other rights that any Indemnified Person may
have.
<PAGE>
April 1, 1999
Mr. Michael Ayres
Chief Financial Officer and Acting Chief Executive Officer
HealthCor Holdings, Inc.
8150 North Central Expressway, Suite M2000
Dallas, Texas 75206
Dear Mr. Ayres:
This letter agreement (the "Agreement") amends in certain respects that letter
agreements dated October 21, 1998 and dated January 1, 1999 (collectively the
"HealthCor Agreements") by and between HealthCor Holdings, Inc. (together with
its subsidiaries and affiliates, the "Company") and CKM Capital LLC ("CKM")
whereby the Company engaged CKM and its affiliates to act as financial advisor
and/or agent to the Company as defined in the respective HealthCor Agreements.
Capitalized terms not defined herein shall have the meanings ascribed to them in
the HealthCor Agreements.
1. Compensation (a) As compensation for services provided by CKM, the Company
------------
agrees to pay CKM a financial advisory fee of $500,000 (the "Advisory Fee") in
two (2) parts: (i) the Company agrees to pay CKM $75,000 per month ("Monthly
Advisory Fee"), from November 1998 through March 1999 for a total of $375,000;
and (ii) the balance of the Advisory Fee, $125,000, shall be paid at the
earliest of a Transaction(s) or six months from the date of this Agreement. The
first part of the Advisory Fee, $375,000, is due and payable on or before April
6, 1999.
(b) In addition, CKM shall be paid a transaction fee equal to 1.25% of the
gross purchase price of a single transaction or a series of Transaction(s) that
involve the sale of all the operating units, excluding accounts receivable, of
the Company (the "Transaction Fee"). The Advisory Fee and the Transaction Fee
shall be paid in cash.
(c) Further, the Company will be responsible for all outstanding expenses
incurred by CKM and other reasonable out-of-pocket expenses, as defined in the
HealthCor Agreements, incurred by CKM which shall be reimbursed on a monthly
basis upon the submission of invoices by CKM.
Without limiting anything else contained herein, no fee payable, including
the Advisory Fee, and the Transaction Fee to any other financial advisor by the
Company or any other entity shall reduce or otherwise affect the fees payable
hereunder to CKM. In addition, this does not obligate the Company under the
HealthCor Agreements to pay any additional fee to CKM except as delineated
above.
<PAGE>
Mr. Michael Ayres
April 1, 1999
Page 2
The Company acknowledges that a Transaction(s) may include the solicitation
of acceptances of a "prepackaged" plan of reorganization pursuant to Chapter 11
of the United States Bankruptcy Code.
The Company further acknowledges and agrees that, at such time as the
Company has obtained formal acceptances of such plan sufficient to have such
plan approved pursuant to Section 1126(b) of the United States Bankruptcy Code
(including through the use of cramdown procedures), CKM thereupon shall have
completed all of the work contemplated to be performed pursuant to the HealthCor
Agreements only and that the Transaction Fee shall have been earned in full.
It is further intended by the parties hereto that such of CKM's fees
payable pursuant hereto, but remaining unpaid at the time of such a filing,
shall be in the nature of a pre-petition claim for administrative expenses. It
is the Company's intention to include in the prepackaged plan of reorganization
submitted to the United States bankruptcy court (the "Bankruptcy Court")
appropriate provisions designed to effectuate the parties' intentions as
described in the immediately preceding sentence. With respect to all fees and
expenses of CKM'S counsel as provided for in the HealthCor Agreements, the
Company intends that to the extent such amounts are not paid in full prior to
the filing of a petition, it will treat such amounts as pre-petition claims for
administrative expenses.
Although some of CKM's services will have been performed prior to the
filing by the Company of a petition under the United States Bankruptcy Code,
given CKM's extensive familiarity with the Company, its financial condition and
the anticipated negotiations of a plan or Transaction(s), the parties hereto
acknowledge that it may be desirable for CKM to render certain ancillary
services to the Company in aid of the confirmation of such plan or
Transaction(s). CKM agrees to provide such services as provided in the
HealthCor Agreements, which may also include assisting the Company in preparing
for court hearings and testifying in court for a period not to exceed nine
months from the date of the filing of such petition and shall be compensated at
the Monthly Advisory Fee rate plus the reimbursement of its reasonable out-of-
pocket expenses.
Notwithstanding the previous paragraphs all other provisions of the HealthCor
Agreements shall remain in full force and effect.
<PAGE>
Mr. Michael Ayres
April 1, 1999
Page 3
Please confirm that the forgoing correctly sets forth our agreement by
signing and returning to CKM the enclosed original copy of this agreement.
Very Truly Yours,
CKM CAPITAL LLC
By:_________________________
Eric A. Scroggins
Vice President
Agreed to and accepted as of the date
first written above.
HEALTHCOR HOLDINGS, INC.
By:_________________________
Michael Ayres
Chief Financial Officer and Acting Chief Executive Officer
<PAGE>
EXHIBIT 11.1
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
UNAUDITED
<TABLE>
<CAPTION>
Basic and diluted earnings per share Years Ended December 31,
---------------------------
1998 1997 1996
-------------------- ------------------ -----------------
<S> <C> <C> <C>
Net income (loss) $(98,270,302) $(15,638,413) $5,332,008
==================== ================== =================
Shares:
Weighted average common shares issued 10,091,340 10,053,734 7,770,175
Assuming exercise of options, reduced by the
number of common shares which could have
been purchased with the proceeds from
exercise of such options -- -- 270,075
-------------------- ------------------ -----------------
Weighted average number of common shares
outstanding, as adjusted 10,091,340 10,053,734 8,040,250
==================== ================== =================
Net income (loss) per common share:
Basic earnings (loss) per share $ (9.74) $ (1.56) $ 0.69
==================== ================== =================
Diluted earnings (loss) per share $ (9.74) $ (1.56) $ 0.66
==================== ================== =================
</TABLE>
58
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K into the Company's previously
filed Registration Statement on Form S-8, No. 333-10967.
ARTHUR ANDERSEN LLP
Dallas, Texas
April 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM DECEMBER 31, 1998 10-K BALANCE SHEET & INCOME STATEMENT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,947,953
<SECURITIES> 0
<RECEIVABLES> 61,657,292
<ALLOWANCES> (33,195,273)
<INVENTORY> 3,799,805
<CURRENT-ASSETS> 39,346,159
<PP&E> 52,820,492
<DEPRECIATION> (31,479,747)
<TOTAL-ASSETS> 74,263,349
<CURRENT-LIABILITIES> 132,365,539
<BONDS> 80,000,000
0
0
<COMMON> 100,926
<OTHER-SE> 39,908,781
<TOTAL-LIABILITY-AND-EQUITY> 74,263,346
<SALES> 115,741,421
<TOTAL-REVENUES> 115,741,421
<CGS> 59,716,603
<TOTAL-COSTS> 143,115,968
<OTHER-EXPENSES> (11,303,568)
<LOSS-PROVISION> 87,094,150
<INTEREST-EXPENSE> (11,485,236)
<INCOME-PRETAX> (98,397,718)
<INCOME-TAX> (127,416)
<INCOME-CONTINUING> (98,270,302)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (98,270,302)
<EPS-PRIMARY> (9.74)
<EPS-DILUTED> (9.74)
</TABLE>
