<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1999
REGISTRATION NO. 333-62679
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ACCREDO HEALTH, INCORPORATED
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8099 62-1642871
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
1640 CENTURY CENTER PARKWAY, SUITE 101
MEMPHIS, TN 38134
(901) 385-3688
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
DAVID D. STEVENS
CHIEF EXECUTIVE OFFICER
ACCREDO HEALTH, INCORPORATED
1640 CENTURY CENTER PARKWAY, SUITE 101
MEMPHIS, TN 38134
(901) 385-3688
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN L. POTTLE, ESQ. JOHN J. EGAN III, P.C.
ALSTON & BIRD LLP GOODWIN, PROCTER & HOAR LLP
ONE ATLANTIC CENTER EXCHANGE PLACE
1201 WEST PEACHTREE STREET BOSTON, MA 02109-2881
ATLANTA, GA 30309-3424 (617) 570-1000
(404) 881-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable on or after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of this prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 29, 1999
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
3,000,000 SHARES
[LOGO]
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby (the "Offering")
are being sold by the Company. Prior to this Offering, there has been no public
market for the Common Stock of the Company. It is currently estimated that the
initial public offering price for the Common Stock will be between $15.00 and
$17.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
applied to have the Common Stock quoted on the Nasdaq National Market under the
symbol ACDO.
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share...................... $ $ $
Total(3)....................... $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock solely to cover over-allotments,
if any. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $
, respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1999, at the offices of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
SUNTRUST EQUITABLE SECURITIES
, 1999
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. As permitted by the rules and regulations of the Commission,
this Prospectus, which is part of the Registration Statement, omits certain
information, exhibits, schedules and undertakings set forth in the Registration
Statement. For further information pertaining to the Company and the Common
Stock, reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance where a copy of the document has been filed as an exhibit to
the Registration Statement reference is made to the exhibit filed. The
Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60611. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's site on the Internet's World Wide Web,
located at http://www.sec.gov. The Registration Statement, including all
exhibits thereto and amendments thereof, has been filed with the Commission
through EDGAR.
Accredo Health, Incorporated-SM- is a service mark of the Company and Nova
Factor-Registered Trademark- is a trademark of the Company. All other service
marks, trademarks and trade names referred to in this Prospectus are the
property of their respective owners.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
THE COMPANY
Accredo Health, Incorporated ("Accredo" or the "Company") provides
specialized contract pharmacy and related services pursuant to agreements with
biotechnology drug manufacturers relating to the treatment of patients with
certain costly, chronic diseases. Because of the unique needs of patients
suffering from chronic diseases, biotechnology drug manufacturers have
recognized the benefits of customized treatment programs to facilitate alternate
site drug administration, ensure compliance with treatment regimens, provide
reimbursement assistance and capture valuable clinical and patient demographic
information. The Company addresses the needs of the manufacturers by providing
specialized services that facilitate product launch and patient acceptance,
including the collection of timely drug utilization and patient compliance
information, patient education and monitoring through the use of written
materials and telephonic consultation, reimbursement expertise and overnight
drug delivery. The Company believes that its ability to accelerate market
penetration and increase revenues for new biotechnology drugs makes it an
attractive partner for manufacturers as evidenced by its preferred relationships
with Genzyme Corporation ("Genzyme"), Biogen, Inc. ("Biogen"), Genentech, Inc.
("Genentech") and Centocor Inc. ("Centocor"). While these relationships are not
exclusive, the Company's preferred status generally involves a designation of
the Company as a preferred or recommended provider of the manufacturer's drugs,
direct marketing of the Company's services, customized pricing reflecting the
Company's specialized services and flexibility in adjusting prices and other
terms in the event of changed market conditions or service levels.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic and
potentially life threatening diseases; (ii) are expensive, with annual therapy
costs generally ranging from $6,000 to $200,000 per patient; (iii) are
administered through injection; and (iv) require temperature control or other
specialized handling as part of their distribution process. Currently, the
Company provides services that address the needs of patients with the following
diseases: Gaucher Disease, a hereditary liver enzyme deficiency; hemophilia, a
hereditary bleeding disorder; Multiple Sclerosis, a debilitating disease of the
central nervous system; and growth hormone-related disorders. In addition, in
August 1998 the Company entered into an agreement with Centocor to provide its
services to patients with Crohn's Disease, a chronic inflammatory disease
affecting the gastrointestinal tract. These diseases generally require life-long
therapy, except for growth hormone-related disorders which typically require
treatment for six to ten years.
