<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-43549
EXTENDICARE HEALTH SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 8051 98-0066268
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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105 WEST MICHIGAN STREET
MILWAUKEE, WI 53203
(Address of Principal Executive Offices and Zip Code)
(414) 271-9696
(Registrant's telephone number, including area code)
SEE TABLE OF ADDITIONAL REGISTRANTS
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 _X_ No ____
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EXTENDICARE HEALTH SERVICES, INC.
INDEX
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PART I. FINANCIAL INFORMATION
Page
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Item 1 Condensed Financial Statements
Consolidated Statements of Earnings
for the three months ended
June 30, 1998 and 1997 and
for the six months ended
June 30, 1998 and 1997 3
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows
for the six months ended
June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis 10
Item 3 Quantitative and Qualitative Disclosures
about Market Risk 20
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Change in Securities 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a
Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-k 22
SIGNATURES 23
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF NET EARNINGS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Dollars in Thousands)
(Unaudited)
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Three months ended Six months ended
June 30 June 30
--------------------------------- --------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
REVENUES:
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Routine care and assisted living $ 185,757 $ 137,097 $ 368,157 $ 272,224
Medical specialty 103,520 82,865 211,592 161,583
Other 1,857 2,249 3,757 4,412
--------- --------- --------- ---------
291,134 222,211 583,506 438,219
COSTS AND EXPENSES:
Operating 240,762 180,536 485,009 355,813
General and administrative 11,322 9,461 23,498 18,613
Lease costs 3,726 2,331 7,432 4,572
Depreciation and amortization 13,844 8,414 27,458 16,401
Interest expense 15,722 4,917 31,054 9,610
Interest income (248) (495) (951) (738)
--------- --------- --------- ---------
285,128 205,164 573,500 404,271
--------- --------- --------- ---------
Earnings from operations 6,006 17,047 10,006 33,948
PROVISION FOR INCOME TAXES 3,375 6,528 5,255 13,070
--------- --------- --------- ---------
Earnings before minority interests 2,631 10,519 4,751 20,878
MINORITY INTERESTS (330) (211) (543) (402)
--------- --------- --------- ---------
Net earnings $ 2,301 $ 10,308 $ 4,208 $ 20,476
========= ========= ========= ========
PER COMMON SHARE:
Net earnings per common share $ 2 $ 11 $ 4 $ 22
========= ========= ========= ========
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The accompanying notes are an integral part of these financial statements.
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EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(Dollars in Thousands)
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ASSETS June 30, 1998 December 31, 1997
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(Unaudited)
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CURRENT ASSETS:
Cash and cash equivalents $ 6,559 $ 1,418
Accounts receivable, less
reserves of $19,015 and $18,926 228,535 225,105
Inventories, supplies and prepaid expenses 17,814 18,879
Income taxes receivable 8,012 8,270
Deferred state income taxes 3,138 2,579
Debt service trust funds 303 493
Due from shareholder -
Federal income taxes receivable -- 2,970
Deferred federal income taxes 16,039 13,636
---------- ----------
Total current assets 280,400 273,350
PROPERTY AND EQUIPMENT, NET 698,900 688,169
GOODWILL, NET 171,016 170,419
IDENTIFIABLE INTANGIBLE ASSETS, NET 66,721 66,855
OTHER ASSETS 33,013 30,456
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LIABILITIES AND SHAREHOLDER'S EQUITY $1,250,050 $1,229,249
========== ==========
CURRENT LIABILITIES:
Bank indebtedness $ -- $ 376
Accounts payable, accrued liabilities and due to shareholder 157,307 147,748
Current maturities of long-term debt 32,441 30,042
---------- ----------
Total current liabilities 189,748 178,166
LONG-TERM DEBT 684,513 683,282
OTHER LONG-TERM LIABILITIES 15,908 11,877
DUE TO SHAREHOLDER AND AFFILIATES
Deferred federal income taxes and other 60,684 60,883
DEFERRED STATE INCOME TAXES 10,884 10,955
MINORITY INTERESTS 2,535 2,314
SHAREHOLDER'S EQUITY:
Common stock, $1 par value, 1,000 shares authorized,
947 shares issued and outstanding 1 1
Additional paid-in capital 206,179 206,381
Retained earnings 79,598 75,390
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Total shareholder's equity 285,778 281,772
---------- ----------
$1,250,050 $1,229,249
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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EXTENDICARE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Dollars in Thousands)
(Unaudited)
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Six months ended
June 30
--------------------------------
1998 1997
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OPERATING ACTIVITIES:
Net earnings $ 4,208 $ 20,476
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization 28,921 16,402
Provision for losses on accounts receivable 4,932 4,247
Deferred income taxes (3,231) (1,773)
Minority interests 543 402
-------- --------
35,373 39,754
Changes in assets and liabilities:
Accounts receivable (8,386) (28,434)
Inventories, supplies and prepaid expenses 1,120 (40)
Debt service trust funds 190 (202)
Bank indebtedness (376) 238
Accounts payable and accrued liabilities 12,296 6,437
Income taxes receivable 257 519
Minority Interests -- 20
Other long-term liabilities 1,911 1,558
-------- --------
Cash provided from operating activities 42,385 19,850
INVESTING ACTIVITIES:
Payment for acquisitions (5,276) (28,227)
Payments for purchase of property and equipment (33,579) (27,126)
Proceeds from sale of property and equipment 6,867 2,225
Changes in other non-current assets (4,884) (3,717)
-------- --------
Cash used for investing activities (36,872) (56,845)
FINANCING ACTIVITIES:
Proceeds from issuance of short-term borrowings -- 10,779
Proceeds from issuance of long-term debt 19,100 30,676
Payments of long-term debt (19,150) (4,151)
Distribution of minority interest (322) --
-------- --------
Cash (used for) provided from financing activities (372) 37,304
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 5,141 309
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 1,418 215
-------- --------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 6,559 $ 524
======== ========
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The accompanying notes are an integral part of these financial statements.
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SUPPLEMENTAL CASH FLOW INFORMATION:
INCOME TAXES
The company paid state income taxes of $1,746 and $1,550 during the six
month periods ended June 30, 1998 and June 30, 1997, respectively. The Company
also made payments for Federal income taxes to its U.S. parent of $140 and
$9,825 for the period ended June 30, 1998 and June 30, 1997, respectively.
INTEREST
The company paid interest of $28,875 and $9,593 during the six month
periods ended June 30, 1998 and June 30, 1997, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying financial statements reflect the operations of
Extendicare Health Services, Inc. ("Extendicare" or the "Company"). Extendicare,
a Delaware corporation is a wholly owned subsidiary of Extendicare Inc.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the
Company and its majority-owned subsidiaries. All transactions between
Extendicare and its majority-owned subsidiaries have been eliminated.
The financial information presented as of any date other than December
31 has been prepared from the books and record without audit. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and the
footnotes required by generally accepted accounting principles for complete
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
financial statements, have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1997 contained in the Company's 1997 Annual Report.
2-RECENTLY ISSSUED ACCOUNTING STANDARD
In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is not expected to significantly impact the
Company's reporting and disclosures.
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3-COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
The Company as of June 30, 1998 had capital expenditure purchase commitments
outstanding of approximately $10,166.
LITIGATION
The Company periodically is a defendant in actions brought against it in
connection with its operations. Management believes, on the basis of information
furnished by legal counsel, that none of these actions will have a material
effect on the financial position or results of operations of the Company.
YEAR 2000
The Company has conducted a review of its computer systems and its third party
systems to identify those systems that could be affected by the "Year 2000"
issue. The Year 2000 issue is the result of computer systems being written using
two digits rather than four to define the applicable year. Any of the Company's
programs or programs of third party providers that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. If
not corrected, Year 2000 issues could result in a major system failure or
modifications and material costs to the Company. As a result of the Company's
review of its proprietary systems, the Company has implemented a plan and begun
the programming necessary to enable such systems to properly recognize the year
2000 in such applications. The Company's results of its reviews of third-party
software has identified those systems with the Year 2000 issue. The Company has
received assurances from such third-party software providers that plans are in
process to achieve compliance with year 2000 processing requirements or, as part
of the continuing evaluation and development of enhanced systems, will be
converting certain of those systems to systems which will be compliant with the
year 2000 requirement. The Company presently believes that, with modifications
to existing software and converting to new software, the Year 2000 issue will
not pose significant operational problems to the Company's computer systems as
so modified and converted, nor will compliance with the Year 2000 issue result
in material cost to the Company. However, if such modifications and conversions
are not completed in a timely manner the Year 2000 issue may have a material
adverse impact on the operations of the Company.
INTEREST RATE SWAP AGREEMENT
The Company entered into five interest rate swap agreements (each $50,000 of
notional principal) with three banks which effectively change the interest
rates on LIBOR based borrowings under the Credit Facility to fixed rates
ranging from 5.53% to 5.84% plus applicable margins, for periods over three to
seven years. The Company may be exposed to credit
<PAGE> 9
loss in the event of non-performance by the banks under the swap agreements but
does not anticipate such non-performance.
4-SUBSEQUENT EVENT
On July 30, 1998, the Company announced a definitive agreement to sell
its pharmacy operations to Omnicare, Inc. for $250 million cash, 125,000 common
shares of Omnicare, and warrants to purchase 1.5 million common shares of
Omnicare at $48.00 per share. The transaction is expected to close no later than
September 30, 1998.
Pharmacy revenues from non-affiliated beds for the six months ended
June 30, 1998 were $61.8 million, accounting for 10.6% of the Company's total
revenue.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is one of the largest providers of long-term care and
related services in the United States. The Company operated 200 nursing (21,373
operational beds) and 41 assisted living and retirement facilities (1,650 units)
at June 30, 1998. The Company's facilities are located in fifteen states. The
Company also operates an institutional pharmacy business, which at June 30, 1998
serviced approximately 52,000 beds in regional markets throughout the United
States.
The Company's revenues are derived through the provision of health care
services in its network of facilities, including long-term care services such as
skilled nursing care, assisted living care and related support services and
medical specialty services such as subacute care and rehabilitative therapy,
pharmacy supplies and services and medical equipment, supplies and services. The
percentage of the Company's revenue derived from routine care and assisted
living care has declined from 66.7% in 1995 to 63.1% at June 30, 1998, while the
percentage of revenue derived from medical specialty services has increased from
32.4% to 36.3%, respectively. The increase in the percentage of revenue
attributable to medical specialty services reflects the Company's focus on
expanding its provision of higher revenue specialized subacute care services.
The Company receives payment for its services and products from Federal
(Medicare) and State (Medicaid) funded cost reimbursement programs, as well as
from private payors. The private pay classification includes payments from
individuals, commercial insurers, health maintenance organizations, and other
fee-based payment sources, including Blue Cross Associations and the Veterans
Administration. The following table sets forth the Company's private pay,
Medicare and Medicaid sources of revenue by percentage of total revenue:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
-------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Private Pay 36% 32% 36% 32%
Medicare 27 33 28 32
Medicaid 37 35 36 36
Funds received by the Company under the Medicare and Medicaid programs
are subject to audit with respect to the application of various payment formulas
and such audits can result in retroactive adjustments to revenues. The Company
is reimbursed under the Medicare program for its direct costs plus an allocation
of indirect costs up to a regional limit. The costs of care for Medicare
patients receiving specialty medical services is often expected to exceed the
regional reimbursement limits. The Company in such cases files for routine cost
limit ("RCL") exceptions in an attempt to recover such additional costs.
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There can be no assurance that the Company will be able to recover such excess
costs under pending or future exception requests. In addition, on-going efforts
by third-party payors to contain healthcare costs by limiting reimbursement
rates, increasing case management reviews and negotiating reduced contract
pricing could affect the Company's future revenues and profitability. Most
recently, the Balanced Budget Act requires the establishment of a prospective
payment system ("PPS") for Medicare residents in skilled nursing facilities
under which facilities will be paid a federal per diem rate for virtually all
covered nursing facility services in lieu of the current cost-based
reimbursement rate. This change will reward efficient providers and penalize
those that are inefficient. The law contains numerous other provisions that will
adversely affect payments to providers.
The following is a summary of acquisitions and expansion through
construction made by the Company during the six months ended June 30, 1998 and
the year ended December 31, 1997 as part of its growth strategy:
ACQUISITIONS
- The Company acquired two nursing facilities (174 operational
beds) for $8.2 million, including the assumption of $2.7
million of debt and the assets of two medical specialty
services related businesses for $0.7 million during the first
six months of 1998. The Company also added one nursing
facility (76 beds) through an operating lease in 1998.
- The Company, during 1997, acquired all of the outstanding
stock of Arbor Health Care Company ("Arbor"), a company
engaged in operating 31 nursing facilities (3,696 operational
beds) for $448.8 million, including the assumption of $109.7
million of Arbor's debt. Seven of the Arbor facilities (802
operational beds) are leased under long-term operating leases.
The acquisition of Arbor also included Arbor's institutional
pharmacies and outpatient rehabilitation businesses.
- The Company also acquired in 1997 nine facilities (890
operational beds) at purchase prices totaling $41.7 million
which included two previously leased facilities. Five of the
facilities were acquired from Medi-Management for a purchase
price of approximately $24 million and the assumption of $9.2
million of debt. The Company also acquired the assets of seven
medical specialty services related businesses for a total of
$9.3 million during the year.
CONSTRUCTION
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- The Company completed construction of two new nursing
facilities (196 operational beds), three assisted living
facilities (145 units), and two therapy additions through the
first six months of 1998.
- The Company completed construction of one new nursing facility
(74 operational beds), three nursing facility additions (79
operational beds), seven assisted living facilities (330
units), two assisted living facility additions (18 units) and
seven therapy additions during 1997.
The Company also sold one nursing facility (179 operational beds) for
$2.0 million during 1997. The price for the facility approximated its net
book value.
RESULTS OF OPERATIONS
The following table sets forth details of revenues and earnings as a
percentage of total revenues:
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THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
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1998 1997 1998 1997
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Revenues
Routine care and assisted living 63.8% 61.7% 63.1% 62.1%
Medical specialty services 35.6 37.3 36.3 36.9
Other 0.6 1.0 0.6 1.0
----- ----- ----- -----
100.0 100.0 100.0 100.0
Operating and general and administrative costs 86.6 85.5 87.2 85.4
Lease costs and depreciation and amortization 6.0 4.8 6.0 4.8
Interest, net 5.3 2.0 5.2 2.0
Earnings before taxes 2.1 7.7 1.6 7.8
Income taxes 1.2 2.9 0.9 3.0
Net Earnings 0.8 4.6 0.7 4.7
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THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
Revenues in the three months ended June 30, 1998 were $291.1 million,
representing an increase of $68.9 million (31.0%) from $222.2 million in the
three months ended June 30, 1997. The majority of the Company's revenue was
derived from routine skilled nursing facility revenues (61.9%).
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The increase in revenues of $68.9 million included increases in routine care and
assisted living revenues of $48.7 million, medical specialty services revenues
of $20.6 million, partially offset by a decrease in other revenues of $0.4
million.
The increase in routine care and assisted living facility revenues of
$48.7 million included $47.6 million from the opening of newly constructed
facilities, the acquisition of five facilities effective June 1, 1997, two
facilities effective September 1, 1997, Arbor's thirty-one facilities effective
November 26, 1997, one facility effective January 31, 1998, one facility
effective April 1, 1998, and the lease of a facility effective April, 1998,
partially offset by a divestiture. Revenues from facilities which the Company
operated during each of 1998 and 1997 ("same facilities") increased $1.1 million
when comparing periods. Same facility revenues increased between periods due to
rate increases. Partially offsetting the rate increases was a decline in
occupancy between periods. Same facility occupancy, defined as patient days for
nursing facilities and units occupied for assisted living facilities, declined
1.7%. Average percentage occupancy for same facilities, based on beds/ units in
operation, was 87.2% in the second quarter of 1998 compared with 87.9% in the
comparable period of 1997. Revenues also declined due to a $2.9 million decrease
in adjustments related to prior years' estimated settlement amounts when
comparing periods.
The increase in medical specialty services revenues of $20.6 million
(24.9%) included $28.3 million from acquisitions during 1997 and 1998, net of
divestitures. The remaining decrease of $7.7 million is due to a number of
factors. Restorative therapy revenues decreased approximately $4.9 million due
to a 10.4% decline in Medicare occupancy and $1.2 million due to a 10% decline
in Medicare Part B rates. Restorative therapy also decreased $4.4 million
primarily due to conversion to salary equivalency. Reduction in oxygen rates by
25% resulted in a decrease in medical specialty services revenues of $0.4
million. Other medical specialty services revenues decreased $0.8 million
between periods. These decreases were partially offset by an increase in
pharmacy revenues of approximately $4.0 million due to volume and price
changes.
Pharmacy operations, on a same store basis, serviced an average of
34,245 nursing facility beds during the three months ended June 30, 1998
compared to 29,967 beds during the comparable period of 1997. Pharmacy
operations were servicing approximately 52,000 beds at June 30, 1998, including
17,300 beds added as a result of the acquisition of Arbor in November 1997.
