<PAGE> 1
FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ------------------
Commission file number: 0-22977
VISION TWENTY-ONE, INC.
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-3384581
- --------------------------------------------- ------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION I.R.S. EMPLOYER IDENTIFICATION)
OR ORGANIZATION) NO.
7209 BRYAN DAIRY ROAD
LARGO, FLORIDA 33777
- --------------------------------------------- ------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 545-4300
NOT APPLICABLE
- -------------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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 such
filing requirements for the past 90 days.
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The registrant had 8,591,234 Shares outstanding as of September 30, 1997.
<PAGE> 2
INDEX
PART 1-FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1 - Consolidated Financial Statements
Consolidated Statements of Operations for the Three Months
Ended September 30, 1996 and 1997 (Unaudited)
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1996 and 1997 (Unaudited)
Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997 (Unaudited)
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1996 and 1997 (unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Report of Independent Certified Public Accountants
Financial Statements of BBG-COA, Inc.
Notes to Consolidated Financial Statements
Unaudited Pro Forma Consolidated Financial Information
- Basis of Presentation
Unaudited Pro Forma Consolidated Statements of
Operations - Year Ended December 31, 1996
Unaudited Pro Forma Consolidated Statements of
Operations Nine-Month Period Ended September 30, 1997
Unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 1997
Notes to Unaudited Pro Forma Financial Information
Item 6 - Exhibits and Reports on Form 8-K
Signature
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended
- ------------------------------------------------------------ -------------------------------------------
September 30, September 30,
1996 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Managed care......................................... $ 1,609,982 $ 3,519,039
Practice management fees............................. 321,093 8,380,001
Other revenue........................................ 58,270 $ 165,133
----------- -----------
Total revenue.......................................... 1,989,345 12,064,173
----------- -----------
Operating expenses:
Medical claims....................................... 2,189,435 3,010,324
Practice management expenses......................... -- 6,696,447
Salaries, wages and benefits......................... 684,578 1,222,529
General and administrative (including $13,000 to
related parties for rent in 1996).................. 281,654 537.094
Depreciation and amortization........................ 19,508 386,894
----------- -----------
Total operating expenses............................... 3,175,175 11,853,288
----------- -----------
Income (loss) from operations.......................... (1,185,830) 210,885
Interest expense....................................... 36,409 209,377
----------- -----------
Income (loss) before income taxes...................... (1,222,239) 1,508
Income taxes........................................... -- --
----------- -----------
Income (loss) before extraordinary
charge............................................... (1,222,239) 1,508
Extraordinary charge - early extinguishment
of debt.............................................. -- 323,346
----------- -----------
Net loss............................................... $(1,222,239) $ (321,838)
=========== ===========
Loss before extraordinary charge
per common share..................................... $ (0.20) $ --
Extraordinary charge per common share.................. -- (0.04)
------------ -----------
Net loss per common share.............................. $ (0.20) $ (0.04)
=========== ===========
Weighted average number of common
shares outstanding................................... 5,979,543 7,822,707
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE> 4
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, September 30,
1996 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Practice management fees............................. $ 555,408 $19,684,406
Managed care......................................... 5,307,075 9,307,430
Other revenue........................................ 163,344 451,925
----------- -----------
Total revenue.......................................... 6,025,827 29,443,761
----------- -----------
Operating expenses:
Practice management expenses......................... -- 15,977,619
Medical claims....................................... 7,319,446 8,052,709
Salaries, wages and benefits......................... 1,374,832 3,405,067
General and administrative (including $39,000 to
related parties for rent in 1996).................. 662,213 1,339,555
Depreciation and amortization........................ 35,222 954,313
----------- -----------
9,391,713 29,729,263
----------- -----------
Loss from operations................................... (3,365,886) (285,502)
Interest expense....................................... 66,147 740,777
----------- -----------
Loss before income taxes............................... (3,432,033) (1,026,279)
Income taxes........................................... -- --
----------- -----------
Loss before extraordinary charge....................... (3,432,033) (1,026,279)
Extraordinary charge - early extinguishment
of debt.............................................. -- 323,346
----------- -----------
Net Loss............................................... $(3,432,033) $(1,349,625)
=========== ===========
Loss before extraordinary charge per common share...... (.57) (.15)
Extraordinary charge per common share.................. -- (.05)
----------- -----------
Net loss per common share.............................. $ (.57) $ (.20)
=========== ===========
Weighted average number of common
shares outstanding................................... $ 5,979,543 $ 6,670,779
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE> 5
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
Current Assets
Cash and cash equivalents............................................ $ 67,353 $ 2,615,335
Accounts receivable, net of allowance for doubtful accounts
of $685,000 and $2,620,000 in 1996 and 1997,
respectively........................................................ 1,968,587 7,471,833
Other receivables ................................................... 185,263 1,321,389
Prepaid expenses and other current assets............................ 192,789 889,941
----------- -----------
Total current assets.......................................... 2,413,992 12,298,498
Fixed assets, net...................................................... 1,941,259 3,263,943
Intangible assets, net of accumulated amortization
of $29,125 and $298,340 in 1996 and 1997,
respectively......................................................... 11,022,396 28,050,825
Deferred offering costs................................................ 287,792 --
Other assets........................................................... 46,792 157,489
----------- -----------
Total Assets $15,712,231 $43,770,755
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................................... 529,427 955,998
Accrued expenses..................................................... 946,519 967,261
Accrued acquisition and offering costs............................... 1,362,012 --
Accrued compensation................................................. 546,740 1,317,385
Due to Managed Professional Associations............................. -- 1,814,691
Due to Selling Shareholders.......................................... -- 3,800,228
Current portion of long-term debt.................................... 48,249 112,889
Current portion of obligations under capital leases.................. 43,849 289,742
Medical claims payable............................................... 1,793,861 1,457,866
----------- -----------
Total current liabilities..................................... 5,270,657 10,716,060
Deferred rent payable.................................................. 263,006 262,376
Obligations under capital leases....................................... 71,870 111,046
Long-term debt, less current portion $5,983,098 and $.00 to related
parties in 1996 and 1997, respectively,.............................. 7,570,974 66,264
Deferred income taxes.................................................. -- 1,716,000
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 10,000,000 shares
authorized in 1996 and 1997, no shares issued...................... -- --
Common stock, $.001 par value; 50,000,000 shares authorized;
3,715,625 (1996) and 8,591,234 (1997).............................. 3,716 8,591
Additional paid in capital........................................... 4,736,361 40,269,136
Common stock to be issued (1,491,397 shares in 1996)................. 5,905,965 --
Deferred compensation................................................ (517,035) (435,810)
Accumulated deficit.................................................. (7,593,283) (8,942,908)
----------- -----------
Total stockholders' equity ................................... 2,535,724 30,899,009
----------- -----------
Total liabilities and stockholders' equity............... $15,712,231 $43,770,755
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 6
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED SEPTEMBER 30, 1997
-------------------------------------------
1996 1997
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... $(3,432,033) $ (1,349,625)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Extraordinary charge - early extinguishment of debt...... -- 323,346
Depreciation and amortization............................ 35,222 954,313
Non-cash compensation expense............................ -- 71,250
Amortization of deferred compensation.................... -- 81,225
Interest accretion....................................... -- 41,477
Changes in operating assets and liabilities, net of
effects from business combinations:
Accounts receivable, net.............................. (568,128) (3,170,230)
Other receivables..................................... 80,481 (1,136,126)
Prepaid expenses and other current assets............. (11,412) (461,214)
Other assets.......................................... (122,836) (110,697)
Accounts payable...................................... 252,109 104,223
Accrued expenses...................................... (1,617) (190,486)
Accrued compensation.................................. 90,594 436,289
Medical claims payable................................ 1,156,689 (335,995)
Due to Managed Professional Associations.............. (27,741) 1,814,691
----------- ------------
Net cash used in
operating activities.............................. (2,548,672) (2,927,559)
INVESTING ACTIVITIES
Purchases of furniture and equipment, net.................. (253,055) (272,044)
Payments for business acquired............................. -- (700,000)
Payments for capitalized acquisition costs................. (1,071,330) (3,928,495)
----------- ------------
Net cash used in investing activities............... (1,324,385) (4,900,539)
FINANCING ACTIVITIES
Net proceeds from sale of common stock..................... 750,000 19,530,000
Payments for offering costs................................ -- (1,473,539)
Proceeds from long term debt............................... 3,266,187 2,000,000
Payments on long term debt................................. (22,173) (9,806,381)
Proceeds from credit facility.............................. -- 4,874,000
Payments on credit facility................................ -- (4,874,000)
Sale of detachable stock purchase warrant.................. -- 126,000
Capital distribution....................................... (49,855) --
----------- ------------
Net cash provided by
financing activities.............................. 3,944,159 10,376,080
Increase in cash........................................... 71,102 2,547,982
Cash and cash equivalents at beginning of period........... 42,272 67,353
----------- ------------
Cash and cash equivalents at end of period................. $ 113,374 $ 2,615,335
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the period for interest................... $ 12,000 $ 883,000
=========== ============
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Common stock issued upon conversion of
a note payable........................................... $ 250,000 $ --
=========== ============
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 7
VISION TWENTY-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - PRESENTATION
In the opinion of management, all adjustments, which include normal
recurring accruals, considered necessary for a fair presentation of the
financial position, results of operations and cash flows at September 30, 1997,
and all periods presented have been included in the accompanying consolidated
financial statements. Operating results for the three months and nine months
ended September 30, 1997, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997.
NOTE 2 - SEPTEMBER 1997 Acquisitions and Public Offering
In September 1997, the Company closed in escrow the acquisition of the
business assets of four ophthalmology clinics and two optical dispensaries
located in Tampa, Florida, Tucson, Arizona and Setauket, New York (the
"September Acquisitions"). Concurrently, the Company entered into Management
Agreements with the related professional associations employing eight
ophthalmologists. These acquisitions were accounted for by recording assets and
liabilities at fair value and allocating the remaining costs to the related
Management Agreements. Additionally, the Company closed in escrow the
acquisition of substantially all the business assets of a managed care company
servicing two capitated managed care contracts covering over 134,000 patient
lives. In connection with the September Acquisitions, the Company provided
aggregate consideration of $7.6 million, consisting of 397,212 shares of Common
Stock, $3.6 million in cash and promissory notes in the amount of $100,000,
subject to closing adjustments. Additionally, the Company is required to provide
additional contingent consideration consisting of up to 76,622 shares of Common
Stock and $800,000 in cash, to be paid to the sellers in the event that certain
post-acquisition performance targets are met.
On August 18, 1997, the Company completed a public offering (the "Initial
Public Offering") of 2,100,000 shares of Common Stock. The Initial Public
Offering price was $10.00 per share, resulting in gross offering proceeds of
$21,000,000. Net proceeds to the Company, net of underwriters' discount and
other offering expenses, were $18,056,461 (unaudited). The net proceeds of the
offering were used to repay outstanding debt and for other general corporate
uses. In connection with the early extinguishment of certain indebtedness
repaid from the net proceeds of the Initial Public Offering, the Company
incurred an extraordinary charge of $323,346 (unaudited) during the nine months
ended September 30, 1997.
NOTE 3 - Subsequent Events
In October 1997, the Company closed in escrow the acquisition of the
business assets of two ophthalmology clinics, two optical dispensaries and one
ASC located in Brandon, Florida and Minneapolis, Minnesota (the "October
Acquisitions"). Concurrently, the Company entered into Management Agreements
with the related professional associations employing three optometrists and five
ophthalmologists. These acquisitions were accounted for by recording assets and
liabilities at fair value and allocating the remaining costs to the related
Management Agreements. In connection with the October Acquisitions, the Company
provided aggregate consideration of $3.2 million, consisting of 101,494 shares
of Common Stock and $1.8 million in cash.
On October 10, 1997, the Company received a written commitment for a
bridge loan credit facility of $37,000,000 at an interest rate of the
three-month London Interbank Offered Rate plus 400 basis points. The loan will
be due at the earlier of six months from closing of the loan or the completion
of an additional equity offering. The loan will be collateralized by all assets
of the Company.
On October 15, 1997, the Company signed a letter of intent to acquire all
of the outstanding stock of BBG-COA, Inc. and all related subsidiaries and
affiliated companies ("Block Vision") from Block Vision's shareholders for a
maximum amount of $37.5 million comprised of cash and Common Stock of the
Company. The Company will account for the acquisition by recording the assets
and liabilities at their fair values and allocating the remaining cost to
goodwill.
On October 29, 1997, the Company filed a Registration Statement on Form
S-1 with the Securities and Exchange Commission. The Company expects to make a
second public offering of 2,800,000 shares of Common Stock. The net proceeds
from the Common Stock expected to be sold by the Company will be used to finance
the cash portion of the Company's pending acquisition of Block Vision and to
repay outstanding indebtedness incurred by the Company in connection with
completed acquisitions of certain optometry and ophthalmology clinics and ASCs.
The following pro forma unaudited results of operations for the nine
months ended September 30, 1997, presents the consolidated results as if the
acquisitions had been consummated as of January 1, 1997 and does not purport to
be indicative of the results that actually would have occurred if the companies
had been acquired as of that date or of results which may occur in the future.
<TABLE>
<CAPTION>
Nine Months Ended
In millions, except per share data September 30, 1997
- --------------------------------------------------------------------------
<S> <C>
Net Revenues $94.70
Loss before extraordinary charge --
Loss before extraordinary charge per common share $(0.01)
</TABLE>
5
<PAGE> 8
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company provides a wide range of management and administrative
services to local area delivery systems ("LADS") established by the
Company. LADS are developed to provide for integrated networks of optometrists,
ophthalmologists, ASCs and retail optical centers which offer the full continuum
of eye care services in local markets. The Company began operations in 1984,
providing management services to seven optometrists practicing at eight clinic
locations. The Company currently provides its services to 39 LADS located in 26
states through which 5,810 Affiliated Providers deliver eye care services. Of
theses Affiliated Providers, 86 are Managed Providers, consisting of 50
optometrists and 36 ophthalmologists practicing at 57 clinic locations and five
ASCs, and 5,724 are Contract Providers, consisting of 4,993 optometrists and 731
ophthalmologists practicing at over 4,300 clinic locations and 35 ASCs. The
Company's Affiliated Providers, in conjunction with select national retail
optical chains operating over 300 retail optical centers, delivery eye care
services under the Company's 82 managed care contracts and 12 discount
fee-for-service plans covering approximately 4.0 million exclusively contracted
patient lives. Furthermore, the Company has established a nationwide eye care
provider network of over 6,700 additional Contract Providers thereby positioning
the Company to capture future managed care business in anticipated new local
markets. Managed Providers refers to the licensed optometrists and
ophthalmologists employed by professional associations and providing eye care
services at Company clinic facilities and ambulatory surgical centers ("ASCs"),
and Contract Providers refers to the licensed optometrists and ophthalmologists
who are credentialed, or in the process of being credentialed, to provide eye
care services at optometry and ophthalmology clinics and ASCs pursuant to the
Company's managed care contracts.
RECENT DEVELOPMENTS
Effective October 31, 1997, the Company closed in escrow the acquisition
of all of the issued and outstanding stock of BBG-COA, Inc., the parent company
of Block Vision, Inc. ("Block Vision"). Block Vision provides administration
services on behalf of managed vision care plans for a nationwide network of
5,171 Contract Providers who provide eye care services pursuant to 58 capitated
and five discount fee-for-service managed care contracts covering over 2.1
million exclusively contracted patient lives. The Block Vision acquisition has
enabled the Company to establish 28 new LADS for future development.
Furthermore, Block Vision has established a network of approximately 4,500
additional credentialed Contract Providers, and another 1,400 Contract Providers
in the process of being credentialed, to provide eye care services to capture
future managed care business in anticipated new local markets. For Block
Vision's fiscal year ended April 30, 1997, managed vision care revenue was
approximately $14.4 million with a medical loss ratio of 71.0%. In addition,
Block Vision operates a buying group division which provides billing and
collection services to suppliers of optical products. The buying group division
is not directly involved in the ordering process or the physical distribution of
eye care products. For Block Vision's fiscal year ended April 30, 1997, buying
group revenue was approximately $54.6 million. See the Consolidated Financial
Statements of BBG-COA, Inc. included elsewhere in this 10-Q.
The Block Vision acquisition was accounted for under the purchase method of
accounting. The aggregate consideration paid by the Company was approximately
$35.0 million, consisting of approximately $25.6 million in cash, 458,365 shares
of Common Stock, subject to certain post-closing adjustments, and 219,633 shares
of Common Stock to be held in escrow as contingent consideration, of which
109,816 shares are to be delivered by the Company to the sellers if EBITDA of
Block Vision reaches $4.5 million of the year ended December 31, 1998. The
remaining 109,817 shares will be deliverable on a pro rata escalating basis if
Block Vision reaches $4.5 million of EBITDA for 1998 with the full contingent
consideration deliverable upon Block Vision attaining $4.9 million of EBITDA for
1998.
6
<PAGE> 9
On October 29, 1997, the Company filed a registration statement with the
Securities and Exchange Commission to register the offer and sale to the public
of 3,220,000 shares of Common Stock (the "Offering") which has not been declared
effective. Upon consummation of the Offering, the Company expects to use the
proceeds from this Offering to fund the cash portion of the Block Acquisition
and the cash portion of the September and October Acquisitions described below.
In October 1997, the Company closed in escrow one acquisition and entered
into an arrangement to acquire the business assets of two ophthalmology clinics,
two optical dispensaries, and one ASC (the "October Acquisitions"). Concurrently
with the October Acquisitions, the Company entered into long-term Management
Agreements with the related professional associations employing three
optometrists and five ophthalmologists. The October Acquisitions were accounted
for by recording the assets and liabilities at fair value and allocating the
remaining costs to the related Management Agreements. In connection with the
October Acquisitions, the Company provided aggregate consideration of $3.2
million consisting of 101,494 shares of Common Stock and $1.8 million in cash.
On a pro forma basis, had the October Acquisitions occurred at the beginning of
1996, the Company would have recorded $2.3 million in practice management fee
revenue for the nine months ended September 30, 1997.
In September 1997, the Company closed in escrow the acquisitions of the
business assets of four ophthalmology clinics and two optical dispensaries (the
"September Acquisitions"). Concurrently with the September Acquisitions, the
Company entered into long-term Management Agreements with the related
professional associations employing eight ophthalmologists. These acquisitions
were accounted for by recording assets and liabilities at fair value and
allocating the remaining costs to the related Management Agreements.
Additionally, the Company closed in escrow the acquisition of substantially all
the business assets of a managed are company servicing two capitated managed
care contracts covering over 134,000 patient lives. In connection with the
September Acquisitions, the Company provided aggregate consideration of $7.6
million, consisting of 397,212 shares of Common Stock, $3.6 million in cash and
promissory notes in the amount of $100,000. Additionally, the Company is
required to provide additional contingent consideration, consisting of 76,622
shares of Common Stock and $800,000 cash to be paid to the sellers if certain
post-acquisition performance targets are met. On a pro forma basis, had the
September Acquisitions occurred at the beginning of 1996, the Company would have
recorded $4.6 million in practice management fee and managed care revenue for
the nine months ended September 30, 1997.
On August 18, 1997, the Company completed its initial public offering of
2,100,000 shares of common stock at a price to the public of $10.00 per share
(the "Initial Public Offering"). The net proceeds of the Initial Public
Offering were used to repay substantially all of the Company's outstanding
indebtedness and to provide funding to continue acquisitions of optometry and
ophthalmology clinics and ASCs.
HISTORICAL OVERVIEW
The Company enters into Management Agreements with the Managed
Professional Associations pursuant to which the Company is the sole provider of
comprehensive management, business and administrative services for the
non-professional aspects of the professional practices which obligate the
Company to provide certain facilities and equipment, accounting services,
purchasing, assistance in managed care, contract negotiations, management and
clinical personnel, information systems, training, and billing and collection
services. Each Managed Provider maintains full authority, control and
responsibility over the provision of professional care and services to its
patients. The Company does not provide professional care to patients nor does
the Company employ any of the ophthalmologists or optometrist, or any other
professional health care provider personnel, of the Managed Professional
Association. The Managed Professional Association is responsible for, among
other things, hiring, supervising, and directing certain of the Managed
Professional Association's professional employees, adopting a peer
review/quality assurance program and maintaining appropriate worker's
compensation, professional and comprehensive general liability insurance. The
Managed Professional Associations derive their revenues from fees received for
professional services provided by optometrists and ophthalmologists, charges for
the use of ASCs and sales of optical goods. The Managed Professional
Associations currently receive revenues from a combination of sources,
7
<PAGE> 10
including fees paid by private-pay patients, indemnity insurance
reimbursements, capitation payments from managed care companies and government
funded reimbursements (Medicare and Medicaid). See "Business-Management
Agreements."
The initial term of the Management Agreement is typically 40 years. Under
substantially all of the Company's Management Agreements, the management fee
ranges from 24% to 37% of the Managed Professional Association's gross revenues
after deducting from such revenues all expenses of the clinic other than those
related to shareholders of the Managed Professional Associations. The practice
management fees earned by the Company pursuant to these Management Agreements
fluctuate depending on variances in revenues and expenses of the Managed
professional Association. Therefore, in connection with the Management
agreements, the amount of such fees will be significantly affected by the
degree of success of operations of the Managed Professional Association and the
Company's ability to successfully manage the practice.
The Company recognizes as managed care revenue certain fixed payments
received pursuant to its managed care contracts on a capitated or risk-sharing
basis. The Company also recognizes fees received for the provision of certain
financial and administrative services related to its indemnity fee-for-service
plans. The Company manages risk of capitated managed care contracts by
monitoring utilization of each Affiliated Provider and comparing their
utilization to national averages, expected utilization at the time the contract
was bid, utilization of other providers and historical utilization of the
Affiliated Provider. Abnormal utilization of an Affiliated provider results in
a medical chart review by the Company and further counseling on appropriate
clinical protocols. To further manage the risk of capitated managed are
contracts, the Company, in certain instances, enters into agreements to pay
Affiliated Providers a fixed per member per month fee for eye care services
rendered or a pro rata share of managed care capitated payments received (as
determined by the number of eye care procedures performed relative to other
Affiliated Providers). The Company targets these payments at a range of 80% to
90% of total payments received pursuant to the Company's capitated managed care
contracts. Pursuant to its capitated managed care contracts, the Company
receives a fixed payment per member per month for a predetermined benefit level
of eye care services, as negotiated between the Company and the payor.
Profitability of the Company's capitated managed care contracts is directly
related to the specific terms negotiated, utilization of eye care services by
member patients and the effectiveness of administering the contracts. The
Company receives a percentage of collected medical billings for administering
indemnity fee-for-service plans for its Affiliated Providers. Although the
terms and conditions of the Company's managed care contracts vary considerably,
they are typically for a one-year term.
Between March 1, 1997 and the Initial Public Offering, which was completed
on August 18, 1997, the Company completed acquisitions of the business assets of
one optometry clinic, 11 ophthalmology clinics, six optical dispensaries and
four ASCs (the "Pre IPO Acquisitions" and collectively with the September
Acquisitions and October Acquisitions the "1997 Acquisitions"). Concurrently,
the Company entered into Management Agreements with the related professional
associations employing six optometrists and 13 ophthalmologists. These
acquisitions were accounted for by recording the assets and liabilities at fair
value and allocating the remaining costs to the related Management Agreements.
In connection with the Pre IPO Acquisitions, the Company provided aggregate
consideration of $7.3 million, consisting of 876,524 shares of Common Stock,
promissory notes in the aggregate principal amount of $264,000 and $29,000 in
cash, subject to closing adjustments.
In December 1996, the Company completed acquisitions of the business assets
of 22 optometry clinics, nine ophthalmology clinics, 15 optical dispensaries and
one ASC (the "1996 Acquisitions"). Concurrently, the Company entered into
Management Agreements with the related professional associations employing 34
optometrists and 13 ophthalmologists. These acquisitions were accounted for by
recording the assets and liabilities at fair value and allocating the remaining
costs to the related Management Agreements. Additionally, the Company acquired
substantially all the business assets of a managed care company servicing four
capitated managed care contracts covering over 100,000 patient lives, which was
accounted for under the purchase method of accounting. In connection with the
1996 Acquisitions, the Company provided aggregate consideration of $11.2
million, consisting of 2.1 million shares of Common Stock, promissory notes in
the aggregate principal amount of $1.9 million and $800,000 in assumed debt.
Additionally, the Company is required to provide additional consideration of up
to $316,000, consisting of up to 79,805 shares of Common Stock, in connection
with several of the 1996 Acquisitions, which will be transferred out of escrow
to certain sellers in the event that certain post-acquisition performance
targets are met. The Company recorded a one-time charge of $1.4 million in the
fourth quarter of 1996 for expenses associated with the planned acquisitions of
the business assets of certain Contract Providers at the time of the 1996
Acquisitions which the Company chose not to continue to pursue.
8
<PAGE> 11
Effective October 1996, the Company renegotiated its agreements to pay
certain ophthalmology Contract Providers a per member per month fee for
surgical eye care services provided under the Company's largest capitated
managed care contract. Previously, the Company had paid these Contract
Providers pursuant to a fee schedule for eye care services provided under the
same capitated managed care contract. In exchange for entering into the
renegotiated agreement, selected ophthalmology Contract Providers obtained
dedicated groups of managed care members and the right to manage the
utilization by these members. The renegotiated capitation agreements improved
the Company's medical claims ratio (medical claims expense divided by managed
care revenue) from 136.0% for the third quarter of 1996 to 90.1% for the fourth
quarter of 1996 and 86.5% for the nine months ended September 30, 1997.
Effective June 1997, the Company renegotiated its agreement to pay the
existing operator of multiple surgical eye care facilities a per member per
month fee for facility services provided at its facilities pursuant to the
Company's largest capitated managed care contract. Previously, the Company had
paid these Contract Providers pursuant to a fee schedule for eye care services
provided under the same capitated managed care contract. In exchange for
entering into the renegotiated agreement, the facility operator obtained
dedicated groups of managed care members. The effect of the renegotiated
agreements of October 1996 and June 1997 was to shift the risk of any increased
utilization for services by members from the Company to the Contract Providers.
The Company leveraged its strategic alliance with a leading optical
retailer by adding five internally developed optometry clinics located in
Oklahoma, Louisiana and Florida and entering into Management Agreements with
the related professional association employing five optometrists. In June 1997,
the Company reached a tentative agreement with the same optical retailer to add
at least 20 internally developed optometry clinics through the first quarter of
1998. The Company will continue to leverage its strategic alliances by adding
select internally developed optometry clinics in affiliated optical retail
locations.