The Company believes that it is well positioned to take advantage of a large
drug development pipeline and the increasing trend toward specialized
outsourcing by the biotechnology drug industry. The Company believes that
biotechnology products represent the most expensive and rapidly growing part of
the new drug pipeline. The Company continuously monitors biotechnology drugs in
various phases of clinical development with a particular focus on identifying
potential new drugs for the treatment of costly, chronic diseases. Unlike many
traditional drugs, these products often possess specific characteristics that
make utilization and compliance increasingly difficult. They are often composed
of unstable proteins which must be taken by injection and require timely,
temperature maintained distribution, dosage monitoring, and controlled inventory
management. In addition, expert reimbursement management is crucial as a result
of their high cost. When addressing chronic diseases, the challenges facing
biotechnology drug manufacturers are often heightened by small patient
populations and the need for patients to remain on therapy for extended periods.
In response to the challenges facing biotechnology drug manufacturers, which
include often limited resources, the unpredictability of the drug approval
process and the onset of significant competition, many manufacturers have sought
to outsource various stages of product development in order to realize a return
on investment prior to the expiration of any patent or orphan drug status
exclusivity. This has included discovery research by outsourcing genomics and
screening functions and clinical development through the use of contract
research organizations (CROs) and site management organizations (SMOs). This
trend has also extended to product commercialization and launch through the
outsourcing of manufacturing, sales and marketing, product detailing, pharmacy
and distribution services and patient support programs.
The Company's objective is to be the leading provider of specialized
contract pharmacy and related services. Key elements of the Company's strategy
include: (i) expanding the number of chronic diseases served; (ii) leveraging
its expertise to expand its service offerings; (iii) establishing additional
relationships with academic medical centers and children's hospitals that treat
patients with costly, chronic diseases; (iv) increasing its number of payor
contracts; and (v) pursuing acquisitions of similar or complementary businesses.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...................... 3,000,000 shares
Common Stock to be outstanding after the Offering........ 8,625,587 shares(1)
Use of proceeds.......................................... To repay certain indebtedness, to redeem
the Company's outstanding Series A
Cumulative Preferred Stock and for
working capital and other general
corporate purposes, including possible
acquisitions.
Proposed Nasdaq National Market symbol................... ACDO
</TABLE>
- ------------------------
(1) Excludes 1,600,000 shares of Common Stock reserved for issuance under the
Company's stock option and employee stock purchase plans, of which 900,786
shares are subject to outstanding options at a weighted average exercise
price of $3.79 per share. See "Capitalization."
------------------------------
UNLESS THE CONTEXT SUGGESTS OTHERWISE, REFERENCES IN THIS PROSPECTUS TO THE
"COMPANY" OR "ACCREDO" MEAN ACCREDO HEALTH, INCORPORATED AND ITS SUBSIDIARIES
AND PREDECESSOR ENTITIES. EXCEPT WHERE OTHERWISE INDICATED, ALL INFORMATION IN
THIS PROSPECTUS: (I) GIVES EFFECT TO A RECAPITALIZATION TO BE EFFECTIVE PRIOR TO
COMPLETION OF THE OFFERING PURSUANT TO WHICH 1,100,000 SHARES OF COMMON STOCK
HELD BY THE COMPANY'S PRINCIPAL STOCKHOLDER, WELSH, CARSON, ANDERSON AND STOWE
VII, L.P. ("WCAS VII"), WILL BE EXCHANGED FOR 1,100,000 SHARES OF NON-VOTING
COMMON STOCK OF THE COMPANY (THE "RECAPITALIZATION"); (II) GIVES EFFECT TO THE
REDEMPTION OF ALL OUTSTANDING SHARES OF THE COMPANY'S SERIES A CUMULATIVE
PREFERRED STOCK (THE "SERIES A PREFERRED STOCK") AT A REDEMPTION PRICE OF $100
PER SHARE (PLUS ACCRUED AND UNPAID DIVIDENDS) USING A PORTION OF THE NET
PROCEEDS FROM THE OFFERING; AND (III) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. UNLESS THE CONTEXT SUGGESTS OTHERWISE, REFERENCES IN THIS