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
Operating and general and administrative costs increased $62.1 million
or 32.7% between periods. The increase included increases in costs relating to
acquisitions and newly constructed facilities, net of divestitures, of
approximately $64.5 million in 1998. The remaining decrease in operating and
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general and administrative costs of $2.4 million (1.3%) included an increase in
wage-related costs of $5.9 million to attract and retain qualified personnel.
The remaining decrease, excluding wage-related costs, was decreased medical
specialty services costs of $7.7 million, principally from decreased therapy
activity and a $0.6 million decrease related to other routine care and general
and administrative costs.
LEASE COSTS AND DEPRECIATION AND AMORTIZATION
Total lease costs and depreciation and amortization increased $6.8
million (63.5%) to $17.6 million in the three months ended June 30, 1998
compared with the three months ended June 30, 1997. The increase includes $5.8
million as a result of the Arbor acquisition. The remaining increase is
principally due to the overall increase in the number of facilities operated by
the Company and the construction of additions to the Company's facilities.
INTEREST
Net interest expense increased $11.1 million to $15.5 million in the
three months ended June 30, 1998 compared with $4.4 million in the comparable
period in 1997. The increase is due to the effect of an increase in the average
debt level to $721.2 million during the second quarter of 1998 from $254.4
million during the second quarter of 1997 resulting from the Company's
acquisitions and capital expenditures and an increase in the weighted average
interest rate of all long-term debt to approximately 8.72% during the second
quarter of 1998 compared to approximately 7.73% during the second quarter of
1997.
START-UP LOSSES
The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in the second quarter of 1998 of $1.4 million compared to
$0.6 million in the second quarter of 1997. The $0.8 million increase when
comparing periods is due to the timing of facility openings and number of
facilities in start-up in 1998 versus 1997.
INCOME TAXES
Income taxes in the three months ended June 30, 1998 decreased to $3.4
million from $6.5 million in the comparable period in 1997 as a result of
decreased pre-tax earnings. The Company's effective tax rates were 56.2% in the
three months ended June 30, 1998 and 38.3% in the three months ended June 30,
1997. The increase in the Company's effective tax rate between periods is
primarily due to non-deductible goodwill amortization associated with the Arbor
acquisition.
<PAGE> 15
NET EARNINGS
Net earnings in the three months ended June 30, 1998 were $2.3 million,
a decrease of $8.0 million (77.7%) over net earnings of $10.3 million in the
comparable period in 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Revenues in the six months ended June 30, 1998 were $583.5 million,
representing an increase of $145.3 million (33.2%) from $438.2 million in the
six months ended June 30, 1997. The majority of the Company's revenue was
derived from routine skilled nursing facility revenues (61.2%). The increase in
revenues of $145.3 million included increases in routine care and assisted
living revenues of $95.9 million and medical specialty services revenues of
$50.0 million partially offset by a decrease in other revenues of $0.6 million.
The increase in routine care and assisted living facility revenues of
$95.9 million included $95.2 million from the opening of newly constructed
facilities, the acquisition of facilities in 1997 and 1998 and the lease of a
facility effective April, 1998, partially offset by a divestiture. Revenues
from same facilities increased $0.7 million when comparing periods. Same
facility revenues increased between periods due to rate increases. Partially
offsetting the rate increases was a decline in occupancy between periods. Same
facility occupancy, defined as patient days for nursing facilities and units
occupied for assisted living facilities, declined 1.5%. Average percentage
occupancy for same facilities, based on beds/units in operation, was 87.5% in
the first six months of 1998 compared with 88.2% in the comparable period of
1997. Revenues also declined due to a $5.5 million decrease in adjustments
related to prior years' estimated settlement amounts when comparing periods.
The increase in medical specialty services revenues of $50.0 million
(31.0%) included $55.8 million from acquisitions during 1997 and 1998, net of
divestitures. The remaining decrease of $5.8 million is due to a number of
factors. Restoration therapy revenue decreased approximately $8.3 million due to
a 9.1% decline in Medicare occupancy, $1.8 million due to a 10% decline in
Medicare Part B rates and $4.4 million due to a conversion to salary
equivalency. Reduction in oxygen rates by 25% resulted in a decrease in medical
specialty revenues of $0.8 million. These decreases were offset by a
$9.5 million increase primarily attributable to an increase in pharmacy
revenues due to volume and price increases.
Pharmacy operations, on a same store basis, serviced an average of
33,351 nursing facility beds
<PAGE> 16
during the six months ended June 30, 1998 compared to 30,449 beds during the
comparable period of 1997. Pharmacy operations were servicing approximately
52,000 beds at June 30, 1998, including 17,300 beds added as a result of the
acquisition of Arbor in November 1997.
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
Operating and general and administrative costs increased $134.1
million or 35.8% between periods. The increase included increases in costs
relating to acquisitions and newly constructed facilities, net of divestitures,
of approximately $128.7 million in 1998. The remaining increase in operating and
general and administrative costs of $5.4 million (1.5%) included wage-related
increased costs of $13.1 million to attract and retain qualified personnel. This
increase was partially offset by decreased medical specialty services costs of
$6.8 million, principally due to decreased therapy activity and a $0.8 million
decrease related to other routine care and general and administrative costs.
LEASE COSTS AND DEPRECIATION AND AMORTIZATION
Total lease costs and depreciation and amortization increased $13.9
million (66.4%) to $34.9 million in the six months ended June 30, 1998 compared
with the six months ended June 30, 1997. The increase includes $11.7 million as
a result of the Arbor acquisition. The remaining increase is principally due to
the overall increase in the number of facilities operated by the Company and the
construction of additions to the Company's facilities.
INTEREST
Net interest expense increased $21.2 million to $30.1 million in the
six months ended June 30, 1998 compared with $8.9 million in the comparable
period in 1997. The increase is due to the effect of an increase in the average
debt level to $719.3 million during the first six months of 1998 from $244.6
million during the first six months of 1997 resulting from the Company's
acquisitions and capital expenditures and an increase in the weighted average
interest rate of all long-term debt to approximately 8.63% in the first six
months of 1998 compared to approximately 7.86% in the first six months of 1997.
The increase was partially offset by favorable investment earnings in the first
six months of 1998 compared to the first six months of 1997.
START-UP LOSSES
The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in the first six months of 1998 of $3.3 million
compared to $1.1 million in the first six months of 1997. The $2.2 million
increase when comparing periods is due to the timing of facility openings and
number of facilities in start-up in 1998 versus 1997.
<PAGE> 17
INCOME TAXES
Income taxes in the six months ended June 30, 1998 decreased to $5.3
million from $13.1 million in the comparable period in 1997 as a result of
decreased pre-tax earnings. The Company's effective tax rates were 52.5% in the
first six months of 1998 and 38.5% in the first six months of 1997. The increase
in the Company's effective tax rate between periods is primarily due to
non-deductible goodwill amortization associated with the Arbor acquisition.
NET EARNINGS
Net earnings in the six months ended June 30, 1998 were $4.2 million, a
decrease of $16.3 million (79.4%) over net earnings of $20.5 million in the
comparable period in 1997.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Company's acquisition of Arbor in November 1997 resulted in a
substantial increase in its indebtedness and interest expense. The Company
arranged for new credit facilities totaling $800 million to finance the
acquisition and to refinance existing indebtedness of both Arbor and the
Company. The new credit facilities consisted of a $200 million Revolving Credit
Facility, a $200 million Tranche A Term Loan Facility, a $200 million Tranche B
Term Loan Facility and a $200 million Tranche C Loan Facility. The Revolving
Credit Facility and the Tranche A Term Loan Facility have a term of six years.
The Tranche B Term Loan Facility has a term of seven years. The Tranche C Loan
Facility was utilized to complete the acquisition of Arbor and was repaid upon
the subsequent completion of an offering of 9.35% Senior Subordinated Notes.
Extendicare Inc., at the time of closing the acquisition, contributed an
additional $44.6 million of equity to the Company.
The Company had cash and cash equivalents of $6.6 million at June 30,
1998 and $1.4 million at December 31, 1997.
Cash flow generated from operations before working capital changes was
$35.4 million for the six months ended June 30, 1998 compared with $40.0 million
in the comparable period of 1997. The decrease in cash flow from operations
before working capital changes is the result of decreased operating earnings.
The Company experienced a decrease in working capital at June 30,
1998, excluding cash and borrowings included in current liabilities, of $7.6
million. The decrease in working capital requirements
<PAGE> 18
includes a decrease of $6.0 as a result of the increase in accounts payable and
accrued liabilities and a decrease of $4.3 as a result of the current year
Federal tax provision. These decreases were partially offset by growth of
accounts receivable. Accounts receivable at June 30, 1998, were $228.5 million
compared with $225.1 million at December 31, 1997, representing an increase of
$3.4 million. The increase in accounts receivable includes no change within the
nursing facility operations, an increase within the Company's UPC Health Network
medical specialty services operations of $5.8 million and a decrease in prior
policy year workers' compensation receivables of $2.4 million due to
collections. Billed patient care and other receivables increased $15.0 million
while third-party payor settlement receivables decreased $15.0 million within
the nursing facility operations. The increase in billed patient care receivables
of $15.0 million included a decrease of $0.6 million due to a decrease in
revenues for medical specialty services due to volume decreases and changes in
the Federal reimbursement policies, partially offset by increases in other
billed services due to rate increases and growth resulting from acquisitions
during the period. The remaining increase in billed patient care receivables of
$15.6 million includes increases due to the timing of the receipt of remittances
between periods and increased Federally mandated medical reviews. The decrease
in settlement receivables of $15.0 million between periods includes $15.5
million due to higher levels of interim reimbursements received for 1997 versus
current year estimated Medicare cost accruals and $2.1 million from the
collection of Medicaid program settlements, partially offset by an increase of
$2.6 million due to an increase in Medicare RCL exception approvals expected.
The increase in UPC Health Network receivables of $5.8 million between periods
includes $4.7 million due to growth, billing delays and the timing of the
receipt of remittances with the remaining increase of $1.1 million due to delays
in obtaining a state issued provider number related to an acquisition in 1997.
Property and equipment increased $10.7 million from December 31, 1997
to a total of $698.9 million at June 30, 1998. The increase is the result of
acquisitions of $8.5 million and capital expenditures and asset transfers of
$33.1 million, partially offset by depreciation expense of $22.8 million and
asset disposals of $8.1 million. Property and equipment capital expenditures
during the six months ended June 30, 1998 included approximately $18.0 million
related to the construction of new facilities and bed and therapy unit additions
to existing facilities. The Company had under construction at June 30, 1998
three nursing facilities, one nursing facility addition and four assisted living
facilities at a total cost of $33.7 million, of which $21.8 million was incurred
prior to June 30, 1998.
The Company financed a portion of its acquisitions in the first six
months of 1998 through its bank credit financing and the issuance of a $1.0
million promissory note as well as the assumption of existing debt in connection
with acquisitions. Existing debt assumed in connection with acquisitions totaled
$2.7 million.
<PAGE> 19
Total borrowings, including bank indebtedness, notes payable and both
current and long-term maturities of debt, totaled $717.0 million at June 30,
1998 for an increase of $3.3 million from December 31, 1997. The increase is
attributable to the growth in property and equipment due to acquisitions and
capital expenditures. The weighted average interest rate of all long-term debt
was 7.92% at June 30, 1998 and such debt had maturities ranging from 1998 to
2015.
The Company had a $200 million revolving credit agreement at June 30,
1998. Borrowing availability under this line of credit totaled $94.7 million at
June 30, 1998.
The principal source of liquidity for the Company is cash flow from
operations and approximately $94.7 million (net of letters of credit in the
amount of $35.3 million) in additional borrowing availability under the
Revolving Credit Facility. The Company contemplates incurring capital
expenditures (excluding any acquisitions) of approximately $34.0 million for the
last six months of 1998. Plans are to complete and open four assisted living
facilities (198 units), three nursing facilities (308 beds), and one nursing
facility additional (47 beds) during the last six months of 1998, or early 1999.
The Company believes that internally generated cash flow, together with
borrowings under the Revolving Credit Facility, will be sufficient to meet the
Company's current operational cash requirements to fund its capital expenditure
program and to meet current debt obligations.
RECENT DEVELOPMENTS
On July 30, 1998, the Company announced a definitive agreement to sell
its pharmacy operations to Omnicare, Inc. for $250 million cash, 125,000 common
shares of Omnicare and warrants to purchase 1.5 million common shares of
Omnicare at $48.00 per share. The transaction is expected to close no later than
September 30, 1998.
The Company intends to apply the net after-tax proceeds of the sale to
debt reduction. As a result, the company will lower its debt by approximately
$165 million.
Pharmacy revenues from non-affiliated beds for the six months ending
June 30, 1998 were $61.8 million accounting for 10.6% of the Company's total
revenue.
The divesture follows a late 1997 management decision that the
pharmacy operations were non-strategic assets. The continuing consolidation of
pharmaceutical services companies would have required the Company to make a
major investment in the pharmacy business. With this transaction, the fair value
of the Company's pharmacy operations is realized and the Company achieves its
goal of sharply reducing its debt-to-equity ratio and significantly lowering
interest expense.
<PAGE> 20
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, and other information provided by the
Company from time to time, contains certain "forward-looking" statements as that
term is defined by the Private Securities Litigation Reform Act of 1995. All
statements regarding the Company's expected future financial position, results
of operations, cash flows, continued performance improvements, ability to
service its debt obligations, finance growth opportunities, respond to changes
in government regulations, and similar statements including, without limitaion,
those containing words such as "believes," "anticipates," "expects," "intends,"
"estimates," "plans," and other similar expressions are forward-looking
statements. Forward-looking statements involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
differ materially from those projected or contemplated in the forward-looking
statements as a result of, but not limited to, the following factors: national
and local economic conditions; the effect of government regulation and changes
in regulations governing the healthcare industry, including the Company's
compliance with such regulations; changes in Medicare and Medicaid payment
levels; liabilities and other claims asserted against the Company; the ability
to attract and retain qualified personnel; the availability and terms of capital
to fund acquisitions; the competitive environment in which the Company operates;
demographic changes; the ability to timely locate and correct all relevant
computer codes prior to the year 2000; and the availability and cost of labor
and materials. Given these risks and uncertainties, the Company can give no
assurances that these forward-looking statements will, in fact, transpire and ,
therefore, cautions investors not to place undue reliance on them.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
<PAGE> 21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings other than litigation
arising in the ordinary course of business. Management believes, on
the basis of information furnished by legal counsel, that none of
these actions will have a material effect on the financial position
or results of operations of the Company.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
10.0 Asset Purchase Agreement
11.0 Computation of earnings per share for the three months and six
months ended June 30, 1998
27.0 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months or six
months ended June 30, 1998.
<PAGE> 22
EXTENDICARE HEALTH SERVICES, INC.
EXHIBIT INDEX
Exhibit No. Description
10 Asset Purchase Agreement
11 Computation of earnings per share for the three months and
six months ended June 30, 1998
27 Financial Data Schedule
<PAGE> 23
SIGNATURES
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.
EXTENDICARE HEALTH SERVICES, INC.
Date: August 10, 1998 By: /s/ Wesley Carter
J. Wesley Carter
President, Chief Executive Officer
and Director (principal executive officer)
Date: August 10, 1998 By: /s/ Stephen F. Dineley
Stephen F. Dineley
Vice President, Chief Financial Officer,
Treasurer and Director (principal
financial officer and principal
accounting officer)
<PAGE> 1
ASSET PURCHASE AGREEMENT
AMONG
OMNICARE, INC.,
BADGER ACQUISITION CORP.,
EXTENDICARE HEALTH SERVICES, INC.