9
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
items in the Company's statement of operations for the periods indicated. As a
result of the 1996 Acquisitions, 1997 Acquisitions, and the Company's entering
into capitated arrangements with its Contract Providers, the Company does not
believe that the historical percentage relationships for the quarter and nine
months ended September 30, 1996 and 1997 reflect the Company's expected future
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ----------------------------
1996 1997 1996 1997
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Practice management fees........... 16.1 % 69.4 % 9.2 % 66.9 %
Managed care....................... 81.0 29.2 88.1 31.6
Other revenue...................... 2.9 1.4 2.7 1.5
--------- ---------- ---------- -----------
Total revenues.............. 100.0 100.0 100.0 100.0
--------- ---------- ---------- -----------
Operating expenses:
Practice management expenses....... -- 55.5 -- 54.3
Medical claims..................... 110.1 25.0 121.5 27.3
Salaries, wages and benefits....... 34.3 10.1 22.8 11.6
Business development............... -- -- --
General and administrative......... 14.2 4.5 11.0 4.5
Depreciation and amortization...... 1.0 3.2 0.6 3.2
--------- ---------- ---------- -----------
159.6 98.3 155.9 100.9
--------- ---------- ---------- -----------
Loss from operations................. (59.6) 1.7 (55.9) (0.9)
Interest expense..................... 1.8 1.7 1.1 2.6
--------- ---------- ---------- -----------
Loss before income taxes............. (61.4) -- (57.0) (3.5)
Income taxes......................... -- -- -- --
--------- ---------- ---------- -----------
Loss before extraordinary charge..... (61.4) -- (57.0) (3.5)
--------- ---------- ---------- -----------
Extraordinary charge -
early extinguishment of debt.... -- -- -- (1.1)
--------- ---------- ---------- -----------
Net loss............................. (61.4)% 0% (57.0)% (4.6)%
========= ========== ========== ===========
Medical claims ratio................. 136.0 % 85.5% 137.9 % 86.5 %
========= ========== ========== ===========
</TABLE>
Revenues. Revenues increased 506.4% and 388.6% from $2.0 million and $6.0
million for the quarter and nine months ended September 30, 1996 to $12.1
million and $29.4 million for the quarter and nine months ended September 30,
1997. This increase was caused primarily by an increase in practice management
fees attributable to the 1996 Acquisitions and the 1997 Acquisitions, which
accounted for $8.1 million and $19.1 million of the increase, and a 118.6% and
75.4% increase in managed care revenues attributable to the addition of one
capitated contract and the expansion of an existing contract, which accounted
for $1.9 million and $4.0 million of the increase for the quarter and nine
months ended September 30, 1997.
Practice Management Expenses. Practice management expenses were $6.7
million and $16.0 million for the quarter and nine months ended September 30,
1997 as a result of the 1996 Acquisitions and the 1997 Acquisitions. Prior to
the 1996 Acquisitions, the Company recognized no practice management expenses
related to its management services because the Company was not liable for such
expenses. Practice management expenses consist of salaries, wages and benefits
of certain clinic staff, professional fees, medical supplies, advertising,
10
<PAGE> 13
building and occupancy costs, and other general and administrative costs
related to the operations of clinics and ASCs.
Medical Claims. Medical claims expense increased 37.5% and 10.0% from $2.2
million and $7.3 million for the quarter and nine months ended September 30,
1996 to $3.0 million and $8.1 million for the quarter and nine months ended
September 30, 1997. The Company's medical claims ratio decreased from 136% and
137.9% for the quarter and nine months ended September 30, 1996 to 85.5% and
86.5% for the quarter and nine months ended September 30, 1997. This decrease
was caused primarily by the Company's renegotiated agreement to pay its
ophthalmology and ASC Contract Providers a per member per month fee for
surgical eye care services provided under the Company's largest capitated
managed care contract. Medical claims expense consists of payments by the
Company to its Affiliated Providers for primary eye care services, medical and
surgical eye care services and facility services. These payments are based on
fixed payments per member per month a pro rata share of managed care capitated
payments received (as determined by the number of eye care procedures performed
relative to other Affiliated Providers) or negotiated fee-for-service
schedules. Capitated payments and pro rata payments collectively represented
66.4% and 62.0% and fee-for-service claims represented 33.6% and 38.0% of total
medical claims expense for the quarter and nine months ended September 30,
1997. Medical claims for the quarter and nine months ended September 30, 1996
were based entirely on negotiated fee-for-service schedules.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
increased 78.6% and 147.7% from $685,000 and $1.4 million for the quarter and
nine months ended September 30. 1996 to $1.2 million and $3.4 million for the
quarter and nine months ended September 30, 1997. This increase was caused
primarily by an increase in corporate staff necessary to support the Company's
expanded practice management and managed care business. Salaries, wages and
benefits expense consists of expenses related to management and administrative
staff located at the Company's corporate headquarters and regional offices. As
a percentage of revenues, salaries, wages and benefits expense decreased from
34.3% and 22.8% for the quarter and nine months ended September 30, 1996 to
10.1% and 11.6% for the quarter and nine months ended September 30, 1997. This
decrease was caused primarily by increased economies of scale resulting from
the Company's expanding business.
General and Administrative. General and administrative expenses increased
90.7% and 102.3% from $282,000 and $662,000 for the quarter and nine months
ended September 30, 1996 to $537,000 and $1.3 million for the quarter and nine
months ended September 30, 1997. This increase was caused primarily by
increases in travel expenses, professional fees and occupancy costs. As
percentage of revenues, general and administrative expenses decreased from
14.2% and 11.0% for the quarter and nine months ended September 30, 1996 to
4.5% and 4.5% for the quarter and nine months ended September 30, 1997. This
decrease was caused primarily by increased economies of scale resulting from
the Company's expanding business.
Depreciation and Amortization. Depreciation and amortization expense
increased from $20,000 and $35,000 for the quarter and the nine months ended
September 30, 1996 to $387,000 and $954,000 for the quarter and nine months
ended September 30, 1997. As a percentage of revenues, depreciation and
amortization expense increased from 1.0% and 0.6% for the quarter and nine
months ended September 30, 1996 to 3.2% and 3.2% for the quarter and nine
months ended September 30, 1997. These increases were caused primarily by the
amortization of intangibles attributable to the 1996 Acquisitions and the 1997
Acquisitions.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its working capital and capital
expenditure requirements primarily through institutional borrowings and private
debt and equity financings. Net cash used in operating activities for the nine
months ended September 30, 1997 was $2.9 million. Net cash used in operating
activities for the nine months ended September 30, 1997 was caused primarily by
net losses offset in part by increases in medical claims payable, deferred
compensation and accrued acquisition expenses.
Net cash used in investing activities for the nine months ended September
30, 1997 was $4.9 million and was caused primarily by the purchase of furniture
and equipment and payments for capitalized acquisition costs.
Net cash provided by financing activities for the nine months ended
September 30, 1997 was $10.4 million. The amounts for the nine months ended
September 30, 1997 were attributable to private debt and equity financings and
higher levels of institutional borrowings to support the Company's internal
expansion and acquisition activities.
Between March 1, 1997 and August 18, 1997, the Company completed the Pre
IPO Acquisitions, and provided aggregate consideration of $7.3 million,
consisting of 876,524 shares of Common Stock, promissory notes in the aggregate
principal amount of $264,000 and $29,000 in cash, subject to closing
adjustments.
On August 18, 1997 the Company completed its Initial Public Offering. The
net proceeds of the Initial Public Offering were used to repay substantially
all of the Company's outstanding indebtedness and to provide funding to
continue acquisitions of optometry and ophthalmology clinics and ASCs.
In September 1997, the Company closed in escrow the September Acquisitions
and provided aggregate consideration of $7.6 million consisting of 397,212
shares of Common Stock, $3.6 million in cash and promissory notes in the amount
of $100,000, subject to closing adjustments. Additionally, the Company is
required to provide additional contingent consideration consisting of 76,622
shares of Common Stock and $800,000 in cash, to be paid to the sellers in the
event that certain post-acquisition performance targets are met.
In October 1997, the Company closed in escrow one of the October
Acquisitions and entered into an arrangement with respect to another of the
October Acquisitions and in conjunction therewith will provide aggregate
consideration of approximately $3.2 million, consisting of approximately 101,494
shares of Common Stock, and $1.8 million in cash.
Effective October 31, 1997, the Company closed in escrow the Block Vision
acquisition in exchange for aggregate consideration paid to the sellers of
approximately $35.0 million, consisting of approximately $25.6 million in cash,
458,365 shares of Common Stock, subject to certain post-closing adjustments and
219,633 shares of Common Stock to be held in escrow as contingent consideration,
of which 109,816 shares are to be delivered by the Company to the sellers if
EBITDA of Block Vision reaches $4.5 million for the year ended December 31,
1998. The remaining 109,817 shares will be deliverable on a pro rata escalating
basis if Block Vision reaches $4.5 million of EBITDA for 1998 with the full
contingent consideration deliverable upon Block Vision attaining $4.9 million of
EBITDA for 1998. Approximately $2.4 million in net indebtedness of Block Vision
will be assumed in connection with the Block Acquisition.
In October 1997, the Company obtained a credit facility from Prudential
Securities Credit Corporation ("Prudential Credit") in the aggregate amount of
$37.0 million pursuant to a Note Purchase Agreement (the "Bridge Credit
Facility"). If needed, the proceeds from the borrowing are to be used to finance
the Block Acquisition and certain other optometry and ophthalmology practice
acquisitions. Amounts borrowed pursuant to the Bridge Credit Facility are
secured by a first security interest in all of the Company's assets. The Bridge
12
<PAGE> 15
Credit Facility must be repaid at the earlier of six months from the date of
any borrowing from the Bridge Credit Facility or upon the closing of any debt or
equity offering by the Company. The Bridge Credit Facility contains negative and
affirmative covenants and agreements which include covenants requiring the
maintenance of certain financial ratios. The Bridge Credit Facility bears
interest at the sum of (i) the London interbank offered rate ("LIBOR Rate") plus
(ii) four percent (4.0%), provided however, that from and after the date ninety
(90) days following the closing of the Bridge Credit Facility, the interest rate
shall be equal at all times to the sum of (i) the LIBOR Rate plus (ii) four and
one-half percent (4.50%). The Company expects to repay in full any borrowing
from the Bridge Credit Facility upon the earlier of the completion of the
Offering or its anticipated future bank credit facility.
The Company has retained Prudential Securities Incorporated as its
investment advisor for the purpose of obtaining on behalf of the Company a
future bank credit facility of up to approximately $50.0 million. The Company
expects to obtain such bank credit facility by the end of 1997.
On October 29, 1997, the Company filed a registration statement with the
Securities and Exchange Commission to register the offer and sale to the public
of 3,220,000 shares of Common Stock (the "Offering") which has not been declared
effective. Upon consummation of the Offering, the Company expects to use the
proceeds from this Offering to fund the cash portion of the Block Acquisition
and the cash portion of the September and October Acquisitions described below.
Intangible assets consist of the Management Agreements with the Managed
Professional Associations. The Management Agreements have 40-year terms and are
being amortized over an average life of 25 years. Intangible assets represented
64.1% of the Company's total assets as of September 30, 1997. In determining
the useful life of a Management Agreement, the Company considers the operating
history and other characteristics of each practice. A principal consideration
is the degree to which the practice has demonstrated its ability to extend its
existence indefinitely. The Company will review the carrying value of its
intangible assets at least quarterly on an entity-by-entity basis to determine
if facts and circumstances exist which would suggest that the intangible assets
may be impaired or that amortization periods need to be modified. Among the
factors the Company considers in making the valuation are changes in the
Managed Professional Associations market position, reputation, profitability,
and geographic penetration.
In addition to the business assets purchase, the Company assumes certain
payables and accrued expenses in connection with its acquisitions. Generally,
the acquired tangible assets exceed the assumed liabilities. The Company has
assumed liabilities of $3.2 million, including $791,000 of long-term debt, in
connection with the acquisitions (including the Block Acquisition) completed
through October 31, 1997.
Based upon the Company's anticipated capital needs for operation of its
business, general corporate purposes, the acquisition of clinics and ASCs and
repayment of certain indebtedness, management believes the combination of the
funds expected to be provided from the Company's operations, anticipated future
bank credit facilities, seller financing and the anticipated net proceeds
received from the Offering, will be sufficient to meet the Company's funding
requirements to conduct its operations for further implementation of its growth
strategy for a period of approximately twelve months. There can be no assurance,
however, that the Company will successfully complete the Offering or be able to
successfully obtain a bank credit facility, and failure of either to be
successfully completed would have a material adverse effect on the furtherance
of the Company's growth strategy and on its future financial results. The
Company will continue to offer Common Stock, notes or combinations thereof as
consideration for certain future mergers and acquisitions related to the growth
of its LADS and currently expects for the foreseeable future to continue to
require contractual lock-up agreements and to provide registration rights
consistent with previous transactions for sellers receiving stock in
acquisitions. After the twelve-month period, or in the event the Company's
capital expenditures are greater than currently expected, or should the current
financing plans not be successfully completed, the Company expects to utilize
supplemental borrowings and/or the net proceeds from the future offering of debt
or equity securities to the extent the same can be finalized in a desirable
manner.
13
<PAGE> 16
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This 10-Q, press releases issued by the Company and certain information
provided periodically in writing and orally by the Company's designated officers
and agents contain statements which constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The words "expect," "believe," "goal,"
"plan," "intend," "estimate," and similar expressions and variations thereof
used are intended to specifically identify forward-looking statements. Those
statements appear in a number of places in this 10-Q, particularly "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things, (i)
the financial prospects of the Company; (ii) potential acquisitions by the
Company and the successful integration of both completed and future
acquisitions; (iii) the Company's financing plans (iv) the Company's growth
strategy and operating strategy; and (v) the Company's future plans and
projections. Prospective investors are cautioned that any such forward looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward looking statements as a result of various factors. The
factors that might cause such material differences include, among others, the
following: (i) the Company's ability to avoid future operating and net losses,
(ii) any material inability of the Company to successfully integrate and
profitably operate Block Vision, (iii) any material inability of the Company to
identify consummate and integrate suitable acquisitions in conjunction with its
growth strategy, (iv) any material inability of the Company to acquire
sufficient capital and financing to fund its growth strategy, (v) any material
inability of the Company to expand its managed care business, renew existing
managed care contracts and maintain and expand its Contract Provider Network,
(vi) any material inability to negotiate managed care contracts with HMOs,
(vii) any material inability of the Company to successfully and profitably
operate its managed care business, (viii) any material managed practices'
inability to operate profitably, (ix) any changes in state and/or federal
governmental regulations which could materially effect the Company's ability to
operate or materially effect the Company's profitability, (x) any inability of
the Company to maintain or obtain required material licensure in the states in
which it operates and in the states in which it may seek to operate in the
future, (xi) any material inability of the Company to successfully obtain public
and private debt and investment capital to expand its operations including the
Company's successful completion of its current secondary offering of common
stock and the Company's anticipated bank credit facility, (xii) any material
inability of the Company to meet its debt financing covenants, restrictions or
commitments, (xiii) any future reductions in the average price earnings multiple
within the Company's industry sector, (xiv) any increased competition in its
acquisition of businesses or in connection with its business and (xv)
fluctuations in the market price of the Company's common stock due to financial
results or announcements by the Company of material events effecting its
business. Any such factors could have a material adverse effect on the
Company's results of operations or financial condition. The Company undertakes
no obligation to publicly update or revise forward looking statements to reflect
events or circumstances after the date of this 10-Q or to reflect the occurrence
of unanticipated events.
14
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings other than
routine litigation arising in the ordinary course of business. The Company does
not believe that the results of any such litigation, even if the outcome were
unfavorable to the Company, would have a material effect on its financial
position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) Sales of Unregistered Securities
Effective July 1997, the Company issued 138,338 shares of Common
Stock into escrow pending final closing upon the professional corporation
obtaining a license in connection with the Merger Agreement with Eye Institute
of Southern Arizona, P.C. This transaction is exempt from the registration
requirements of the Securities Act pursuant to Section 4(2).
In September 1997, the Company issued 219,057 shares of Common
Stock in connection with the closing in escrow of the acquisition of Retina
Associates Southwest, P.C. This transaction is exempt from the registration
requirements of the Securities Act pursuant to Section 4(2).
In September 1997, the Company issued 155,702 shares of Common
Stock in connection with the closing in escrow of the acquisition of Florida
Eye Center, Sever & Ramseur, MD, P.A., Thomas J. Pusateri, M.D., P.A., and
Leonard E. Cortelli, M.D., P.A., Center Optical, Inc. This transaction is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2).
In September 1997, the Company issued 22,453 shares of Common
Stock in connection with the closing in escrow of the acquisition of Eye Q
Corporation. This transaction is exempt from the registration requirements of
the Securities Act pursuant to Section 4(2).
(d) Use of Proceeds
During the quarter, the Company filed a registration statement
with the United States Securities and Exchange Commission (Registration No. -
333-29213 which was declared effective on August 18, 1997 to register the public
sale of 2,100,000 shares of its common stock (excluding 315,000 shares which the
underwriters had an option to purchase to cover over-allotments, if any). The
offering was terminated after all of the 2,100,000 shares offered by the Company
were sold by the managing underwriters, Prudential Securities Incorporated and
Wheat, First Securities, Inc. The aggregate price of the 2,415,000 shares of
common stock registered (which included 315,000 shares pursuant to
over-allotment options) was $31,395,000 and 2,100,000 shares of common stock
were sold to the public by the Company at a price of $10.00 per share for an
aggregate price to the public of $21,000,000. The Company paid underwriting
discounts and commission of $1,470,000 and incurred additional expenses of
$1,474,000. The Company received net offering proceeds of $18,056,000 after
deducting underwriters' discounts and commissions and offering expenses. Through
September 30, 1997, the Company used $14,518,000 of the net proceeds to repay
outstanding indebtedness and interest, and $1,724,000 of the net proceeds for
acquisitions and related expenses, leaving a balance of $1,814,000 of net
proceeds available for future use by the Company.
15
<PAGE> 18
Of the $14,518,000 of indebtedness and interest repaid by the
Company, $6,250,000 was paid to certain stockholders of the Company which
include certain of the Company's officers and directors and the balance of
$8,268,000 was paid to other non-related parties.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
The Block Vision Acquisition. Effective October 31, 1997, the
Company closed in escrow the acquisition of all of the issued and outstanding
stock of BBG-COA, Inc. the parent company of Block Vision, Inc. ("Block Vision")
which event is otherwise reportable on Form 8-K under items 2 and 7. Block
Vision provides administration services on behalf of managed vision care plans
for a nationwide network of 5,171 Contract Providers who provide eye care
services pursuant to 58 capitated and five discount fee-for-service managed care
contracts covering over 2.1 million exclusively contracted patient lives. The
Block Acquisition has enabled the Company to establish 28 new LADS for future
development. Furthermore, Block Vision has established a network of
approximately 4,500 additional credentialed Contract Providers, and another
1,400 Contact Providers in the process of being credentialed, to provide eye are
services to capture future managed are business in anticipated new local
markets. In addition, Block Vision operates a buying group division which
provides billing and collection services to suppliers of optical products. The
Block Acquisition was accounted for under the purchase method of accounting. The
aggregate consideration paid by the Company was approximately $35.0 million,
consisting of approximately $25.6 million in cash, 458,365 shares of Common
Stock, subject to certain post-closing adjustments, and 219,633 shares of Common
Stock to be held in escrow as contingent consideration, of which 109,816 shares
of Common Stock are to be delivered by the Company to the sellers if earnings
before interest, taxes, depreciation and amortization ("EBITDA") of Block vision
reaches $4.5 million for the year ended December 31, 1998. The remaining 109,817
shares will be deliverable on a pro rata escalating basis if Block Vision
reaches $4.5 million of EBITDA for 1998 with the full contingent consideration
deliverable upon Block Vision attaining $4.9 million of EBITDA for 1998. The
report of independent public accountants, audited financial statements of Block
Vision and unaudited pro forma financial statements are set forth below.
16
<PAGE> 19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Shareholders of
BBG-COA, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and accumulated deficit and of
cash flows present fairly, in all material respects, the financial position of
BBG-COA, Inc. and its subsidiaries (the "Company") at April 30, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
July 1, 1997, except as to Note 10,
which is as of August 19, 1997
17
<PAGE> 20
BBG-COA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 653,228 $ 704,312
Accounts receivable:
Receivables from buying group members, less allowance
for doubtful accounts of $35,632 and $56,406.......... 6,031,354 6,441,516
Managed vision care fees receivable.................... 284,529 211,484
Receivables from fee for service plans................. 727,802 18,128
Other.................................................. 237,603 106,862
Prepaid expenses and other current assets................. 81,334 143,510
Prepaid income taxes...................................... 191,971 273,055
Deferred income taxes..................................... 31,810 122,243
----------- -----------
Total current assets.............................. 8,239,631 8,021,110
Restricted cash............................................. 125,000 125,000
Furniture, fixtures and purchased software, net............. 915,913 482,225
Other assets................................................ 50,826 156,083
Goodwill, less accumulated amortization of $2,684,636 and
$2,312,735................................................ 5,144,180 5,516,081
----------- -----------
Total assets...................................... $14,475,550 $14,300,499
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations.............. $ 33,750 $ 40,000
Accounts payable:
Payables to buying group suppliers..................... 5,726,000 6,126,767
Managed vision care claim reserves..................... 1,507,835 1,018,607
Fee for service plans claims payable................... 719,455 13,458
Accrued liabilities....................................... 306,699 394,311
----------- -----------
Total current liabilities......................... 8,293,739 7,593,143
Line of credit.............................................. 3,302,352 4,446,415
Capital lease obligations................................... 18,414 24,890
----------- -----------
Total liabilities................................. 11,614,505 12,064,448
----------- -----------
Shareholders' equity
Common stock, $0.01 par value, authorized 3,000,000
shares; issued and outstanding 1,363,814 shares........ 13,638 13,638
Additional paid-in capital................................ 3,828,365 3,828,365
Accumulated deficit....................................... (980,958) (1,605,952)
----------- -----------
Total shareholders' equity........................ 2,861,045 2,236,051
----------- -----------
Total liabilities and shareholders' equity........ $14,475,550 $14,300,499
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 21
BBG-COA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Buying group sales.................................... $54,589,487 $56,361,820 $63,245,994
Managed vision care division fees..................... 14,386,981 8,283,865 --
----------- ----------- -----------
Total revenues................................ 68,976,468 64,645,685 63,245,994
Expenses:
Cost of product -- buying group....................... 51,816,568 53,448,373 58,287,963
Cost of service -- managed vision care division....... 10,220,761 5,965,721 --
Selling and administrative expenses................... 5,474,972 4,747,000 4,135,986
Provision for relocation costs........................ -- -- 552,000
----------- ----------- -----------
67,512,301 64,161,094 62,975,949
Income from operations.................................. 1,464,167 484,591 270,045
Interest expense........................................ 291,354 364,163 335,956
Other (income) expense, net............................. (14,303) 36,454 31,348
----------- ----------- -----------
Income (loss) before income taxes....................... 1,187,116 83,974 (97,259)
Provision for income taxes.............................. 562,122 166,479 126,188
----------- ----------- -----------
Net income (loss)............................. 624,994 (82,505) (223,447)
Accumulated deficit -- beginning of year................ (1,605,952) (1,523,447) (1,300,000)
----------- ----------- -----------
Accumulated deficit -- end of year...................... $ (980,958) $(1,605,952) $(1,523,447)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 22
BBG-COA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)........................................ $ 624,994 $ (82,505) $(223,447)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization......................... 646,901 478,256 455,220
Changes in assets and liabilities
(Increase) decrease in accounts receivable.......... (503,298) (510,244) 426,424
Decrease (increase) in prepaid expenses and other
current assets................................... 62,176 53,292 (119,765)
Decrease (increase) in prepaid income taxes......... 81,084 (215,000) (42,654)
Decrease (increase) in deferred income taxes........ 90,433 187,640 (134,142)
Increase in restricted cash......................... -- (125,000) --
Decrease (increase) in other assets................. 105,257 (78,386) 14,021
Increase (decrease) in accounts payable............. 794,458 1,502,110 (368,754)
(Decrease) increase in accrued liabilities.......... (87,612) (1,044,481) 710,756
Other............................................... -- 37,337 --
----------- --------- ---------
Net cash provided by operating activities........ 1,814,393 203,019 717,659
----------- --------- ---------
Cash flows from investing activities
Capital expenditures..................................... (708,688) (347,175) (51,513)
----------- --------- ---------
Net cash used in investing activities............ (708,688) (347,175) (51,513)
----------- --------- ---------
Cash flows from financing activities
(Repayments of) proceeds from revolving credit loan,
net................................................... (1,144,063) 881,675 (33,220)
Repayments of capital lease obligations.................. (12,726) (37,000) (11,304)
Repayments of long-term debt and notes
payable -- shareholders............................... -- (370,000) (666,667)
----------- --------- ---------
Net cash (used in) provided by financing
activities..................................... (1,156,789) 474,675 (711,191)
----------- --------- ---------
Net (decrease) increase in cash............................ (51,084) 330,519 (45,045)
Cash -- beginning of year.................................. 704,312 373,793 418,838
----------- --------- ---------
Cash -- end of year........................................ $ 653,228 $ 704,312 $ 373,793
=========== ========= =========
Supplemental cash flow information
Cash paid during the year for:
Interest.............................................. $ 291,354 $ 378,000 $ 364,290
=========== ========= =========
Income taxes.......................................... $ 652,532 $ 265,000 $ 251,400
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 23
BBG-COA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS
BBG-COA, Inc. (the "Company") through its wholly-owned subsidiary, Block
Vision, Inc. ("BVI") (formerly Block Buying Group, Inc.), provides billing and
collection services to suppliers of optical products, through its buying group
division ("buying group"). The Company, through its managed care division and
through BVI's wholly-owned subsidiary, Block Vision of Texas, Inc. ("BVT")
provides vision benefit management services to health maintenance organizations,
preferred provider organizations and other managed care entities.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and reflect management's estimates and
assumptions, such as those regarding managed vision care costs that affect the
recorded amounts. These consolidated financial statements include the accounts
of the Company and its subsidiaries. All material intercompany transactions have
been eliminated. References to 1997, 1996 and 1995 refer to the fiscal years
ended April 30, 1997, 1996 and 1995, respectively.
REVENUE RECOGNITION
The buying group business provides billing and collection services to
suppliers of optical products, whereby providers receive merchandise from
suppliers for direct shipment to the providers. The Company pays the vendors and
likewise bills the providers for such products. The Company receives revenue by
retaining generally 5% of the total receivables collected by the Company. This
commission revenue is included in buying group sales in the accompanying
statements of operations and is recognized upon shipment of merchandise by the
suppliers.
The managed vision care division of the Company provides vision care
administrative services to health maintenance organizations and other groups,
generally based on predetermined monthly fees. The Company reimburses
participating vision care providers for vision care services rendered by such
providers to enrollees of the Company's clients.
CASH AND CASH EQUIVALENTS
Short-term investments with a maturity of three months or less at the time
of purchase are reported as cash equivalents and include a certificate of
deposit.
RESTRICTED CASH
The Company established a Texas subsidiary during 1996 which is subject to
various regulatory restrictions. At April 30, 1997 and 1996, the Company
maintained a minimum required surplus of $125,000, including a statutory deposit
of $50,000.
FURNITURE, FIXTURES AND PURCHASED SOFTWARE
Furniture, fixtures and purchased software are carried at cost less
accumulated depreciation and amortization. Depreciation and amortization expense
is computed using the straight-line method based on estimated useful lives of
the assets ranging from 5 to 7 years.
GOODWILL
The cost of acquired businesses in excess of values assigned to net assets
is amortized over 20 years. Amortization expense for each of the years ended
April 30, 1997, 1996 and 1995 was $371,901, and is included in selling and
administrative expenses. The Company periodically reviews the recoverability of
goodwill from future cash flows, and adjusts the carrying value as required. At
April 30, 1997 and 1996, the Company determined that goodwill, net of
accumulated amortization, was not impaired.
21
<PAGE> 24
BBG-COA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MANAGED VISION CARE CLAIM RESERVES
The Company has accrued a liability for unpaid claims of $546,054 and
$328,142 at April 30, 1997 and 1996, respectively, and a liability for claims
incurred but not reported (IBNR) of $961,781 and $690,465 at April 30, 1997 and
1996, respectively. The liability for IBNR claims includes amounts for which
services by a vision care provider have been rendered but are not yet paid and
an estimate of costs incurred but not reported. Accruals are based on
estimations of the Company's incurred claims. The accrued liabilities for unpaid
claims and for claims incurred but not reported are included in accounts
payable.