PROSPECTUS TO "COMMON STOCK" INCLUDE THE NON-VOTING COMMON STOCK TO BE ISSUED AS
PART OF THE RECAPITALIZATION.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
COMPANY(1)
--------------------------------------------
PREDECESSOR(1) SIX
-------------------------- MONTHS
JULY 1, MAY 24, ENDED
1995 1996 YEARS ENDED DECEMBER
YEAR ENDED THROUGH THROUGH JUNE 30, 31,
JUNE 30, MAY 31, JUNE 30, -------------------- ---------
1995 1996 1996 1997 1998 1997
------------- ----------- ----------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenues:
Net patient service revenue............. $ 71,513 $ 68,585 $ 6,647 $ 106,143 $ 170,002 $ 80,367
Other revenue........................... 6,710 6,346 597 8,049 9,806 4,680
Equity in net income (loss) of joint
ventures.............................. 646 (139) 49 1,017 1,150 539
------------- ----------- ----------- --------- --------- ---------
Total revenues...................... 78,869 74,792 7,293 115,209 180,958 85,586
Operating expenses:
Cost of services........................ 68,273 65,867 6,450 101,081 154,046 73,087
General and administrative.............. 2,714 2,753 627 5,939 12,351 5,729
Bad debts............................... 1,322 1,860 251 2,977 3,165 1,582
Depreciation and amortization........... 76 104 126 1,599 2,528 1,245
Corporate overhead allocation(2)........ 1,900 4,206 -- -- -- --
------------- ----------- ----------- --------- --------- ---------
Total operating expenses............ 74,285 74,790 7,454 111,596 172,090 81,643
------------- ----------- ----------- --------- --------- ---------
Operating income (loss)..................... 4,584 2 (161) 3,613 8,868 3,943
Interest expense, net....................... 943 266 106 983 3,552 1,781
------------- ----------- ----------- --------- --------- ---------
Income (loss) before income taxes........... 3,641 (264) (267) 2,630 5,316 2,162
Income tax expense (benefit)................ 1,387 (72) (29) 1,508 2,495 1,100
------------- ----------- ----------- --------- --------- ---------
Net income (loss)........................... $ 2,254 $ (192) (238) 1,122 2,821 1,062
Mandatorily redeemable cumulative preferred
stock dividends........................... (170) (2,043) (2,043) (1,021)
----------- --------- --------- ---------
Net income (loss) attributable to common
stockholders.............................. $ (408) $ (921) $ 778 $ 41
----------- --------- --------- ---------
----------- --------- --------- ---------
Net income (loss) per share attributable to
common stockholders--diluted(4)........... $ (.08) $ (.18) $ .13 $ .01
----------- --------- --------- ---------
----------- --------- --------- ---------
Weighted average shares and dilutive
equivalents outstanding--diluted.......... 5,107 5,418 5,875 5,852
<CAPTION>
1998
---------
STATEMENT OF OPERATIONS DATA:
Revenues:
Net patient service revenue............. $ 113,748
Other revenue........................... 5,647
Equity in net income (loss) of joint
ventures.............................. 631
---------
Total revenues...................... 120,026
Operating expenses:
Cost of services........................ 101,909
General and administrative.............. 8,299
Bad debts............................... 2,284
Depreciation and amortization........... 1,320
Corporate overhead allocation(2)........ --
---------
Total operating expenses............ 113,812
---------
Operating income (loss)..................... 6,214
Interest expense, net....................... 1,730
---------
Income (loss) before income taxes........... 4,484
Income tax expense (benefit)................ 1,930
---------
Net income (loss)........................... 2,554
Mandatorily redeemable cumulative preferred
stock dividends........................... (1,021)
---------
Net income (loss) attributable to common
stockholders.............................. $ 1,533
---------
---------
Net income (loss) per share attributable to
common stockholders--diluted(4)........... $ .25
---------
---------
Weighted average shares and dilutive
equivalents outstanding--diluted.......... 6,162
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
AS
ACTUAL ADJUSTED(3)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 1,636 $ 3,344