AND
THE SELLERS PARTIES HERETO
DATED AS OF JULY 29, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
ARTICLE 1 SALE AND PURCHASE OF ASSETS.................................................2
Section 1.1 The Assets and the Assumed Liabilities.........................2
Section 1.2 Closing........................................................2
Section 1.3 Deliveries by the Sellers......................................3
Section 1.4 Deliveries by Seller Parent....................................3
Section 1.5 Deliveries by the Purchaser....................................4
Section 1.6 Post-Closing Adjustment........................................4
Section 1.7 Allocation of the Purchase Price...............................6
Section 1.8 Changes in Facilities..........................................6
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE SELLER ENTITIES.......................7
Section 2.1 Organization...................................................7
Section 2.2 Authority Relative to this Agreement...........................7
Section 2.3 Consents and Approvals; No Violations..........................7
Section 2.4 Financial Statements...........................................8
Section 2.5 Absence of Certain Changes.....................................8
Section 2.6 No Default.....................................................9
Section 2.7 Litigation.....................................................9
Section 2.8 Permits; Compliance with Applicable Law........................9
Section 2.9 Taxes.........................................................10
Section 2.10 Intellectual Property.........................................12
Section 2.11 Transactions with Affiliates..................................12
Section 2.12 Contracts.....................................................12
Section 2.13 Labor Relations...............................................13
Section 2.14 Environmental.................................................13
Section 2.15 Assets Used in the Business...................................14
Section 2.16 Title to Assets...............................................15
Section 2.17 Insurance.....................................................15
Section 2.18 Inventory.....................................................15
Section 2.19 Accounts Receivable...........................................15
Section 2.20 Product Returns and Warranties................................15
Section 2.21 Customers; Suppliers..........................................16
Section 2.22 Absence of Certain Business Practices.........................17
Section 2.23 Certain Healthcare Legal Matters..............................17
Section 2.24 Real Property.................................................19
Section 2.25 Purchasing Contracts..........................................19
Section 2.26 Employee Benefits.............................................19
</TABLE>
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<TABLE>
<S> <C>
Section 2.27 Purchase Price................................................19
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND
PARENT.....................................................................19
Section 3.1 Organization..................................................19
Section 3.2 Authority Relative to this Agreement..........................19
Section 3.3 Consents and Approvals; No Violations.........................20
Section 3.4 Funds.........................................................20
ARTICLE 4 COVENANTS..................................................................20
Section 4.1 Conduct of the Business.......................................20
Section 4.2 Access to Information.........................................22
Section 4.3 Disclosure Supplements........................................22
Section 4.4 Reasonable Efforts............................................23
Section 4.5 Further Assurances............................................23
Section 4.6 Brokers or Finders............................................24
Section 4.7 No Solicitation...............................................24
Section 4.8 Tax Matters...................................................24
Section 4.9 Release of Liens..............................................24
Section 4.10 Performance of Obligations....................................24
Section 4.11 Consents to Transfer Assets...................................25
Section 4.12 Employment Matters............................................25
Section 4.13 Non-Competition...............................................27
Section 4.14 Transition Services...........................................29
Section 4.15 Bulk Sales Laws...............................................29
Section 4.16 Facilities....................................................29
Section 4.17 Payments to the Business......................................29
Section 4.18 Share Legend; Transfer........................................29
Section 4.19 Audit.........................................................30
ARTICLE 5 CONDITIONS.................................................................31
Section 5.1 Conditions to Each Party's Obligations........................31
Section 5.2 Conditions to Obligations of the Parent and the Purchaser.....32
Section 5.3 Conditions to Obligations of Seller Parent and the Sellers....33
ARTICLE 6 TERMINATION AND AMENDMENT..................................................33
Section 6.1 Termination...................................................33
Section 6.2 Effect of Termination.........................................34
Section 6.3 Amendment.....................................................34
Section 6.4 Extension; Waiver.............................................34
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
ARTICLE 7 SURVIVAL; INDEMNIFICATION..................................................34
Section 7.1 Survival Periods..............................................34
Section 7.2 Indemnification Amounts.......................................35
Section 7.3 Indemnification...............................................35
Section 7.4 Claims........................................................36
Section 7.5 Relation to Escrow............................................37
Section 7.6 Exclusive Remedy..............................................37
ARTICLE 8 MISCELLANEOUS..............................................................37
Section 8.1 Notices.......................................................37
Section 8.2 Headings......................................................38
Section 8.3 Counterparts..................................................38
Section 8.4 Entire Agreement; Assignment..................................38
Section 8.5 Governing Law.................................................39
Section 8.6 Specific Performance..........................................39
Section 8.7 Publicity.....................................................39
Section 8.8 Binding Nature; No Third Party Beneficiaries..................40
Section 8.9 Severability..................................................40
Section 8.10 Interpretation................................................40
Section 8.11 Payment of Expenses...........................................40
Section 8.12 Access to Records.............................................41
</TABLE>
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<PAGE> 5
Exhibit A The Warrant
Exhibit B DEA Power of Attorney
Exhibit C Milwaukee Lease
Exhibit D Federal Way Sublease
Exhibit E Canada and UK Provider Agreement
Exhibit F Escrow Agreement
Exhibit G Accu-Med License Agreement
Exhibit H Registration Rights Agreement
<PAGE> 6
ASSET PURCHASE AGREEMENT, dated as of July 29, 1998 among Omnicare,
Inc., a Delaware corporation ("Parent"), Badger Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of Parent (the "Purchaser"),
Extendicare Health Services, Inc., a Delaware corporation ("Seller Parent"), and
the subsidiaries of Seller Parent listed on the signature pages hereto
(collectively, the "Sellers" and, together with Seller Parent, the "Seller
Entities").
WHEREAS, the Seller Entities are engaged in several businesses, one of
them being the UPC Institutional Pharmacy business, defined herein as consisting
of the provision to nursing homes, assisted living facilities and other
long-term care facilities and residents of such facilities (collectively, the
"LTC Customers"), of the following items: (i) pharmaceutical products, (ii)
pharmacy-related services, (iii) infusion therapy products and services, (iv)
respiratory equipment and supplies, and (v) parenteral and enteral nutrition
products, wound care products, ostomy and urological supplies, together with all
home health care services provided by United Professional Companies, Inc.
("UPC") at its Springfield, Ohio location whether to LTC Customers or others
(the "Business" and all such products, equipment and supplies collectively the
"Business Products"). The Business excludes the following: (a) respiratory
therapist services, not including the provision of Business Products to LTC
Customers, (b) the provision of respiratory equipment and supplies other than to
LTC Customers, (c) home health services (including those provided by Stein
Medical), except for those services provided by UPC at its Springfield, Ohio
location and the provision of Business Products to LTC Customers, (d) group
purchasing services, provided that such services do not include the sale by
Seller Entities or affiliates (as distinguished from sales by unaffiliated
vendors or original manufacturers) of Business Products to LTC Customers, (e)
clinical psychology and other behavior health services, not including the
provision of Business Products to LTC Customers, (f) the business of contracting
with managed care organizations, insurers, and other payors of health care
services for the provision of care to individuals in nursing homes, assisted
living facilities and other long-term care facilities, provided that the
provision of all products and services included within the Business shall not be
provided by Seller Entities or any affiliates, (g) respiratory equipment and
supplies provided by UPC/ Chippewa Valley Home Care, LLC in the Eau Claire,
Wisconsin area and (h) the provision by UPC Home Health Services of respiratory
equipment and supplies to residents in assisted living facilities in Wisconsin
which are not affiliated with the Seller Entities.
WHEREAS, the Seller Entities wish to sell, and the Purchaser wishes to
purchase, certain assets relating to the Business.
NOW, THEREFORE, the parties agree as follows:
<PAGE> 7
ARTICLE 1
SALE AND PURCHASE OF ASSETS
Section 1.1 The Assets and the Assumed Liabilities.
(a) Upon the terms and subject to the conditions of this
Agreement, at the Closing, the Sellers shall sell, convey, assign, transfer and
deliver to the Purchaser and the Purchaser shall purchase and acquire good and
valid title to all of the properties, assets and rights of the Sellers or any
subsidiary thereof set forth on Schedule 1.1(a)(x) hereto (collectively, the
"Assets"), provided that the Assets shall not include any of the Assets set
forth on Schedule 1.1(a)(y) hereto (the "Excluded Assets").
(b) Upon the terms and subject to the conditions of this
Agreement, at the Closing, the Purchaser shall assume, and shall be solely and
exclusively liable with respect to, and shall pay, perform or discharge in
accordance with their respective terms, the liabilities and obligations of the
Sellers set forth on Schedule 1.1(b) hereto (collectively, the "Assumed
Liabilities").
(c) Notwithstanding anything in this Agreement to the
contrary, (i) the Purchaser shall not assume, nor shall it be deemed to have
assumed, any liabilities or obligations, except as expressly provided in Section
1.1(b) hereof and (ii) the Assumed Liabilities shall not, in any event, include
the liabilities and obligations set forth on Schedule 1.1(c) hereto
(collectively, the "Excluded Liabilities").
(d) Purchase Price. (x) In consideration for the sale and
transfer of the Assets and the performance by the Seller Entities of their
covenants hereunder (including making the deliveries contemplated hereby), at
the Closing the Purchaser shall pay an aggregate of (i) $250,000,000, (ii)
125,000 shares of common stock, par value $1.00 per share (the "Shares"), and
(iii) warrants, in the form of Exhibit A hereto (the "Warrants"), to purchase up
to 1,500,000 Shares on the terms set forth therein (the "Purchase Price") as
provided in this Article I, subject to adjustment as provided in Sections
1.1(d)(y) and 1.6, and Parent and the Purchaser shall perform their respective
covenants hereunder (including making the deliveries contemplated hereby).
(y) Subject to Section 5.1(c), if the Audited EBITA Number
(as defined in Section 4.19 hereof) is less than $20,914,560, each of the amount
of cash, number of Shares and number of Shares issuable pursuant to the Warrants
contemplated by Section 1.1(d)(x) shall be reduced by the percentage equal to
(x) one minus the result obtained by dividing the Audited EBITA Number by
$21,786,000, multiplied by (y) 100.
Section 1.2 Closing. (a) Upon the terms and subject to the
conditions of this Agreement, the closing of the transactions contemplated by
this Agreement (the "Closing") will take place on the tenth business day
following the satisfaction or waiver of the conditions set
2
<PAGE> 8
forth in Article V hereof (other than conditions which, by their nature, are to
be satisfied at the Closing, but subject to such conditions), at 10:00 a.m.,
Milwaukee time, at the offices of Quarles & Brady, Milwaukee, Wisconsin, or at
such other time or at such other place as shall be agreed upon by the parties.
The date on which the Closing occurs is hereinafter referred to as the "Closing
Date."
(b) By virtue of the Closing, (a) the Sellers shall sell,
convey, assign, transfer and deliver to the Purchaser and the Purchaser shall
purchase and acquire good and valid title to all the Assets and (b) the
Purchaser shall assume, and shall be solely and exclusively liable with respect
to, and shall pay, perform or discharge in accordance with their respective
terms, the Assumed Liabilities.
Section 1.3 Deliveries by the Sellers. At the Closing, each Seller
shall deliver or cause to be delivered to the Purchaser the following:
(a) Good and sufficient instruments of assignment with
respect to Intellectual Property (as defined herein) in recordable form;
(b) A duly executed DEA Power of Attorney in the form of
Exhibit B attached hereto; and
(c) Such other duly executed documents and certificates as
may be required to be delivered by such Seller pursuant to the terms of this
Agreement or as may be reasonably requested by the Purchaser prior to the
Closing.
Section 1.4 Deliveries by Seller Parent. At the Closing, Seller
Parent shall deliver to the Purchaser the following:
(a) A duly executed lease containing the terms set forth on
Exhibit C (the "Milwaukee Lease");
(b) A duly executed sublease containing the terms set forth
on Exhibit D (the "Federal Way Sublease");
(c) A duly executed Canada and UK Provider Agreement
containing the terms set forth on Exhibit E (the "Provider Agreement");
(d) On behalf of the Sellers, a duly executed escrow
agreement in the form of Exhibit F attached hereto (the "Escrow Agreement");
(e) A duly executed Accu-Med license agreement in the form
of Exhibit G attached hereto; and
3
<PAGE> 9
(f) Such other duly executed documents and certificates as
may be required to be delivered by Seller Parent pursuant to the terms of this
Agreement or as may be reasonably requested by the Purchaser prior to the
Closing.
Section 1.5 Deliveries by the Purchaser. At the Closing, the
Purchaser shall deliver or cause to be delivered (x) to Seller Parent the
following:
(a) An aggregate of (i) $211,796,875 in immediately
available funds, by wire transfer to an account or accounts specified by Seller
Parent no later than one business day prior to the Closing, (ii) 125,000 newly
issued, duly authorized, validly issued, fully paid and non-assessable Shares
and (iii) the Warrants, duly executed;
(b) A duly executed Escrow Agreement;
(c) A duly executed Accu-Med license agreement;
(d) A duly executed Milwaukee Lease;
(e) A duly executed Federal Way Sublease;
(f) A duly executed Registration Rights Agreement, in the
form of Exhibit H;
(g) A duly executed Provider Agreement; and
(h) Such other duly executed documents and certificates as
may be required to be delivered by the Purchaser pursuant to the terms of this
Agreement or as may be reasonably requested by the Sellers prior to the Closing;
and
(i) To the Escrow Agent, $38,203,125 in immediately
available funds by wire transfer to an account specified by the Escrow Agent.
Section 1.6 Post-Closing Adjustment.
(a) If the Closing Date Net Assets (as defined below) are
less than $44,000,000, the Sellers shall pay the difference to the Purchaser;
provided that if any event which would result in a reduction in the Closing Date
Net Assets (the "CDNA Amount") has resulted in an adjustment pursuant to Section
1.1(d)(y), then the amount to be paid by Seller pursuant to this Section 1.6
shall be reduced by the CDNA Amount. If the Closing Date Net Assets are more
than $46,000,000, the Purchaser shall pay the difference to the Seller. Any
payment under this Section 1.6(a) shall be made in immediately available funds
within five business days of the date the Closing Date Net Assets are finally
determined pursuant to this Section 1.6 and shall be accompanied by interest on
such amount from the Closing Date to
4
<PAGE> 10
the date of payment at a floating rate equal to the publicly announced prime
lending rate of NationsBank, N.A. Any such payment shall be made in accordance
with Section 7.5 hereof.
(b) As promptly as practicable following the Closing Date,
but in no event more than 90 days following the Closing Date, the Purchaser
shall prepare and deliver to Seller Parent a balance sheet setting forth the
Assets and the Assumed Liabilities as of the Closing Date, in accordance with
clause (f) below.
(c) Unless within 30 days after its receipt of the Closing
Date Balance Sheet (as defined below), Seller Parent shall deliver to the
Purchaser a detailed statement describing its objections thereto, the amounts
determined in accordance with clause (b) shall be final and binding.
(d) If Seller Parent shall deliver the statement referred to
in clause (c) above, the Purchaser and Seller Parent will use reasonable efforts
to resolve any disputes, but if a final resolution is not reached within 20 days
after Seller Parent has submitted its objections, any remaining disputes will be
resolved by Arthur Andersen LLP or such other national accounting firm as the
parties mutually agree upon based on its neutrality with respect to all parties
(the "Reviewing Accountants"). The Reviewing Accountants shall be instructed to
resolve any matters in dispute as promptly as practicable in accordance with
Section 1.6(e) below. The determination of the Reviewing Accountants will be
final and binding.
(e) The Purchaser and Seller Parent will each pay one-half
of the fees and expenses of the Reviewing Accountants. Seller Parent and the
Purchaser shall cooperate with each other and the Reviewing Accountants in
connection with the matters contemplated by this Section 1.6, including by
furnishing such information and access to books, records (including accountants
work papers), personnel and properties as may be reasonably requested at their
own expense. Each party may also furnish to the Reviewing Accountants such other
information and documents as it deems relevant with copies and notification to
the other party. The Reviewing Accountants may conduct such procedures as it
deems appropriate, provided that the parties do not intend that formal civil
procedures necessarily be followed.
(f) The "Closing Date Net Assets" will be equal to the total
assets less the total liabilities set forth on the balance sheet finally
determined in accordance with this Section 1.6 (the "Closing Date Balance
Sheet"). The Closing Date Balance Sheet shall be prepared in accordance with
U.S. generally accepted accounting principles ("GAAP") applied on a basis
otherwise consistent with the accounting principles used in preparation of the
December 31, 1997 and March 31, 1998 balance sheets delivered pursuant to
Section 2.4 hereof and in all respects as if the Closing Date were the end of a
fiscal year. Future payments by Parent or any subsidiary thereof under any
non-competition or "earn-out" agreements included in the Assets and Assumed
Liabilities shall be deemed liabilities for purposes of this Section 1.6 and the
present value (using a 7% discount rate) of such payments shall be so reflected
on the Closing Date Balance Sheet. The provisions set forth in Schedule 1.6(f)
shall
5
<PAGE> 11
govern the preparation of the Closing Date Balance Sheet and the review thereof.
Parent, Seller Parent, KPMG Peat Marwick LLP ("KPMG") and Price Waterhouse
Coopers LLP ("PWC") shall promptly meet, and during the preparation of the
Closing Date Balance Sheet and review thereof shall continue to meet, to discuss
such Closing Date Balance Sheet, and any additions or other modifications to
such Schedule. Any dispute shall be resolved by the Reviewing Accountants.
Section 1.7 Allocation of the Purchase Price. On or prior to the
Closing Date, Seller Parent and the Purchaser shall mutually agree on an
allocation of the Purchase Price and the amount of the Assumed Liabilities (and
all other capitalizable costs) among the Assets (on both a consolidated and
state by state basis) and other relevant items in accordance with Section 1060
of the Code (as defined below) and the regulations promulgated thereunder and
all applicable provisions of state, local and foreign law (such allocations, the
"Section 1060 Allocations"). If Seller Parent and the Purchaser are unable to
agree with respect to the Section 1060 Allocations, Seller Parent and the
Purchaser shall engage the Reviewing Accountants to determine such allocations.