INCOME TAXES
The Company provides for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes." SFAS No. 109 requires the Company to recognize
deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Under this method, deferred tax assets and liabilities are determined
based on the differences between the financial statement carrying amounts and
the tax bases of assets and liabilities using enacted tax rates in effect in the
year in which the differences are expected to reverse.
CASH FLOW INFORMATION
Certain noncash transactions are excluded from the consolidated statement
of cash flows as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ---- --------
<S> <C> <C> <C>
Noncash investing and financing activities
Fixed assets acquired under capital leases................ $29,181 $ -- $113,194
</TABLE>
STOCK BASED COMPENSATION
The Company's employee stock option plan is accounted for using the
intrinsic value method as prescribed by Accounting Principles Board Opinion No.
25 ("APB 25"). Effective May 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock Based
Compensation". SFAS No. 123 establishes a fair value based accounting method of
accounting for stock based compensation plans. As permitted under the Statement,
the Company has elected to continue to apply the provisions of APB 25 and to
comply with the disclosure requirements of SFAS No. 123. There was no effect on
the Company's results of operations or financial position upon adoption of the
Statement (see Note 7).
2. FURNITURE, FIXTURES AND PURCHASED SOFTWARE
Furniture, fixtures and purchased software consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Furniture and fixtures...................................... $ 442,088 $ 368,354
Computer equipment.......................................... 432,603 383,147
Purchased software.......................................... 933,735 348,237
Leasehold improvements...................................... 16,001 16,001
---------- ----------
1,824,427 1,115,739
Less: Accumulated depreciation and amortization............. 908,514 633,514
---------- ----------
$ 915,913 $ 482,225
========== ==========
</TABLE>
22
<PAGE> 25
BBG-COA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in selling and administrative expenses is depreciation and
amortization expense for the years ended April 30, 1997, 1996 and 1995 of
$275,000, $106,355 and $83,319, respectively. The Company leases certain
computer equipment under capital leases with an aggregate cost of $142,375 and
$113,058 at April 30, 1997 and 1996, respectively.
3. DEBT AND CREDIT AGREEMENTS
<TABLE>
<CAPTION>
APRIL 30,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Line of credit.............................................. $3,302,352 $4,446,415
Capital lease obligations................................... 52,164 64,890
---------- ----------
3,354,516 4,511,305
Less: Current portion....................................... 33,750 40,000
---------- ----------
$3,320,766 $4,471,305
========== ==========
</TABLE>
At April 30, 1997 and 1996, the Company had $3,302,352 and $4,446,415,
respectively, outstanding under a financing agreement (the "Agreement") with
NationsBank. The Agreement expires on September 30, 1997. Under the Agreement,
borrowings under a line of credit facility are limited to the lesser of
$6,500,000 or approximately 85% of accounts receivable (maximum line of
approximately $6,189,095 at April 30, 1997). The Agreement also contains a
letter of credit facility which is limited to $2,200,000. The exposure under the
letters of credit, calculated from time to time, reduces the amount available
under the line of credit. As of April 30, 1997 and 1996, the Company had caused
letters of credit to be issued to suppliers to guarantee future payments for up
to $1,425,000 and $1,770,000, respectively. The outstanding borrowings under the
line of credit bear interest at the prime interest rate plus 1%. Additionally,
the Company is required to pay a commitment fee of .5% annually on the unused
portion of the commitment. Borrowings under the Agreement are secured by
substantially all assets of the Company. The Agreement, as amended, contains
certain financial covenants including the maintenance of minimum levels of
profitability and maximum debt to equity leverage ratios.
4. INCOME TAXES
A summary of the provision (benefit) for income taxes follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current
Federal.............................................. $402,748 $(33,654) $188,305
State................................................ 68,942 13,493 72,337
-------- -------- --------
471,690 (20,161) 260,642
-------- -------- --------
Deferred
Federal.............................................. 76,728 136,166 (98,027)
State................................................ 13,704 51,474 (36,545)
-------- -------- --------
90,432 187,640 (134,572)
-------- -------- --------
$562,122 $167,479 $126,070
======== ======== ========
</TABLE>
At April 30, 1997, 1996 and 1995, the Company has net operating loss
carryforwards of approximately $0, $95,000 and $0, respectively, for both
financial reporting and federal income tax purposes. Differences between book
and taxable income primarily relate to non-deductible amortization of goodwill.
23
<PAGE> 26
BBG-COA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences which give rise to deferred income
tax assets as of April 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Allowance for doubtful accounts............................. $13,408 $ 20,037
Returns and allowance reserve............................... -- 30,400
Net operating loss carryforwards............................ -- 32,020
Deferred gains.............................................. 6,593 11,850
Other....................................................... 11,809 27,936
------- --------
Deferred tax asset.......................................... $31,810 $122,243
======= ========
</TABLE>
5. CREDIT AND CONCENTRATION RISK
Financial instruments which subject the Company to concentrations of credit
risk consist principally of buying group accounts receivables. The Company
provides credit, in the normal course of business, to a large number of
optometrists.
Revenues generated from sales of products from one vendor constituted
approximately 15%, 16% and 19% of the Company's buying group sales revenue
during the years ended April 30, 1997, 1996 and 1995, respectively. Revenues
generated from sales of products from a second vendor constituted 14%, 13% and
12% of the Company's buying group sales revenue during the years ended April 30,
1997, 1996 and 1995, respectively.
Capitation payments generated from three managed care customers comprised
12%, 11% and 7% of total capitation payments during the year ended April 30,
1997.
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) plan to which employees can contribute 1%
- -15% of their pretax salary. The Company makes a discretionary match of this
amount. During the years ended April 30, 1997 and 1996, the Company's expense
for this plan was $57,364 and $33,478, respectively.
During the year ended April 30, 1995, the Company sponsored defined benefit
and contribution plans. The Company's pension expense under these plans in 1995
was $75,323.
7. STOCK OPTIONS
In May 1993, the Company adopted an incentive stock option plan ("Plan"),
which authorized the granting of options to purchase 100,000 shares of the
Company's common stock. On June 15, 1993, the Company granted 67,500 options to
key employees at an option price of $4.33 per share which was determined to be
the fair market value on the date of grant. In fiscal year 1995, 6,250 options
lapsed due to the resignation of an employee. On May 18, 1995, the Company
authorized the grant of 23,750 options at an option price of $7.00 per share
which was determined to be the fair market value on the date of grant. Of the
23,750 options authorized for grant in May 1995, only 21,250 were issued. On
December 26, 1995, the Company granted the remaining 17,500 options to key
employees at an option price of $7.00 per share which was determined to be the
fair market value on the date of grant. These options vest over 36 to 48 months
and can be exercised over a 10-year period beginning with the respective date of
grant. At April 30, 1997, there were no options available for issuance under the
Plan and no options had been exercised as of April 30, 1997.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal year 1996: dividend yield of 0%; risk-free
interest rate of 6.76%; and expected lives of 7.5 years.
24
<PAGE> 27
BBG-COA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option plan as of and for each of the
three years ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.......... 100,000 $5.36 61,250 $4.33 67,500 $4.33
Granted................................. -- -- 41,250 7.00 -- --
Exercised............................... -- -- -- -- -- --
Forfeited............................... -- -- (2,500) 7.00 (6,250) 4.33
------- ----- ------- ----- ------ -----
Outstanding at end of year................ 100,000 $5.36 100,000 $5.36 61,250 $4.33
======= ===== ======= ===== ====== =====
Weighted-average fair value of options
granted during the year................. $ -- $7.00 $ --
===== ===== =====
</TABLE>
The following table summarizes information about stock options outstanding
at April 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF CONTRACTUAL AVERAGE
EXERCISE REMAINING EXERCISE
PRICES NUMBER LIFE PRICE
-------- ------- ----------- --------
<S> <C> <C> <C>
$4.33.................................................... 61,250 6 years $ 4.33
$7.00.................................................... 38,750 8 years 7.00
- ------------- ------- --------- -------
$4.33 - $7.00............................................ 100,000 7 years $ 5.36
============= ======= ========= =======
</TABLE>
8. RELOCATION COSTS
In January 1995, the Company's Board of Directors approved the relocation
of the Company's operations to Florida. In 1995, the Company recorded a $552,000
charge for the costs associated with the move. These charges cover office moving
costs, severance payments to approximately 15 employees not relocating, and
moving costs for employees relocating including closing costs and real estate
commissions on new homes.
9. COMMITMENTS
OPERATING LEASES
The Company leases its office facilities and various equipment. Total
rental expense for the years ended April 30, 1997, 1996 and 1995 was $256,648,
$227,662 and $149,316, respectively. Approximate minimum annual rental
commitments under non-cancelable operating leases at April 30, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................................ $224,731
1999........................................................ 199,926
2000........................................................ 205,055
2001........................................................ 210,804
2002........................................................ 17,637
Thereafter.................................................. --
--------
$858,153
========
</TABLE>
25
<PAGE> 28
BBG-COA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CUSTOMER CONTRACTS
The Company has entered into several contracts with health maintenance
organizations ("HMO's"). These contracts define a business relationship whereby
the Company, through its network of providers, arranges vision care services to
members of the HMO's pursuant to a predetermined reimbursement schedule. The HMO
contracts generally have a term of one to two years, but generally may be
terminated by either party without cause on 60-90 days notice.
10. SUBSEQUENT EVENT
On August 19, 1997, the Company and NationsBank entered into a verbal
agreement to renew the Company's line of credit facility through September 30,
1998.
* * * * *
26
<PAGE> 29
BBG-COA, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JULY 31,
1997
-----------
(UNAUDITED)
<S> <C>
ASSETS
Current assets
Cash...................................................... $ 338,845
Accounts receivable:
Receivables from buying group members, less allowance
for doubtful accounts of $41,632..................... 5,058,177
Managed vision care fee receivables.................... 718,420
Receivables from fee for service plans................. 785,701
Prepaid expenses and other current assets................. 41,848
Prepaid income taxes...................................... (9,163)
Deferred income taxes..................................... 24,173
-----------
Total current assets.............................. 6,958,001
Restricted cash............................................. 125,000
Furniture, fixtures and purchased software, net............. 977,787
Other assets................................................ 133,513
Goodwill, less accumulated amortization of $2,777,612....... 5,051,204
-----------
Total assets...................................... $13,245,505
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations.............. $ 27,511
Accounts payable:
Payables to buying group suppliers..................... 4,830,741
Managed vision care claim reserves..................... 1,207,326
Fee for service plans claims payable................... 563,568
Accrued liabilities....................................... 193,956
-----------
Total current liabilities......................... 6,823,102
Line of credit.............................................. 3,124,134
Other long-term liabilities................................. 40,211
-----------
Total liabilities................................. 9,987,447
-----------
Shareholders' equity
Common stock, $0.01 par value, authorized 3,000,000
shares;
issued and outstanding 1,363,814 shares................ 13,638
Additional paid-in capital................................ 3,828,365
Accumulated deficit....................................... (583,945)
-----------
Total shareholders' equity........................ 3,258,058
-----------
Total liabilities and shareholders' equity........ $13,245,505
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 30
BBG-COA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
JULY 31,
--------------------------
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Buying group sales........................................ $13,921,435 $14,021,144
Managed vision care division fees......................... 3,913,145 2,883,234
----------- -----------
Total revenues.................................... 17,834,580 16,904,378
Expenses:
Cost of product -- buying group........................... 13,233,812 13,322,123
Cost of service -- managed vision care division........... 2,418,131 1,973,292
Selling and administrative expenses....................... 1,428,039 1,257,195
----------- -----------
17,079,982 16,552,610
Income from operations............................ 754,598 351,768
Interest expense............................................ 60,228 92,968
Other income, net........................................... (8,596) (8,363)
----------- -----------
Income before income taxes.................................. 702,966 267,163
Provision for income taxes.................................. 305,953 210,259
----------- -----------
Net income........................................ 397,013 56,904
Accumulated deficit -- beginning of period.................. (980,958) (1,605,952)
----------- -----------
Accumulated deficit -- end of period........................ $ (583,945) $(1,549,048)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
28
<PAGE> 31
BBG-COA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
JULY 31,
--------------------------
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 397,013 $ 56,904
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization.......................... 164,975 140,975
Changes in assets and liabilities
Decrease in accounts receivable...................... 718,990 1,179,937
Decrease in prepaid expenses and other current
assets.............................................. 39,486 30,963
Decrease in prepaid income taxes..................... 201,134 109,064
Decrease in deferred income taxes.................... 7,637 41,734
Increase in other assets............................. (82,687) (41,875)
Decrease in accounts payable......................... (1,351,655) (1,186,636)
Decrease in accrued liabilities...................... (112,743) (220,019)
Other................................................ 40,211 115,502
----------- -----------
Net cash provided by operating activities......... 22,361 226,549
----------- -----------
Cash flows from investing activities
Capital expenditures...................................... (133,874) (143,380)
----------- -----------
Net cash used in investing activities............. (133,874) (143,380)
----------- -----------
Cash flows from financing activities
Repayments of revolving credit loan, net.................. (178,217) (436,518)
Repayments of capital lease obligations................... (24,653) (13,015)
----------- -----------
Net cash used in financing activities............. (202,870) (449,533)
----------- -----------
Net decrease in cash........................................ (314,383) (366,364)
Cash -- beginning of period................................. 653,228 704,312
----------- -----------
Cash -- end of period....................................... $ 338,845 $ 337,948
=========== ===========
Supplemental cash flow information
Cash paid during the period for:
Interest............................................... $ 60,227 $ 92,968
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 32
BBG-COA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of BBG-COA, Inc. and its subsidiaries
(the "Company") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The interim
financial data is unaudited; however, in the opinion of the Company, the interim
data includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for interim periods.
These consolidated financial statements should be read in conjunction with
the audited financial statements and the notes thereto contained in the
prospectus.
The Company believes that the maturation of the Company's managed vision
care business and the Company's termination of certain unprofitable managed
vision care contracts has resulted in lower participant utilization and higher
gross profits on the Company's managed vision care business during the quarter
ended July 31, 1997. However, the results of operations for the three month
period ended July 31, 1997 are not necessarily indicative of the results to be
expected for the full year.
2. AMENDMENT OF FINANCING AGREEMENT
On October 1, 1997, the Company and NationsBank executed an amendment to
the Company's financing agreement to extend the maturity date of the agreement
to September 30, 1998 and to amend various covenants specified in the agreement.
3. SALE OF COMPANY
On October 13, 1997, BBG-COA's Board of Directors approved the terms of a
letter of intent for the acquisition by Vision Twenty-One, Inc. of 100% of the
issued and outstanding shares of BBG-COA's common stock for $35.0 million
consideration consisting of cash and the common stock of Vision Twenty-One, Inc.
plus the assumption of certain indebtedness. Additional shares of common stock
will be held in escrow as contingent consideration, deliverable upon the
attainment of certain operating results.
30
<PAGE> 33
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
BASIS OF PRESENTATION
Effective December 1, 1996, Vision Twenty-One, Inc. (the "Company")
acquired substantially all of the assets, primarily consisting of accounts
receivable, leases, contracts, equipment and other tangible and intangible
assets (the "business assets"), and assumed certain liabilities of 10
ophthalmology and optometry practices located in Minnesota, Arizona and Florida
(the "1996 Acquisitions"). In conjunction with the 1996 Acquisitions, the
Company entered into various business management agreements (the "Management
Agreements") with the professional associations operating those practices. From
March 1, 1997 to the Company's Initial Public Offering on August 18, 1997, the
Company acquired the business assets of one optometry clinic, 11 ophthalmology
clinics, six optical dispensaries and four ASCs located in Arizona and Florida
(the "Pre IPO Acquisitions"). In conjunction with the Pre IPO Acquisitions, the
Company entered into Management Agreements with the professional associations
operating the practices. In September 1997, the Company acquired the business
assets of four ophthalmology clinics and two optical dispensaries located in
Arizona, Florida and New York and acquired the business assets of a managed care
company (the "September Acquisitions"). The September Acquisitions included the
following entities: (i) Retina Associates, Southwest P.C., (ii) DGL Properties,
Inc., (iii) Center Optical, Inc., (iv) Managed Health Services, Inc., and (v)
Florida Eye Center. In October 1997, the Company closed in escrow one
acquisition and entered into an arrangement to acquire the business assets of,
collectively, one optical dispensary, two ophthalmology clinics and one ASC
located in Florida (the "October Acquisitions"). In conjunction with the
September and October Acquisitions, the Company entered into various Management
Agreements with the professional associations operating those practices.
Effective October 31, 1997, the Company acquire all of the issued and
outstanding stock of BBG-COA, Inc. (the "Block Acquisition"). The Pre IPO
Acquisitions, the September Acquisitions and the October Acquisitions are
collectively referred to as the "1997 Acquisitions." Except for the Company's
acquisitions of managed care companies and the Block Acquisition, which were
accounted for under the purchase method of accounting, its acquisitions have
been accounted for by recording the assets and liabilities at fair value and
allocating the remaining costs to the related Management Agreements. The
Company plans to sell 2,800,000 shares of Common Stock to raise approximately
$29,748,500 net of Offering expenses in November 1997 (the "Offering").
The following unaudited pro forma consolidated financial statements are
based on the historical consolidated financial statements of the Company,
adjusted to give effect to the transactions described below. The unaudited pro
forma consolidated statements of operations of the Company for the year ended
December 31, 1996 give effect to the following transactions as if they had
occurred on January 1, 1996: (i) the 1996 Acquisitions, (ii) the 1997
Acquisitions, (iii) the Block Acquisition, (iv) the Initial Public Offering and
the application of the net proceeds therefrom and (v) the Offering and the
application of the estimated net proceeds therefrom. The unaudited pro forma
consolidated statements of operations of the Company for the nine-month period
ended September 30, 1997 give effect to the following transactions as if they
had occurred on January 1, 1996: (i) the 1997 Acquisitions, (ii) the Block
Acquisition, (iii) the Initial Public Offering and the application of the net
proceeds therefrom and (iv) the Offering and the application of the estimated
net proceeds therefrom. The unaudited pro forma consolidated balance sheet of
the Company as of September 30, 1997 gives effect to the October Acquisitions
and the Block Acquisition at that date and the consummation of the Offering and
the application of the estimated net proceeds therefrom.
The unaudited pro forma consolidated financial statements are based on the
historical financial statements of the Company, Block Vision and the
professional or other entities which owned the business assets which were the
subject of the 1996 and 1997 Acquisitions and give effect to the 1996
Acquisitions, the 1997 Acquisitions, the Block Acquisition, the Initial Public
Offering and the Offering and the assumptions and adjustments described in the
notes thereto. The unaudited pro forma consolidated financial information does
not purport to indicate what the results of operations or financial condition of
the Company would have been if the 1996 and 1997 Acquisitions, the Block
Acquisition, the Initial Public Offering and the Offering had been effected on
the dates indicated or to project the future results of operations or financial
condition of the Company. Such pro forma financial information should be read in
conjunction with the consolidated financial statements of the Company and the
financial statements of certain of the other entities as previously filed with
the Securities and Exchange Commission.
31
<PAGE> 34
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
COMPANY BLOCK 1996 AND
FOR THE TWELVE-MONTH FOR THE TWELVE-MONTH BLOCK 1997
PERIOD ENDED PERIOD ENDED ACQUISITION ACQUISITIONS PRO FORMA
DECEMBER 31, 1996 DECEMBER 31, 1996 ADJUSTMENTS ADJUSTMENTS CONSOLIDATED
-------------------- -------------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Practice management
fees................... $ 1,942,843 $37,538,000(2) $ 39,480,843
Managed care............. 7,315,196 $12,279,598 3,492,000(1) 23,086,794
Buying group sales....... 54,832,374 54,832,374
Other revenue............ 305,654 26,244 3,000(1) 334,898
----------- ----------- ----------- ----------- ------------
9,563,693 67,138,216 -- 41,033,000 117,734,909
Operating expenses:
Practice management
expenses............... 1,244,173 30,504,000(2) 31,748,173
Medical claims........... 9,128,659 8,741,585 2,919,000(1) 20,789,244
Cost of buying group
sales.................. 52,084,442 -- 52,084,442
Salaries, wages and
benefits............... 1,889,395 2,530,611 (90,000)(4) 38,000(1) 6,806,006
2,438,000(12)
Business development..... 1,926,895 -- 1,926,895
General and
administrative......... 1,208,678 2,274,141 322,000(1) 4,034,819
230,000(12) --
Depreciation and
amortization........... 126,046 556,000 (372,000)(5) 2,338,000(3) 4,059,046
1,411,000(5)
----------- ----------- ----------- ----------- ------------
15,523,846 66,186,779 949,000 38,789,000 121,448,625
Income (loss) from
operations............... (5,960,153) 951,437 (949,000) 2,244,000 (3,713,716)
Interest expense.......... 159,484 333,074 510,000(11) 204,000(6) 1,206,558
----------- ----------- ----------- ----------- ------------
Income (loss) before
income taxes............. (6,119,637) 618,363 (1,459,000) 2,040,000 (4,920,274)
Income tax expense
(benefit)................ -- 391,194 (176,194)(7) (1,536,000)(7) (1,321,000)
----------- ----------- ----------- ----------- ------------
Net income (loss)......... $(6,119,637) $ 227,169 $(1,282,806) $ 3,576,000 $ (3,599,274)
=========== =========== =========== =========== ============
Net income (loss) per
common share............. $ (1.02) $ (0.47)
=========== ============
Weighted average number of
common shares
outstanding.............. 5,979,543 7,664,524
=========== ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
32
<PAGE> 35
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
COMPANY BLOCK
FOR THE NINE-MONTH FOR THE NINE-MONTH BLOCK 1997
PERIOD ENDED PERIOD ENDED ACQUISITION ACQUISITIONS PRO FORMA
SEPTEMBER 30, 1997 JULY 31, 1997 ADJUSTMENTS ADJUSTMENTS CONSOLIDATED
------------------ ------------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Practice management fees..... $19,684,406 $11,388,000(2) $31,072,406
Managed care................. 9,307,430 $11,878,000 1,461,000(1) 22,646,430
Buying group revenue......... 40,389,000 -- 40,389,000
Other revenue................ 451,925 147,000 -- 598,925
----------- ----------- ----------- ----------- -----------
29,443,761 52,414,000 -- 12,849,000 94,706,761
----------- ----------- ----------- ----------- -----------
Operating expenses:
Practice management
expenses................... 15,977,619 9,190,000(2) 25,167,619
Medical claims............... 8,052,709 8,103,000 1,186,000(1) 17,341,709
Cost of buying group sales... 38,360,000 -- 38,360,000
Salaries, wages and
benefits................... 3,405,067 2,228,000 (68,000)(4) -- 5,565,067
General and administrative... 1,339,555 1,770,000 104,000(1) 3,213,555
Depreciation and
amortization............... 954,313 530,000 (297,000)(5) 808,000(3) 3,053,313
1,058,000(5) --
----------- ----------- ----------- ----------- -----------
29,729,263 50,991,000 693,000 11,288,000 92,701,263
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations................... (285,502) 1,423,000 (693,000) 1,561,000 2,005,498
Interest expense.............. 740,777 181,000 510,000(11) -- 1,431,777
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes........................ (1,026,279) 1,242,000 (1,203,000) 1,561,000 573,721
Income taxes.................. -- 601,000 (188,000)(7) 201,000(7) 614,000
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary charge(13)..... $(1,026,279) $ 641,000 $(1,015,000) $ 1,360,000 $ (40,279)
=========== =========== =========== =========== ===========
Income (loss) before
extraordinary charge per
common share(13)............. $ (0.15) $ (0.01)
=========== ===========
Weighted average number of
common shares outstanding.... 6,670,779 7,664,524
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
33
<PAGE> 36
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
COMPANY BLOCK
AS OF AS OF BLOCK OCTOBER
SEPTEMBER 30, JULY 31, ACQUISITION ACQUISITION
1997 1997 ADJUSTMENTS ADJUSTMENTS
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 2,615,335 $ 338,845 (750,000)(9) $(1,792,000)(8)
(370,000)(11)
Accounts receivable............. 7,471,833 6,562,298 --
Other receivables............... 1,321,389 --
Prepaid expenses and other
current assets................ 889,941 56,858 --
----------- ----------- ----------- -----------
Total current assets...... 12,298,498 6,958,001 (1,120,000) (1,792,000)
Fixed assets, net................. 3,263,943 977,787 --
Intangible assets................. 28,050,825 5,051,204 29,211,942(9) 3,150,000(8)
590,000(8)
Other assets...................... 157,489 258,513 --
----------- ----------- ----------- -----------
Total assets.............. $43,770,755 $13,245,505 $28,091,942 $ 1,948,000
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 955,998 $ 6,601,635 --
Accrued expenses................ 967,261 193,956 --
Accrued acquisition and offering
costs......................... -- --
Accrued compensation............ 1,317,385 --
Due to managed professional
associations.................. 1,814,691 --
Due to selling shareholders..... 3,800,228 25,600,000(9)
Current portion of long-term
debt.......................... 112,889 --
Current portion of obligations
under capital leases.......... 289,742 27,511 --
Medical claims payable.......... 1,457,866 --
----------- ----------- ----------- -----------
Total current
liabilities............. 10,716,060 6,823,102 25,600,000 --
Deferred rent payable............. 262,376 --
Obligations under capital
leases.......................... 111,046 -- --
Long-term debt, less current
portion......................... 66,264 3,124,134 --
Other long-term liabilities....... 40,211
Deferred income taxes............. 1,716,000 590,000(8)
Stockholders' equity:
Common stock.................... 8,591 13,638 (13,638)(9) 101(8)
458(9)
Additional paid-in capital...... 40,269,136 3,828,365 (3,828,365)(9) 1,357,899(8)
6,049,542(9)
70,000(9)
140,000(11)
Deferred compensation........... (435,810) --
Accumulated deficit............. (8,942,908) (583,945) 583,945(9) --
(510,000)(11)
----------- ----------- ----------- -----------
Total stockholders'
equity.................. 30,899,009 3,258,058 2,491,942 1,358,000
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity.... $43,770,755 $13,245,505 $28,091,942 $ 1,948,000
=========== =========== =========== ===========
<CAPTION>
PRO FORMA
PRO FORMA OFFERING CONSOLIDATED
CONSOLIDATED ADJUSTMENTS AFTER OFFERING
------------ ------------ --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 42,180 $ 348,272 $ 390,452
Accounts receivable............. 14,034,131 14,034,131
Other receivables............... 1,321,389 1,321,389
Prepaid expenses and other
current assets................ 946,799 946,799
------------ ------------ -----------
Total current assets...... 16,344,499 348,272 16,692,771
Fixed assets, net................. 4,241,730 4,241,730
Intangible assets................. 66,053,971 66,053,971
Other assets...................... 416,002 416,002
------------ ------------ -----------
Total assets.............. $ 87,056,202 $ 348,272 $87,404,474
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 7,557,633 $ 7,557,633
Accrued expenses................ 1,161,217 1,161,217
Accrued acquisition and offering
costs......................... -- --
Accrued compensation............ 1,317,385 1,317,385
Due to managed professional
associations.................. 1,814,691 1,814,691
Due to selling shareholders..... 29,400,228 $ (3,800,228)(10) --
(25,600,000)(10)
Current portion of long-term
debt.......................... 112,889 112,889
Current portion of obligations
under capital leases.......... 317,253 317,253
Medical claims payable.......... 1,457,866 1,457,866
------------ ------------ -----------
Total current
liabilities............. 43,139,162 (29,400,228) 13,738,934
Deferred rent payable............. 262,376 262,376
Obligations under capital
leases.......................... 111,046 111,046
Long-term debt, less current
portion......................... 3,190,398 3,190,398
Other long-term liabilities....... 40,211 40,211
Deferred income taxes............. 2,306,000 2,306,000
Stockholders' equity:
Common stock.................... 9,150 2,800(10) 11,950
Additional paid-in capital...... 47,886,577 29,745,700(10) 77,632,277
Deferred compensation........... (435,810) (435,810)
Accumulated deficit............. (9,452,908) (9,452,908)
------------ ------------ -----------
Total stockholders'
equity.................. 38,007,009 29,748,500 67,755,509
------------ ------------ -----------
Total liabilities and
stockholders' equity.... $ 87,056,202 $ 348,272 $87,404,474
============ ============ ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
34
<PAGE> 37
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
(1) The Company has acquired two managed care businesses -- one on December
1, 1996 (a 1996 Acquisition) and the other on September 1, 1997 (a 1997
Acquisition). These adjustments reflect the pro forma additional managed care
revenue, medical claims, salaries, wages and benefits and general and
administrative expenses that would have been generated by each business if the
1996 Acquisition and the 1997 Acquisition had occurred on January 1, 1996. The
managed care revenue, medical claims, salaries, wages and benefits and general
and administrative expenses for the nine-month period ended September 30, 1996
reflect the pro forma additional amounts that would have been incurred if the
1997 Acquisition had occurred on January 1, 1996.
<TABLE>
<CAPTION>
TWELVE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
12/31/96 9/30/97
------------ ------------
<S> <C> <C>
Revenues:
Managed care.............................................. $3,492,000 $1,461,000
Other..................................................... 3,000 --
---------- ----------
3,495,000 1,461,000
---------- ----------
Expenses:
Medical claims............................................ 2,919,000 1,186,000
Salaries, wages and benefits.............................. 38,000 --
General and administrative................................ 322,000 104,000
---------- ----------
3,279,000 1,290,000
---------- ----------
Net......................................................... $ 216,000 $ 171,000
========== ==========
</TABLE>
(2) The practice management fees and practice management expenses for the
year ended December 31, 1996 reflect the pro forma additional practice
management fee revenue that would have been earned through the management of the
related managed professional entities under the Management Agreements if the
1996 Acquisitions (which were effective on December 1, 1996) and the 1997
Acquisitions had occurred on January 1, 1996, less approximately $479,000 earned
by the Company on a historical basis through a management agreement with managed
professional entities included in the 1996 Acquisitions. The practice management
fees and practice management expenses for the nine-month period ended September
30, 1997 reflect the pro forma additional practice management fee revenue that
would have been earned through the management of the related managed
professional entities under the Management Agreements if the 1997 Acquisitions
had occurred on January 1, 1996. This revenue represents reimbursement of
practice management expenses incurred by the Company, including depreciation of
fixed assets. In addition, the Company receives a percentage (ranging from 24 to
37 percent) of the related managed professional entities net earnings before
interest, taxes and shareholder physician expenses, as determined under the
related Management Agreements.