The conclusions of the Reviewing Accountants shall be binding on the parties.
The fees and expenses of the Reviewing Accountants shall be shared equally by
Seller Parent and the Purchaser. Each of the parties hereto agrees (i) to
prepare and file Tax Returns (as defined below), including Form 8594, in a
manner consistent with the Section 1060 Allocations, as finally determined
pursuant to this Section 1.7, (ii) to report this transaction for federal,
state, local and foreign income tax purposes in accordance with the Section 1060
Allocations, as finally determined pursuant to this Section 1.7, and (iii) to
use its best efforts to sustain the Section 1060 Allocations, as finally
determined pursuant to this Section 1.7, in any subsequent tax audit or dispute.
Section 1.8 Changes in Facilities. The Sellers shall pay the
Purchaser an amount equal to the diminution in value to the Business resulting
from:
(a) the extent to which the rights assigned by Sellers to
Purchasers at the Closing under contracts pursuant to which Seller Parent, or
any subsidiary or affiliate, provides products or services to any Facility
relates to a number of pharmacy beds which is less than 47,553,
(b) any Facility ceasing to be a Seller Facility within 18
months following the Closing, or
(c) prior to the 18th month following the Closing, there
being an event or fact which has had or is reasonably likely to have a material
adverse effect on the Business with respect to Seller Facilities for a reason
unrelated to (i) the management of the Business by Parent or its subsidiaries or
affiliates, (ii) any natural disasters or (iii) any "Changes in Law." As used in
this paragraph, "Change in Law" shall mean a change, after the date hereof, in
federal or state laws, regulations or programs pertaining to the provision of
services to residents of Facilities, or with respect to payment therefor,
excluding (x) any changes relating
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to or resulting from the Balanced Budget Act of 1997 (to include the Medicare
Prospective Payment System for skilled nursing facilities contained therein),
including any implementing regulations proposed or adopted after the date
hereof, and (y) changes in the Seller Facilities' pharmacy, infusion,
respiratory or medical supply usage resulting from changes in clause (x).
(d) As used herein, (i) "Facilities" shall mean all
healthcare facilities, including nursing homes, assisted living facilities and
independent living facilities, which are now or hereafter provided products or
services by the Business under contract and (ii) "Seller Facilities" shall mean
all Facilities now or hereafter owned, operated or leased by Seller Parent or
any subsidiary or affiliate.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE SELLER ENTITIES
The Seller Entities, jointly and severally, represent and warrant to
the Purchasers as follows, except as set forth in the disclosure schedule being
delivered by the Seller Entities to the Purchaser concurrently herewith (the
"Disclosure Schedule") (which Disclosure Schedule identifies the section or
subsection of this Agreement to which each entry relates):
Section 2.1 Organization. Each Seller Entity (x) is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and (y) has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
(including the Business) as now being conducted. Neither the Assets nor the
Assumed Liabilities include any securities of any person.
Section 2.2 Authority Relative to this Agreement. Each Seller Entity
has full corporate power and authority to execute and deliver this Agreement and
to consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement by each Seller Entity and the consummation by each
Seller Entity of the transactions contemplated by this Agreement have been duly
and validly authorized by the Boards of Directors of each Seller Entity, and by
Seller Parent as the sole stockholder of each of the Sellers, and no other
corporate proceedings on the part of any Seller Entity are necessary to
authorize this Agreement and to consummate the transactions contemplated by this
Agreement. This Agreement has been duly and validly executed and delivered by
each Seller Entity and constitutes the valid and binding obligation of each
Seller Entity, enforceable against each Seller Entity in accordance with its
terms.
Section 2.3 Consents and Approvals; No Violations. Except for the
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), no filing with, and no permit, authorization,
consent or approval of any federal, state, local, municipal or foreign or other
government or governmental agency or body ("Governmental Entity") or any third
party, is necessary for the consummation by any Seller
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Entity of the transactions contemplated by this Agreement. Neither the execution
and delivery of this Agreement by any Seller Entity nor the consummation by any
Seller Entity of the transactions contemplated by this Agreement nor compliance
by any Seller Entity with any of the provisions hereof will (i) conflict with or
result in any breach of any provision of the certificate of incorporation or
by-laws of any Seller Entity, (ii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, modification, cancellation or
acceleration or loss of material benefits) under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, contract, agreement,
permit, license, lease, purchase order, sales order, arrangement or other
commitment or obligation to which any Seller Entity is a party or may be subject
or which is included in the Assets or the Assumed Liabilities or (iii) violate
any order, writ, injunction, decree, statute, treaty, rule or regulation
applicable to any Seller Entity, the Assets or the Assumed Liabilities, except
in the case of (ii) or (iii), for violations, breaches or defaults which would
not (x) in the aggregate, have or would be reasonably likely to have a material
adverse effect on the business, operations, assets, liabilities, financial
condition or results of operations of the Business, Assets or Assumed
Liabilities or (y) prevent or significantly delay the consummation of the
transactions contemplated hereby (in either case, a "Material Adverse Effect").
Section 2.4 Financial Statements.
(a) Section 2.4(a) of the Disclosure Schedule sets forth the
unaudited balance sheets and unaudited statements of income of the Business as
of and for the year ended December 31, 1997 and the three months ended March 31,
1998, and an unaudited statement of cash flows for the three months ended March
31, 1998 (collectively, the "Financial Statements").
(b) Each of the balance sheets (including the related notes)
included in the Financial Statements fairly presents, in all material respects,
the financial position of the Business as of the respective dates thereof and
the statements of income and cash flow (including the related notes) included in
the Financial Statements fairly present the results of operations of the
Business for the respective periods then ended. Each of the Financial Statements
has been (i) prepared in accordance with GAAP consistently applied during the
periods involved, except as otherwise noted therein or, with respect to the
year-end Financial Statements, in the notes thereto and (ii) prepared in
accordance with the books and records of the Sellers.
Section 2.5 Absence of Certain Changes. Since December 31, 1997, (a)
the Business has operated in the ordinary course of business , (b) no Seller
Entity has taken, or agreed to take, any of the actions set forth in Section 4.1
hereof and (c) the Business has not suffered a Material Adverse Effect.
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Section 2.6 No Default. There exists no default or violation (and no
event has occurred which with notice or lapse of time would constitute a default
or violation or loss of material benefits) by any Seller Entity or, to the
knowledge of the Seller Entities, any other party thereto, of any term,
condition or provision of (i) any note, bond, mortgage, indenture, contract,
agreement, permit, license, lease, purchase order, sales order, arrangement or
other commitment or obligation to which any Seller Entity is a party or may be
subject or which is included in the Assets or the Assumed Liabilities or (ii)
any order, writ, injunction, decree, statute, treaty, rule or regulation
applicable to any of the Assets or the Assumed Liabilities, except for
violations or defaults which would not, in the aggregate, have a Material
Adverse Effect.
Section 2.7 Litigation. There is no claim, action, suit, proceeding,
opposition, challenge, cancellation proceeding, charge or investigation
(collectively, a "Proceeding") pending or, to the knowledge of the Seller
Entities, threatened, regarding the Business, Assets or Assumed Liabilities.
There are no outstanding orders, writs, judgments, injunctions, decrees or
settlements that apply, in whole or in part, to the Business, Assets or Assumed
Liabilities that restrict the Business, Assets or Assumed Liabilities in any
material respect.
Section 2.8 Permits; Compliance with Applicable Law.
(a) The Sellers possess all permits, licenses, variances,
exemptions, orders, approvals and authorizations of all Governmental Entities
necessary for the lawful conduct of the Business, including, without limitation,
all provider agreements and other authorizations necessary for the Business to
obtain reimbursement under the Medicare program, each state Medicaid program and
all other governmental reimbursement programs under which the Business has
obtained reimbursement since January 1, 1997 (the "Permits"). All of such
Permits which are material, including all Permits to provide pharmacy services,
are set forth in Section 2.8(a) of the Disclosure Schedule, and those, if any,
included in the Assets are appropriately identified as being purchased by the
Purchaser, but only to the extent Sellers may convey the same. All such Permits
have been legally obtained and maintained and are in full force and effect. The
Sellers are duly licensed to provide pharmacy services in all states in which
the Business is conducted and are in substantial compliance with the terms of
such licenses.
(b) Except to the extent failure to be in compliance would
not have a Material Adverse Effect, the Business is being and has been conducted
in compliance with all Permits, orders, writs, judgments, injunctions, decrees
and settlements and applicable laws, ordinances, codes, rules, regulations and
policies of any Governmental Entity (collectively, the "Applicable Laws").
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Section 2.9 Taxes.
(a) Each of the Seller Entities has duly and timely filed,
or had Seller Parent file on its behalf (and, with respect to Tax Returns (as
defined below) due after the date hereof and prior to the Closing Date, will
duly and timely file or have Seller Parent file on its behalf), with the
appropriate federal, state, local and foreign taxing authorities all Tax Returns
required to be filed by or with respect to each member of the Group. All such
Tax Returns were (and, as to Tax Returns not filed as of the date hereof, will
be) true, correct and complete in all material respects as of the time of
filing. Seller Parent and each member of the Group has paid (and, until the
Closing Date, will pay) in full on a timely basis all Taxes (as defined below)
due. The balance for accrued Taxes on the March 31, 1998 balance sheet referred
to in Section 2.4 for the payment of accrued but unpaid Taxes through the date
thereof is correct and the amount of the Seller Entities' liability for unpaid
Taxes shall not exceed such balance for accrued but unpaid Taxes of the Seller
Entities. All monies which each member of the Group was required by Applicable
Laws to withhold from employee wages have been withheld (and, until the Closing
Date, will be withheld) and either timely paid to the proper governmental
authority or set aside in accounts for such purposes and accrued on the books of
the Group or member, as the case may be.
(b) Each of the Seller Entities is a domestic corporation
for U.S. federal income Tax purposes, within the meaning of Sections 7701(a)(3)
and (4) of the Code.
(c) Except as set forth on Schedule 2.9, (i) none of the
members of the Group has received any notice of a deficiency or assessment with
respect to Taxes for which any of the Seller Entities could be liable from any
taxing authority which has not been fully paid or finally settled, except to the
extent any such deficiency or assessment is being contested in good faith
through appropriate proceedings; (ii) there are no ongoing audits or
examinations of any Tax Return relating to the Group or any member thereof for
which any of the Seller Entities could be liable and no notice (oral or written)
of audit or examination of any such Tax Return has been received by any member
of the Group; (iii) none of the Seller Entities has given nor has there been
given on its behalf a waiver or extension of any statute of limitations relating
to the payment of Taxes for any year; (iv) no issue has been raised (either in
writing or orally, formally or informally) on audit or in any other proceeding
(and is currently pending) with respect to Taxes of the Group or any member
thereof for which any of the Seller Entities could be liable by any taxing
authority.
(d) None of the Sellers is a party to any tax sharing
agreement and has not assumed the liability of any other person with respect to
Taxes under law or contract.
(e) None of the Assets is or could be treated as an equity
interest in a corporation (or an entity treated as a corporation for U.S.
federal income Tax purposes), an interest in a partnership (or an entity treated
as a partnership for U.S. federal income Tax
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purposes), or any interest in an entity (e.g., a corporation or trust) for U.S.
federal income Tax purposes.
(f) There are no security interests on any of the Assets
that arose in connection with any failure (or alleged failure) to pay any Taxes
and, except for liens for real and personal property Taxes that are not yet due
and payable, there are no liens for any Tax upon any Asset.
(g) For purposes of this Section 2.9, the following terms
shall have the meaning given to them below:
(i) "Group" means, individually and collectively, (i)
Seller Parent, (ii) the subsidiaries included in the affiliated group of which
Seller Parent is the common parent within the meaning of Section 1504 of the
Internal Revenue Code of 1986, as amended (the "Code"), (iii) the Sellers and
(iv) any individual, trust, corporation, partnership or any other entity as to
which any of the Sellers are liable for Taxes incurred by such individual or
entity either as a transferee or successor, or pursuant to Treasury Regulation
Sections .1.1502-6, or pursuant to any other Law.
(ii) "Tax" means any of the Taxes, and "Taxes" means,
with respect to the Group, (i) all income taxes (including any tax on or based
upon net income, or gross income, or income as specially defined, or earnings,
or profits, or selected items of income, earnings, or profits) and all gross
receipts, estimated, sales, use, ad valorem, transfer, franchise, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, environmental (including taxes under Code Section
59A), alternative, add-on minimum, custom duties, capital stock, social security
(or similar), unemployment, disability, or other taxes, fees, assessments, or
charges of any kind whatsoever, together with any interest, penalty, or addition
thereto, whether disputed or not, imposed by any taxing authority on the Group
or any member thereof, and (ii) any liability for payment of any amount of the
Tax described in the immediately preceding clause (i) as a result of being a
"transferee" (within the meaning of Code Section 6901 or any other applicable
law) of another person or successor, by contract, or otherwise, or a member of
an affiliated, consolidated, or combined group.
(iii) "Tax Return" means any return, declaration,
report, claim or refund, or information return or statement or other document
(including any related or supporting information) filed or required to be filed
with any appropriate federal, state, local or foreign governmental entity or
authority (individually or collectively, "taxing authority") or other authority
in connection with the determination, assessment or collection of any Tax paid
or payable by the Group or the administration of any Laws, regulations, or
administrative requirements relating to any such Tax.
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Section 2.10 Intellectual Property. The Assets include all U.S. and
foreign, registered and unregistered, patents, trademarks, trade names,
copyrights, technology (including software), trade secrets, know-how,
inventions, data, processes and other intellectual property rights
(collectively, "Intellectual Property Rights") material to the conduct of the
Business. No claims are pending by any person as to the use of any Intellectual
Property Rights in the Business and, to the best knowledge of each Seller
Entity, the use by the Seller Entities of all Intellectual Property Rights does
not infringe on the rights of any person and there is no basis for any such
claim. To the best knowledge of each Seller Entity, no third person is
infringing on the Intellectual Property Rights. The Intellectual Property Rights
are owned exclusively by the Seller Entities and not subject to any licenses or
other encumbrances. The Seller Entities have taken and, prior to Closing will
continue to take, all measures reasonably necessary to preserve and protect the
Intellectual Property Rights. Section 2.10 of the Disclosure Schedule sets forth
a list of all material Intellectual Property Rights included in the Assets.
Section 2.11 Transactions with Affiliates. As directly related to the
Business, there are no outstanding liabilities or obligations for amounts owing
to or from, or contracts and, within the past year there have been no
transactions, between Seller Parent or its stockholder, directors, officers,
employees or other affiliates (other than the Sellers) on the one hand, and the
Sellers, the Business, the Assets or the Assumed Liabilities, on the other hand,
other than the contracts included in the Assets and the Assumed Liabilities and
other than the provision of pharmacy services in the ordinary course of
business.
Section 2.12 Contracts.
(a) Section 2.12 of the Disclosure Schedule sets forth a
complete and accurate list of all contracts included in the Assets or the
Assumed Liabilities, other than contracts which involve the payment of less than
$100,000 per year and which are not otherwise material to the Business.
(b) Each contract included in the Assets or the Assumed
Liabilities, (i) is legal, valid, binding and enforceable against the applicable
Seller Entity, and to the Seller Entities' knowledge, against each other party
thereto, is in full force and effect and, subject to obtaining all requisite
consents to assignment from the other parties (which are listed in Section
2.12(b) of the Disclosure Schedule) will continue to be so legal, valid,
binding, enforceable and in full force and effect following the Closing and (ii)
neither the applicable Seller Entity, nor to the Seller Entities' knowledge, any
other party, is in breach or default, and no event has occurred which would
constitute (with or without notice or lapse of time or both) a breach or default
(or give rise to any right of termination, modification, cancellation or
acceleration) or loss of material benefits under any such contract, except in
the case of (i) and (ii) above for lack of binding effect, enforceability,
violations, breaches or defaults which would not, individually or in the
aggregate, have a Material Adverse Effect.
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(c) The Seller Entities have delivered or made available for
review by Parent true and complete copies of each contract listed on Section
2.12 of the Disclosure Schedule. Since the Balance Sheet Date, there has been no
material modification, breach or termination of any such contract nor, to the
Seller Entities' knowledge, is any such modification, breach or termination
contemplated.
Section 2.13 Labor Relations.
(a) There is no unfair labor practice, charge or complaint
or other proceeding pending or, to the knowledge of each Seller Entity,
threatened, against any of the Assets or the Sellers or relating to the Business
before the National Labor Relations Board or any other Governmental Entity.
(b) There is no labor strike, slowdown or stoppage pending
or, to the knowledge of the Sellers, threatened, against or affecting the
Business, nor has there been any such activity within the past two years
affecting the Business.
(c) There are no pending collective bargaining negotiations
relating to the employees of any of the Sellers.
(d) (i) there are no agreements with, or pending petitions
for recognition of, a labor union or association as the exclusive bargaining
agent for any or all of the employees of any of the Seller Entities, (ii) no
such petitions have been pending within the past five years and (iii) to the
best knowledge of each Seller Entity, there has not been any general
solicitation of representation cards by any union seeking to represent the
employees of any of the Seller Entities as their exclusive bargaining agent at
any time within the past five years.
Section 2.14 Environmental.
(a) Except to the extent that any of the following,
individually or in the aggregate, could not result in any Damages (as defined in
Section 7.2(a) hereof) to any of the Seller Entities, the Assets or the
Business, individually or in the aggregate, of a value greater than $50,000: (i)
the Sellers, Seller Parent (in connection with the Business), the Assets and the
Business comply and at all times have complied with all applicable Environmental
Laws (as defined below), (ii) no Hazardous Substances (as defined below) are
present at or have been disposed on or released or discharged from, onto or
under any of the properties currently owned, leased, operated or otherwise used
by the Sellers (including soils, groundwater, surface water, buildings or other
structures) or Seller Parent (in connection with the Business), (iii) no
Hazardous Substances were present at or disposed on or released or discharged
from, onto or under any of the properties formerly owned, leased, operated or
otherwise used by the Sellers, Seller Parent (in connection with the Business)
or the Business during the period of ownership, lease, operation or use by any
of the Sellers, Seller Parent (in connection with the Business) or the Business,
(iv) none of the Sellers, Seller Parent (in connection with the
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Business), the Assets or the Business are subject to any liability or obligation
in connection with Hazardous Substances present at any location owned, leased,
operated or otherwise used by any third party, (v) none of the Seller Entities
or the Business has received any notice, demand, letter, claim or request for
information alleging that any of the Sellers, Seller Parent (in connection with
the Business), the Assets or the Business is or may be in violation of or liable
under any Environmental Law, (vi) none of the Sellers, Seller Parent (in
connection with the Business), any of the Assets or the Business is subject to
any order, decree, injunction or other directive of any governmental authority
and none of the Sellers, Seller Parent (in connection with the Business), the
Assets or the Business is subject to any indemnity or other agreement with any
person or entity relating to Hazardous Substances and (vii) there are no
circumstances or conditions involving any of the Seller Entities, any of the
Assets or the Business, any assets (including real property) or businesses
previously owned, leased, operated or otherwise used by any of the Seller
Entities, or any of the assets (including real property) or businesses of any
predecessors of any of the Seller Entities that could reasonably be expected to
result in any Damages to any of the Sellers, Seller Parent (in connection with
the Business), any of the Assets or the Business arising under or pursuant to
Environmental Law or in any restriction on the ownership, use or transfer of any
of the Assets arising under or pursuant to any Environmental Law.
(b) As used herein, the term "Environmental Law" means any
international, national, provincial, regional, federal, state, municipal or
local law, regulation, order, judgement, decree, permit, authorization, opinion,
common or decisional law (including, without limitation, principles of
negligence and strict liability) or agency requirement currently in effect
relating to the protection, investigation or restoration of the environment
(including, without limitation, natural resources) or the health or safety of
human or other living organisms, including, without limitation, the manufacture,
introduction into commerce, export, import, handling, use, presence, disposal,
release or threatened release of any Hazardous Substance or noise, odor,
wetlands, pollution, contamination or any injury or threat of injury to persons
or property.
(c) As used herein, the term "Hazardous Substance" means any
element, compound, substance or other material (including any pollutant,
contaminant, hazardous waste, hazardous substance, chemical substance, or
product) that is listed, classified or regulated pursuant to any Environmental
Law currently in effect, including, without limitation, any petroleum product,
by-product or additive, asbestos, presumed asbestos-containing material,
asbestos-containing material, medical waste, chloroflourocarbon, hydro
chloroflourocarbon, lead-containing paint or plumbing, polychlorinated
biphenyls, radioactive material or radon.
Section 2.15 Assets Used in the Business. The Assets constitute all
of the assets, properties and rights used in the conduct of the Business, other
than the Excluded Assets. The Sellers are the sole owners of the Assets and
Assumed Liabilities. Immediately following the Closing, no Seller Entity (or any
subsidiary thereof) will own or lease any assets, properties or
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rights which are used in or are necessary for the conduct of the Business, other
than the Excluded Assets.
Section 2.16 Title to Assets. The Sellers have good, valid and
marketable title to the Assets, free and clear of any lien, security interest,
pledge, claim, restriction on transferability, option, charge or encumbrance of
any nature whatsoever ("Liens") other than Permitted Liens (as defined below).
At the Closing, the Sellers will deliver the Assets free and clear of any Liens
other than Permitted Liens.
"Permitted Liens" means (i) Liens for current taxes not yet due
and payable or (ii) Liens arising or incurred in the ordinary course of business
, which, individually or in the aggregate, are not substantial in amount, do not
materially detract from the value of or materially interfere with the present
use of any of the assets subject thereto or materially impair the conduct of the
Business.
Section 2.17 Insurance. During the past five years, no insurance
policy covering the Business has been revoked, cancelled or limited by the
provider of the insurance, and, to the knowledge of the Sellers, no provider of
insurance has threatened to revoke, cancel or limit any such policy.
Section 2.18 Inventory. At the Closing, the inventory included in the
Assets (the "Inventory"), will be items of a quality usable or saleable by the
Business in the ordinary course of business , except for dated or defective
materials (including raw materials, work-in-process and finished goods), which
will be written down or reserved against on the Closing Date Balance Sheet in
accordance with GAAP and the past practices of the Seller Entities. The
Inventory delivered at the Closing will be of a quantity and quality that is
reasonable and warranted in the circumstances of the Business. Notwithstanding
anything herein to the contrary, inventory shall be accounted for on a "first
in, first out" basis, and not on a "last in, first out" basis.
Section 2.19 Accounts Receivable. All accounts receivable, notes
receivable and other indebtedness included in the Assets (the "Accounts
Receivable") will represent sales actually made or services actually delivered
in the ordinary course of business . Except to the extent reserved against on
the Closing Date Balance Sheet, the Seller Entities know of no reason why such
Account Receivable would not be collectible in the ordinary course of business.
Reserves for bad debt shall be made in accordance with GAAP and the past
practices of Seller.
Section 2.20 Product Returns and Warranties. There are no liabilities
for product returns other than those arising in the ordinary course of business
. To the best knowledge of the Seller Entities, there are no threatened claims
for (i) product returns, (ii) warranty obligations or (iii) product services
other than in the ordinary course of business and such as have been adequately
reserved against on the Seller's books and records. No Seller Entity has
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made any express warranties with respect to products sold or distributed by the
Seller Entities (other than passing on warranties made by the manufacturers
thereof) and, to the knowledge of the Seller Entities, no other warranties have
been made by their respective officers, directors, employees, consultants or
agents (collectively, the "Personnel"). No Seller Entity has any knowledge of
any presently existing circumstances that would constitute a valid basis for any
voluntary or governmental recall of any pharmaceutical or other product sold or
distributed by any Seller Entity in the course of or that relates to the
Business.
Section 2.21 Customers; Suppliers.
(a) Section 2.21 of the Disclosure Schedule contains a true
and correct summary of all nursing homes and other facilities, including
assisted living or independent living, and the approximate number of licensed
beds in those facilities which are provided products and services by the
Business under contract, and, except as set forth in Section 2.21 of the
Disclosure Schedule, during the quarter ended March 31, 1998, not more than 5%
of the revenues of the Business during such period was attributable to patients
serviced in a single nursing home company or other company or any group of
affiliated companies. Section 2.21 of the Disclosure Schedule sets forth a
complete list of all nursing home companies (including affiliated companies)
known to a Seller Entity to own or control more than 5% of the beds serviced by
the Business and all nursing home companies, other companies and related groups
or entities from which the Business derives directly or indirectly more than 5%
of its revenues. No Seller Entity has received any notice that any party intends
to cancel any contract or materially reduce the level of business it conducts
with Business.
(b) With respect to any of the contracts applicable to the
provision of pharmacy services by the Seller Entities to Seller Facilities, the
Seller Entities represent and warrant as follows:
(i) Seller Parent makes no representation in this
Section 2.21(b) regarding whether pharmacy services provided by the Seller
Entities pursuant to contracts are in compliance with applicable laws and
regulations. Notwithstanding the foregoing, Seller Parent agrees and
acknowledges that (x) any liabilities which might arise as a result of such
contracts with Seller Facilities or (y) any liabilities which might arise from
the operation of the Business prior to Closing as a result of such contracts
with facilities other than Seller Facilities, in either case, not complying with
such laws and regulations, including disallowances under prudent buyer or
related party principles, shall be Excluded Liabilities and accordingly shall
remain the obligation and responsibility of Seller Parent;
(ii) No Seller Facility intends to reduce materially
the level of business which it does with the Business after the Assets and the
Business are acquired by Purchaser; and
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(iii) No actions are contemplated by Seller Parent or
any subsidiary or affiliate to sell, transfer or otherwise dispose of any
Facility (or Assets thereof) under contract with a Seller Entity. Neither Seller
Parent nor any of its subsidiaries or affiliates have executed a purchase and
sale agreement or letter of intent to sell, transfer or otherwise dispose of any
owned or leased Facility (or Assets thereof).
(iv) Notwithstanding the intentions of Seller Parent
and any subsidiary of Affiliate expressed in subsections (ii) and (iii) of this
Section 2.21(b), the parties ac knowledge that neither such intentions nor this
Agreement is intended to place any obligations or restrictions on the Seller
Entities or the Facilities which would result in a violation of any Healthcare
Law.
Section 2.22 Absence of Certain Business Practices. No Seller Entity,
nor any director, officer, employee or agent of any Seller Entity, nor any other
person acting on behalf of the Business, directly or indirectly, has to the
Seller Entities' knowledge given or agreed to give any gift or similar benefit
to any customer, supplier, governmental employee or other person which (i) could
reasonably be expected to subject the Business, Assets or Assumed Liabilities to
any damage or penalty in any civil, criminal or governmental litigation or
proceeding (ii) if not given in the past, might have had a Material Adverse
Effect, or (iii) if not continued in the future, might have a Material Adverse
Effect or which might subject a Seller Entity to suit or penalty in any private
or governmental litigation or proceeding.
Section 2.23 Certain Healthcare Legal Matters. With respect to the
Business, the Assets or the Assumed Liabilities:
(a) The Seller Entities and all of their Personnel have
complied in all material respects with all applicable statutes, regulations,
rules, orders, ordinances and other laws of any Governmental Entity to which it
is subject with respect to healthcare regulatory matters (including, without
limitation, The Social Security Act, as amended, Sections 1128, 1128A and 1128B,
42 U.S.C. Sections 1320a-7, 7(a) and 7(b) including Criminal Penalties Involving
Medicare or State Health Care Programs, commonly referred to as the "Federal
Anti-Kickback Statute" and The Social Security Act, as amended, Section 1877, 42
U.S.C. Section 1395nn (Prohibition Against Certain Referrals), commonly referred
to as the "Stark Statute", the statute commonly referred to as the "Federal
False Claims Act" and all statutes and regulations related to the possession,
distribution, maintenance and documentation of controlled substances)
("Healthcare Laws"). The Seller Entities have maintained all records required to
be maintained by the FDA, DEA and State Board of Pharmacy and the Medicare and
Medicaid programs as required by applicable Healthcare Laws. There are no
presently existing circumstances which would result or would be likely to result
in violations of any such Healthcare Laws.
(b) The Seller Entities hold all permits necessary for the
lawful conduct of their business under and pursuant to all applicable statutes,
laws, ordinances, rules and
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regulations of all Governmental Entities having, asserting or claiming
jurisdiction over it or any part of their operations.
(c) The Seller Entities are qualified for participation in
the Medicare and Medicaid programs. None of the Seller Entities has received any
notice indicating that such qualification may be terminated or withdrawn and
have no reason to believe that such qualification may be terminated or
withdrawn. The Seller Entities have timely filed all claims or other reports
required to be filed with respect to the purchase of products or services by
third-party payors (including Medicare and Medicaid), and all such claims or
reports are complete and accurate in all material respects except where the
failure to file such claims and reports would not result in a Material Adverse
Effect. The Seller Entities have no liability to any payor with respect thereto,
except for liabilities incurred in the ordinary course of business. There are no
pending appeals, overpayment determinations, adjustments, challenges, audit,
litigation or notices of intent to open Medicare or Medicaid claim
determinations or other reports required to be filed by the Seller Entities.
(d) To the best of the Seller Entities' knowledge, no
Personnel have been convicted of, charged with, or investigated for a Medicare,
Medicaid or other Federal Health Care Program (as defined in 42 U.S.C. Sections
1320a-7b(f)) related offense, or convicted of, charged with, or investigated for
a violation of federal or state law related to fraud, theft, em bezzlement,
breach of fiduciary responsibility, financial misconduct, obstruction of an
investigation, or controlled substances. To the best knowledge of the Seller
Entities, no Personnel have been excluded or suspended from participation in
Medicare, Medicaid or any other Federal Health Care Program, or have been
debarred, suspended or are otherwise ineligible to participate in federal
programs. To the best of the Seller Entities' knowledge, no Personnel have
committed any offense which my reasonably serve as the basis for any such
exclusion, suspension, debarment or other ineligibility. To the best knowledge
of the Seller Entities, no Seller Entity has arranged or contracted with any
individual or entity that such Seller Entity knows or should know is suspended,
excluded or debarred from participation in, or otherwise ineligible to
participate in, a Federal Health Care Program or other federal program.
(e) There are no pharmaceutical or other products now being
sold or distributed by the Seller Entities which, at the date hereof, would
require any approval of any governmental or administrative body, whether
federal, state, local or foreign, prior to commercial distribution of such
products, for which approval has not been obtained. All pharmaceutical or other
products now being distributed by the Seller Entities and all products included
in the inventories of the Seller Entities on the date hereof comply with
applicable legal requirements of all jurisdictions in which such pharmaceutical
or other products are now being distributed.
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Section 2.24 Real Property. Section 2.24 of the Disclosure Schedule
sets forth the location and a description of the owned or leased real property
included in the Assets or Assumed Liabilities and the general nature of the
facilities located on the properties.
Section 2.25 Purchasing Contracts. No provision, including of any
law, rule, regulation or to the knowledge of Seller Parent, any contract,
arrangement, understanding or other item which binds the Business or is included
in the Assets or Assumed Liabilities, prevents or will prevent the Business from
changing its purchasing contracts or arrangements with wholesalers to such new
contracts and arrangements as Parent or the Purchaser may specify.
Section 2.26 Employee Benefits. Section 2.26 of the Disclosure
Schedule lists or summarizes all (i) employee benefit and severance plans,
practices, programs or arrangements maintained by Seller Entities in which
Seller Employees (as defined below) are eligible to participate and (ii)
employment, consulting and non-compete contracts, agreements or arrangements
between any Seller Entity and any Seller Employee. No Seller Entity is a party
to any contract, agreement, plan or arrangement that, individually or in the
aggregate, or when taken together with any payment that may be made under this
Agreement or any agreements contemplated hereby, could give rise to the payment
of any "excess parachute payment" within the meaning of Section 280G of the
Code.
Section 2.27 Purchase Price. The transactions contemplated hereby
will not constitute, and Seller Parent will take such actions as are necessary
to ensure that they will not constitute, fraudulent transfers as to any Seller
under applicable federal or state law.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND PARENT
The Purchaser and Parent, jointly and severally, represent and warrant
to the Seller Entities as follows:
Section 3.1 Organization. Each of the Parent and the Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate power
and authority to own, lease and operate its properties and to conduct its
business as now being conducted.
Section 3.2 Authority Relative to this Agreement. Each of the Parent
and the Purchaser has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by each of Parent and
the Purchaser and the consummation by each of Parent and the Purchaser of the
transactions contemplated by this Agreement have been duly and validly
authorized by the Board of Directors of each of Parent and the Purchaser and no
other corporate proceedings on the part of the Parent and the Purchaser are
necessary to
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authorize this Agreement or to consummate the transactions contemplated by this
Agreement. This Agreement has been duly and validly executed and delivered by
each of Parent and the Purchaser and constitutes the valid and binding agreement
of Parent and the Purchaser, enforceable against Parent and the Purchaser in
accordance with its terms.
Section 3.3 Consents and Approvals; No Violations. Except for the
applicable requirements of the HSR Act, no filing with, and no permit,
authorization, consent or approval of any Governmental Entity or any third party
is necessary for the consummation by Parent and the Purchaser of the
transactions contemplated by this Agreement. Neither the execution and delivery
of this Agreement by Parent and the Purchaser nor the consummation by Parent and
the Purchaser of the transactions contemplated by this Agreement nor compliance
by Parent and the Purchaser with any of the provisions hereof will (i) conflict
with or result in any breach of any provision of the certificates of
incorporation or by-laws of Parent and the Purchaser, (ii) result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration or loss of material benefits) under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, contract, agreement,
permit, license, lease, purchase order, sales order, arrangement or other
commitment or obligation to Parent and the Purchaser are a party or by which
Parent and the Purchaser or any of their respective properties or assets may be
bound or (iii) violate any order, writ, injunction, decree, statute, treaty,
rule or regulation (including, without limitation, Healthcare Laws) applicable
to Parent and the Purchaser, or any of their properties or assets, except in the
case of (ii) or (iii) for violations, breaches or defaults which would not, in
the aggregate, prevent or delay the consummation of the transactions
contemplated by this Agreement.