35
<PAGE> 38
The following analysis summarizes the adjustments related to practice
management fees:
<TABLE>
<CAPTION>
1996 AND 1997
ACQUISITION ADJUSTMENTS
---------------------------
TWELVE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
12/31/96 9/30/97
------------ ------------
<S> <C> <C>
Practice management fee summary:
Reimbursement of practice management expenses:
Practice management expenses.............................. $30,504,000 $ 9,190,000
Depreciation.............................................. 1,140,000 347,000
----------- -----------
31,644,000 9,537,000
Share of Managed Professional Associations' net earnings.... 6,373,000 1,851,000
----------- -----------
38,017,000 11,388,000
Less management fee earned by the Company through a
management agreement with a Managed Professional
Association for the eleven-month period ended November 30,
1996...................................................... (479,000) --
----------- -----------
Practice management fee revenue............................. $37,538,000 $11,388,000
=========== ===========
</TABLE>
The share of Managed Professional Associations' net earnings was computed
as follows:
<TABLE>
<CAPTION>
TWELVE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
12/31/96 9/30/97
------------ ------------
<S> <C> <C>
Gross practice revenues..................................... $52,887,000 $15,707,000
less defined practice expenses including depreciation..... 31,644,000 9,537,000
----------- -----------
Managed Professional Associations'
net earnings.............................................. $21,243,000 $ 6,170,000
Weighted-average management fee percentage.................. 30% 30%
----------- -----------
Share of Managed Professional Associations'
net earnings.............................................. $ 6,373,000 $ 1,851,000
=========== ===========
</TABLE>
The pro forma adjustments for practice management fees and practice
management expenses are based on the actual results of operations of the
individual practices, as adjusted for the terms of the Management Agreements.
While the Company expects the operations of the practices to improve under its
management, there can be no assurance that operations will not deteriorate.
However, the Company believes this information is the best available objective
information upon which to evaluate the performance of the practices.
(3) Depreciation and amortization reflect depreciation of the related
managed professional entities' fixed assets acquired over their estimated useful
life and amortization of intangible assets over an average life of 25 years:
<TABLE>
<CAPTION>
1996 AND 1997
ACQUISITION ADJUSTMENTS
---------------------------
TWELVE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
12/31/96 9/30/97
------------ ------------
<S> <C> <C>
Fixed assets(a)............................................. $ 1,140,000 $ 347,000
Intangible assets(b)........................................ 1,198,000 461,000
----------- ----------
$ 2,338,000 $ 808,000
=========== ==========
</TABLE>
(a) Depreciation on fixed assets is calculated on a straight-line method
over the estimated useful lives of the various classes of assets, which range
from three to seven years.
(b) Amortization of intangible assets is calculated on a straight-line
method over an average life of 25 years. Included in amortization expense is
$191,000 and $109,000 for the twelve-month period ended
36
<PAGE> 39
December 31, 1996 and the nine-month period ended September 30, 1997,
respectively, for the addition to intangible assets and corresponding increase
in deferred income taxes for the value of the portion of the Management
Agreements acquired in non-taxable transactions as if they had occurred on
January 1, 1996 and January 1, 1997, respectively.
(4) The adjustment reduces certain salaries of the management of Block by
$90,000 and $68,000 for the twelve-month period ended December 31, 1996 and the
nine-month period ended September 30, 1997, respectively, to levels that will be
paid by the Company.
(5) The adjustment removes the goodwill amortization previously recorded by
Block of $372,000 and $297,000 for the twelve-month period ended December 31,
1996 and the nine-month period ended September 30, 1997, respectively, and
records the goodwill amortization of $1,411,000 and $1,058,000 for the
twelve-month period ended December 31, 1996 and the nine-month period ended
September 30, 1997, respectively, related to the acquisition of Block by the
Company.
(6) The adjustment to interest expense reflects the additional interest on
the notes issued and the debt assumed in conjunction with the 1996 Acquisitions
as if the 1996 Acquisitions occurred on January 1, 1996, as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT INTEREST INTEREST
DESCRIPTION 12/31/96 RATE PERIOD EXPENSE
- ----------- ---------- -------- ----------------- --------
<S> <C> <C> <C> <C>
Unsecured notes payable issued to
stockholders of the Managed
Professional Associations on
12/1/96............................ $1,924,959 8.00% 1/1/96 -- 11/30/96 $141,000
Certain notes payable and capital
lease obligations assumed of the
Managed Professional Associations
on 12/1/96......................... 744,481 9.25% 1/1/96 -- 11/30/96 63,000
--------
$204,000
========
</TABLE>
(7) The adjustment records the income tax expense (benefit) that would have
been recorded if the transactions had occurred on January 1, 1996. The expense
(benefit) is calculated using an estimated average income tax rate of 38% and
income before income taxes adjusted for the amortization of the non-deductible
goodwill resulting from the Block Acquisition.
(8) The adjustment reflects the October Acquisitions. The fair value of
the net assets and Management Agreements associated with the October
Acquisitions is expected to approximate $3,150,000. The October Acquisitions
were financed through the expected payment of $1,792,000 in cash and the
issuance of approximately 101,000 shares of the Company's Common Stock, valued
at the average closing prices of the Company's Common Stock five days before and
after the closing dates. The acquisition adjustment assumes the fair value of
the net business assets is immaterial and, accordingly, allocates the entire
fair value of $3,150,000 to intangible assets, principally representing the fair
value of the Management Agreements. The Company has also recorded an
37
<PAGE> 40
addition to intangible assets of $590,000 with a corresponding increase in
deferred income taxes for the value of the portion of the Management Agreements
acquired in non-taxable transactions.
(9) The adjustments reflect the Block Acquisition which was effective
October 31, 1997. The Company delivered 458,365 shares of the Company's Common
Stock valued at $13.20 per share based on the average closing prices of the
Company's Common Stock in the five days before the closing date. The Company is
obligated to pay $25,600,000 in cash on the earlier of consummation of the
Offering or November 30, 1997. Goodwill was estimated as follows:
<TABLE>
<S> <C> <C>
Value of Company Common Stock............................... $ 6,050,000
Cash to be paid to selling shareholders..................... 25,600,000
Transaction fee paid in cash................................ 750,000
Transaction fee paid in warrants............................ 70,000
-----------
32,470,000
Recorded net book value of Block............................ $3,258,058
Less previously recorded goodwill........................... 5,051,204 (1,793,146)
---------- -----------
Resulting goodwill.......................................... 34,263,146
Previously recorded goodwill................................ 5,051,204
-----------
Net increase in goodwill.......................... $29,211,942
===========
</TABLE>
The Company anticipates that it will amortize the goodwill over a 25 year
life. The Company will continue to evaluate the appropriate value of the assets
and liabilities, the purchase price allocation and the amortization period for
the goodwill. The adjustments also record the amounts due to selling
shareholders of $25,600,000; the issuance of $6,050,000 in the Company Common
Stock; payment of $750,000 in cash and $70,000 in warrants for certain
transaction fees to be incurred in connection with the Block Acquisition; and
the elimination of Block's historical equity accounts. There is no adjustment to
deferred income taxes because the goodwill is non-deductible. If the Company
subsequently determines that there are identifiable intangible assets, the
amortization period for those amounts will be adjusted accordingly and deferred
income taxes will also be recorded, which will increase the amount of goodwill.
(10) The adjustments reflect the Company's intent to sell 2,800,000 shares
of Common Stock in the Offering resulting in net proceeds of $29,748,500. Such
proceeds will be used to repay the amounts due selling shareholders at September
30, 1997 $3,800,228 and the amounts due the selling shareholders of Block of
$25,600,000. The remaining proceeds of $348,272 will be retained in cash.
(11) The adjustments reflect the Company's entering into a bridge loan
credit facility in October 1997 to borrow up to $37.0 million to complete the
acquisition of Block if the Offering is not completed in a timely manner. The
Company paid $370,000 in cash and issued 50,000 warrants valued at $140,000 to
enter into the borrowing arrangement. If the Company draws on the borrowing
arrangement, it will pay an additional funding fee and will issue additional
warrants. Because the cash fee paid and warrants issued are not refundable, they
are recognized as an expense in the unaudited pro forma consolidated statement
of operations for the year ended December 31, 1996 and the nine-month period
ended September 30, 1997. The unaudited pro forma consolidated balance sheet as
of September 30, 1997 includes adjustments to reduce cash by $370,000; record
the $140,000 value of warrants as an increase in additional paid-in capital; and
reduce accumulated deficit by $510,000.
(12) The adjustment increases the salaries, wages and benefits for the year
ended December 31, 1996 by $2,438,000 and general and administrative expenses
for the year ended December 31, 1996 by $230,000 to the level incurred in the
first six months of 1997 to reflect the expense of the additional infrastructure
needed to manage the 1996 Acquisitions and the 1997 Acquisitions. The adjusted
salaries, wages and benefits and general and administrative expenses for the
year ended December 31, 1996 equal the annualized expenses incurred through June
30, 1997 for the same activities.
(13) Net income (loss) excludes the extraordinary charge for early
extinguishment of debt for $323,346.
38
<PAGE> 41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER EXHIBIT
- ------ -------
2.1 Stock Purchase Agreement dated as of October 31, 1997 by and
among Vision Twenty-One, Inc., BBG-COA, Inc. MarketCorp Venture
Associates, L.P., New York State Business Venture Partnership,
Chase Venture Capital Associates, Michael P. Block, Saree Block
and James T. Roberto.
4.1 Credit Facility commitment letter dated October 10, 1997 between
Prudential Credit Corporation and Vision Twenty-One, Inc. (filed
previously as Exhibit 4.9 to the Company's Registration Statement
on Form S-1 filed October 30, 1997 (Reg. No. 333-39031) and
incorporated herein by reference.
23.1 Consent of Price Waterhouse LLP, Independent Public
Accountants.
27 Financial Data Schedule for nine months ended September 30,
1997 (For SEC use only).
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on October 1, 1997 related
to the Company's acquisition of Retina Associates Southwest,
Florida Eye Center and Managed Health Services.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized, in the city of Largo, State of
Florida on November 14, 1997.
VISION TWENTY-ONE, INC.
Registrant
/s/ RICHARD T. WELCH
--------------------------------------
Chief Financial Officer (The Principal
Accounting Officer and Duly Authorized
Officer)
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EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
DATED: AS OF OCTOBER 31, 1997
<PAGE> 2
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement"), effective October 31,
1997, is by and among VISION TWENTY-ONE, INC., a Florida corporation (the
"Purchaser"), BBG-COA, Inc., a Delaware corporation (the "Company"), and
MARKETCORP VENTURE ASSOCIATES, L.P., NEW YORK STATE BUSINESS VENTURE
PARTNERSHIP, CHASE VENTURE CAPITAL ASSOCIATES, L.P., MICHAEL P. BLOCK, SAREE
BLOCK and JAMES T. ROBERTO (individually, a "Stockholder" and collectively, the
"Stockholders").
RECITALS
A. Stockholders own all of the issued and outstanding shares of capital
stock of the Company.
B. Purchaser desires to purchase from the Stockholders, and the
Stockholders desire to sell to Purchaser, all of the issued and outstanding
capital stock of the Company, pursuant to and in accordance with this Agreement.
NOW, THEREFORE, in consideration of the mutual representations,
warranties and covenants contained herein, and on the terms and subject to the
conditions herein set forth, the parties hereto hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings set forth below:
1.1. AAA. The term "AAA" shall mean the American Arbitration
Association.
1.2. Accounts Receivable. The term "Accounts Receivable" shall
have the meaning set forth in SECTION 3.34.
1.3. Acquisition Proposal. The term "Acquisition Proposal"
shall have the meaning set forth in SECTION 3.30.
1.4. Affiliate. The term "Affiliate" with respect to any
person or entity shall mean a person or entity that directly or indirectly
through one or more intermediaries, controls, or is controlled by or is under
common control with, such person or entity.
1.5. Assets. The term "Assets" shall mean all of the assets of
the Company.
1.6. Business. The term "Business" shall have the meaning set
forth in SECTION 16.1(b)(i).
1.7. Cash Compensation. The term "Cash Compensation" shall
have the meaning set forth in SECTION 3.11(a).
<PAGE> 3
1.8. Claim Notice. The term "Claim Notice" shall have the
meaning set forth in SECTION 14.4(a).
1.9. Closing. The term "Closing" shall mean the consummation
of the transactions contemplated by this Agreement.
1.10. Closing Date. The term "Closing Date" shall mean the
final Closing which shall take place as soon as practicable after the Escrow
Closing, and no later than November 30, 1997, or such other date as mutually
agreed upon by the parties.
1.11. Code. The term "Code" shall mean the Internal Revenue
Code of 1986, as amended.
1.12. Commitments. The term "Commitments" shall have the
meaning set forth in SECTION 3.16(a).
1.13. Common Stock. The term "Common Stock" shall mean the
common stock, par value $.01 per share, of Purchaser.
1.14. Company. The term "Company" shall have the meaning set
forth in the introductory paragraph of the Agreement.
1.15. Company Balance Sheet. The term "Company Balance Sheet"
shall have the meaning set forth in SECTION 3.9.
1.16. Company Balance Sheet Date. The term "Company Balance
Sheet Date" shall have the meaning set forth in SECTION 3.9.
1.17. Company Common Stock. The term "Company Common Stock"
shall mean the common stock of the Company.
1.18. Compensation Plans. The term "Compensation Plans" shall
have the meaning set forth in SECTION 3.11(b).
1.19. Competitor. The term "Competitor" shall mean any person
or entity which, individually or jointly with others, whether for its own
account or for that of any other person or entity, owns or holds any ownership
or voting interest in any person or entity engaged in the business of providing
purchasing services to eye care professionals and of providing managed vision
care services to health maintenance organizations, preferred provider
organizations and other third party payor entities.
1.20. Contingent Shares. The term "Contingent Shares" shall
mean that aggregate number of Purchaser's shares which will be delivered to the
Stockholders,
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on a pro-rata basis, upon the attainment of certain performance targets by the
Company pursuant to SECTION 2.3(c).
1.21. Contingent Shares Escrow Agreement. The term "Contingent
Shares Escrow Agreement" shall mean the Contingent Shares Escrow Agreement
entered into among the Stockholders, Purchaser and the Escrow Agent at the
Escrow Closing with respect to the Contingent Shares.
1.22. Controlled Group. The term "Controlled Group" shall have
the meaning set forth in SECTION 3.12(g).
1.23. Damages. The term "Damages" shall have the meaning set
forth in SECTION 14.1.
1.24. "EBITDA Impact". The term "EBITDA Impact" shall have the
meaning set forth in SECTION 2.5(b).
1.25. Effective Date. The term "Effective Date" shall mean
11:59 p.m. on October 31, 1997.
1.26. Election Period. The term "Election Period" shall have
the meaning set forth in SECTION 14.3(a).
1.27. Employee Benefit Plans. The term "Employee Benefit
Plans" shall have the meaning set forth in SECTION 3.12(a).
1.28. Employee Policies and Procedures. The term "Employee
Policies and Procedures" shall have the meaning set forth in SECTION 3.11(d).
1.29. Employment Agreements. The term "Employment Agreements"
shall have the meaning set forth in SECTION 3.11(c).
1.30. ERISA. The term "ERISA" shall mean the Employee
Retirement Income Security Act of 1974, as amended.
1.31. Escrow Agent. The term "Escrow Agent" shall mean Olshan
Grundman Frome & Rosenzweig LLP.
1.32. Escrow Agreement. The term "Escrow Agreement" shall mean
the Escrow Agreement entered into among the Stockholders, Purchaser and the
Escrow Agent at the Escrow Closing.
1.33. Escrow Closing. The term "Escrow Closing" shall mean the
preliminary closing of the transactions contemplated by this Agreement to occur
on or
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before November 4, 1997 subject to final Closing upon fulfillment of the
conditions set forth in SECTION 13.
1.34. Escrow Closing Date. The term "Escrow Closing Date"
shall mean the date of the Escrow Closing.
1.35. Estimated Closing Balance Sheet. The term "Estimated
Closing Balance Sheet" shall have the meaning set forth in SECTION 2.5(a).
1.36. Exchange Act. The term "Exchange Act" shall mean the
Securities Exchange Act of 1934, as amended.
1.37. Financial Statements. The term "Financial Statements"
shall have the meaning set forth in SECTION 3.9.
1.38. GAAP. The term "GAAP" shall mean generally accepted
accounting principles, applied on a consistent basis with prior periods, as set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of the determination.
1.39. Governmental Entity. The term "Governmental Entity"
shall mean any national, state, provincial, local or tribunal governmental,
judicial or administrative authority or agency.
1.40. Indemnified Party. The term "Indemnified Party" shall
have the meaning set forth in SECTION 14.4(a).
1.41. Indemnifying Party. The term "Indemnifying Party" shall
have the meaning set forth in SECTION 14.4(a).
1.42. Indemnity Notice. The term "Indemnity Notice" shall have
the meaning set forth in SECTION 14.4(d).
1.43. Insurance Policies. The term "Insurance Policies" shall
have the meaning set forth in SECTION 3.17.
1.44. IRS. The term "IRS" shall mean the Internal Revenue
Service.
1.45. Material Adverse Effect. The term "Material Adverse
Effect" shall mean a material adverse effect on the business, assets,
operations, condition (financial or
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<PAGE> 6
otherwise) or results of operations, taken as a whole, considering all relevant
facts and circumstances, of the subject company and its subsidiaries.
1.46. Proprietary Rights. The term "Proprietary Rights" shall
have the meaning set forth in SECTION 3.18.
1.47. Purchase Adjustment Escrow Agreement. The term "Purchase
Adjustment Escrow Agreement" shall mean the Purchase Adjustment Escrow Agreement
entered into among the Stockholders, Purchaser and the Escrow Agent at the
Escrow Closing with respect to the 2.5(b) Proposed Stock Purchase Consideration
Adjustment.
1.48. Registration Rights Agreement. The term "Registration
Rights Agreement" shall mean the Registration Rights Agreement entered into
between each Stockholder and Purchaser at the Escrow Closing.
1.49. SEC. The term "SEC" shall mean the Securities and
Exchange Commission.
1.50. Securities. The term "Securities" shall mean the shares
of Common Stock of Purchaser to be delivered to the Stockholders and the Escrow
Agent at the Closing.
1.51. Securities Act. The term "Securities Act" shall mean the
Securities Act of 1933, as amended.
1.52. Stock. The term "Stock" shall have the meaning set forth
in SECTION 2.1.
1.53. Stock Purchase Consideration. The term "Stock Purchase
Consideration" shall mean the consideration set forth in SECTION 2.3 of this
Agreement.
1.54. Subsidiaries. The term "Subsidiaries" shall mean the
subsidiaries of the Company identified on Schedule 3.2.
1.55. Tax Returns. The term "Tax Returns" shall have the
meaning set forth in SECTION 3.19.
1.56. Third Party Claim. The term "Third Party Claim" shall
have the meaning set forth in SECTION 14.4(a).
1.57. 2.5(a) Proposed Stock Purchase Consideration Adjustment.
The term "2.5(a) Proposed Stock Purchase Consideration Adjustment" shall have
the meaning set forth in SECTION 2.5(c).
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<PAGE> 7
1.58. 2.5(b) Proposed Stock Purchase Consideration Adjustment.
The term "2.5(b) Proposed Stock Purchase Consideration Adjustment" shall have
the meaning set forth in SECTION 2.5(d).
2. PURCHASE AND SALE OF STOCK.
2.1. Purchase of Stock. Upon and subject to the terms and
conditions of this Agreement, Purchaser agrees to purchase and accept delivery
from each Stockholder of, and each Stockholder agrees to sell, assign, transfer
and deliver to Purchaser, at the Closing, all of the issued and outstanding
shares of common stock of the Company owned by such Stockholder (collectively,
for all of the Stockholders, the "Stock"), free and clear of all liens, pledges,
security interests, claims, charges, restrictions, equities or encumbrances of
any kind whatsoever.
2.2. The Escrow Closing and the Closing. The Escrow Closing
and the Closing shall take place on the Escrow Closing Date and the Closing
Date, respectively, at the offices of Shumaker, Loop & Kendrick, LLP, 101 E.
Kennedy Boulevard, Suite 2800, Tampa, Florida 33602 or at such other location as
the parties shall mutually agree.
2.3. Stock Purchase Consideration. As consideration for the
Stock, Purchaser shall pay to the Stockholders, in proportion to their
respective ownership of the Stock as set forth on Schedule 3.3, the maximum
aggregate value of Thirty-Seven Million Five Hundred Thousand Dollars
($37,500,000) less the aggregate amount of outstanding long-term indebtedness
(including the outstanding credit facility with NationsBank N.A.) in excess of
net working capital of the Company at the Effective Date (hereinafter, the "net
indebtedness sum"), the net result of which is the "Stock Purchase
Consideration". For purposes hereof, "net working capital" is defined as (a) the
current assets as determined in accordance with GAAP on the Effective Date less
(b) the current liabilities as determined in accordance with GAAP on the
Effective Date (exclusive of any obligations of the Company to Price Waterhouse
LLP in connection with work done by them for Purchaser's pending registration
statement or any expense required to be recorded in connection with the
cancellation of the stock options as required by Section 7.12). The Stock
Purchase Consideration is subject to adjustment as set forth in SECTION 2.5. The
Stock Purchase Consideration shall be delivered in accordance with SECTIONS 12
AND 13 hereof and as follows:
(a) Cash. Purchaser shall deliver the sum of
Twenty-Five Million Six Hundred Fifty-One Thousand Two Hundred Fifty-Nine
Dollars ($ 25,651,259) to the Stockholders on a pro-rata basis by wire transfer
of immediately available funds to such account or accounts as shall be
designated by the Stockholders prior to Closing.
(b) Common Stock. Purchaser shall deliver Four
Hundred Fifty-Eight Thousand Three Hundred Sixty-Five (458,365) shares of Common
Stock to
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<PAGE> 8
the Stockholders on a pro-rata basis.
(c) Contingent Shares. Purchaser shall deliver Two
Hundred Nineteen Thousand Six Hundred Thirty-Three (219,633) shares of Common
Stock, calculated in accordance with the worksheet attached hereto as Schedule
2.3, to be held in escrow in accordance with the terms hereof and of the
Contingent Shares Escrow Agreement. The Contingent Shares shall be released to
the Stockholders from escrow no later than 30 days after completion of audited
financial statements of the Company for the twelve month period ending December
31, 1998 as follows: (A) one-half of the Contingent Shares shall be released
from escrow and distributed among the Stockholders if the Company attains a
minimum EBITDA for such twelve month period of at least $4,550,000 and (B) that
portion of the remaining number of Contingent Shares to be released shall be the
product of (i) one-half of the total number of Contingent Shares and (ii) a
fraction, the numerator of which is the actual EBITDA for such year less the
target EBITDA of $4,550,000, and the denominator of which is $350,000. EBITDA
shall be determined and calculated utilizing the accounting practices of the
Company in its audited financial statements at April 30, 1997 which were
prepared in accordance with GAAP and will not be diminished by any costs or
charges related to the transactions contemplated by this Agreement or corporate
or other overhead charges or expenses of Purchaser or any Purchaser Subsidiary
during such twelve month period. In no event shall the Stockholders be entitled
to receive shares of Common Stock in excess of the number of shares of Common
Stock delivered to the Escrow Agent at the Escrow Closing. In the event the
Stockholders believe that Purchaser has not calculated the number of Contingent
Shares in accordance with this SECTION 2.3, the Stockholders shall, within
thirty (30) days of receipt of the Contingent Shares from escrow, so object to
Purchaser in writing, setting forth a specific description of the nature of the
objection and the number of Contingent Shares the Stockholders believe should
have been paid to them. If no objection is received by Purchaser on or before
the last day of such thirty (30) day period, then the number of Contingent
Shares calculated by Purchaser shall be final. If an objection has been made and
Purchaser and the Stockholders are unable to resolve all of their disagreements
with respect thereto within fifteen (15) days following delivery of the
Stockholders' objection, the dispute shall be submitted to arbitration as
provided in SECTION 17.2. The arbitrator shall be instructed to deliver his
determination of the dispute to the parties no later than thirty (30) days after
the arbitration hearing. Purchaser shall provide to the Stockholders and their
accountants full access to all relevant books, records and work papers utilized
in calculating the number of Contingent Shares to be delivered to the
Stockholders from escrow.
2.4. Fractional Shares. Notwithstanding any other provision
herein, no fractional shares of Common Stock will be issued. Fractional shares
shall be rounded down to the nearest whole number of shares.
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<PAGE> 9
2.5. Stock Purchase Consideration Adjustments.
a. The Stock Purchase Consideration shall be subject
to adjustment on a dollar for dollar basis to the extent that upon audit by
Purchaser's designated auditor, the actual net working capital (as defined in
SECTION 2.3 herein) on the Effective Date differs from the amount of net working
capital reflected on the trial balance sheet dated as of the Effective Date and
attached hereto as Schedule 2.5 (the "Estimated Closing Balance Sheet").
b. The parties also agree to make a Stock Purchase
Consideration adjustment to the extent that upon audit by Purchaser's designated
auditor, the actual consolidated EBITDA of the Company on an annualized basis
for the four month period ended August 31, 1997 is greater or less than the
EBITDA of the Company on an annualized basis for that period, as set forth on
the unaudited financial statements of the Company for the four month period
ended August 31, 1997 provided to Purchaser (the difference on an annualized
basis herein referred to as the "EBITDA Impact"). The Stock Purchase
Consideration shall be adjusted to reflect the EBITDA Impact and shall be
settled in the same proportion of stock and cash as the Stock Purchase
Consideration is split as described in SECTION 2.3 hereof on a pro-rata basis
with each Stockholder by multiplying the amount of the EBITDA Impact by the
valuation multiple of 10.73. Notwithstanding the foregoing, no adjustment shall
be made to the Stock Purchase Consideration unless the EBITDA Impact is equal to
or greater than $100,000.00 and then such adjustment shall be made for the
entire amount of the EBITDA Impact.
c. Within ninety (90) days following the Escrow
Closing Date, Purchaser shall present to the Stockholders its calculation of
EBITDA on an annualized basis for the four month period ended August 31, 1997
and the resultant adjustment pursuant to SECTION 2.5(a) hereof (the "2.5(a)
Proposed Stock Purchase Consideration Adjustment"). The Stockholders shall,
within forty-five (45) days after the delivery by Purchaser of the calculation
of EBITDA and the 2.5(a) Proposed Stock Purchase Consideration Adjustment, if
any, complete their review thereof. In the event that the Stockholders believe
that the calculation of EBITDA and the 2.5(a) Proposed Stock Purchase
Consideration Adjustment has not been prepared on the basis set forth in SECTION
2.5(a) or otherwise contests any item set forth therein, the Stockholders shall,
on or before the last day of such forth-five (45) day period, so object to
Purchaser in writing, setting forth a specific description of the nature of the
objection and the corresponding adjustments the Stockholders believe should be
made. If no objection is received by Purchaser on or before the last day of such
forty-five (45) day period, then the 2.5(a) Proposed Stock Purchase
Consideration Adjustment delivered by Purchaser shall be final and the
Stockholders or the Purchaser, as the case may be, shall return their pro-rata
share of such amount or pay additional Stock Purchase Consideration, as the case
may be, to the other party or parties within five (5) days thereafter. If an
objection has been made and Purchaser and the Stockholders are unable to resolve
all of their disagreements with respect to the proposed adjustments within
fifteen (15) days following
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<PAGE> 10
the delivery of the Stockholders' objection, the dispute shall be submitted to
arbitration as provided in SECTION 17.2 except that the arbitrator shall be
instructed to deliver his determination of the dispute to the parties no later
than thirty (30) days after the arbitration hearing, whereupon the Stockholders
or the Purchaser, as the case may be, shall return their pro-rata share of the
2.5(a) Proposed Stock Purchase Consideration Adjustment, or pay additional Stock
Purchase Consideration, as the case may be, to the other party or parties, if
and to the extent determined by such arbitrator, within ten (10) days of such
arbitrator's determination. Purchaser shall provide to the Stockholders and
their accountants full access to all relevant books, records and work papers
utilized in preparing the calculation of EBITDA and the 2.5(a) Proposed Stock
Purchase Consideration Adjustment.
d. Purchaser shall use its best efforts to cause its
chosen auditor, on or before the Escrow Closing Date, at Purchaser's option, to
either prepare audited financial statements of the Company for the four month
period ended August 31, 1997 or review the unaudited financial statements for
such period prepared by the Company pursuant to reasonable procedures
established by Purchaser, and Purchaser shall promptly thereafter present the
Stockholders with its calculation of EBITDA and the proposed stock purchase
consideration adjustment pursuant to SECTION 2.5(b) hereof (the "2.5(b) Proposed
Stock Purchase Consideration Adjustment"). The Stockholders shall have ten (10)
days to complete their review of the 2.5(b) Proposed Stock Purchase
Consideration Adjustment. If the parties agree on the calculation of EBITDA and
the amount of the adjustment prior to the Closing Date, the adjustment shall
occur at Closing. However, if the calculation of EBITDA and the amount of the
2.5(b) Proposed Stock Purchase Consideration Adjustment is in dispute on the
Closing Date, the amount of the adjustment discrepancy shall be held in escrow
by the Escrow Agent pursuant to the Purchase Adjustment Escrow Agreement. The
dispute shall be handled in the same manner as set forth in SECTION 2.5(c)
hereof.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND MICHAEL P.
BLOCK. The Company and Michael P. Block ("MB") hereby jointly and severally
represent and warrant to Purchaser that the following are true and correct on
the date hereof and shall be true and correct as of the Escrow Closing Date as
if made on such date; when used in this SECTION 3, the term "best knowledge" (or
words of similar import) shall mean such knowledge on the part of MB and the
Company as shall have been obtained after conducting due and diligent
investigation and, in the case of the Company, shall mean the best knowledge of
those individuals listed on Schedule 3:
3.1. Organization and Good Standing; Qualification. Each of
the Company and the Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, with all requisite corporate power and authority to carry on the
business in which it is engaged, to own the properties it owns, to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
Each of the Company and the Subsidiaries is duly qualified and
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<PAGE> 11
licensed to do business in each jurisdiction in which the character or location
of the properties owned or leased by the Company or the Subsidiaries or the
practice of the businesses conducted by the Company or the Subsidiaries makes
such qualification necessary or desirable, except where the failure to be so
qualified would not have a Material Adverse Effect.
3.2. Subsidiaries. Except as set forth on Schedule 3.2, the
Company does not own, directly or indirectly, any of the capital stock of any
other corporation or any equity, profit sharing, participation or other interest
in any corporation, partnership, joint venture or other entity. With respect to
each corporation that is owned, directly or indirectly, beneficially or of
record by the Company (each, a "Subsidiary"), Schedule 3.2 sets forth a true,
correct and complete list of (i) the name and jurisdiction of incorporation of
each Subsidiary, (ii) the jurisdiction in which each Subsidiary is qualified or
licensed to do business as a foreign corporation, (iii) the authorized capital
stock of each Subsidiary, (iv) the number of shares of each class thereof issued
and outstanding, and (v) the number of shares and percentage of outstanding
capital stock owned by the Company. The Company has delivered or made available
to Purchaser true, correct and complete copies of the Certificate of
Incorporation and By-laws or any other governing documents of each Subsidiary as
in effect on the date hereof. All outstanding shares of capital stock of each
Subsidiary have been duly authorized and validly issued, are fully paid and
non-assessable, and are owned by the Company free and clear of all liens,
pledges, security interests, restrictions, voting trusts or other encumbrances
of any nature whatsoever.
3.3. Capitalization. The authorized capital stock of the
Company consists of 3,000,000 shares of Company Common Stock, of which 1,363,813
shares are issued and outstanding and 100,000 shares are reserved for issuance
under the Company's incentive stock option plan. All such options have been or
concurrently with the Closing will be canceled in accordance with SECTION 7.12.
The Stockholders own all of the issued and outstanding Company Common Stock in
the amounts set forth on Schedule 3.3, free and clear of all liens, pledges,
restrictions, voting trusts, security interests or other encumbrances of any
nature whatsoever. Each outstanding share of Company Common Stock has been
legally and validly issued and is fully paid and nonassessable. No shares of
Company Common Stock are owned by the Company in treasury. No shares of Company
Common Stock have been issued or disposed of in violation of the preemptive
rights, rights of first refusal or similar rights of the Stockholders. The
Company has no bonds, debentures, notes or other obligations the holders of
which have the right to vote (or are convertible into or exercisable for
securities having the right to vote) with the Stockholders on any matter.
3.4. Transactions in Capital Stock. Except as set forth on
Schedule 3.4, there exist no options, warrants, subscriptions or other rights to
purchase, or securities convertible into or exchangeable for, any of the
authorized or outstanding securities of the Company, and no option, warrant,
call, conversion right or commitment of any kind exists which obligates the
Company to issue any of its authorized but unissued
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capital stock. Except as set forth on Schedule 3.4, the Company has no
obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any of its equity securities or any interests therein or to pay any dividend or
make any distribution in respect thereof.
3.5. Corporate Records. Copies of the Certificate of
Incorporation and Bylaws, and all amendments thereto, of the Company have been
delivered or made available to Purchaser and are true, correct and complete
copies thereof, as in effect on the date hereof. The minute books of the Company
and the Subsidiaries, copies of which have been delivered or made available to
Purchaser, contain accurate minutes of all meetings of, and accurate consents to
all actions taken without meetings by, the Board of Directors (and any
committees thereof) and the stockholders of the Company and the Subsidiaries in
the three (3) years prior to the Closing Date, and contain all other material
minutes and consents of the directors and stockholders of the Company and the
Subsidiaries since their formation.
3.6. Governmental Consents. Except as disclosed on Schedule
3.6, no filing or registration with, or authorization, consent or approval of,
any Governmental Entity is necessary for the consummation of the transactions
contemplated by this Agreement.
3.7. Authorization and Validity. The Company has the corporate
power and authority to execute this Agreement and carry out its obligations
hereunder. The execution, delivery and performance by the Company of this
Agreement and the other agreements contemplated hereby, and the consummation of
the transactions contemplated hereby and thereby to be performed by the Company,
have been duly authorized by the Company. This Agreement has been duly executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as may be limited by applicable bankruptcy, insolvency or
similar laws affecting creditors' rights generally or the availability of
equitable remedies.
3.8. No Conflict. Except as disclosed on Schedule 3.8, the
execution and delivery of the documents contemplated hereunder and the
consummation of the transactions contemplated thereby by the Company will not
(i) violate any provision of the Company's organizational documents, (ii)
violate any provision of or result in the breach of or entitle any party to
accelerate (whether after the giving of notice or lapse of time or both) any
obligation under, any mortgage, lien, lease, contract, license, permit,
instrument or any other agreement to which the Company or the Subsidiaries is a
party, (iii) result in the creation or imposition of any lien, charge, pledge,
security interest or other encumbrance upon any property of the Company or the
Subsidiaries, or (iv) violate or conflict with any order, award, judgment or
decree or other restriction or any law, ordinance, rule or regulation to which
the Company or its property is subject except for those which would not have a
Material Adverse Effect.
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3.9. Financial Statements. The Company has furnished to
Purchaser its audited consolidated balance sheets and related audited
consolidated statements of operations, accumulated deficits and of cash flows of
the Company and the Subsidiaries at April 30, 1997, 1996 and 1995, together with
supporting schedules and the reports thereon of Price Waterhouse LLP and its
unaudited interim balance sheet (the "Company Balance Sheet") at August 31, 1997
and related unaudited statements of income for the fiscal period then ended (all
collectively, with the related notes thereto, the "Financial Statements"). All
of the Financial Statements have been prepared in accordance with GAAP, reflect
all liabilities of the Company and the Subsidiaries required to be stated
therein and fairly present the consolidated financial position of the Company
and its consolidated subsidiaries at the respective dates of said Financial
Statements subject, in the case of the interim financial statements, to (i)
normal year end adjustments and (ii) the absence of footnote disclosure. Since
August 31, 1997 (the "Company Balance Sheet Date") there has been no material
adverse change (other than for the recognition of accrued tax liability) in the
assets or liabilities or in the business or condition, financial or otherwise,
or the results of operations or prospects of the Company or the Subsidiaries,
whether as a result of any legislative or regulatory change, revocation of any
license, litigation, administrative action, fire, explosion, accident, casualty,
labor trouble, flood, drought, riot, storm, condemnation or act of God or other
public force or otherwise, except for the recognition of accrued tax liability
or as disclosed and consented to by Purchaser or as disclosed in this Agreement.
3.10. No Undisclosed Liabilities. Except as set forth in the
Financial Statements or on Schedule 3.10, each of the Company and the
Subsidiaries is not liable upon or with respect to, or obligated in any other
way to provide funds in respect of or to guarantee or assume in any manner, any
debt, obligation or dividend of any person, corporation, association,
partnership, joint venture, trust or other entity, and neither the Company nor
MB knows of any valid basis for the assertion of any other claims or liabilities
of any nature or in any amount.
3.11. Employee Matters.
a. Cash Compensation. The Company has provided to
Purchaser a complete and accurate list of the names, titles and annual cash
compensation as of the Effective Date, including without limitation wages,
salaries, bonuses (discretionary and formula) and other cash compensation (the
"Cash Compensation") of all employees of the Company and the Subsidiaries. Such
list also contains a complete and accurate description of (i) all increases in
Cash Compensation of employees of the Company and the Subsidiaries during the
current fiscal year and the immediately preceding fiscal year and (ii) any
contractually committed increases in Cash Compensation of employees of the
Company and the Subsidiaries that have not yet been effected.
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b. Compensation Plans. Schedule 3.11(b) contains a
complete and accurate list of all compensation plans, arrangements or practices
(the "Compensation Plans") sponsored by the Company or the Subsidiaries or to
which the Company or the Subsidiaries contributes on behalf of its employees,
other than pursuant to Employment Agreements listed on Schedule 3.11(c) and
Employee Benefit Plans listed on Schedule 3.12(a). The Compensation Plans
include without limitation plans, arrangements or practices that provide for
performance awards and stock ownership or stock options. The Company has
provided or made available to Purchaser a complete and accurate copy of each
written Compensation Plan and a written description of each unwritten
Compensation Plan. Except as set forth on Schedule 3.11(b), each of the
Compensation Plans can be terminated or amended at will by the Company.
c. Employment Agreements. Except as set forth on
Schedule 3.11(c), neither the Company nor the Subsidiaries are a party to any
employment agreement ("Employment Agreements") with respect to any of its
employees. Employment Agreements include without limitation employee leasing
agreements, employee services agreements and non-competition agreements. Except
as set forth on Schedule 3.11(c), no payment of any amounts, other than
compensation earned in the ordinary course, shall be due and payable under any
Employment Agreement as a result of the transactions contemplated hereby.
d. Employee Policies and Procedures. Schedule 3.11(d)
contains a complete and accurate list of all employee manuals and all material
policies, procedures and work-related rules (the "Employee Policies and
Procedures") that apply to employees of the Company and the Subsidiaries. The
Company has provided or made available to Purchaser a complete and accurate copy
of all written Employee Policies and Procedures and a written description of all
material unwritten Employee Policies and Procedures.
e. Unwritten Amendments. Except as described on
Schedule 3.11(b), 3.11(c), 3.11(d) or 3.11(e), no material unwritten amendments
have been made, whether by oral communication, pattern of conduct or otherwise,
with respect to any Compensation Plans, Employment Agreements, or Employee
Policies and Procedures.
f. Labor Compliance. Each of the Company and the
Subsidiaries has been and is in compliance with all applicable laws, rules,
regulations and ordinances respecting employment and employment practices, terms
and conditions of employment and wages and hours, except for any such failures
to be in compliance that, individually or in the aggregate, would not result in
a Material Adverse Effect, and neither the Company nor any of the Subsidiaries
is liable for any arrearages of wages or penalties for failure to comply with
any of the foregoing. Each of the Company and the Subsidiaries has not engaged
in any unfair labor practices or discriminated on the basis of race, color,
religion, sex, national origin, age, disability or handicap in its employment
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conditions or practices that would, individually or in the aggregate, result in
a Material Adverse Effect. Except as set forth on Schedule 3.11(f), there are no
(i) unfair labor practice charges or complaints or racial, religious, sex,
national origin, age, disability or handicap discrimination charges or
complaints pending or, to the best knowledge of the Company and MB threatened
against the Company or the Subsidiaries before any federal, state or local
court, board, department, commission or agency (nor, to the best knowledge of
the Company and MB does any valid basis therefor exist) or (ii) existing or, to
the best knowledge of the Company and MB threatened labor strikes, disputes,
grievances, controversies or other labor troubles affecting the Company (nor, to
the best knowledge of the Company and MB does any valid basis therefor exist).
g. Unions. Each of the Company and the Subsidiaries
has never been a party to any agreement with any union, labor organization or
collective bargaining unit. No employees of the Company or the Subsidiaries are
represented by any union, labor organization or collective bargaining unit.
Except as set forth on Schedule 3.11(g), to the actual knowledge of the Company,
none of the employees of the Company or the Subsidiaries has threatened to
organize or join a union, labor organization or collective bargaining unit.
h. Aliens. All employees of the Company and the
Subsidiaries are, to the best knowledge of the Company, citizens of, or are
authorized in accordance with federal immigration laws to be employed in, the
United States.
3.12. Employee Benefit Plans.
a. Identification. Schedule 3.12(a) contains a
complete and accurate list of all employee benefit plans (within the meaning of
Section 3(3) of ERISA) sponsored by the Company and the Subsidiaries or to which
the Company and the Subsidiaries contributes on behalf of their employees and
all employee benefit plans previously sponsored or contributed to on behalf of
their employees within the three (3) years preceding the date hereof (the
"Employee Benefit Plans"). The Company has provided or made available to
Purchaser complete and accurate copies of all plan documents, determination
letters, pending determination letter applications, trust instruments, insurance
contracts, administrative services contracts, annual reports, actuarial
valuations, summary plan descriptions, summaries of material modifications,
administrative forms and other documents that constitute a part of or are
incident to the administration of the Employee Benefit Plans. Except as set
forth on Schedule 3.12(a) and subject to the requirements of the Code and ERISA,
each of the Employee Benefit Plans can be terminated or amended at will by the
Company. Except as set forth on Schedule 3.12(a), no unwritten amendment exists
with respect to any Employee Benefit Plan.
b. Administration. Each Employee Benefit Plan has
been administered and maintained in compliance with all applicable laws, rules
and regulations,
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except where the failure to be in compliance would not, individually or in the
aggregate, result in a Material Adverse Effect and would not result in the
disqualification of any Employee Benefit Plan intended to be qualified within
the meaning of Code Section 401(a). The Company and the Subsidiaries have (i)
made all necessary filings with respect to such Employee Benefit Plans,
including the timely filing of Form 5500 if applicable, and (ii) made all
necessary filings, reports and disclosures pursuant to and have complied with
all requirements of the IRS Voluntary Compliance Resolution Program, if
applicable, with respect to all profit sharing retirement plans and pension
plans in which employees of the Company and the Subsidiaries participate.
c. Examinations. Except as set forth on Schedule
3.12(c), the Company has not received any notice that any Employee Benefit Plan
is currently the subject of an audit, investigation, enforcement action or other
similar proceeding conducted by any state or federal agency.
d. Prohibited Transactions. No prohibited
transactions (within the meaning of Section 4975 of the Code or Sections 406 and
407 of ERISA) have occurred with respect to any Employee Benefit Plans.
e. Claims and Litigation. No pending or, to the
actual knowledge of the Company and MB, threatened claims, suits, or other
proceedings exist with respect to any Employee Benefit Plan other than normal
benefit claims filed by participants or beneficiaries.
f. Qualification. The Company and/or the Subsidiaries
have received a favorable determination letter or ruling from the IRS for each
of the Employee Benefit Plans intended to be qualified within the meaning of
Section 401(a) of the Code and/or tax-exempt within the meaning of Section
501(a) of the Code. Each such Employee Benefit Plan continues to be qualified
under Section 401(a), and to the best knowledge of the Company and MB, there
have been no defects or omissions in the operation of any such tax-qualified
employee benefit which could result in the disqualification of such plan, except
for defects or omissions described in VCR Compliance Statements issued by the
IRS or currently pending applications under the IRS Voluntary Compliance
Resolution Program.
g. Funding Status. No accumulated funding deficiency
(within the meaning of Section 412 of the Code), whether or not waived, exists
with respect to any Employee Benefit Plan or any plan sponsored by any member of
a controlled group (within the meaning of Section 412(n)(6)(B) of the Code) in
which the Company is a member ("Controlled Group"). With respect to each
Employee Benefit Plan subject to Title IV of ERISA, the assets of each such plan
are at least equal in value to the present value of accrued benefits determined
on an ongoing basis as of the date hereof. Neither the Company nor any of the
Subsidiaries sponsor any Employee Benefit Plan described in Section 501(c)(9) of
the Code.
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h. Excise Taxes. Neither the Company nor any member
of a Controlled Group has any liability to pay excise taxes with respect to any
Employee Benefit Plan under applicable provisions of the Code or ERISA.
i. Multiemployer Plans. Neither the Company nor any
member of a Controlled Group is or ever has been obligated to contribute to a
multiemployer plan within the meaning of Section 3(37) of ERISA.
j. Retirees. Neither the Company nor any of the
Subsidiaries has any obligation or commitment to provide medical, dental or life
insurance benefits to or on behalf of any of its employees who may retire or any
of its former employees who have retired except as may be required pursuant to
the continuation of coverage provisions of Section 4980B of the Code and
Sections 501 through 508 of ERISA.
k. Other Compensation. Except as set forth on
Schedule 3.11(b), 3.11(c), 3.11(d) and 3.12(a), neither the Company nor the
Subsidiaries is a party to any compensation or debt arrangement with any person
relating to the provision of health care related services.
l. Golden Parachute Payments. No employee of the
Company or the Subsidiaries is entitled to receive, either under the terms of an
Employee Benefit Plan or the terms of any other agreement with the Company, any
payment (including accelerated vesting of any payment) that would be a
non-deductible excess parachute payment under Section 280G of the Code.
3.13. Absence of Certain Changes. Except as set forth on
Schedule 3.13 or as contemplated in this Agreement, since the Company Balance
Sheet Date, the Company and the Subsidiaries have not:
a. suffered a Material Adverse Effect, whether or not
caused by any deliberate act or omission of the Company or the Subsidiaries;
b. contracted for the purpose of acquiring any
capital asset having a cost in excess of $100,000 or made any single expenditure
for a capital asset in excess of $100,000;
c. incurred any indebtedness for borrowed money in
excess of $100,000 (other than short-term borrowings in the ordinary course of
business), or issued or sold any debt securities;
d. incurred or discharged any material liabilities or
obligations except in the ordinary course of business;
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e. paid any amount on any indebtedness prior to the
due date, forgiven or canceled any claims or any debt or released or waived any
rights or claims except in the ordinary course of business;
f. mortgaged, pledged or subjected to any security
interest, lien, lease or other charge or encumbrance any of its properties or
assets (other than statutory liens arising in the ordinary course of business or
other liens that do not materially detract from the value or interfere with the
use of such properties or assets);
g. suffered any damage or destruction to or loss of
any assets (whether or not covered by insurance) that has, individually or in
the aggregate, resulted in a Material Adverse Effect;
h. acquired or disposed of any assets having an
aggregate value in excess of $100,000, except in the ordinary course of
business;
i. written up or written down the carrying value of
any of its assets, other than accounts receivable in the ordinary course of
business;
j. changed the costing system or depreciation methods
of accounting for its assets in any material respect;
k. lost or terminated any employee, patient, customer
or supplier that has, individually or in the aggregate, resulted in a Material
Adverse Effect;
l. increased the compensation of any director,
officer, key employee or consultant, except as disclosed to Purchaser pursuant
to Schedule 3.11(a);
m. increased the compensation of any employee (except
for increases in the ordinary course of business) or hired any new employee who
is expected to receive annualized compensation of at least $75,000;
n. formed or acquired or disposed of any interest in
any corporation, partnership, joint venture or other entity;
o. redeemed, purchased or otherwise acquired, or
sold, granted or otherwise disposed of, directly or indirectly, any of its
capital stock, paid any dividend or made any distribution or payment on any of
its capital stock, or agreed to change the terms and conditions of any such
capital stock;
p. entered into any agreement providing for total
payments in excess of $50,000 in any twelve (12) month period with any person or
group, or modified or amended in any material respect the terms of any such
existing agreement,
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except in the ordinary course of business whereupon the sum of total payments
shall not exceed $100,000 in any twelve (12) month period;
q. entered into, adopted or amended any Employee
Benefit Plan, except as contemplated hereby or the other agreements contemplated
hereby; or
r. entered into any other commitment or transaction
or experienced any other event that would materially interfere with its
performance under this Agreement or any other agreement or document executed or
to be executed pursuant to this Agreement, or otherwise has, individually or in
the aggregate, resulted in a Material Adverse Effect.
3.14. Title to Assets and Properties.
a. Real Property. The Company and the Subsidiaries do
not own any interest (other than leasehold interests referred to on Schedule
3.14(c)) in real property. The leased real property referred to on Schedule
3.14(c) constitutes the only real property necessary for the conduct of the
Company's business.
b. Personal Property. Except as set forth on Schedule
3.14(b), the Company and/or the Subsidiaries have valid and marketable title to
all the personal property constituting the Assets. The personal property
constituting the Assets constitutes the only personal property necessary for the
conduct of the Company's and the Subsidiaries businesses in the manner in which
they are currently conducted and contemplated to be conducted.
c. Leases. Schedule 3.14(c) sets forth a true,
correct and complete list and brief description of (i) all leases of real
property and (ii) leases of personal property involving rental payments within
any twelve (12) month period in excess of $50,000, in either case to which the
Company or the Subsidiaries is a party, either as lessor or lessee, are set
forth on Schedule 3.14(c). All such leases are valid and enforceable in
accordance with their respective terms and no event has occurred which, with the
giving of notice, the lapse of time or both, would constitute an event of
default thereunder, including the execution of this Agreement or the
consummation of the transactions contemplated hereby.
3.15. Condition of Fixed Assets. All of the fixtures,
structures, machinery and equipment reflected in the Financial Statements and
used by the Company and the Subsidiaries in its business are in good operating
condition and repair, subject to normal wear and tear, and conform in all
material respects with all applicable ordinances, regulations and other laws.
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3.16. Commitments.
a. Commitments; Defaults. Except as set forth on
Schedule 3.16 or as otherwise disclosed pursuant to this Agreement, neither the
Company nor any of the Subsidiaries is a party to nor bound by, nor are any of
the shares of Company Common Stock subject to, nor are the Assets or the
businesses of the Company or the Subsidiaries bound by, whether or not in
writing, any of the following (collectively, "Commitments"):
i) partnership or joint venture
agreement;
ii) guaranty or suretyship,
indemnification or contribution agreement or performance bond;
iii) debt instrument, loan agreement or
other obligation relating to indebtedness for borrowed money or money lent or to
be lent to another;
iv) contract to purchase real property;
v) material agreements or arrangements
with buying group members;
vi) material agreements with suppliers
of eye care and related products;
vii) agreement with dealers or sales or
commission agents, public relations or advertising agencies, accountants or
attorneys (other than in connection with this Agreement and the transactions
contemplated hereby) involving total payments within any twelve (12) month
period in excess of $100,000 and which is not terminable on thirty (30) days'
notice or without penalty;
viii) agreement relating to any material
matter or transaction in which an interest is held by a person or entity that is
an Affiliate of the Company or the Stockholders, except as otherwise disclosed
in this Agreement;
ix) agreement for the acquisition of
services, supplies, equipment, inventory, fixtures or other property involving
more than $100,000 in the aggregate, except in the ordinary course of business.
x) powers of attorney;
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xi) contracts containing
non-competition covenants;
xii) agreement providing for the
purchase from a supplier of all or substantially all of the requirements of the
Company or any Subsidiary of a particular product or services, except as is
generally consistent with the Company's and such Subsidiary's previous
purchasing history and which does not involve more than a twelve month
commitment on behalf of the Company or any Subsidiary; or
xiii) any other agreement or commitment
in excess of $100,000 not made in the ordinary course of business or that is
material to the business, operations, condition (financial or otherwise) or
results of operations of the Company.