Section 3.4 Funds. Parent and the Purchaser have, or at the
Closing will have, sufficient funds to consummate the transactions contemplated
by Article I hereto.
ARTICLE 4
COVENANTS
Section 4.1 Conduct of the Business. During the period from the date
hereof to the Closing, except as otherwise expressly provided in this Agreement,
the Seller Entities shall operate the Business only in the ordinary course of
business . The Seller Entities shall use their respective reasonable best
efforts to preserve intact the present organization of the Business, keep
available the services of the present officers and employees of the Business and
preserve relationships with customers, suppliers, licensors, licensees,
contractors, distributors and others having business dealings with the Business.
Without limiting the generality of the foregoing, from the date of this
Agreement to the Closing, the Seller Entities shall not, without the prior
written consent of Parent, to the extent related to the Business:
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(a) sell, lease, encumber, transfer or dispose of any assets
or rights or acquire any assets or rights which would be included in the Assets,
unless in the ordinary course of business, or pursuant to the capital
expenditure plan described in Section 4.1(a) of the Disclosure Schedule, or
except for the acquisition from Metrovision of North America, Inc. of the 40%
minority interest in York Hannover Partnership, a Wisconsin general partnership;
(b) engage in any sales of a product (i) with payment terms
longer than terms customarily offered by each of the Seller Entities for such
product, (ii) at a greater discount from listed prices than customarily offered
for such product, other than pursuant to a promotion of a nature previously used
in the normal course of business of each of the Seller Entities for such
product, (iii) at a price which does not give effect to any previously announced
general increase in the list price for such product, (iv) with shipment terms
more favorable to the customer than shipment terms customarily offered by each
of the Seller Entities for such product, (v) in a quantity greater than the
reasonable retail or wholesale (as the case may be) resale requirement of the
particular customer or (vi) in conjunction with other benefits to the customer
not in the ordinary course of business with such customer;
(c) collect any accounts receivables or fail to pay any
accounts payable, other than in the ordinary course of business ;
(d) enter into any material commitment or transaction unless
in the ordinary course of business ;
(e) permit any Asset to suffer any Lien thereupon, other
than Permitted Liens;
(f) change (or permit to be changed) any accounting (other
than with respect to inventory accounting as described in Section 2.18) or Tax
procedure or practice or its financial structure or make (or permit to be made)
any Tax election or settle or compromise any liability for Taxes;
(g) enter into, adopt, amend or terminate any employee
benefit plan, increase in any manner the compensation or benefits of any officer
or employee or pay any benefit not required by any existing employee benefit
plan, or enter into any contract, agreement, commitment or arrangement to do any
of the foregoing, except to the extent bound by applicable law and except for
normal merit and seniority raises and discretionary bonuses in the aggregate not
to exceed $10,000 to any individual, granted in the ordinary course of business
consistent with past practices;
(h) enter into or offer to enter into any employment or
consulting agreement with any person outside the ordinary course of business,
unless terminable at will by the employing Seller Entity;
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(i) make any capital expenditures outside the ordinary
course of business, except for those included in the capital expenditure plan
described in Section 4.1(a) of the Disclosure Schedule;
(j) enter into, amend or terminate any material contract,
except in the ordinary course of business;
(k) enter into any transaction or any contract with any
affiliate, other than transactions on arm's-length terms in the ordinary course;
or
(l) authorize, or commit or agree to take, any of the
foregoing actions.
Section 4.2 Access to Information. The Seller Entities shall afford
to officers, employees, accountants, counsel and other representatives of Parent
and the Purchaser reasonable access to all of the properties, personnel, books
and records of the Seller Entities relating to the Business, and the Seller
Entities shall furnish promptly to the Parent and the Purchaser all information
within the Sellers' control or possession concerning the business, properties
and personnel of the Business as Parent and the Purchaser may reasonably
request. All such information shall be kept confidential in accordance with the
terms of the Confidentiality Agreement, dated as of May 4, 1998, between Parent
and Bear Stearns, on its own behalf and on behalf of Extendicare, Inc.
Section 4.3 Disclosure Supplements.
(a) From time to time prior to the Closing, the Seller
Entities shall supplement or amend the Disclosure Schedule with respect to any
matter hereafter arising or any information obtained after the date hereof of
which, if existing, occurring or known at or prior to the date of this
Agreement, would have been required to be set forth or described in the
Disclosure Schedule or which is necessary to complete or correct any information
in such schedule or in any representation and warranty of the Seller Entities
which has been rendered inaccurate thereby. The Seller Entities shall promptly
inform Parent of any claim by a third party that a material contract has been
breached, is in default, may not be renewed or that a consent would be required
as a result of the transactions contemplated by this Agreement. For purposes of
determining the satisfaction of the conditions set forth in Article V and the
indemnification obligations set forth in Article VII hereof, and except as
expressly provided in Section 4.3(b) with respect to Disclosure Schedule
updates, no such supplement, amendment or information shall be considered.
(b) If requested in writing by Parent, Seller Parent will
meet and discuss with Parent any update to the Disclosure Schedule made by any
Seller Entity pursuant to the first sentence of Section 4.3(a). If Parent shall
fail to make such request (i) prior to the Closing, with respect to an update
received by Parent at least 5 business days but less than 15 business days prior
to the Closing or (ii) otherwise within 15 business days of receipt of an
update, such
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update shall be treated for all purposes as if it had been included in the
Disclosure Schedule being delivered by the Seller Entities concurrently
herewith. However, if Parent shall so request, then the update shall not be
considered for purposes of determining the satisfaction of the conditions set
forth in Article V and the indemnification obligations set forth in Article VII
hereof, except to the extent mutually agreed between the parties. No such update
may be made following the Closing.
Section 4.4 Reasonable Efforts.
(a) Upon the terms and subject to the conditions of this
Agreement, each of the parties hereto shall use all reasonable efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement as
promptly as practicable including, but not limited to, (i) the preparation and
filing of all forms, registrations and notices required to be filed to
consummate the transactions contemplated by this Agreement and the taking of
such commercially reasonable actions as are necessary to obtain any requisite
approvals, consents, orders, exemptions or waivers by any third party or
Governmental Entity, including filings pursuant to the HSR Act and (ii) using
all reasonable efforts to cause the satisfaction of all conditions to Closing.
Each party shall promptly consult with the other with respect to, provide any
necessary information with respect to and provide the other (or its counsel)
copies of, all filings made by such party with any Governmental Entity or any
other information supplied by such party to a Governmental Entity in connection
with this Agreement and the transactions contemplated by this Agreement. No
party will take any action which would prevent the satisfaction of any condition
to Closing set forth in Article V hereof.
(b) Each party hereto shall promptly inform the others of
any communication from any Governmental Entity regarding any of the transactions
contemplated by this Agreement. If any party or affiliate thereof receives a
request for additional information or documentary material from any such
Governmental Entity with respect to the transactions contemplated by this
Agreement, then such party will endeavor in good faith to make, or cause to be
made, as soon as reasonably practicable and after consultation with the other
party, an appropriate response in compliance with such request.
Section 4.5 Further Assurances. From time to time after the Closing,
without additional consideration, each of the parties hereto will (or, if
appropriate, cause their affiliates to) execute and deliver such further
instruments and take such other action as may be necessary to make effective the
transactions contemplated by this Agreement. If any party to this Agreement
shall following the Closing have in its possession any asset or right which
under this Agreement should have been delivered to the other, such party shall
promptly deliver such asset or right to the other.
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Section 4.6 Brokers or Finders. Each party hereto represents, as to
itself and its affiliates that no agent, broker, investment banker, financial
advisor or other firm or person is or will be entitled to any broker's or
finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement, other than Bear Stearns in the
case of the Seller Entities and NationsBanc Montgomery Securities LLC
("NationsBanc Montgomery") in the case of Parent and the Purchaser. The Seller
Entities shall be solely responsible for any payments to Bear Stearns and Parent
and the Purchaser shall be solely responsible for any payments to NationsBanc
Montgomery.
Section 4.7 No Solicitation.
(a) Each Seller Entity will, and will cause its officers,
directors, employees, subsidiaries, affiliates and agents to, immediately cease
any existing discussions or negotiations with respect to any Takeover Proposal
(as defined below) and will not, and will cause such persons and entities not
to, directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group (other than Parent and
the Purchaser or their directors, officers, employees or other affiliates)
concerning any Takeover Proposal. The Seller Entities will immediately
communicate to Parent any such inquiries or proposals regarding a Takeover
Proposal including the terms thereof.
(b) "Takeover Proposal" shall mean any of the following
involving the Business, the Assets or the Assumed Liabilities (other than the
transactions contemplated by this Agreement): any inquiry or proposal relating
to a sale of stock, merger, consolidation, share exchange, business combination,
disposition of assets (or any interest therein) or other similar transaction.
Section 4.8 Tax Matters. Notwithstanding any other provision of this
Agreement, all transfer, registration, stamp, documentary, sales, use and
similar Taxes (including, but not limited to, all applicable real estate
transfer or gains Taxes and transfer Taxes), any penalties, interest and
additions to Tax, and fees incurred in connection with this Agreement shall be
shared equally by Seller Parent and Purchaser, other than the HSR filing fee,
which shall remain the Purchaser's responsibility. Seller Parent and the
Purchaser shall cooperate in the timely making of all filings, returns, reports
and forms as may be required in connection therewith.
Section 4.9 Release of Liens. At or prior to the Closing, Seller
Parent shall cause the release of all Liens on the Assets, so that such Assets
and rights are free and clear of any liens, except for Permitted Liens.
Section 4.10 Performance of Obligations. Seller Parent shall cause
each of the Sellers to timely perform their respective obligations under this
Agreement and as otherwise contemplated by the transactions contemplated hereby.
Parent shall cause the Purchaser to
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timely perform its obligations under this Agreement and as otherwise
contemplated by the transactions contemplated hereby.
Section 4.11 Consents to Transfer Assets. The Seller Entities agree
that if any required consent to the transfer of any Asset to the Purchaser as
provided for herein is not obtained prior to Closing, the Seller Entities shall
exercise commercially reasonable efforts to arrange for the Purchaser to acquire
all of the material benefits of such Asset as though the required consents had
been obtained (and, to the extent, but, notwithstanding anything herein to the
contrary, only to the extent, such benefits are provided, the Purchaser shall
assume the corresponding obligation) and shall continue to use all reasonable
efforts to obtain such consent. Nothing in this Section 4.11 shall (i) affect
Parent's and the Purchaser's other rights under this Agreement or (ii) require
Seller Parent to pay money or other consideration to any third party in
violation of applicable law or regulation.
Section 4.12 Employment Matters.
(a) Definitions. As used in this Section 4.12:
(i) "Hired Employee" shall mean each Seller Employee
listed on Section 4.12(a)(i) of the Disclosure Schedule, as such Section may be
modified pursuant hereto, who receives and accepts an offer of employment from
the Purchaser in accordance with Section 4.12(b) hereof.
(ii) "Non-Hired Employee" shall mean any Seller
Employee who is neither a Hired Employee or a Transitional Employee, but
excluding each Seller Employee, if any, listed on Section 4.12(a)(i) or (a)(v)
of the Disclosure Schedule, as such Section may be modified pursuant hereto, who
Purchaser fails to make an offer of employment in accordance with Section
4.12(b) hereof ("Non-Offered Employees").
(iii) "Seller Employee" shall mean salaried and
hourly employees of the Seller Entities, who as of the Closing Date are in the
active employment of a Seller Entity and whose duties relate to the Business or
who are on employment leave therefrom.
(iv) "Seller Service" shall mean a Hired Employee's
period of employment prior to the Closing Date with any one or more Seller
Entities and any predecessor employers, which are counted by the Seller for
purposes of determining the Seller Employee's eligibility to participate in any
vacation, sick pay or similar plan programs or arrangement maintained by Seller
Entities. Seller Service and the compensation of Seller Employees shall be
reported to the Purchaser as determined by the Seller Entities in connection
with the specific plans. The Purchaser shall be entitled to rely on the Seller
Entities computation of Seller Service.
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(v) "Transitional Employees" shall mean each Seller
Employee listed in Section 4.12(a)(v) of the Disclosure Schedule who receives
and accepts an offer of temporary employment from the Purchaser in accordance
with Section 4.12(b) hereof.
(vi) "Transitional Severance Plan" shall mean any
severance pay to which Purchaser and Seller Entities jointly agree to pay
Transitional Employees following their termination of employment from Purchaser.
(b) Duty of Purchaser to Offer Employment. Purchaser shall
offer employment to each Seller Employee identified jointly by Purchaser and
Seller and listed in Section 4.12(a)(i) of the Disclosure Schedule; which
employment shall commence as of the Effective Time of the Closing. Such offers
shall include salary and benefits comparable, in the aggregate, either to the
salary and benefits such employees were entitled to from the Seller Entities
immediately prior to the Closing Date or to the salary and benefits provided to
similarly situated employees of Parent. Purchaser shall offer temporary
employment to each Seller Employee listed in Section 4.12(a)(v) of the
Disclosure Schedule which employment shall commence as of the Effective Time of
the Closing. Seller will not discourage any employees listed in Sections
4.12(a)(i) or 4.12(a)(v) of the Disclosure Schedule from accepting an employment
offer from the Purchaser and Seller will comply with any reasonable request of
Purchaser in connection with such offers of employment. Purchaser shall not have
any obligation to offer employment to any Seller Employee not listed in Sections
4.12(a)(i) or 4.12(a)(v) of the Disclosure Schedule.
(c) Termination Liabilities. Following termination of
employment from the Purchaser, a Transition Employee will be paid an amount
equal to the severance pay such employee is entitled to under the Transitional
Severance Plan, with the aggregate cost of such plan to be divided equally
between the Purchaser and the Seller Entities. Any other costs associated with
the termination of such employment (including, without limitation, any liability
assessed under the Workers Adjustment Retraining and Notification Act (the "WARN
Act") or any Seller severance policy) shall be borne by the Seller Entities.
(d) Vacation and Sick Leave Benefits. From and after the
Effective Time of the Closing, Purchaser shall grant all Hired Employees credit
for Seller Service (to the same extent such service with Purchaser is taken into
account with respect to similarly situated employees of Purchaser) for purposes
of determining Hired Employees' eligibility to participate in and receive
benefits under the Purchaser's vacation, sick leave and other similar plans.
(e) Medical Coverage. Each Purchaser medical benefit plan
covering Hired Employees as of the Effective Time of the Closing shall provide
such coverage without regard to any pre-existing condition exclusion contained
in such plans to the extent such pre-existing condition would not be applicable
under the medical benefit plan under which such employee was covered immediately
prior to the Effective Time of the Closing.
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(f) Employee Information. Seller Parent and the Purchaser
shall furnish to each other such employee information and such descriptions of
personnel policies, procedures and benefits plans applicable to Seller Employees
as either party may reasonably request, both prior to and after the Effective
Time of the Closing. Seller Parent and the Purchaser shall each make its
appropriate employees available to the other at such reasonable times as may be
necessary for the proper administration by the other of any and all matters
relating to employee benefits and workers' compensation claims affecting their
employees.
(g) Indemnity. The Seller Entities shall retain all
liability and shall be responsible for, and shall indemnify and hold Purchaser
harmless from and against, any direct and indirect costs, claims, liabilities or
losses with respect to Non-Hired Employees including, without limitation, any
liability assessed under the WARN Act or comparable state laws. Purchaser shall
assume all liability and shall be responsible for, and shall indemnify and hold
the Seller Entities harmless from and against, any direct and indirect costs,
claims, liabilities or losses incurred by Seller Entities as a result of
Purchaser's failure to satisfy its obligations under Section 4.12(b) hereof with
respect to Non-Offered Employees including, without limitation, any liability
assessed under the WARN Act or comparable state laws.
(h) Deemed Termination. All Seller Employees, other than
Non-Hired Employees and those who continue to be employed by the Seller Entities
immediately following the Closing, shall be deemed to have been terminated by
the applicable Seller Entity.
(i) Update of Schedule 4.12. From time to time prior
to the Closing Date, Purchaser shall have the right to supplement or amend
Schedule 4.12 in respect of the categorization of Seller Employees as described
in this Section 4.12.
Section 4.13 Non-Competition.