True, correct and complete copies of the written Commitments, and true, correct
and complete written descriptions of the oral Commitments, have heretofore been
delivered or made available to Purchaser. Except as set forth on Schedule 3.16
and to the best knowledge of the Company and MB there are no existing events of
default or events, occurrences, acts or omissions that, with the giving of
notice or lapse of time or both, would constitute defaults by the Company or any
of the Subsidiaries or, to the best knowledge of the Company and MB, any other
party under any material Commitment, and no penalties have been incurred nor are
amendments pending, with respect to the material Commitments, except as
described on Schedule 3.16. The Commitments are in full force and effect and are
valid and enforceable obligations of the Company or the Subsidiaries, and to the
best knowledge of the Company and MB, are valid and enforceable obligations of
the other parties thereto, in accordance with their respective terms, and no
defenses, off-sets or counterclaims have been asserted, nor has the Company
waived any rights thereunder, except as described on Schedule 3.16. Except as
set forth on Schedule 3.16, no consents or approvals are required under the
terms of any Commitment listed on Schedule 3.16 in connection with the
transactions contemplated herein.
b. No Cancellation or Termination of Commitment.
Except as disclosed pursuant to this Agreement and except where such default
would not have a Material Adverse Effect, (i) neither the Company nor the
Subsidiaries has received notice of any plan or intention of any other party to
any Commitment to exercise any right to cancel or terminate any Commitment, and
neither the Company nor MB has actual knowledge of any fact that would justify
the exercise of such a right; and (ii) neither the Company nor the Subsidiaries
currently contemplates, or has actual knowledge that any other person currently
contemplates, any amendment or change to any Commitment.
3.17. Insurance. The Company and the Subsidiaries carry
property, liability, workers' compensation and such other types of insurance
pursuant to the insurance policies listed and briefly described on Schedule 3.17
(the "Insurance
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Policies"). The Insurance Policies are all of the insurance policies of the
Company and the Subsidiaries relating to the business of the Company and the
Assets. All Insurance Policies shall be maintained in force without interruption
up to and including the Closing Date. True, complete and correct copies of all
Insurance Policies have been provided or made available to Purchaser. Except as
set forth on Schedule 3.17, neither the Company nor the Subsidiaries has
received any notice or other communication from any issuer of any Insurance
Policy canceling such policy, materially increasing any deductibles or retained
amounts thereunder, and to the best knowledge of the Company and MB, no such
cancellation or increase of deductibles, retainages or premiums is threatened.
Except as set forth on Schedule 3.17, neither the Company nor any of the
Subsidiaries has any outstanding claims, settlements or premiums owed against
any Insurance Policy, and the Company has given all notices or has presented all
potential or actual claims under any Insurance Policy in due and timely fashion.
Schedule 3.17 also sets forth a list of all claims under any Insurance Policy in
excess of $50,000 per occurrence filed by the Company since January 1, 1994.
3.18. Proprietary Rights and Information. Set forth on
Schedule 3.18 is a complete and accurate description of the following
("Proprietary Rights"):
a. all trademarks, trade names, service marks and
other trade designations, including common law rights, registrations and
applications therefor, and all patents and copyrights and applications therefor
currently owned, in whole or in part, by the Company or the Subsidiaries, and
all licenses, royalties, assignments and other similar agreements relating to
the foregoing to which the Company or the Subsidiaries is a party (including the
expiration date thereof if applicable); and
b. all agreements relating to technology, know-how or
processes that the Company and the Subsidiaries are licensed or authorized to
use by others or which it licenses or authorizes others to use.
The Company and the Subsidiaries own or have the legal right to use the
Proprietary Rights, and to the best knowledge of the Company and MB such
ownership or use does not conflict, infringe or violate the rights of any other
person. Except as disclosed on Schedule 3.18, no consent of any person will be
required for the use of any Proprietary Rights by Purchaser upon consummation of
the transactions contemplated hereby and the Proprietary Rights are freely
transferable. No claim has been asserted by any person to the ownership of or
for infringement by the Company or the Subsidiaries of the proprietary right of
any other person, and neither the Company nor MB knows of any valid basis for
any such claim. To the best knowledge of the Company and MB, the Company and the
Subsidiaries have the right to use, free and clear of any adverse claims or
rights of others, all trade secrets, customer lists and proprietary information
required for the marketing of all merchandise and services formerly or presently
sold or marketed by it.
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3.19. Taxes.
a. Filing of Tax Returns. Each of the Company and the
Subsidiaries has duly and timely filed (in accordance with any extensions duly
granted by the appropriate governmental agency, if applicable) with the
appropriate governmental agencies all federal, state, local or foreign income,
excise, corporate, franchise, property, sales, use, payroll, withholding,
provider, value added and other tax returns and reports (collectively the "Tax
Returns") required to be filed by the United States or any state or any
political subdivision thereof or any foreign jurisdiction. All such Tax Returns
are complete and accurate and properly reflect the taxes of the Company and the
Subsidiaries for the periods covered thereby.
b. Payment of Taxes. Except for such items as the
Company or the Subsidiaries may be disputing in good faith by proceedings in
compliance with applicable law, which are described on Schedule 3.19, (i) the
Company and the Subsidiaries have paid all taxes, penalties, assessments and
interest that have become due as reported with respect to any Tax Returns that
they have filed and have properly accrued on their books and records for all of
the same that have not yet become due, and (ii) the Company and the Subsidiaries
are not delinquent in the payment of any tax, assessment or governmental charge
including estimated tax payments and deposits.
c. No Pending Deficiencies, Delinquencies,
Assessments or Audits. Except as set forth on Schedule 3.19, neither the Company
nor the Subsidiaries has received any notice that any tax deficiency or
delinquency has been asserted against the Company or any of the Subsidiaries.
There is no unpaid assessment, proposal for additional taxes, deficiency or
delinquency in the payment of any of the taxes of the Company or any of the
Subsidiaries that could be asserted by any taxing authority. There is no taxing
authority audit of the Company or any of the Subsidiaries pending, or to the
best knowledge of the Company and MB, threatened, and the results of any
completed audits are properly reflected in the Financial Statements. The Company
and the Subsidiaries have not violated any federal, state, local or foreign tax
law.
d. No Extension of Limitation Period. Neither the
Company nor the Subsidiaries has granted an extension to any taxing authority of
the limitation period during which any tax liability may be assessed or
collected.
e. All Withholding Requirements Satisfied. All monies
required to be withheld by the Company and the Subsidiaries and paid to
governmental agencies for all income, social security, unemployment insurance,
sales, excise, use and other taxes have been collected or withheld and paid to
the respective governmental agencies.
f. Foreign Person. Neither the Company, any of the
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Subsidiaries nor any of the Stockholders is a foreign person, as such term is
referred to in Section 1445(f)(3) of the Code.
g. Safe Harbor Lease. None of the Assets constitutes
property that the Company, the Subsidiaries, Purchaser, or any Affiliate of
Purchaser, will be required to treat as being owned by another person pursuant
to the "Safe Harbor Lease" provisions of Section 168(f)(8) of the Code prior to
repeal by the Tax Equity and Fiscal Responsibility Act of 1982.
h. Tax Exempt Entity. None of the Assets are subject
to a lease to a "tax exempt entity" as such term is defined in Section 168(h)(2)
of the Code.
i. Collapsible Corporation. The Company and the
Subsidiaries have not at any time consented, and the Stockholders will not
permit the Company nor the Subsidiaries to elect, to have the provisions of
Section 341(f)(2) of the Code apply to any of them.
j. Boycotts. Neither the Company nor the Subsidiaries
has at any time participated in or cooperated with any international boycott as
defined in Section 999 of the Code.
k. Parachute Payments. No payment required or
contemplated to be made by the Company or the Subsidiaries will be characterized
as an "excess parachute payment" within the meaning of Section 280G(b)(1) of the
Code.
l. S Corporation. Neither the Company nor the
Subsidiaries has made an election to be taxed as an "S" corporation under
Section 1362(a) of the Code.
m. Personal Service Corporation. Neither the Company
nor the Subsidiaries is a personal service corporation subject to the provisions
of Section 269A of the Code.
n. Personal Holding Company. Neither the Company nor
the Subsidiaries is or has been a personal holding company within the meaning of
Section 542 of the Code.
o. Tax Sharing Agreements. Neither the Company nor
the Subsidiaries is party to any tax sharing agreement with any other person or
entity.
p. Intercompany Transactions. Except as set forth on
Schedule 3.19, there is no gain or loss allocable to the Company or any of the
Subsidiaries arising out of any "deferred intercompany transaction" as such term
is defined by Treasury Regulation Section 1.1502-13.
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3.20. Governmental Authorizations. Except as set forth on
Schedule 3.20, to the best knowledge of the Company and MB, the Company and the
Subsidiaries possess all necessary licenses, franchises, permits and other
governmental authorizations, including, but not limited to all licenses,
franchises, permits and authorizations for the conduct of the Company's and the
Subsidiaries' businesses as now conducted, all of which are listed (with
expiration dates, if applicable) on Schedule 3.20, except where the failure to
possess such licenses, franchises, permits or authorizations would not have a
Material Adverse Effect. Except as set forth on Schedule 3.20, the transactions
contemplated by this Agreement will not result in a default under or a breach or
violation of, or adversely affect the rights and benefits afforded by any such
licenses, franchises, permits or authorizations, except where such default,
breach or violation would not have a Material Adverse Effect. All such licenses,
franchises, permits and other authorizations are valid and in full force and
effect, the Company and the Subsidiaries are currently in material compliance
therewith and neither the Company nor any Subsidiary has received any notice
that any governmental authority is considering challenging, revoking, canceling,
restricting, conditioning or not renewing any such license, franchise, permit or
other authorization.
3.21. Compliance with Applicable Laws. Except as set forth on
Schedule 3.21, to the best knowledge of the Company and MB, the Company and each
of the Subsidiaries hold all permits, licenses, variances, exemptions, orders
and approvals of all Governmental Entities necessary to the business of the
Company or such Subsidiary, as the case may be, including, without limitation,
applicable state corporation, insurance and health regulatory authorities, and
other Governmental Entities regulating preferred provider organizations, medical
utilization review organizations, lay intermediaries, or third party
administrators, except where the failure to hold such permits, licenses,
variances, exemptions, orders or approvals would not have a Material Adverse
Effect (the "Company Permits"). The Company and the Subsidiaries are in current
compliance with the terms of the Company Permits, except for such failures to
comply which, singly or in the aggregate, would not have a Material Adverse
Effect. Except as disclosed in Schedule 3.21, the Company and each of the
Subsidiaries are in compliance with all applicable laws, ordinances and
regulations of any Governmental Entity, including, without limitation,
applicable state corporation, insurance and health regulatory authorities and
other Governmental Entities regulating preferred provider organizations, medical
utilization review organizations, lay intermediaries and third-party
administrators, except where the failure to comply would not have a Material
Adverse Effect. Except as disclosed in Schedule 3.21, to the best knowledge of
the Company and MB, no investigation or review by any Governmental Entity,
including, without limitation, applicable state corporation, insurance and
health regulatory authorities, with respect to the Company or any of the
Subsidiaries is pending or threatened, nor has any Governmental Entity,
including, without limitation, applicable state corporation, insurance and
health regulatory authorities indicated an intention to conduct the same, other
than those the outcome of which would not have a Material Adverse Effect.
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3.22. Litigation. Except as described on Schedule 3.22, there
are no legal actions or administrative proceedings or investigations instituted
which affect or are reasonably likely to affect the Company Common Stock or the
operation, business, condition (financial or otherwise), or results of
operations of the Company and the Subsidiaries, taken as a whole, which (i) if
successful are reasonably likely to, individually or in the aggregate, have a
Material Adverse Effect or (ii) are reasonably likely to adversely affect the
ability of the Company to effect the transactions contemplated hereby. Neither
the Company nor the Subsidiaries is (a) subject to any continuing court or
administrative order, judgment, writ, injunction or decree applicable
specifically to the Company Common Stock or the operation, business, condition
(financial or otherwise) or results of operations of the Company or the
Subsidiaries or (b) in default with respect to any such order, judgment, writ,
injunction or decree. Neither the Company nor MB have any actual knowledge of
any valid basis for any such action, proceeding or investigation. Except as set
forth on Schedule 3.22, all claims asserted, general liability incidents and
incident reports have been submitted to the Company's insurer therefor. All
claims made or threatened against the Company or the Subsidiaries in excess of
its deductible are covered under its Insurance Policies.
3.23. Banking Relations. Set forth on Schedule 3.23 is a
complete and accurate list of all borrowing and investing arrangements that the
Company and the Subsidiaries have with any bank or other financial institution,
indicating with respect to each relationship the type of arrangement maintained
(such as checking account, borrowing arrangements, safe deposit box, etc.), the
location thereof and the person or persons authorized in respect thereof.
3.24. Ownership Interests of Interested Persons; Affiliations.
Except as set forth on Schedule 3.24, to the actual knowledge of the Company and
MB, no officer or director of the Company or the Subsidiaries, or their
respective spouses, children or Affiliates, owns directly or indirectly, on an
individual or joint basis, any interest in, has a compensation or other
financial arrangement with, or serves as an officer or director of, any customer
or supplier of the Company or the Subsidiaries or any organization that has a
material contract or arrangement with the Company or the Subsidiaries.
3.25. Investments in Competitors. Except as disclosed on
Schedule 3.25, the Company does not own directly or indirectly any interests or
have any investment in any person that is a Competitor of the Company or the
Subsidiaries.
3.26. Certain Payments. To the best knowledge of the Company
and MB, neither the Company, the Subsidiaries nor any director, officer or
employee of the Company or the Subsidiaries acting for or on behalf of the
Company, has paid or caused to be paid, directly or indirectly, in connection
with the business of the Company or the Subsidiaries:
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a. to any government or agency thereof or any agent
of any supplier or customer any bribe, kick-back or other similar payment; or
b. any contribution to any political party or
candidate (other than from personal funds of directors, officers or employees
not reimbursed by their respective employers or as otherwise permitted by
applicable law).
3.27. Medicare and Medicaid Programs. Neither the Company nor
any Subsidiary is a direct party to any agreement with the Health Finance
Administration.
3.28. Fraud and Abuse. Neither the Company, the Subsidiaries,
nor their respective officers and directors have engaged in any activities which
are prohibited under 42 U.S.C. Sections 1320-7, 7a or 7b or 42 U.S.C. Section
1395nn (subject to the exceptions set forth in such legislation), or the
regulations promulgated thereunder or pursuant to similar state or local
statutes or regulations, or which are prohibited by rules of professional
conduct, including but not limited to the following:
a. knowingly and willfully offering, paying,
soliciting or receiving any remuneration (including any kickback, bribe, or
rebate), directly or indirectly, overtly or covertly, in cash or in kind (i) in
return for referring an individual to a person for the furnishing or arranging
for the furnishing of any item or service for which payment may be made in whole
or in part by Medicare or Medicaid, or (ii) in return for purchasing, leasing,
or ordering, or arranging for or recommending purchasing, leasing, or ordering
any good, facility, service, or item for which payment may be made in whole or
in part by Medicare or Medicaid; and
b. referring a patient for designated health services
(as defined in 42 U.S.C. Section 1395nn) to or providing designated health
services to a patient upon a referral from an entity or person with which the
Stockholders or an immediate family member has a financial relationship, and to
which no exception under 42 U.S.C. Section 1395nn applies.
3.29. Customers and Suppliers. The Company has provided to
Purchaser a complete and accurate list of the names and addresses of each
customer of the Company and the Subsidiaries which accounted for more than 3% of
the revenues of the Company or any Subsidiary in the three (3) previous fiscal
years and each material supplier of the Company or any Subsidiary. Except as set
forth on Schedule 3.29, the Company and the Subsidiaries have good relations
with their customers and suppliers and no material customer or supplier has
notified the Company or any Subsidiary that it intends to discontinue its
relationship with the Company or such Subsidiary.
3.30. Acquisition Proposals. Neither the Company, any of the
Subsidiaries nor any of the Stockholders is currently engaged in any discussions
with a
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third party other than Purchaser or is a party to any agreement other than this
Agreement concerning a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
any equity securities of, the Company or the Subsidiaries (any such proposal or
offer being hereinafter referred to as an "Acquisition Proposal"). Each party,
if any, with whom the Company has entered into a confidentiality or lock-up
agreement within the past 12 months or to whom the Company has provided
confidential information within the past 12 months, has either returned to the
Company all confidential information concerning the Company received by it in
connection with their Acquisition Proposal or delivered to the Company a signed
certificate attesting to the destruction of all such confidential information.
3.31. Investment Company Status. Neither the Company nor any
of the Subsidiaries is currently, or has it ever been, an "investment company"
as that term is defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
3.32. Insolvency Proceedings. Neither the Company nor any of
the Subsidiaries is currently under the jurisdiction of a Federal or state court
in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Code.
3.33. Positive Net Worth. On the Effective Date the assets of
the Company and the Subsidiaries will equal or exceed the sum of the liabilities
of the Company and the Subsidiaries plus the amount of any other liabilities to
which the assets of the Company and the Subsidiaries are subject.
3.34. Accounts Receivable/Payable.
a. The accounts receivable of the Company and the
Subsidiaries reflected on the Company Balance Sheet and the Estimated Closing
Balance Sheet (the "Accounts Receivable"), to the extent uncollected on the date
hereof, are recorded in the Company's financial statements in accordance with
GAAP. The Company and the Subsidiaries are in substantial compliance with all
third party payor and buying group arrangements relating to the Accounts
Receivable. There are not, and on the Effective Date there will not be, any
refunds, discounts, set-offs, defenses, counterclaims or other adjustments
payable or assessable with respect to the Accounts Receivable. The Company and
the Subsidiaries have collected Accounts Receivable only in the ordinary course
and has not changed collection procedures or methods nor accelerated the pace of
such collection efforts in anticipation of the transactions contemplated in this
Agreement. The Company and the Subsidiaries have paid accounts payable in the
ordinary course and have not changed payment procedures or methods nor delayed
the timing of such payments in anticipation of the transactions contemplated in
this Agreement.
b. Since the Company Balance Sheet Date, neither the
Company nor any of the Subsidiaries has changed any material principle or
practice with
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respect to the recordation of accounts receivable or the calculation of reserves
therefor, or any material collection, discount or write-off policy or procedure.
The Company and each of the Subsidiaries is in compliance with the terms and
conditions of all third-party payor arrangements relating to its accounts
receivable, except where the failure to so comply would not have a Material
Adverse Effect.
3.35. Insurance Reserves. The Company has established and
maintains all required insurance company reserves in all of those states that it
is required to do so and has established and maintains all required deposits and
bonds as are necessary in such state.
3.36. Managed Care Contracts. On October 1, 1997 the number of
enrollees covered under the Company's managed care contracts as reported by the
clients of the Company is substantially as set forth on Schedule 3.36.
3.37. Finder's Fee. Except as set forth on Schedule 3.37,
neither the Company nor the Stockholders has incurred any obligation for any
finder's, brokers or agent's fee in connection with the transactions
contemplated hereby.
3.38. Environmental Matters. To the best knowledge of the
Company and MB, the Company and the Subsidiaries are, and at all times have
been, in full compliance with, and have not been and are not presently in
violation of or liable under, any federal, state, county or local statutes,
laws, regulations, rules, ordinances, codes, licenses and permits relating in
any way to the protection of the environment, including, without limitation, the
Clean Air Act, the Clean Water Act, the Federal Water Pollution Control Act of
1972, the Resource Conservation and Recovery Act of 1976 ("RCRA"), the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), and the Toxic Substances Control Act and any amendments or
extensions of the foregoing and the regulations promulgated thereunder
(collectively, the "Environmental Laws"), except as the failure to be in
compliance would not have a Material Adverse Effect. Neither the Company nor any
Subsidiary has received any notice of any actual or potential violation of or
failure to comply with any Environmental Law or of any actual or threatened
obligation to undertake or bear the cost of any expense, liability or other
liability arising from or under any Environmental Law with respect to the any of
its properties or assets.
3.39. Disclosure. To the best of the Company's and MB's
knowledge, no representation, warranty or statement made by the Company or MB in
this Agreement or any of the exhibits or schedules hereto, or any agreements,
certificates, documents or instruments delivered or to be delivered to Purchaser
in accordance with this Agreement or the other documents contemplated herein
contains any untrue statement of a material fact or omits state a material fact
necessary to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading.
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4. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS. Each
Stockholder represents and warrants to Purchaser about itself only (it being
understood that only MB is making the representations in Sections 4.6 and 4.7),
that the following are true and correct on the date hereof and shall be true and
correct as of the Escrow Closing Date as if made on such date:
4.1. Stock Ownership. Such Stockholder owns the number of
shares of Company Common Stock set forth opposite such Stockholder's name on
Schedule 3.3, free and clear of all liens, pledges, restrictions, voting trusts,
security interests or other encumbrances whatsoever, other than agreements among
Stockholders being terminated at Closing and restrictions imposed by the
Securities Act.
4.2. Validity; Stockholders Capacity. This Agreement and each
other agreement contemplated hereby have been duly executed and delivered by
such Stockholder and constitutes the legal, valid and binding obligations of
such Stockholder, enforceable against such Stockholder in accordance with their
respective terms, except as may be limited by applicable bankruptcy, insolvency
or similar laws affecting creditors' rights generally or the availability of
equitable remedies.
4.3. No Violation. Except as set forth on Schedule 4.3,
neither the execution, delivery or performance of this Agreement or the other
agreements to be executed and delivered by such Stockholder in connection
herewith, nor the consummation of the transactions contemplated hereby or
thereby, will (a) conflict with, or result in a violation or breach of the
terms, conditions or provisions of, or constitute a default under, any
agreement, indenture or other instrument under which such Stockholder is bound
or to which any of his property or shares of Company Common Stock are subject,
or result in the creation or imposition of any security interest, lien, charge
or encumbrance upon any of his property or shares of Company Common Stock or (b)
to the best knowledge of such Stockholder, violate or conflict with any
judgment, decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body applicable to such Stockholder.
4.4. Consents. Assuming neither the Company nor Purchaser is a
"$100 Million person" within the meaning of the Hart - Scott - Rodino Antitrust
Improvement Act of 1976, no consent, authorization, approval, permit or license
of, or filing with, any governmental or public body or authority, or any other
person is required to authorize, or is required in connection with, the
execution, delivery and performance of this Agreement or the agreements
contemplated hereby on the part of such Stockholder.
4.5. Certain Payments. Such Stockholder has not paid or caused
to be paid, directly or indirectly, in connection with the business of the
Company or the Subsidiaries:
a. to any government or agency thereof or any agent
of
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any supplier or customer any bribe, kick-back or other similar payment; or
b. any contribution to any political party or
candidate (other than from personal funds not reimbursed by the Company or as
otherwise permitted by applicable law).
4.6. Ownership of Interested Persons Affiliations. Except as
set forth on Schedule 4.6, none of MB or Saree Block (collectively, the
"Blocks") nor their spouses, children or Affiliates, owns directly or
indirectly, on an individual or joint basis, any interest in, has a compensation
or other financial arrangement with, or serves as an officer or director of, any
customer or supplier of the Company or any organization that has a material
contract or arrangement with the Company. None of the Blocks nor any of their
Affiliates is, or within the last three (3) years was, a party to any contract,
lease, agreement or arrangement, including, but not limited to, any joint
venture or consulting agreement with any physician, hospital, pharmacy, home
health agency or other person which is in a position to make or influence
referrals to, or otherwise generate business for, the Company.
4.7. Investments in Competitors. Except as disclosed on
Schedule 4.7, none of the Blocks nor any of their Affiliates own directly or
indirectly any interests or have any investment in any person that is a
Competitor of the Company.
5. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
represents and warrants to the Company and the Stockholders that the following
are true and correct on the date hereof and shall be true and correct as of the
Escrow Closing Date as if made on such date; when used in this SECTION 5, the
term "best knowledge" (or words of similar import) shall mean such knowledge, as
shall have been obtained after conducting due and diligent inquiry, of those
individuals listed on Schedule 5:
5.1. Organization and Good Standing; Qualification. Each of
the Purchaser and its subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, with all requisite corporate power and authority to carry on the
business in which it is engaged, to own the properties it owns, to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
Each of the Purchaser and its subsidiaries is duly qualified and licensed to do
business in each jurisdiction in which the character or location of the
properties owned or leased by Purchaser or its subsidiaries or the practice of
the businesses conducted by Purchaser or its subsidiaries makes such
qualification necessary or desirable, except where the failure to be so
qualified would not have a Material Adverse Effect.
5.2. Subsidiaries. Except as set forth on Schedule 5.2,
Purchaser does not own, directly or indirectly, any of the capital stock of any
other corporation or any
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equity, profit sharing, participation or other interest in any corporation,
partnership, joint venture or other entity. With respect to each corporation
that is owned, directly or indirectly, beneficially or of record by Purchaser
(each, a "Purchaser Subsidiary"), Schedule 5.2 sets forth a true, correct and
complete list of (i) the name and jurisdiction of incorporation of each
Purchaser Subsidiary, (ii) the jurisdiction in which each Purchaser Subsidiary
is qualified or licensed to do business as a foreign corporation, (iii) the
authorized capital stock of each Purchaser Subsidiary, (iv) the number of shares
of each class thereof issued and outstanding, and (v) the number of shares and
percentage of outstanding capital stock owned by Purchaser. All outstanding
shares of capital stock of each Purchaser Subsidiary have been duly authorized
and validly issued, are fully paid and non-assessable, and are owned by
Purchaser free and clear of all liens, pledges, security interests,
restrictions, voting trusts or other encumbrances of any nature whatsoever.
5.3. Capitalization. The authorized capital stock of Purchaser
consists of 50,000,000 shares of Common Stock and 10,000,000 shares of preferred
stock, of which 9,187,389 shares of Common Stock are issued and outstanding
(including the shares of Common Stock delivered to the Escrow Agent but
excluding the Contingent Shares). There will be an additional 3,220,000 shares
of Common Stock issued and outstanding after completion of Purchaser's currently
pending public offering (assuming exercise in full of the underwriters'
over-allotment option). Schedule 5.3 sets forth an accurate and complete list of
all outstanding options and warrants to acquire shares of Common Stock. The
issuance and delivery of the shares of Common Stock to be issued by Purchaser in
connection with this Agreement have been duly and validly authorized by all
necessary corporate action on the part of Purchaser. The Common Stock being
transferred by Purchaser hereunder shall be free and clear of all liens,
pledges, restrictions, voting trusts, security interests or other encumbrances
of any nature whatsoever, except as set forth herein, in the Contingent Shares
Escrow Agreement or in the Registration Rights Agreement. Each outstanding share
of Common Stock and the shares to be issued hereunder have been legally and
validly issued and are fully paid and nonassessable. No shares of Common Stock
have been, and the shares of Common Stock to be issued pursuant to this
Agreement will not be, issued or disposed of in violation of the preemptive
rights, rights of first refusal or similar rights of any of Purchaser's
stockholders.
5.4. Governmental Consents. Except as disclosed on Schedule
5.4, no filing or registration with, or authorization, consent or approval of,
any Governmental Entity is necessary for the consummation of the transactions
contemplated by this Agreement.
5.5. Authorization and Validity. Purchaser has the corporate
power and authority to execute this Agreement and carry out its obligations
hereunder. The execution, delivery and performance by Purchaser of this
Agreement and the other agreements contemplated hereby, and the consummation of
the transactions
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contemplated hereby and thereby to be performed by Purchaser, have been duly
authorized by Purchaser. This Agreement and the other agreements contemplated
hereby to be executed by Purchaser have been, or will be as of the Closing, duly
executed and delivered by Purchaser and constitute the legal, valid and binding
obligation of Purchaser, enforceable against Purchaser in accordance with its
terms, except as may be limited by applicable bankruptcy, insolvency or similar
laws affecting creditors' rights generally or the availability of equitable
remedies.
5.6. No Conflict. The execution and delivery of this Agreement
and the documents contemplated hereunder and the consummation of the
transactions contemplated thereby by Purchaser will not (i) violate any
provision of Purchaser's organizational documents, (ii) violate any provision of
or result in the breach of or entitle any party to accelerate (whether after the
giving of notice or lapse of time or both) any obligation under, any mortgage,
lien, lease, contract, license, permit, instrument or any other agreement to
which Purchaser or the Purchaser Subsidiaries is a party, (iii) result in the
creation or imposition of any lien, charge, pledge, security interest or other
encumbrance upon any property of Purchaser or the Purchaser Subsidiaries, or
(iv) violate or conflict with any order, award, judgment or decree or other
restriction or any law, ordinance, rule or regulation to which Purchaser or its
property is subject except for those which would not have a Material Adverse
Effect.
5.7. Governmental Authorizations. To the best knowledge of
Purchaser, Purchaser and the Purchaser Subsidiaries possess all necessary
licenses, franchises, permits and other governmental authorizations, including,
but not limited to all licenses, franchises, permits and authorizations for the
conduct of Purchaser's and the Purchaser Subsidiaries' businesses as now
conducted, all of which are listed (with expiration dates, if applicable) on
Schedule 5.7, except where the failure to possess such licenses, franchises,
permits or authorizations would not have a Material Adverse Effect. Except as
set forth on Schedule 5.7, the transactions contemplated by this Agreement will
not result in a default under or a breach or violation of, or adversely affect
the rights and benefits afforded by any such licenses, franchises, permits or
authorizations, except where such default, breach or violation would not have a
Material Adverse Effect. All such licenses, franchises, permits and other
authorizations are valid and in full force and effect, Purchaser and the
Purchaser Subsidiaries are currently in material compliance therewith and
neither Purchaser nor any Purchaser Subsidiary has received any notice that any
governmental authority is considering challenging, revoking, canceling,
restricting, conditioning or not renewing any such license, franchise, permit or
other authorization, except as set forth on Schedule 5.7. Purchaser has no
actual knowledge of any information related solely to it or its executive
officers which would be reasonably likely to preclude Purchaser from obtaining
the consent of the Texas Department of Insurance to certain of the transactions
contemplated hereby; it being expressly understood that Purchaser has not
received any advice of counsel with respect to the laws, rules and regulations
applicable to the obtaining of such consent.
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5.8. Compliance with Applicable Laws. To the best knowledge
of Purchaser, Purchaser and each of the Purchaser Subsidiaries hold all permits,
licenses, variances, exemptions, orders and approvals of all Governmental
Entities necessary to the business of Purchaser or such Purchaser Subsidiary, as
the case may be, including, without limitation, applicable state corporation,
insurance and health regulatory authorities, and other Governmental Entities
regulating exclusive provider organizations, preferred provider organizations,
medical utilization review organizations, medical service organizations, lay
intermediaries, secondary contractors, or third party administrators, except
where the failure to hold such permits, licenses, variances, exemptions, orders
or approvals would not have a Material Adverse Effect (the "Purchaser Permits").
Purchaser and the Purchaser Subsidiaries are in current compliance with the
terms of the Purchaser Permits, except for such failures to comply which, singly
or in the aggregate, would not have a Material Adverse Effect. Except as
disclosed in Schedule 5.8, Purchaser and each of the Purchaser Subsidiaries are
in compliance with all applicable laws, ordinances and regulations of any
Governmental Entity, including, without limitation, applicable state
corporation, insurance and health regulatory authorities and other Governmental
Entities regulating exclusive provider organizations, preferred provider
organizations, medical utilization review organizations, medical service
organizations, lay intermediaries, secondary contractors or third-party
administrators and all Medicare and Medicaid provider agreements to which it is
a party, except where the failure to comply would not have a Material Adverse
Effect. Except as disclosed in Schedule 5.8, to the best knowledge of Purchaser,
no investigation or review by any Governmental Entity, including, without
limitation, applicable state corporation, insurance and health regulatory
authorities, with respect to Purchaser or any of the Purchaser Subsidiaries is
pending or threatened, nor has any Governmental Entity, including, without
limitation, applicable state corporation, insurance and health regulatory
authorities, indicated an intention to conduct the same, other than those the
outcome of which would not have a Material Adverse Effect.
5.9. Finder's Fee. Except as disclosed on Schedule 5.9,
Purchaser has not incurred any obligation for any finder's, broker's or agent's
fee in connection with the transactions contemplated hereby.
5.10. Purchaser Documents. Purchaser has furnished the Company
with a true and complete copy of each report and registration statement filed by
it with the SEC (the "Purchaser Documents") since its initial public offering,
which are all the documents that it was required to file with the SEC since such
date. As of their respective dates, the Purchaser Documents did not contain any
untrue statements of material facts or omit to state material facts required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their respective
dates, the Purchaser Documents complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act and the rules
and regulations promulgated under such statutes. The financial statements
contained in the Purchaser Documents, together with the notes
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thereto, have been prepared in accordance with GAAP, reflect all liabilities of
Purchaser required to be stated therein and present fairly the financial
condition of Purchaser at such date and the results of operations and cash flows
of Purchaser for the period then ended. The Purchaser Documents do not contain
any untrue statements of material facts or omit to state any material facts
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading as of the
date hereof except for such facts as are disclosed herein and except for the
transactions contemplated hereby.
5.11. Public Offering. Purchaser has filed a registration
statement on Form S-1 with the Securities and Exchange Commission (the
"Registration Statement") providing for the sale by the Purchaser of 3,220,000
shares of Common Stock of the Purchaser (assuming exercise in full of the
underwriters' over-allotment option). Purchaser has provided a copy of the
Registration Statement to the Company. The Registration Statement does not
contain any untrue statements of material facts or omit to state any material
facts required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
6. SECURITIES LAW MATTERS.
6.1. Investment Representations and Covenants. Each
Stockholder hereby represents, warrants and covenants, as to itself only, the
following:
a. Such Stockholder understands that the Securities
will not be registered under the Securities Act or any state securities laws on
the grounds that the issuance of the Securities is exempt from registration
pursuant to Section 4(2) of the Securities Act and applicable state securities
laws, and that the reliance of Purchaser on such exemptions is predicated in
part on such Stockholder's representations, warranties, covenants and
acknowledgments set forth in this Section.
b. Such Stockholder represents and warrants that the
Securities to be acquired by it upon consummation of the transactions described
in this Agreement will be acquired by such Stockholder for its own account, not
as a nominee or agent, and without a view to resale or other distribution within
the meaning of the Securities Act and the rules and regulations thereunder, and
that the Stockholder will not distribute any of the Securities in violation of
the Securities Act.; provided, however, each of MarketCorp Venture Associates,
L.P, New York State Business Venture Partnership and Chase Venture Capital
Associates, L.P. (each, an "Institutional Stockholder") can distribute any of
the Securities to such Institutional Stockholder's partners if such
Institutional Stockholder delivers to Purchaser an opinion of counsel,
reasonably acceptable to Purchaser, to the effect that such transfer is exempt
from the registration requirements of the Securities Act and applicable state
"Blue Sky" laws and is otherwise in compliance with such Act and laws.
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c. Such Stockholder (i) acknowledges that the
Securities issued to it at the Closing must be held indefinitely by it unless
subsequently registered under the Securities Act or an exemption from
registration is available, (ii) is aware that any sales of Securities made
pursuant to Rule 144 under the Securities Act may be made only in limited
amounts and in accordance with the terms and conditions of that Rule and that in
such cases where the Rule is not applicable, compliance with some other
registration exemption will be required, (iii) is aware that Rule 144 is not
currently available for use for resale of any of the Securities to be acquired
by such Stockholder upon consummation of the transactions described in this
Agreement until the applicable holding period has elapsed and (iv) acknowledges
and agrees that the transfer of the Securities shall be further restricted by
any "lock-up" provisions contained in the Registration Rights Agreement.
d. Such Stockholder represents and warrants to
Purchaser that it has such knowledge and experience in financial and business
matters such that it is capable of evaluating the merits and risks of an
investment in the Securities and is able to sustain a complete loss of such
investment.
e. Such Stockholder confirms that it has had the
opportunity to ask questions of and receive answers from Purchaser concerning
the terms and conditions of its investment in the Securities, and that it has
received, to its satisfaction, such information about Purchaser's operations as
it has requested.
f. Such Stockholder acknowledges and agrees that the
certificates or instruments representing the Securities to be issued to it
pursuant to this Agreement shall contain a restrictive legend noting the
restrictions on transfer described in this Section and required by federal and
applicable state securities laws, and that appropriate "stop-transfer"
instructions will be given to Purchaser's transfer agent in the event such
provisions and applicable federal and state securities laws are not complied
with by such Stockholder.
g. Such Stockholder represents and warrants that it
is an "accredited investor" as defined under the Securities Act and state "Blue
Sky" laws and further represents and warrants that such Stockholder's principal
residence is the address set forth below such Stockholder's name on Schedule
6.1(g).
7. COVENANTS OF THE COMPANY AND THE STOCKHOLDERS. The Company and
each Stockholder, except as noted otherwise, agree, as to itself only, that
between the date hereof and the Closing (with respect to the Company's
covenants, MB agrees to use his best efforts to cause the Company to perform and
each other Stockholder agrees not to take any action to authorize the Company
not to perform):
7.1. Consummation of Agreement. The Company and each
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Stockholder shall use their commercially reasonable best efforts to cause the
consummation of the transactions contemplated hereby in accordance with their
terms and conditions.
7.2. Business Operations. Except as may be required to fulfill
their obligations under this Agreement, the Company and the Subsidiaries shall
operate their businesses in the ordinary course and substantially in the manner
conducted as of the date hereof. The Company and MB shall use their best efforts
to preserve the business of the Company and the Subsidiaries intact, to keep
available to Purchaser the services of their officers, agents and independent
contractors and to preserve for Purchaser their relationships with their
suppliers, licensees, distributors, buying group members, customers and others
having business relationships with it. Neither the Company nor MB shall take any
action that would, individually or in the aggregate, result in a Material
Adverse Effect.
7.3. Access. The Company and MB shall, at reasonable times
during normal business hours and on reasonable notice, permit Purchaser and its
authorized representatives, access to, and make available for inspection, all of
the assets and properties of the Company and the Subsidiaries, including their
employees, and permit Purchaser and its authorized representatives to inspect
and, at Purchaser's sole cost and expense, make copies of all documents, records
and information with respect to the affairs of the Company and the Subsidiaries
as Purchaser and its representatives may request.
7.4. Notification of Certain Matters. The Company and MB shall
promptly inform Purchaser in writing of (a) any notice of, or other
communication relating to, a default or event that, with notice or lapse of time
or both, would become a default, received by any of them subsequent to the date
of this Agreement and prior to the Closing Date under any Commitment material to
the Company's condition (financial or otherwise), operations, assets,
liabilities or business and to which it is subject; or (b) any material adverse
change in the Company's condition (financial or otherwise), operations, assets,
liabilities or business.
7.5. Approvals of Third Parties. As soon as practicable after
the date hereof, the Company and the Stockholders shall use their commercially
reasonable best efforts to secure all necessary approvals and consents of
Governmental Entities to the consummation by them of the transactions
contemplated hereby and shall use their commercially reasonable best efforts to
secure all necessary approvals and consents of other third parties to the
consummation by them of the transactions contemplated hereby which efforts shall
include, but not be limited to, agreeing to reasonable requests or requirements
to secure regulatory approvals.
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7.6. Employee Matters. Except as set forth in Schedule 3.11 or
as otherwise contemplated by this Agreement, the Company shall not, without the
prior written approval of Purchaser, except as required by law:
a. increase the cash compensation of any directors,
officers or employees of the Company or the Subsidiaries (other than in the
ordinary course of business and consistent with past practice);
b. adopt, amend or terminate any (i) Compensation
Plan; (ii) Employment Agreement; (iii) Employee Policies and Procedures; or (iv)
Employee Benefit Plan;
c. take any action that could materially deplete the
assets of any Employee Benefit Plan, other than payment of benefits in the
ordinary course to participants and beneficiaries;
d. fail to pay any premium or contribution due or
with respect to any Employee Benefit Plan, which failure would have a Material
Adverse Effect;
e. fail to file any return or report with respect to
any Employee Benefit Plan, which failure would have a Material Adverse Effect;
f. institute, settle or dismiss any employment
litigation except as could not, individually or in the aggregate, result in a
Material Adverse Effect;
g. enter into, modify, amend or terminate any
agreement with any union, labor organization or collective bargaining unit; or
h. take or fail to take any action with respect to
any past or present employee of the Company or the Subsidiaries that would,
individually or in the aggregate, result in a Material Adverse Effect.
7.7. Contracts. Except as may be required to fulfill its
obligations under this Agreement, the Company shall not, without the prior
written approval of Purchaser, assume or enter into any contract, lease,
license, obligation, indebtedness, commitment, purchase or sale, or alter any
Commitment in any material respect, except in the ordinary course of business
nor shall it waive any material right or cancel any material contract, debt or
claim.
7.8. Capital Assets; Payments of Liabilities. Except as may be
required to fulfill its obligations under this Agreement, the Company shall not,
without the prior written approval of Purchaser (a) acquire or dispose of any
capital asset having a fair market value of $100,000 or more, or acquire or
dispose of any capital asset outside
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of the ordinary course of business or (b) discharge or satisfy any lien or
encumbrance or pay or perform any obligation or liability other than (i)
liabilities and obligations reflected in the Financial Statements or (ii)
current liabilities and obligations incurred in the usual and ordinary course of
business since the Company Balance Sheet Date and, in either case (i) or (ii)
above, only as required by the express terms of the agreement or other
instrument pursuant to which the liability or obligation was incurred.
7.9. Mortgages, Liens and Guaranties. The Company shall not,
without the prior written approval of Purchaser, enter into or assume any
mortgage, pledge, conditional sale or other title retention agreement, permit
any security interest, lien, encumbrance or claim of any kind to attach to any
of its assets (other than statutory liens arising in the ordinary course of
business and other liens that do not materially detract from the value or
interfere with the use of such assets), whether now owned or hereafter acquired,
or guarantee or otherwise become contingently liable for any obligation of
another, except obligations arising by reason of endorsement for collection and
other similar transactions in the ordinary course of business, or make any
capital contribution or investment in any person.
7.10. Acquisition Proposals. The Company and each Stockholder
(severally and not jointly) agree that through November 30, 1997 (a) neither the
Company nor the Stockholders nor any of their officers and directors shall, and
MB and the Company shall cause the Company's employees, agents and
representatives not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any Acquisition Proposal or
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal; (b) the Company and each Stockholder will immediately
cease and cause to be terminated by it any existing activities, discussions or
negotiations with any parties conducted by it heretofore with respect to any of
the foregoing and each will take the necessary steps to inform the individuals
or entities related to it referred to in the first sentence hereof of the
obligations undertaken in this SECTION 7.10; and (c) the Company will notify
Purchaser immediately if any such inquiries or proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, the Company or the Stockholders.
7.11. Distributions and Repurchases. Subject to SECTION 7.12,
no distribution, payment or dividend of any kind will be declared or paid by the
Company with respect to its capital stock, nor will any repurchase of any of the
Company's capital stock be approved or effected, except as may be required to
fulfill the Company's obligations under this Agreement.
7.12. Stock Options. All outstanding options to purchase or
acquire shares of Company Common Stock shall be canceled through the payment by
the
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Company to the holders of such options of the fair value of such options
immediately prior to Closing if sufficient funds are available or, if sufficient
funds are not available, immediately after Closing but with effect on or prior
to the Effective Date and any agreements with respect to such options shall be
terminated on or prior to the Effective Date. For purposes of this SECTION 7.12,
"fair value" shall mean the difference between the then current value of the
Company on a per share basis (assuming a Stock Purchase Consideration of
$35,000,000 as adjusted pursuant to the terms of this Agreement) less the
exercise price of such options.
7.13. Retained Equity. The Company shall not make payment by
way of dividend or distribution of all or any portion of any retained equity of
the Company at any time prior to Closing.
7.14. Termination of Retirement Plans and Employment
Agreements. Prior to Closing, upon written notice to the Company by Purchaser,
the Company shall take all steps necessary to discontinue benefit accruals under
any Employee Benefit Plan and to terminate all such plans effective as of
Closing or as soon thereafter as may be practical. The Company shall terminate
its existing employment agreements with Michael Block and Andrew Alcorn
effective as of the Closing Date.
8. COVENANTS OF PURCHASER. Purchaser agrees that between the
date hereof and the Closing:
8.1. Consummation of Agreement. Purchaser shall use its
commercially reasonable best efforts to cause the consummation of the
transactions contemplated hereby in accordance with their terms and conditions
including the filing of an application with the Texas Department of Insurance
seeking approval of the Commissioner of Insurance for certain of the
transactions contemplated hereby.
8.2. Approvals of Third Parties. Purchaser shall use its
commercially reasonable best efforts to secure, as soon as practicable after the
date hereof, all necessary approvals and consents of third parties to the
consummation of the transactions contemplated hereby.
8.3. Conduct of Business. Except as may be required to
complete the transactions contemplated hereby, Purchaser and the Purchaser
Subsidiaries shall operate their businesses in the ordinary course and
substantially in the manner conducted as of the date hereof. Purchaser shall not
take any action that would, individually or in the aggregate, result in a
Material Adverse Effect.
9. COVENANTS OF PURCHASER, THE COMPANY AND THE STOCKHOLDERS.
Purchaser, the Company and the Stockholders agree as follows:
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9.1. Amendment of Schedules. Each party hereto agrees that,
with respect to the representations and warranties of such party contained in
this Agreement, such party shall have the continuing obligation until the Escrow
Closing to attach, supplement or amend promptly the Schedules with respect to
any matter that would have been or would be required to be set forth or
described in the Schedules in order to not breach any representation, warranty
or covenant of such party contained herein; provided that no amendment or
supplement to a Schedule that constitutes or reflects a material adverse change
to the Company or the Assets may be made unless Purchaser consents to such
amendment or supplement, and no amendment or supplement to a Schedule that
constitutes or reflects a material adverse change to Purchaser may be made
unless the Company and the Stockholders consent to such amendment or supplement.
For all purposes of this Agreement, including without limitation for purposes of
determining whether the conditions set forth in SECTIONS 10 AND 11 have been
fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended
or supplemented pursuant to this SECTION 9.1.
9.2. Fees and Expenses. Each of the Company and Purchaser
shall pay the costs and expenses of their respective advisors with respect to
legal, accounting and other professional services rendered in connection with
the preparation, negotiation and consummation of this Agreement. The Company
shall have paid or accrued in full on the Estimated Closing Balance Sheet the
amount of all such costs and expenses. In the event any Stockholder engages
independent advisors, such Stockholder shall be responsible for the costs and
expenses of such advisors.
9.3. Tax Matters.
a. Returns. The Company and the Subsidiaries shall
duly and timely file all Tax Returns required to be filed on or before the
Closing Date and duly and timely pay all taxes shown on such Tax Returns to be
due.
b. Tax Sharing Agreements. Any tax sharing agreement
between the Company or any of the Subsidiaries and any other party shall be
terminated as of the Closing Date and shall have no further effect for any
taxable year (whether the current year, a future year or a past year).
c. Audits. The Company and MB will allow Purchaser
and its counsel to participate, at Purchaser's expense, in any audits of the
consolidated federal income tax returns of the Company and the Subsidiaries for
tax periods ending on or before the Closing Date. Neither the Company nor MB
will not settle any such audit without the prior written consent of Purchaser.
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER. Except as
may be waived in writing by Purchaser, the obligations of Purchaser hereunder
are subject to the fulfillment at or prior to the Escrow Closing Date (or, with
respect to
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SECTION 10.5, the Closing Date) of each of the following conditions precedent:
10.1. Representations and Warranties. The representations and
warranties of the Company and the Stockholders contained herein shall have been
true and correct in all material respects when initially made and shall be true
and correct in all material respects as of the Escrow Closing Date.
10.2. Covenants. The Company and the Stockholders shall have
performed and complied with all covenants required by this Agreement to be
performed and complied with by the Company or the Stockholders prior to the
Escrow Closing Date.
10.3. Proceedings. No action, proceeding or order by any court
or governmental body or agency shall have been asserted, instituted or entered
to restrain or prohibit or which is reasonably likely to restrain or prohibit
the carrying out of the transactions contemplated hereby.
10.4. No Material Adverse Change. No material adverse change
in the condition (financial or otherwise), operations, assets, liabilities or
business of the Company shall have occurred since the Company Balance Sheet
Date, whether or not such change shall have been caused by the deliberate act or
omission of the Company or the Stockholders.
10.5. Government Approvals and Required Consents. The Company,
the Stockholders and Purchaser shall have obtained all necessary government and
other third-party approvals and consents (other than consents technically
required as a result of the transactions contemplated hereby under the terms of
managed care contracts to which the Company or any of its employees are a
party).
10.6. Closing Deliveries. Purchaser shall have received all
documents and agreements, duly executed and delivered in form reasonably
satisfactory to Purchaser, referred to in SECTION 12.1.
10.7. Exemption Under Securities Laws. The transfer of
Purchaser's Securities to the Stockholders as contemplated in this Agreement
shall qualify for one or more exemptions from registration under state and
federal securities laws. Purchaser shall pay all filing fees in connection with
any filing required to qualify the transfer of the Securities for such
exemption(s).
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
STOCKHOLDERS. Except as may be waived in writing by the Company and the
Stockholders, the obligations of the Company and the Stockholders hereunder are
subject to fulfillment at or prior to the Escrow Closing Date or, with respect
to SECTION 11.4, the Closing Date, of each of the following conditions
precedent:
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11.1. Representations and Warranties. The representations and
warranties of Purchaser contained herein shall be true and correct in all
material respects when initially made and shall be true and correct in all
material respects as of the Escrow Closing Date.
11.2. Covenants. Purchaser shall have performed and complied
with all covenants and conditions required by this Agreement to be performed and
complied with by it prior to the Escrow Closing Date.
11.3. Proceedings. No action, proceeding or order by any court
or governmental body or agency shall have been threatened in writing, asserted,
instituted or entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
11.4. Government Approvals and Required Consents. The Company
the Stockholders and Purchaser shall have obtained all necessary government and
other third-party approvals and consents (other than consents technically
required as a result of the transactions contemplated hereby under the terms of
managed care contracts to which the Company or any of its employees are a
party).
11.5. Closing Deliveries. The Company and the Stockholders
shall have received all documents, instruments and agreements, duly executed and
delivered in form reasonably satisfactory to the Company, referred to in SECTION
12.2.
11.6. No Material Adverse Effect. No material adverse change
in the condition (financial or otherwise), operations, assets, liabilities or
business of Purchaser shall have occurred since the most recent balance sheet of
Purchaser disclosed to the Company, other than such changes which may be caused
by fluctuations in the financial markets.
12. ESCROW CLOSING DELIVERIES; POST-ESCROW CLOSING MATTERS.
12.1. Deliveries of the Company and the Stockholders. At the
Escrow Closing, the Company or each Stockholder, as appropriate, shall deliver
to the Escrow Agent the following, all of which shall be in a form reasonably
satisfactory to Purchaser and shall be held in escrow pending the Closing in
accordance with the terms of the Escrow Agreement:
a. certificates representing all of the issued and
outstanding shares of Company Common Stock, duly endorsed in blank by the
applicable Stockholders or accompanied by duly endorsed stock powers in blank,
with all necessary transfer tax and other revenue stamps, acquired at the
applicable Stockholder's expense, affixed and canceled. Each Stockholder agrees
to cure any deficiencies with respect to
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the endorsement of the certificates or other documents of conveyance with
respect to the Company Common Stock being delivered by it or with respect to the
stock powers accompanying such Company Common Stock;
b. a copy of resolutions of the Boards of Directors
of the Company authorizing the execution, delivery and performance of this
Agreement and all other documents and agreements to be executed by the Company
in connection herewith, certified by the Assistant Secretary of the Company as
being true and correct copies of the originals thereof subject to no
modifications or amendments;
c. certificates of the President of the Company and
each of the Stockholders, dated the Escrow Closing Date, certifying the truth
and accuracy of their respective representations and warranties contained
herein, on and as of the Escrow Closing Date;
d. certificates of the President of the Company and
each of the Stockholders, dated the Escrow Closing Date certifying (i) the
performance of and compliance by them with all of their respective covenants
contained herein on and as of the Escrow Closing Date and (ii) that all
conditions precedent of the Company or such Stockholder, as the case may be, to
the Escrow Closing have been satisfied;
e. a certificate of the Assistant Secretary of the
Company dated the Escrow Closing Date, certifying the incumbency and signatures
of each officer who has executed documents delivered pursuant to the Agreement
on behalf of the Company;
f. a certificate, dated within ten (10) days prior to
the Escrow Closing Date, of the Secretary of State of the state of incorporation
for the Company and each of the Subsidiaries establishing that such corporations
are in existence, have paid all franchise or similar taxes, and are in good
standing to transact business in their respective states of organization;
g. certificates, dated within ten (10) days prior to
the Escrow Closing Date, of the Secretaries of State of the states in which the
Company and each of the Subsidiaries are qualified to do business, to the effect
that such corporations are qualified to do business and in good standing as
foreign corporations in each of such states;
h. a certificate of the Assistant Secretary of the
Company and each of the Subsidiaries, dated the Escrow Closing Date, certifying
true, correct and complete copies of the respective Certificate of Incorporation
and By-Laws of the Company and Block Vision, Inc., subject to no modifications
and amendments;
i. an opinion of corporate and regulatory counsel to
the
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Company and the Stockholders, dated as of the Escrow Closing Date, in
substantially the forms attached hereto as Exhibit 12.1(i), (which may be relied
upon by Purchaser, its counsel and underwriters in connection with any
registration statement of Purchaser);
j. all authorizations, consents, or approvals of any
Governmental Entity referenced in SECTION 3.6;
k. the resignations of all directors of the Company
and each of the Subsidiaries, other than Block Vision of Texas, Inc., effective
immediately upon Closing;
l. an executed Registration Rights Agreement between
Purchaser and each Stockholder in substantially the form attached hereto as
Exhibit 12.1(l);
m. an executed Escrow Agreement in substantially the
form attached hereto as Exhibit 12.1(m);
n. an executed Employment Agreement between Purchaser
and each of Michael Block and Andrew Alcorn in substantially the form attached
hereto as Exhibit 12.1(n);
o. an executed Contingent Shares Escrow Agreement in
substantially the form attached hereto as Exhibit 12.1(o); and
p. an executed Purchase Adjustment Escrow Agreement
in substantially the form attached hereto as Exhibit 12.1(p).