(a) From and after the Closing, until the fifteenth
anniversary of the Closing Date, Seller Parent will not, and Seller Parent will
cause its affiliates not to, directly or indirectly, anywhere in the United
States (i) engage in, own any interest in, invest in, lend funds to, or provide
any management, consulting, financial, administrative or other services to any
Competitive Business (as defined below), (ii) solicit, sell or attempt to sell
goods and services offered by the Business to any facility which is a customer
of the Business (or any successor), or (iii) disclose any confidential or
non-public information regarding the Business to any third party, except as may
be required by law. For purposes hereof, a "Competitive Business" means any
business that provides the following goods or services to nursing homes,
assisted living facilities and other long-term care constituencies: (a)
pharmaceutical products, (b) pharmacy-related services of a nature currently
provided (or being developed with the intention of providing) by Parent, its
affiliates or the Business, (c) infusion therapy products and services, (d)
respiratory equipment and supplies, and (e) parenteral and enteral nutrition
products, wound care products, ostomy and urological supplies, together with all
home health
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care services provided by UPC at its Springfield, Ohio location whether to LTC
Customers or others. For a period of one year following the Closing Date, Seller
Parent will not, and will cause its affiliates to not solicit, employ or
contract with any person who is an employee of the Business (or any successor)
and who is hired by Parent or the Purchaser in connection with the transactions
contemplated thereby. This covenant not to hire shall not preclude Seller Parent
or any of its affiliates from employing any person responding to a general
solicitation for employment, provided neither Seller Parent nor any of its
affiliates specifically directed the solicitation to such person. Moreover, the
noncompetition covenant contained in this Section 4.13(a) shall not be
interpreted to prohibit Seller Parent or any affiliate from owning or acquiring
securities of any corporation or other business enterprise that may be engaged
in activities described in said noncompetition covenants, provided that: (i) no
affiliate of Seller Parent is an officer, director or employee of, or consultant
to, such corporation or business enterprise, (ii) such securities are held by
Seller Parent or any affiliate for investment purposes only and represent in the
aggregate less than five percent of the total equity interests of such
corporation or business enterprise and (iii) such securities are listed on a
national securities exchange or are regularly quoted in the over the counter
market by one or more members of the National Association of Securities Dealers,
Inc. Additionally, this covenant shall not preclude Sellers from continuing to
operate the businesses identified in Section 4.13 of the Disclosure Schedule.
The Sellers shall use all reasonable efforts to cause such employees as Parent
may designate to sign employment and non-competition agreements on such terms as
Parent may reasonably designate.
(b) Notwithstanding the foregoing, Seller Parent may
acquire a healthcare business which includes business operations in which Seller
Parent could not engage consistent with its covenant under Section 4.13(a) above
(a "Competitive Operation") or an investment therein, provided that Parent shall
have the right to acquire the Competitive Operation portion of such business at
its fair market value. Seller Parent shall give Parent notice of such
acquisition as promptly as practicable, but in no event later than the execution
of a definitive purchase agreement relating thereto. As promptly as practicable
Seller Parent and Parent shall attempt to agree on the fair market value of such
Competitive Operation and the terms of the acquisition thereof, which shall be
reasonable and customary under the circumstances. If they are not able to agree
promptly, they shall engage a recognized, national investment banking firm (the
"Investment Bank") to resolve such dispute. Parent and Seller Parent will each
pay one-half of the fees and expenses of the Investment Bank and shall cooperate
with each other and such firm in connection with the matters contemplated by
this Section 4.13, including by furnishing such information and access to books,
records, personnel and properties as may be reasonably requested. Parent shall
have the right, within 30 days of the final determination of such price and
terms, to execute a definitive agreement with Seller Parent to implement such
acquisition. If Parent does not exercise such right, Seller Parent may continue
to operate such Competitive Operation for eighteen months, during which time it
shall use its reasonable best efforts to divest itself of such Competitive
Operation. If, upon the expiration of such 18-month period, Seller Parent has
not sold such
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Competitive Operation, pursuant to the noncompetition covenants contained
herein, Seller Parent shall cease its operation of said Competitive Operation.
Section 4.14 Transition Services. The Seller Entities shall provide
such transition services as Parent may reasonably request, including, without
limitation, the transition services listed on Schedule 4.14. Such services shall
(i) include the use of facilities shared between the Business and the Seller
Entities and any services provided by the Seller Entities to the Business, (ii)
be performed in a prompt and commercially reasonable manner and (iii) be
provided at the Seller Entities' cost of providing such services (without taking
into account general overhead charges) plus an amount equal to ten percent of
such costs. In addition, Parent and the Purchaser shall have the right to use
the names "UPC" and "UPC Pharmacy" (and similar names) on Business letterhead,
signage, purchase orders, invoices and other business forms and similar items
while Parent and the Purchaser secure their own supplies of such materials, for
a period of 90 days from Closing.
Section 4.15 Bulk Sales Laws. The parties hereto hereby waive
compliance with the provisions of any applicable bulk sales laws, including
Article 6 of the Uniform Commercial Code as it may be in effect in any
applicable jurisdiction.
Section 4.16 Facilities. None of Seller Parent or subsidiary or
affiliate has taken or within 18 months of Closing will take any action which
would make the representations and warranties contained in Section 2.21(b)
hereof untrue or incorrect as of the date when made or as of any future date, as
if made as of such future date.
Section 4.17 Payments to the Business. Seller Parent shall pay, or
cause its subsidiaries and affiliates to pay, all accounts receivable and other
amounts owing to the Business in accordance with their terms.
Section 4.18 Share Legend; Transfer.
(a) Each certificate for the Shares to be issued at the
Closing shall bear the following legend:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED,
SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO (I) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND
ANY APPLICABLE STATE SECURITIES LAWS OR (II) AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES
LAWS, SUCH EXEMPTION TO BE EVIDENCED BY SUCH
DOCUMENTATION AS THE ISSUER MAY REASONABLY REQUEST.
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Any certificate issued at any time in exchange or substitution for
any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act) shall also bear such legend unless, in the opinion of
counsel selected by the holder of such certificate (which counsel and opinion
shall be reasonably acceptable to Parent), the securities represented thereby
need no longer be subject to restrictions on resale under the Securities Act or
any state securities laws.
(b) The Sellers and their affiliates shall not offer, sell,
transfer, pledge, hypothecate or otherwise dispose of the Shares issued on the
Closing Date or any interest therein prior to the date which is six months
following the Closing Date. The Sellers and their affiliates shall not offer,
sell, transfer, pledge, hypothecate or otherwise dispose of the Warrant or any
interest therein at any time, other than pursuant to the terms of the Warrants.
If any person to whom the Warrant or any portion thereof was transferred ceases
to be a wholly owned subsidiary of Seller Parent, Seller Parent shall cause the
transfer of such Warrant or portion thereof to Seller Parent or a wholly owned
subsidiary of Seller Parent no later than immediately prior to the time such
person ceases to be a wholly owned subsidiary of Seller Parent. Neither the
Shares issuable upon exercise of the Warrants nor any interest therein may be
offered, sold, transferred, pledged, hypothecated or otherwise disposed of
except pursuant to (i) an effective registration statement under the Securities
Act and any applicable state securities laws or (ii) an exemption from the
registration requirements of the Securities Act and any applicable state
securities laws, such exemption to be evidenced by such doc umentation as Parent
may reasonably request, including an opinion of counsel (which counsel and
opinion shall be reasonably satisfactory to Parent) that such transfer is not in
violation of the Securities Act and any applicable state laws.
Section 4.19 Audit.
(a) As promptly as practicable after the date hereof, but
in no event later than July 31, 1998, Seller Parent shall deliver to Parent an
unaudited income statement for the Business for the six months ended June 30,
1998, which shall fairly present, in all material respects, the results of
operations for the Business for such period in accordance with generally
accepted accounting principles. Upon such delivery, the parties shall cause KPMG
to audit such income statement in accordance with generally accepted auditing
standards. PWC shall have the right to participate in and observe all aspects of
such audit.
(b) The parties hereto shall cooperate with KPMG and PWC
with respect to such audit, including by furnishing each of KPMG and PWC with
such information and access as it shall reasonably request (including KPMG's
work papers). Seller Parent shall make such adjustments (if any) to such income
statement as are necessary to enable KPMG to deliver an unqualified opinion (in
its customary form but subject to Schedule 4.19(f)(2)) to the effect that such
income statement presents fairly, in all material respects, the results of
operations of the Business for the six months ended June 30, 1998. Such audited
income statement, as finally determined pursuant to this Section 4.19, is
sometimes referred to as the "Audited Income
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Statement." The amount of earnings before interest, taxes and amortization
reflected on such audited income statement, multiplied by two, shall be included
in a schedule to KPMG's opinion, and is referred to as the "Audited EBITA
Number" (subject to final determination as provided in this Section 4.19). The
calculation of EBITA shall be performed in a manner consistent with Schedule
4.19(b).
(c) Unless within six business days after its receipt of the
Audited Income Statement, Parent shall deliver to Seller Parent a detailed
statement describing its objections thereto, the Audited EBITA Number determined
in accordance with clause (b) above shall be final and binding.
(d) If Parent shall deliver the statement referred to in
clause (c) above, Parent and Seller Parent will use reasonable efforts to
resolve any disputes, but if a final resolution is not reached within 5 days
after Parent has submitted its objections, any remaining disputes will be
resolved by the Reviewing Accountants. The Reviewing Accountants shall be
instructed to resolve any matters in dispute as promptly as practicable in
accordance with clause (e) below. The determination of the Reviewing Accountants
will be final and binding.
(e) Parent and Seller Parent will each pay one-half of the
fees and expenses of the Reviewing Accountants. Parent and Seller Parent shall
cooperate with each other and the Reviewing Accountants in connection with the
matters contemplated by this Section 4.19, including by furnishing such
information and access to books, records (including accountants work papers),
personnel and properties as may be reasonably requested at their own expense.
Each party may also furnish to the Reviewing Accountants such other information
and documents as it deems relevant with copies and notification to the other
party. The Reviewing Accountants may conduct such procedures as it deems
appropriate, provided that the parties do not intend that formal civil
procedures necessarily be followed.
(f) The provisions set forth in Schedule 4.19(f) shall
govern the audit and the review thereof. Parent, Seller Parent, KPMG and PWC
shall promptly meet, and during the audit and review shall continue to meet, to
discuss such audit, including the scope of the audit, and any additions or other
modifications to such Schedule. Any dispute shall be resolved by the Reviewing
Accountant.
ARTICLE 5
CONDITIONS
Section 5.1 Conditions to Each Party's Obligations. The respective
obligation of each party to effect the transactions contemplated by this
Agreement shall be subject to the satisfaction or waiver of the following
conditions:
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(a) All consents and approvals of any Governmental Entity
required for the consummation of the transactions contemplated by this
Agreement, the absence of which would have a Material Adverse Effect, shall have
been obtained, and any waiting period applicable to the consummation of the
transactions contemplated hereby under the HSR Act shall have expired or been
terminated.
(b) No statute, rule, regulation, order, decree or
injunction shall have been enacted, entered, promulgated or enforced by a
Governmental Entity which prohibits the consummation of the transactions
contemplated by this Agreement and shall be in effect.
(c) The Audited EBITA Number shall have been finally
determined pursuant to Section 4.19 hereof and the Audited EBITA Number shall
not be less than $20,043,120.
Section 5.2 Conditions to Obligations of the Parent and the
Purchaser. The obligation of Parent and the Purchaser to effect the transactions
contemplated by this Agreement are further subject to the satisfaction or waiver
of the following conditions:
(a) The representations and warranties of the Seller
Entities in this Agreement shall be true and correct in all material respects
(without regard for any materiality qualifiers therein) as of the date hereof
and at and as of the Closing with the same effect as though such representations
and warranties had been made at and as of such time, other than rep resentations
and warranties that speak as of another specific date or time prior to the date
hereof (which need only be true and correct as of such date or time).
(b) The Seller Entities shall have performed in all material
respects all obligations required to be performed by them under this Agreement
at or prior to the Closing.
(c) There shall not have occurred any events that have had
or are reasonably likely to have a Material Adverse Effect.
(d) All consents or approvals listed in Section 2.3 of the
Disclosure Schedule and identified as mandatory shall have been obtained and any
other consents or approvals, the absence of which would have a Material Adverse
Effect, shall have been obtained.
(e) Parent shall have received from the Seller Entities a
certificate, dated the Closing Date, duly executed by an executive officer of
each Seller Entity, reasonably satisfactory in form to Parent, to the effect of
(a)-(d) above.
(f) If requested by Parent, each Seller shall provide Parent
with a certified statement, in the form contained in Section
1.1445-2(b)(2)(iii)(B) of the Treasury Regulations, that it is not a "foreign
person."
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(g) Parent shall have received from Seller Parent written
evidence that certain medical carts and fax machines have been transferred to
the Sellers at net book value and such medical carts and fax machines are
reflected on the Closing Date Balance Sheet.
Section 5.3 Conditions to Obligations of Seller Parent and the
Sellers. The obligation of Seller Parent and the Sellers to effect the
transactions contemplated by this Agreement are further subject to the
satisfaction or waiver of the following conditions:
(a) The representations and warranties of the Parent and the
Purchaser in this Agreement shall be true and correct in all material respects
(without regard for any materiality qualifiers therein) as of the date hereof
and at and as of the Closing with the same effect as though such representations
and warranties had been made at and as of such time, other than representations
and warranties that speak as of another specific date or time prior to the date
hereof (which need only be true and correct as of such date or time).
(b) Parent and the Purchaser shall have performed in all
material respects all obligations required to be performed by them under this
Agreement at or prior to the Closing.
(c) Seller Parent shall have received from the Parent and
the Purchaser a certificate, dated the Closing Date, duly executed by an
executive officer of Parent and the Purchaser, reasonably satisfactory in form
to the Sellers, to the effect of (a) and (b).
ARTICLE 6
TERMINATION AND AMENDMENT
Section 6.1 Termination. This Agreement may be terminated at any
time prior to the Closing by:
(a) Mutual consent of Seller Parent and Parent;
(b) Either Seller Parent or Parent if the Closing shall not
have occurred on or before September 30, 1998, provided that if the Audited
EBITA Number shall not have been finally determined by such date or the
applicable waiting period under the HSR Act has not expired or been terminated
by such date, 15 business days from the later of the date that the Audited EBITA
Number is finally determined and the applicable waiting period under the HSR Act
has expired or been terminated (unless the failure to consummate the Closing by
such date shall be due to the action or failure to act of the party (or its
affiliates) seeking to terminate this Agreement); or
(c) Either Seller Parent or Parent if any court of
competent jurisdiction or other competent Governmental Entity shall have issued
a statute, rule, regulation, order, decree or injunction or taken any other
action permanently restraining, enjoining or otherwise
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prohibiting the transactions contemplated by this Agreement and such statute,
rule, regulation, order, decree or injunction or other action shall have become
final and nonappealable.
Section 6.2 Effect of Termination. In the event of the termination
and abandonment of this Agreement pursuant to Section 6.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party hereto or its affiliates, directors, officers or stockholders,
other than the provisions of the Confidentiality Agreement and Section 8.11
hereof. Nothing contained in this Section 6.2 shall relieve any party from
liability for any breach of this Agreement.
Section 6.3 Amendment. This Agreement may be amended or modified at
any time by the parties hereto, but only by an instrument in writing signed on
behalf of each of the parties hereto.
Section 6.4 Extension; Waiver. At any time prior to the Closing, the
parties hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party. Neither the failure nor the
delay on the part of any party to exercise any right, remedy, power or privilege
under this Agreement shall operate as a waiver thereof.
ARTICLE 7
SURVIVAL; INDEMNIFICATION
Section 7.1 Survival Periods.
(a) All representations and warranties of the parties
contained in this Agreement, the Disclosure Schedule or any certificate
delivered in connection herewith shall survive until the date which is 18 months
from the Closing Date, and, if notice of a claim is provided by such date, shall
survive until the final resolution thereof, provided, that the representations
and warranties set forth in Sections 2.9 [taxes] and 2.16 [title] (the "Listed
Representations") shall survive the Closing without limitation. All covenants
hereunder shall survive without limit (unless by their terms they are to survive
for a shorter period). The obligation of the Seller Entities to indemnify Parent
and the Purchaser pursuant to this Article VII with respect to the Excluded
Liabilities set forth in Schedule 1.1(c), Item 3 [environmental] shall survive
until the date which is 18 months from the Closing Date, and, if notice of a
claim is provided by such date, shall survive until the final resolution
thereof.
(b) For purposes of this Agreement, a party's
representations and warranties shall be deemed to include such party's
Disclosure Schedule and all other documents or
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certificates delivered by or on behalf of such party in connection with this
Agreement. None of the Closing, any party's waiver of any condition to Closing
or a party's knowledge of any breach prior to the Closing shall constitute a
waiver of any rights such party may have hereunder.
Section 7.2 Indemnification Amounts.
(a) Notwithstanding any provision to the contrary contained
in this Agreement, the Seller Entities shall not be obligated to indemnify
Parent or the Purchaser for any costs or expenses (including reasonable
attorneys', experts' and consultants' fees), judgments, fines, penalties,
losses, claims, liabilities and damages, net of any insurance proceeds and tax
benefits but grossed up to take into account tax detriments (such net amounts
being referred to herein as, "Damages") pursuant to this Article VII to the
extent they (i) are the result of any breach of any representation or warranty
or failure to perform any covenant made by or on behalf of the Seller Entities
(other than Damages resulting from the breach of any of the Listed
Representations as to which there shall be no limitation) or (ii) constitute
Excluded Liabilities set forth in Schedule 1.1(c), Item 3 [environmental],
unless and until the dollar amount of all Damages shall equal in the aggregate
$1,500,000, and then only for the excess over such amount. Notwithstanding the
foregoing, no breach of the representations and warranties contained in Section
2.18, 2.19 and 2.20 [inventory, accounts receivable and product returns and
warranties] shall be counted as Damages until all reserves for such matters
reflected on the Closing Date Balance Sheet have been exhausted.
(b) Notwithstanding any provision to the contrary contained
in this Agreement, the Parent and the Purchaser shall not be obligated to
indemnify the Seller Entities for any Damages pursuant to this Article VII to
the extent they are the result of any breach of any representation or warranty
or failure to perform any covenant made by or on behalf of Parent or the
Purchaser, unless and until the dollar amount of all such Damages shall equal in
the aggregate $1,500,000, and then only for the excess over such amount.
(c) Notwithstanding any provision to the contrary contained
in this Agreement, the maximum aggregate amount payable pursuant to this Article
VII to Parent and the Purchaser or the Seller Entities, as the case may be,
shall not exceed the Purchase Price.
Section 7.3 Indemnification. Subject to the other provisions of
this Article VII, from and after the Closing:
(a) The Seller Entities shall jointly and severally
indemnify and hold harmless Parent, the Purchaser, their affiliates and their
and their affiliates employees, officers, directors, agents and other
representatives from and against any Damages that are the result of, arise out
of or relate to (i) any breach of any representation or warranty or failure to
perform any covenant made by or on behalf of any of the Seller Entities under
this Agreement, (ii) any Excluded Liabilities, (iii) any bulk sales law or a
determination that the sale of the Assets
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hereunder is ineffective against any creditor of any Seller Entity or any taxing
authority or other entity asserting any similar claim against any Seller Entity,
Parent, the Purchaser or the Assets or (iv) any claims that any transaction
contemplated hereby constituted a fraudulent transfer under applicable federal
or state law.
(b) Parent and the Purchasers shall jointly and severally
indemnify and hold harmless the Seller Entities, their affiliates and their and
their affiliates employees, officers, directors, agents and other
representatives from and against any Damages that are the result of, arise out
of or relate to (i) any breach of any representation or warranty or the failure
to perform any covenant made by or on behalf of Parent or the Purchaser under
this Agreement or (ii) any Assumed Liabilities.
(c) The persons to whom indemnification is provided
hereunder are referred to herein as the "Indemnified Parties" and the persons
providing indemnification are referred to as the "Indemnifying Parties."
Section 7.4 Claims.
(a) If an Indemnified Party intends to seek indemnification
pursuant to this Article VII, such Indemnified Party shall promptly notify the
Indemnifying Party in writing of such claim. The Indemnified Party will provide
the Indemnifying Party with prompt notice of any third party claim in respect of
which indemnification is sought. The failure to provide either such notice will
not affect any rights hereunder except to the extent the Indemnifying Party is
materially prejudiced thereby.
(b) If such claim involves a claim by a third party against
the Indemnified Party, the Indemnifying Party may, within ten days after receipt
of such notice and upon notice to the Indemnified Party, assume, through counsel
of its own choosing and at its own expense, the settlement or defense thereof,
and the Indemnified Party shall cooperate with it in connection therewith,
provided, that the Indemnified Party may participate in such settlement or
defense through counsel chosen by it. If the Indemnified Party reasonably
determines that representation by the Indemnifying Party's counsel of both the
Indemnifying Party and the Indemnified Party may present such counsel with a
conflict of interest, then the Indemnifying Party shall pay the reasonable fees
and expenses of the Indemnified Party's counsel. Notwithstanding anything in
this Section 7.4 to the contrary, the Indemnifying Party may not, without the
consent of the Indemnified Party, settle or compromise any action or consent to
the entry of any judgment, such consent not to be unreasonably withheld. So long
as the Indemnifying Party is contesting any such claim in good faith, the
Indemnified Party shall not pay or settle any such claim without the
Indemnifying Party's consent, such consent not to be unreasonably withheld. If
the Indemnifying Party is not contesting such claim in good faith (including if
it does not notify the Indemnified Party of its assumption of the defense of
such claim within the ten day period set forth above), then the Indemnified
Party may conduct and control, through counsel of its own choosing and at the
expense of the Indemnifying Party, the
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settlement or defense thereof, and the Indemnifying Party shall cooperate with
it in connection therewith. The failure of the Indemnified Party to participate
in, conduct or control such defense shall not relieve the Indemnifying Party of
any obligation it may have hereunder.
(c) If a firm written offer is made by the third party to
settle a third party claim referred to in (b) above and the Indemnifying Party
proposes to accept such settlement and the Indemnified Party refuses to consent
to such settlement, then, provided that such proposed settlement (x) includes a
full and unconditional release of the Indemnified Party and (y) does not provide
for anything other than the payment of money damages, (i) the Indemnifying Party
shall be excused from, and the Indemnified Party shall be solely responsible
for, all further defense of such third party claim, (ii) the maximum liability
of the Indemnifying Party relating to such third party claim shall be the amount
of the proposed settlement, and other amounts for which the Indemnified Party
would be entitled to prior to the rejection of the proposed settlement, if the
amount thereafter recovered from the Indemnified Party on such third party claim
is greater than the amount of the proposed settlement and (iii) the Indemnified
Party shall pay all attorneys' fees incurred after the rejection of such
settlement by the Indemnified Party, but if the amount thereafter recovered by
such third party from the Indemnified Party is less than the amount of the
proposed settlement, the Indemnified Party shall be reimbursed by the
Indemnifying Party for such attorneys' fees up to a maximum amount equal to the
difference between the amount recovered by such third party and the amount of
the proposed settlement.
Section 7.5 Relation to Escrow. Amounts payable to the Purchaser for
in demnification claims under this Article VII or claims made under Section 1.6
hereof shall first be paid from the escrow account under the Escrow Agreement.
To the extent the foregoing is not sufficient to pay such claim, such claim
shall be paid by the Indemnifying Parties.
Section 7.6 Exclusive Remedy. Following the Closing, the provisions
of this Article VII shall be the exclusive remedy for the matters covered
hereby, provided that nothing herein shall relieve any party from any liability
for fraud.
ARTICLE 8
MISCELLANEOUS
Section 8.1 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given upon receipt by the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
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<TABLE>
<S> <C> <C>
(a) If to Parent or the Purchaser, to: Omnicare, Inc.
2800 Chemed Center
255 East Fifth Street
Cincinnati, Ohio 45203
Attention: President
Telecopy: 513-762-6678
with a copy to: Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Attention: Morton A. Pierce and
Richard D. Pritz
Telecopy: 212-259-6333
(b) If to the Sellers to: Extendicare Inc.
105 W. Michigan Street
Milwaukee, WI 53203
Attention: President and CFO
Telecopy: 905-470-4003
with a copy to: Extendicare Health Services, Inc.
105 W. Michigan Street
Milwaukee, WI 53203
Attention: Timothy J. Murphy, Esq.
Telecopy: 414-207-3663
</TABLE>
Section 8.2 Headings. The headings herein are inserted for
convenience only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
Section 8.3 Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same instrument.
Section 8.4 Entire Agreement; Assignment.
(a) This Agreement and the exhibits and schedules hereto
and the documents and certificates delivered in connection herewith constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof.
(b) This Agreement shall not be assigned by a party hereto
by operation of law or otherwise; provided, that Parent or the Purchaser may
assign its rights and obligations hereunder to any wholly owned subsidiary
(including an LLC) of Parent or the Purchaser, but
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no such assignment shall relieve Parent or the Purchaser of its obligations
hereunder if such assignee does not perform such obligations.
Section 8.5 Governing Law.
(a) THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO ANY
APPLICABLE CONFLICTS OF LAW PRINCIPLES. THE PARTIES HERETO EXPRESSLY AND
IRREVOCABLY (I) CONSENT TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND STATE
COURTS SITTING IN DELAWARE, (II) AGREE NOT TO BRING ANY ACTION RELATED TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY IN ANY OTHER COURT (EXCEPT TO
ENFORCE THE JUDGMENT OF SUCH COURTS), (III) AGREE NOT TO OBJECT TO VENUE IN SUCH
COURTS OR TO CLAIM THAT SUCH FORUM IS INCONVENIENT AND (IV) AGREE THAT NOTICE OR
THE SERVICE OF PROCESS IN ANY PROCEEDING SHALL BE PROPERLY SERVED OR DELIVERED
IF DELIVERED IN THE MANNER CONTEMPLATED BY SECTION 8.1 HEREOF. FINAL JUDGEMENT
BY SUCH COURTS SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY MANNER PERMITTED
BY LAW. IN ADDITION, EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO TRIAL BY
JURY WITH RESPECT TO ANY CLAIM OR PRO CEEDING RELATED TO OR ARISING OUT OF THIS
AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.
(b) Prior to commencing any litigation involving any dispute
arising from this Agreement or the transactions contemplated hereby, the parties
shall negotiate in good faith for a period of 30 days (the "Negotiation Period")
to resolve such dispute. Any relevant time periods hereunder or under applicable
law, rule or regulation will be tolled during the Negotiation Period. If, upon
the expiration of the Negotiation Period, the parties have failed to resolve
such dispute, all remedies at equity or law shall be available to the parties.
Notwithstanding the foregoing, if a party in good faith believes that the other
party is taking or will take action that is irreparable or otherwise requires
injunctive relief, such party may seek injunctive relief without complying with
the other provisions of this Section 8.5(b).
Section 8.6 Specific Performance. The parties hereto agree that if
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached, irreparable damage would occur,
no adequate remedy at law would exist and damages would be difficult to
determine, and that the parties shall be entitled to specific performance of the
terms hereof, in addition to any other remedy at law or equity.
Section 8.7 Publicity. Except as otherwise required by law or the
rules and regulations of any U.S. or foreign national securities exchange, no
party hereto shall issue any press release or otherwise make any public
statement with respect to the transactions contemplated by this Agreement
without prior approval of the other parties hereto. Neither
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the Sellers nor any affiliates shall disparage the Business, including by
commenting negatively on its earnings or prospects.
Section 8.8 Binding Nature; No Third Party Beneficiaries. This
Agreement shall be binding upon and inure solely to the benefit of each party
hereto and their permitted successors and assigns, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person or persons any rights, benefits or remedies of any nature whatsoever
under or by reason of this Agreement.
Section 8.9 Severability. This Agreement shall be deemed severable;
the invalidity or unenforceability of any term or provision of this Agreement
shall not affect the validity or enforceability of this Agreement or of any
other term hereof, which shall remain in full force and effect.
Section 8.10 Interpretation. As used in this Agreement, (a)
"including" (or similar terms) shall be deemed followed by "without limitation"
and shall not be deemed to be limited to matters of a similar nature to those
enumerated, (b) "contract" shall include any note, bond, mortgage, indenture,
contract, agreement, permit, license, lease, purchase order, sales order,
arrangement or other commitment, obligation or understanding, (c) "subsidiary"
of any person means another person, an amount of the voting securities, other
voting ownership or voting partnership interests of which is sufficient to elect
at least a majority of its Board of Directors or other governing body (or, if
there are no such voting interests, 50% or more of the equity interests of
which) is owned directly or indirectly by such first person and, in the case of
the Seller Entities, shall include all subsidiaries, affiliates or any entity
under the control of such Seller Entity or over which it has the power to
direct, or cause the direction, of the management of the entity, whether through
ownership of stock, by contract or otherwise, but not including Chippewa Valley
Home Care, LLC, HFM/UPC Home Medical Services, LLC or UPC/HME, LLC, (d)
"ordinary course of business" (or similar terms) shall be deemed followed by
"consistent with past practice," (e) "assets" shall include "rights" including
rights under contracts and (f) "knowledge" (or similar terms) with respect to
any Seller Entity shall mean the knowledge of the persons set forth in Section
8.10(f) of the Disclosure Schedule, provided, however, that with respect to
matters relating to Facilities, assets or operations acquired as part of the
acquisition of the Arbor Health Care Company, knowledge shall mean the knowledge
such individuals would have after conducting a reasonable inquiry. In
determining whether a fact, event or other item has a Material Adverse Effect,
such fact, event or other item shall be considered individually and in the
aggregate with all similar or related facts, events or other items. Seller
Entities hereby represent and warrant that HFM/UPC Home Medical Services, LLC
and UPC/HME, LLC are not engaged in the Business and none of the assets of such
entities are utilized in the conduct of the Business.
Section 8.11 Payment of Expenses. Whether or not the transactions
contemplated by this Agreement shall be consummated, each party hereto shall pay
its own expenses incident to preparing for, entering into and carrying out this
Agreement.
40
<PAGE> 46
Section 8.12 Access to Records.
(a) Parent and the Purchaser agree that each of the Seller
Entities and their attorneys, agents, accountants and designees may have such
access to the books and records of the Business which are a part of the Assets
and such right to make copies thereof as the Sellers may reasonably deem
necessary. Any such examination shall be at the expense of the Sellers, shall be
performed at the place where such books and records are regularly maintained,
shall be conducted during normal business hours, and shall be done in a
reasonable manner so as to minimize the disruption and interference with normal
business activities. Such access shall extend only insofar as such books and
records relate to the Sellers or events arising prior to the Closing Date with
respect to the Business or the Sellers.
(b) Each Seller Entity agrees that each of Parent and the
Purchaser and their attorneys, agents, accountants and designees may have such
access to the books and records of the Business which were not part of the
Assets and such right to make copies thereof as Parent or the Purchaser may
reasonably deem necessary. Any such examination shall be at the expense of
Parent and the Purchaser, shall be performed at the place where such books and
records are regularly maintained, shall be conducted during normal business
hours, and shall be done in a reasonable manner so as to minimize the disruption
and interference with normal business activities. Such access shall extend only
insofar as such books and records relate to the Business or events arising after
the Closing Date with respect thereto.
41
<PAGE> 47
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
OMNICARE, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
BADGER ACQUISITION CORP.
By:___________________________________
Name:_________________________________
Title:________________________________
EXTENDICARE HEALTH SERVICES, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
THE SELLERS:
ALTERNACARE PLUS ENTERPRISES, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
BAY GERIATRIC PHARMACY, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
42
<PAGE> 48
THE DRUGGIST, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
HOME CARE PHARMACY, INC. OF
FLORIDA.
By:___________________________________
Name:_________________________________
Title:________________________________
POLY-STAT COMPUTER APPLICATIONS,
INC.
By:___________________________________
Name:_________________________________
Title:________________________________
POLY-STAT SUPPLY CORPORATION
By:___________________________________
Name:_________________________________
Title:________________________________
Q.D. PHARMACY, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
UNITED PROFESSIONAL COMPANIES,
INC.
By:___________________________________
Name:_________________________________
Title:________________________________
43
<PAGE> 1
EXHIBIT 11
EXTENDICARE HEALTH SERVICES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30 June 30
------------------------- -------------------------
1998 1997 1998 1997
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net Earnings $2,301 $10,308 $4,208 $20,476
Weighted Average Number of
Common Shares Outstanding 947 947 947 947
------ ------- ------ -------
Net earnings per Common Share $ 2 $ 11 $ 4 $ 22
====== ======= ====== =======
</TABLE>
The Company does not have a complex capital structure and therefore, only has
basic earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF EXTENDICARE HEALTH SERVICES, INC. FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,559
<SECURITIES> 0
<RECEIVABLES> 247,550
<ALLOWANCES> 19,015
<INVENTORY> 9,840
<CURRENT-ASSETS> 280,400
<PP&E> 900,203
<DEPRECIATION> 201,304
<TOTAL-ASSETS> 1,250,050
<CURRENT-LIABILITIES> 189,748
<BONDS> 684,513
0
0
<COMMON> 1
<OTHER-SE> 285,777
<TOTAL-LIABILITY-AND-EQUITY> 1,250,050
<SALES> 0
<TOTAL-REVENUES> 583,506
<CGS> 0
<TOTAL-COSTS> 485,009
<OTHER-EXPENSES> 58,388
<LOSS-PROVISION> 5,055
<INTEREST-EXPENSE> 30,103
<INCOME-PRETAX> 10,006
<INCOME-TAX> 5,255
<INCOME-CONTINUING> 4,208
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,208
<EPS-PRIMARY> 4
<EPS-DILUTED> 4
</TABLE>