12.2. Deliveries of Purchaser. At the Escrow Closing,
Purchaser shall deliver to the Escrow Agent the following, all of which shall be
in a form reasonably satisfactory to the Stockholders and shall be held in
escrow pending the Closing in accordance with the terms of the Escrow Agreement:
a. a copy of the resolutions of the Board of
Directors of Purchaser authorizing the execution, delivery and performance of
this Agreement and all other documents and agreements to be executed in
connection herewith, certified by the Secretary of Purchaser as being true and
correct copies of the originals thereof subject to no modifications or
amendments;
b. a certificate of the President of Purchaser, dated
the Escrow Closing Date, certifying the truth and accuracy of the
representations and warranties of Purchaser contained herein, on and as of the
Escrow Closing Date;
c. a certificate of the President of Purchaser, dated
the
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Escrow Closing Date, certifying (i) the performance and compliance by Purchaser
with all covenants contained herein on and as of the Escrow Closing Date and
(ii) that all conditions precedent of Purchaser to the Escrow Closing have been
satisfied;
d. a certificate of the Secretary of Purchaser, dated
the Escrow Closing Date, certifying the incumbency and signatures of each
officer who has executed documents delivered pursuant to the Agreement on behalf
of Purchaser;
e. a certificate, dated within ten (10) days prior to
the Escrow Closing Date, of the Secretary of State of the State of Florida
establishing that Purchaser is in existence, has paid all franchise or similar
taxes, if any, and is in good standing to transact business in such state;
f. certificates, dated within ten (10) days prior to
the Escrow Closing Date, of the Secretary of State of each state in which
Purchaser is qualified to do business, to the effect that Purchaser is qualified
to do business and is in good standing as a foreign corporation in each of such
states;
g. an opinion of Shumaker, Loop & Kendrick, LLP,
counsel to Purchaser, dated as of the Escrow Closing Date, in substantially the
form attached hereto as Exhibit 12.2(g);
h. an executed Registration Rights Agreement;
i. an executed Escrow Agreement;
j. an executed Employment Agreement between Purchaser
and each of Michael Block and Andrew Alcorn;
k. an executed Contingent Shares Escrow Agreement;
l. an executed Purchase Adjustment Escrow Agreement;
and
m. a statement from Price Waterhouse LLP of their
agreement to supply their Accountants' Consent as described in SECTION 12.3
hereof.
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12.3. Post Escrow Closing Matters.
a. Accountants' Consent. From and after the Escrow
Closing, at the request of Purchaser, the Company agrees to use its commercially
reasonable best efforts to cause Price Waterhouse LLP to consent to the
inclusion of the consolidated financial statements of the Company and the
Subsidiaries for the fiscal years ended April 30, 1995, 1996 and 1997 in any
registration statement or other filing made by Purchaser under the Securities
Act or the Exchange Act.
b. Conduct of Business. From and after the Escrow
Closing Date until the Closing Date, all decisions concerning the Company or any
of the Subsidiaries outside of the ordinary course of business or involving
expenditures in excess of $100,000 shall be made jointly by the Company and
Purchaser. Upon Closing, all benefits and detriments of ownership of the Company
from and after the Effective Date shall be for the account of Purchaser for
financial statement and all other purposes. In the event the Closing does not
occur, all benefits and detriments with respect to the Company from and after
the Effective Date shall be reinstated in the Company and the Company and the
Purchaser shall cooperate with each other and take all such actions as may be
necessary in order to reinstate such benefits and detriments.
13. CLOSING.
13.1. Closing Date. The Closing shall occur as soon as
practicable after the Escrow Closing and the receipt of all consents of third
parties, governmental agencies and regulatory authorities which are material to
the continued operation of the Company's business by Purchaser and which are
required to enable the parties to consummate the transactions contemplated by
this Agreement and which were not obtained by the parties on or before the
Escrow Closing Date.
13.2. Deliveries of the Company and the Stockholders. At the
Closing, the Company shall deliver to Purchaser the following:
a. all consents referred to in SECTION 13.1; and
b. a certificate of the President of the Company
dated the Closing Date certifying that all conditions precedent of the Company
and the Stockholders to the Closing have been satisfied.
13.3. Deliveries by Purchaser. At the Closing, Purchaser shall
deliver to the Stockholders the following:
a. the Stock Purchase Consideration; and
b. a certificate of the President of Purchaser, dated
the
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Closing Date, certifying that all conditions precedent of Purchaser to the
Closing have been satisfied.
13.4. Deliveries by the Escrow Agent. At the Closing, the
Escrow Agent shall deliver to (i) the Stockholders the items delivered to it at
the Escrow Closing pursuant to SECTION 12.1 hereof; and (ii) Purchaser the items
delivered to it at the Escrow Closing pursuant to SECTION 12.2 hereof.
14. REMEDIES.
14.1. Indemnification by the Stockholders. Subject to the
terms and conditions of this Agreement, each Stockholder (severally and not
jointly, except as provided in Section 14.9) agrees to indemnify, defend and
hold Purchaser and its directors, officers, members, managers, employees,
agents, attorneys and affiliates (collectively, "Purchaser Indemnified Parties")
harmless from and against all losses, claims, obligations, demands, assessments,
penalties, liabilities, costs, damages, reasonable attorneys' fees and expenses
(collectively, "Damages") asserted against or incurred by any Purchaser
Indemnified Party arising out of or resulting from: (i) a breach of any
representation, warranty or covenant of such Stockholder contained herein or in
any schedule or certificate delivered hereunder; or (ii) any liability arising
from any alleged unlawful sale or offer to sell or transfer any of the Company
Common Stock by such Stockholder.
14.2. Indemnification by MB. Subject to the terms and
conditions of this Agreement, MB agrees to indemnify, defend and hold the
Purchaser Indemnified Parties harmless from and against all Damages asserted
against or incurred by any Purchaser Indemnified Party arising out of or
resulting from a breach of any representation, warranty or covenant of the
Company contained herein or in any schedule or certificate delivered hereunder.
14.3. Indemnification by Purchaser. Subject to the terms and
conditions of this Agreement, Purchaser hereby agrees to indemnify, defend and
hold the Stockholders harmless from and against all Damages asserted against or
incurred by them arising out of or resulting from: (i) a breach by Purchaser of
any representation, warranty or covenant of Purchaser contained therein or in
any schedule or certificate delivered hereunder; or (ii) any liability arising
from any alleged unlawful sale or offer to sell or transfer to the Stockholders
any of the Common Stock by Purchaser.
14.4. Conditions of Indemnification. All claims for
indemnification under this Agreement shall be asserted and resolved as follows:
a. A party claiming indemnification under this
Agreement (an "Indemnified Party") shall promptly (and, in any event, at least
ten (10) days prior to the due date for any responsive pleadings, filings or
other documents) (i) notify the party
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from whom indemnification is sought (the "Indemnifying Party") of any
third-party claim or claims asserted against the Indemnified Party ("Third Party
Claim") that could give rise to a right of indemnification under this Agreement
and (ii) transmit to the Indemnifying Party a written notice ("Claim Notice")
describing in reasonable detail the nature of the Third Party Claim, a copy of
all papers served with respect to such claim (if any), an estimate of the amount
of damages attributable to the Third Party Claim and the basis of the
Indemnified Party's request for indemnification under this Agreement. The
failure to promptly deliver a Claim Notice shall not relieve the Indemnifying
Party of its obligations to the Indemnified Party with respect to the related
Third Party Claim except to the extent that the resulting delay is prejudicial
to the defense of such claim. Within thirty (30) days after receipt of any Claim
Notice (the "Election Period"), the Indemnifying Party shall notify the
Indemnified Party (i) whether the Indemnifying Party disputes its potential
liability to the Indemnified Party under this Article 14 with respect to such
Third Party Claim and (ii) whether the Indemnifying Party desires, at the sole
cost and expense of the Indemnifying Party, to defend the Indemnified Party
against such Third Party Claim.
If the Indemnifying Party notifies the Indemnified
Party within the Election Period that the Indemnifying Party elects to assume
the defense of the Third Party Claim, then the Indemnifying Party shall have the
right to defend, at its sole cost and expense, such Third Party Claim by all
appropriate proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this SECTION 14.4(a). The Indemnifying
Party shall have full control of such defense and proceedings, including any
compromise or settlement thereof. If requested by the Indemnifying Party, the
Indemnified Party agrees, at the sole cost and expense of the Indemnifying
Party, to cooperate with the Indemnifying Party and its counsel in contesting
any Third Party Claim that the Indemnifying Party elects to contest, including,
without limitation, the making of any related counterclaim against the person
asserting the Third Party Claim or any cross-complaint against any person. The
Indemnified Party may participate in, but not control, any defense or settlement
of any Third Party Claim controlled by the Indemnifying Party pursuant to
SECTION 14.4(b) and shall bear its own costs and expenses with respect to such
participation; provided, however, that if the named parties to any such action
(including any impleaded parties) include both the Indemnifying Party and the
Indemnified Party, and the Indemnified Party has been advised by counsel that
there may be one or more legal defenses available to it that are different from
or additional to those available to the Indemnifying Party, then the Indemnified
Party may employ separate counsel at the expense of the Indemnifying Party, and
upon written notification thereof, the Indemnifying Party shall not have the
right to assume the defense of such action on behalf of the Indemnified Party;
provided further that the Indemnifying Party shall not, in connection with any
one such action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable for the reasonable fees and expenses of more than one separate firm of
attorneys at any time for the Indemnified Party, which firm shall be designated
in writing by the Indemnified Party.
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b. If the Indemnifying Party fails to notify the
Indemnified Party within the Election Period that the Indemnifying Party elects
to defend the Indemnified Party pursuant to SECTION 14.4(a), or if the
Indemnifying Party elects to defend the Indemnified Party pursuant to SECTION
14.4(a) but fails diligently and promptly to prosecute or settle the Third Party
Claim, then the Indemnified Party shall have the right to defend, at the sole
cost and expense of the Indemnifying Party (if the Indemnified Party is entitled
to indemnification hereunder), the Third Party Claim by all appropriate
proceedings, which proceedings shall be promptly and vigorously prosecuted by
the Indemnified Party to a final conclusion or settled. The Indemnified Party
shall have full control of such defense and proceedings, provided, however, that
the Indemnified Party may not enter into, without the Indemnifying Party's
consent, which shall not be unreasonably withheld, any compromise or settlement
of such Third Party Claim. Notwithstanding the foregoing, if the Indemnifying
Party has delivered a written notice to the Indemnified Party to the effect that
the Indemnifying Party disputes its potential liability to the Indemnified Party
under this Article 14 and if such dispute is resolved in favor of the
Indemnifying Party, the Indemnifying Party shall not be required to bear the
costs and expenses of the Indemnifying Party's defense pursuant to this Section
or of the Indemnifying Party's participation therein at the Indemnified Party's
request, and the Indemnified Party shall reimburse the Indemnifying Party in
full for all costs and expenses of such litigation. The Indemnifying Party may
participate in, but not control any defense or settlement controlled by the
Indemnified Party pursuant to this SECTION 14.4(b), and the Indemnifying Party
shall bear its own costs and expenses with respect to such participation;
provided, however, that if the named parties to any such action (including any
impleaded parties) include both the Indemnifying Party and the Indemnified
Party, and the Indemnifying Party has been advised by counsel that there may be
one or more legal defenses available to the Indemnified Party, then the
Indemnifying Party may employ separate counsel and upon written notification
thereof, the Indemnified Party shall not have the right to assume the defense of
such action on behalf of the Indemnifying Party.
c. In the event any Indemnified Party should have a
claim against any Indemnifying Party hereunder that does not involve a Third
Party Claim, the Indemnified Party shall transmit to the Indemnifying Party a
written notice (the "Indemnity Notice") describing in reasonable detail the
nature of the claim, an estimate of the amount of damages attributable to such
claim and the basis of the Indemnified Party's request for indemnification under
this Agreement. If the Indemnifying Party does not notify the Indemnified Party
within sixty (60) days from its receipt of the Indemnity Notice that the
Indemnifying Party disputes such claim, the claim specified by the Indemnified
Party in the Indemnity Notice shall be deemed a liability of the Indemnifying
Party hereunder. If the Indemnifying Party has timely disputed such claim, as
provided above, such dispute shall be resolved in accordance with SECTION 17.1.
d. Payments of all amounts owing by an Indemnifying
49
<PAGE> 51
Party pursuant to this Article 14 relating to a Third Party Claim shall be made
within thirty (30) days after the latest of (i) the settlement of such Third
Party Claim, (ii) the expiration of the period for appeal of a final
adjudication of such Third Party Claim or (iii) the expiration of the period for
appeal of a final adjudication of the Indemnifying Party's liability to the
Indemnified Party under this Agreement. Payments of all amounts owing by an
Indemnifying Party pursuant to SECTION 14.4(c) shall be made within thirty (30)
days after the later of (i) the expiration of the sixty (60) day Indemnity
Notice period or (ii) the expiration of the period for appeal, if any, of a
final adjudication of the Indemnifying Party's liability to the Indemnified
Party under this Agreement.
14.5. Exclusivity of Remedies. The remedies provided in this
Agreement shall be exclusive of any other rights or remedies available to one
party against the other, either at law or in equity; provided, however, such
remedies shall not be exclusive in the event any claim hereunder is based on
fraud. This ARTICLE 14 shall survive the Closing.
14.6. Costs, Expenses and Legal Fees. Each party hereto agrees
to pay the costs and expenses (including attorneys' fees and expenses) incurred
by the other parties in successfully (a) enforcing any of the terms of this
Agreement, or (b) proving that another party breached any of the terms of this
Agreement.
14.7. Indemnification Limitations. Notwithstanding the
provisions of SECTIONS 14.1, 14.2 AND 14.3, no party shall be required to
indemnify another party with respect to a breach of a representation, warranty
or covenant unless the claim for indemnification is brought on or before March
31, 1999, except that a claim for indemnification for a breach of the
representations and warranties contained in SECTIONS 3.3 AND 4.1 may be made at
any time, and a claim for indemnification for a breach of the representations
and warranties contained in SECTION 3.19 may be made at any time within the
applicable statute of limitations period.
14.8. Tax Benefits; Insurance Proceeds. The total amount of
any indemnity payments owed by one party to another party to this Agreement
shall be reduced by any correlative tax benefit received by the party to be
indemnified or the net proceeds received by the party to be indemnified with
respect to recovery from third parties or insurance proceeds and such
correlative insurance benefit shall be net of the insurance premium, if any,
that becomes due as a result of such claim.
14.9. Stockholder Indemnification. Notwithstanding anything
contained herein to the contrary, no Stockholder shall be liable for
indemnification under SECTION 14 of this Agreement in excess of such
Stockholder's pro rata share of the Stock Purchase Consideration and such
liability shall be several; provided, however, that the Blocks shall be jointly
and severally liable to the extent of the total Stock Purchase Consideration
paid to both of them.
50
<PAGE> 52
14.10. Indemnification Limitation. No duty of indemnification
shall arise under SECTION 14 of this Agreement unless and until the amount of
Damages of the Indemnified Party exceeds 1% of the aggregate Stock Purchase
Consideration and then such liability shall be limited to Damages in excess of
1% of the aggregate Stock Purchase Consideration.
15. TERMINATION.
15.1. Termination. This Agreement may be terminated between
the Escrow Closing and the Closing Date:
a. by mutual written agreement of all parties; or
b. by any party, by written notice to all other
parties, if all of the conditions to Closing have not been satisfied or waived
by November 30, 1997 or such later date as shall be mutually agreed to by the
parties (unless at November 30, 1997 all conditions to Closing have not been
satisfied or waived, but it is reasonably likely that such satisfaction or
waiver will occur soon thereafter and that the delay will not cause harm to the
parties hereto).
15.2. Effect of Termination. In the event this Agreement is
terminated pursuant to SECTION 15.1, this Agreement shall be null and void and
of no further force and effect and all documents, instruments and agreements
executed and delivered by each party at the Escrow Closing shall be promptly
returned to the party delivering such document, instrument and agreement, except
that Purchaser, the Company and the Stockholders shall each be entitled to
pursue, exercise and enforce any and all remedies, rights, powers and privileges
available at law or in equity, subject to the limitations set forth in ARTICLE
14.
15.3. Liquidated Damages. In the event that Purchaser
terminates this Agreement for any reason other than as set forth in SECTION 15.1
hereof, or if Purchaser terminates this Agreement pursuant to SECTION 15.1(c)
hereof solely for the reason that the Texas Department of Insurance has refused
to grant its consent to the transfer of Block Vision of Texas, Inc. to Purchaser
and such refusal was based solely and directly upon either (i) Purchaser's
failure to file an application with the Department of Insurance seeking such
consent (or an exemption therefrom) or (ii) facts which are contrary to and
evidence a breach of the representation made by Purchaser in the last sentence
of SECTION 5.7 hereof, then Purchaser shall be liable to the Stockholders for
agreed upon liquidated damages of the aggregate sum of $5,000,000, which the
parties hereto agree are reasonable in light of the damage the Stockholders
would suffer as a result therefrom.
51
<PAGE> 53
16. CONFIDENTIALITY COVENANTS.
16.1. Confidentiality. From and after the date hereof, each
Stockholder agrees that it shall not, directly or indirectly, use for any
purpose, or disclose to any third party, any information of Purchaser or the
Company, as appropriate (whether written or oral), including any business
management or economic studies, customer lists, proprietary forms, proprietary
business or management methods, marketing data, fee schedules, or trade secrets
of Purchaser or of the Company, as applicable, and including the terms and
provisions of this Agreement and any transaction or document executed by the
parties pursuant to this Agreement. Notwithstanding the foregoing, any
Stockholder may disclose information that it can establish (a) is or becomes
generally available to and known by the public or optometric community (other
than as a result of an unpermitted disclosure directly or indirectly by it or
its Affiliates, advisors or representatives); (b) is or becomes available to
such Stockholder on a nonconfidential basis from a source other than Purchaser,
the Company or their respective Affiliates, advisors or representatives,
provided that such source is not and was not bound by a confidentiality
agreement with or other obligation of secrecy to Purchaser, the Company or their
respective Affiliates, advisors or representatives of which such Stockholder has
knowledge; or (c) has already been or is hereafter independently acquired or
developed by such Stockholder without violating any confidentiality agreement
with or other obligation of secrecy to Purchaser, the Company or their
respective Affiliates, advisors or representatives. Without limiting the other
possible remedies to Purchaser for the breach of this covenant, each Stockholder
agrees that injunctive or other equitable relief shall be available to enforce
this covenant, such relief to be without the necessity of posting a bond, cash
or otherwise. Each Stockholder further agrees that if any restriction contained
in this SECTION 16 is held by any court to be unenforceable or unreasonable, a
lesser restriction shall be enforced in its place and the remaining restrictions
contained herein shall be enforced independently of each other.
16.2. Survival. The parties acknowledge and agree that this
Article 16 shall survive the Closing of the transactions contemplated herein.
17. DISPUTES.
17.1. Submission to Jurisdiction; Selection of Forum. Subject
to SECTION 17.2, each party hereto agrees that it shall bring any action or
proceeding in respect of any claim arising out of or related to this Agreement
or the transactions contained in or contemplated by this Agreement and the
agreements executed and delivered in connection herewith, exclusively in the
United States District Court for the Middle District of Florida or the Florida
State Courts located in Orange County (the "Chosen Courts") and (i) irrevocably
submits to the exclusive jurisdiction of the Chosen Courts, (ii) waives any
objection to laying venue in any such action or proceeding in the Chosen Courts,
(iii) waives any objection that the Chosen Courts are an inconvenient forum or
do not have jurisdiction over any party hereto and (iv) agrees that service of
52
<PAGE> 54
process upon such party in any such action or proceeding shall be effective if
notice is given in accordance with SECTION 18.4 of this Agreement.
17.2. Arbitration. Any dispute or controversy arising out of
SECTION 2.5 of this Agreement that cannot be settled through negotiation shall
be settled by arbitration in accordance with the rules of the AAA, to be held in
Orlando, Florida before a single arbitrator and to commence within fifteen (15)
days of the appointment of the arbitrator by the AAA. The determination of such
arbitrator shall be final and binding and may be entered in any of the Chosen
Courts.
18. MISCELLANEOUS
18.1. Taxes. Each Stockholder shall pay all transfer taxes,
sales and other taxes and charges, if any, which may become payable in
connection with the sale of such Stockholder's shares of Company common stock.
Notwithstanding the foregoing, Purchaser shall pay all transfer taxes, sales and
other taxes and charges imposed by the State of Florida, if any, which may
become payable in connection with the transactions and documents contemplated
hereunder.
18.2. Remedies Not Exclusive. Except as provided otherwise in
SECTION 14.5, no remedy conferred by any of the specific provisions of this
Agreement or any document contemplated by this Agreement is intended to be
exclusive of any other remedy so conferred, and each and every remedy shall be
cumulative and shall be in addition to every other remedy given hereunder or now
or hereafter existing at law or in equity or by statute or otherwise. The
election of any one or more remedies hereunder by any party hereto shall not
constitute a waiver of the right to pursue other available remedies hereunder.
18.3. Parties Bound. Except to the extent otherwise expressly
provided herein, this Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, representatives,
administrators, guardians, permitted successors and assigns; and no other person
shall have any right, benefit or obligation hereunder.
18.4. Notices. All notices, reports, records or other
communications that are required or permitted to be given to the parties under
this Agreement shall be sufficient in all respects if given in writing and
delivered in person, by telecopy, by overnight courier or by registered or
certified mail, postage prepaid, return receipt requested, to the receiving
party at the following address:
53
<PAGE> 55
If to Purchaser addressed to:
Vision Twenty-One, Inc.
7209 Bryan Dairy Road
Largo, Florida 33777
Facsimile No.: (813) 545-4419
Attn: Richard T. Welch
With copies to:
Shumaker, Loop & Kendrick
Post Office Box 172609
101 E. Kennedy Boulevard, Suite 2800
Tampa, Florida 33672-0609
Facsimile No. (813) 229-1660
Attn: Darrell C. Smith, Esquire
If to the Company or the Stockholders addressed to:
Block Vision, Inc.
621 N.W. 53rd Street, Suite 600
Boca Raton, Florida 33487
Facsimile No. (561) 241-5126
Attn: Audrey M. Weinstein, Esquire
With copies to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Facsimile No.: (212) 755-1467
Attn: Robert Friedman, Esquire
or to such other address as such party may have given to the other parties by
notice pursuant to this SECTION 18.4. Notice shall be deemed given on the date
of delivery, in the case of personal delivery or telecopy, or on the delivery or
refusal date, as specified on the return receipt, in the case of overnight
courier or registered or certified mail.
18.5. Choice of Law. This Agreement shall be construed,
interpreted, and the rights of the parties determined in accordance with, the
laws of the State of Florida except with respect to matters of law concerning
the internal affairs of any corporate or partnership entity which is a party to
or the subject of this Agreement, and as to those matters the law of the state
of incorporation or organization of the respective entity shall govern.
54
<PAGE> 56
18.6. Entire Agreement; Amendments and Waivers. This
Agreement, together with the documents contemplated by this Agreement and all
Exhibits and Schedules hereto and thereto, constitutes the entire agreement
between the parties pertaining to the subject matter hereof and supersedes all
prior and contemporaneous agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, and there are no
warranties, representations or other agreements between the parties in
connection with the subject matter hereof. No supplement, modification or waiver
of any of the provisions of this Agreement shall be binding unless it shall be
specifically designated to be a supplement, modification or waiver of this
Agreement and shall be executed in writing by the party to be bound thereby. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision hereof (whether or not similar), nor
shall such waiver constitute a continuing waiver unless otherwise expressly
provided.
18.7. Confidentiality Agreements. The provisions of any prior
confidentiality agreements and letters of intent between or among Purchaser, the
Company and the Stockholders, as amended, shall terminate and cease to be of any
force or effect at and upon the Closing.
18.8. Assignment. This Agreement may not be assigned by
operation of law or otherwise without the prior written consent of each party
hereto.
18.9. Attorneys' Fees. Except as otherwise specifically
provided herein, if any action or proceeding is brought by any party with
respect to this Agreement or the other documents contemplated with respect to
the interpretation, enforcement or breach hereof, the prevailing party in such
action shall be entitled to an award of all reasonable costs of litigation or
arbitration, including, without limitation, attorneys' fees, to be paid by the
losing party, in such amounts as may be determined by the court having
jurisdiction of such action or proceeding or by the arbitrators deciding such
action or proceeding.
18.10. Further Assurances. From time to time hereafter and
without further consideration, each of the parties hereto shall execute and
deliver such additional or further instruments of conveyance, assignment and
transfer and take such other actions as any of the other parties hereto may
reasonably request in order to more effectively consummate the transactions
contemplated hereunder or as shall be reasonably necessary or appropriate in
connection with the carrying out of the parties' respective obligations
hereunder for the purposes of this Agreement.
18.11. Announcements and Press Releases. Any press releases or
any other public announcements concerning this Agreement or the transactions
contemplated hereunder shall be approved in advance by Purchaser and the
Company; provided, however, that such approval shall not be unreasonably
withheld and if any party
55
<PAGE> 57
has been advised in writing by counsel that it has a legal obligation to make a
press release and the consent of the other party cannot be obtained, then the
release may be made without such approval.
18.12. No Tax Representations. Each party acknowledges that it
is relying solely on its advisors to determine the tax consequences of the
transactions contemplated hereunder and that no representation or warranty has
been made by any party as to the tax consequences of such transactions except as
otherwise specifically set forth in this Agreement.
18.13. No Rights as Stockholder. The Stockholders shall have
no rights as a stockholder with respect to any shares of Common Stock until the
issuance of a stock certificate evidencing such shares. Except as otherwise
provided in the Agreement, no adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to such date
any stock certificate is issued.
18.14. Multiple Counterparts. This Agreement may be executed
in one or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
18.15. Headings. The headings of the several articles and
sections herein are inserted for convenience of reference only and are not
intended to be part of or to affect the meaning or interpretation of this
Agreement.
18.16. Severability. Each article, section and subsection of
this Agreement constitutes a separate and distinct undertaking, covenant or
provision of this Agreement. If any such provision shall finally be determined
to be unlawful, such provision shall be deemed severed from this Agreement, but
every other provision of this Agreement shall remain in full force and effect.
56
<PAGE> 58
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first written above.
"COMPANY"
BBG-COA, INC.
By:
-----------------------------------------------
Michael P. Block
Chairman and Chief Executive Officer
"STOCKHOLDERS"
MARKETCORP VENTURE ASSOCIATES, L.P.
By: MarketCorp Ventures, L.P., Its General Partner
By:
-----------------------------------------------
Stephen T. Rossetter
A General Partner
NEW YORK STATE BUSINESS VENTURE PARTNERSHIP
By: New York Venture Associates, L.P.,
Its General Partner
By:
-----------------------------------------------
John D. Miller
Managing Partner
57
<PAGE> 59
CHASE VENTURE CAPITAL
ASSOCIATES, L.P.
By: CHASE CAPITAL PARTNERS,
Its General Partner
By:
-----------------------------------------------
Kelly F. Shackelford
Principal
--------------------------------------------------
MICHAEL P. BLOCK
--------------------------------------------------
SAREE BLOCK
--------------------------------------------------
JAMES T. ROBERTO
"PURCHASER"
VISION TWENTY-ONE, INC.
By:
-----------------------------------------------
Richard T. Welch
Chief Financial Officer
58
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-38285) of Vision Twenty-One, Inc. and
Subsidiaries of our report dated July 1, 1997, except as to Note 10, which is as
of August 19, 1997 relating to the consolidated financial statements of BBG-COA,
Inc., which appears in the Report on Form 10-Q of Vision Twenty-One, Inc. and
Subsidiaries for the quarter ended September 30, 1997.
/s/ PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
November 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF VISION TWENTY-ONE, INC. AND SUBSIDIARIES FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,615,335
<SECURITIES> 0
<RECEIVABLES> 7,471,833
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,298,498
<PP&E> 3,263,943
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,770,755
<CURRENT-LIABILITIES> 10,716,060
<BONDS> 66,264
0
0
<COMMON> 8,591
<OTHER-SE> 30,890,418
<TOTAL-LIABILITY-AND-EQUITY> 43,770,755
<SALES> 0
<TOTAL-REVENUES> 29,443,761
<CGS> 0
<TOTAL-COSTS> 29,729,263
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 740,777
<INCOME-PRETAX> (1,026,279)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 323,346
<CHANGES> 0
<NET-INCOME> (1,349,625)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