Working capital..................................................................... 25,470 27,178
Total assets........................................................................ 135,256 136,964
Long-term debt...................................................................... 36,538 27,498
Mandatorily redeemable cumulative preferred stock................................... 30,814 --
Stockholders' equity................................................................ 19,411 61,748
</TABLE>
- ------------------------
(1) The Company was incorporated on May 24, 1996. On May 31, 1996, the Company
acquired Southern Health Systems, Inc. ("SHS"), a holding company, and its
wholly-owned subsidiary, Nova Factor, Inc. ("Nova Factor" or the
"Predecessor"). Since the Company was newly formed at May 24, 1996, and
because the Predecessor had been in existence for several years, the Company
is considered the successor to the Predecessor's operations. The balance
sheet data of the Predecessor represents the historical cost basis of the
Predecessor's assets and liabilities prior to its acquisition by the
Company. The acquisition of the Predecessor by the Company resulted in a new
basis of accounting such that the Predecessor's assets and liabilities were
recorded at their fair value in the Company's consolidated balance sheet
upon consummation of the acquisition. Additionally, the Company acquired
Horizon Health Systems, Inc. ("HHS") on June 1, 1997. Accordingly, the
Summary Financial Data are not strictly comparable for the periods
presented. See Notes 1 and 3 of Notes to the Company's Consolidated
Financial Statements.
(2) The Predecessor has been allocated expenses for certain services provided by
its parent, SHS, including cash management, tax reporting, risk management
and executive management services. Charges for these services were based
upon a general allocation methodology determined by SHS (used to allocate
all corporate overhead expenses to SHS subsidiaries), and were not
necessarily allocated based on specific identification of expenses.
Management believes the allocation methodology is reasonable. See Note 6 of
Notes to the Nova Factor, Inc. Financial Statements.
(3) As adjusted to reflect the sale of the Common Stock offered hereby at an
assumed initial public offering price of $16.00 per share and the receipt
and application of the estimated net proceeds therefrom as if such
transactions had occurred on December 31, 1998. See "Use of Proceeds" and
"Capitalization." Retained earnings was reduced due to the extraordinary
charge, net of tax effect, for unamortized Original Issue Discount
associated with the early extinguishment of the Company's Senior
Subordinated Notes Payable with part of the Offering proceeds. At December
31, 1998, the Original Issue Discount charge associated with these Notes was
approximately $1,303,000, net of income taxes of $755,000.
(4) Historical diluted loss per share for 1996 and 1997 have been calculated
using the same denominator as used for basic loss per share because the
inclusion of dilutive securities in the denominator would have an
anti-dilutive effect.
5
<PAGE>
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY, ITS
BUSINESS AND AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS (WHICH MAY BE IDENTIFIED BY
WORDS SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND" AND
SIMILAR EXPRESSIONS) INCLUDE, WITHOUT LIMITATION, THE COMPANY'S BELIEFS
CONCERNING THE AVAILABILITY OF NEW DRUGS, THE DEMAND FOR ITS SERVICES, ITS
ABILITY TO EXPAND THROUGH JOINT VENTURES AND ACQUISITIONS, ITS ABILITY TO
MAINTAIN ITS PRICING ARRANGEMENTS WITH SUPPLIERS THAT PRESERVE ITS MARGINS, THE
IMPACT OF EXISTING AND NEW GOVERNMENT REGULATIONS, THE IMPACT OF YEAR 2000
ISSUES, ITS NEED FOR ADDITIONAL CAPITAL, THE SEASONALITY AND VARIABILITY OF ITS
OPERATING RESULTS AND ITS ABILITY TO IMPLEMENT THE STRATEGIES DESCRIBED HEREIN
AND ACHIEVE ITS OBJECTIVES. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, MANY
OF WHICH CANNOT BE PREDICTED WITH ACCURACY AND SOME OF WHICH MIGHT NOT EVEN BE
ANTICIPATED. FUTURE EVENTS AND ACTUAL RESULTS, FINANCIAL AND OTHERWISE, COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN OR CONTEMPLATED BY THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN. IMPORTANT FACTORS THAT COULD CONTRIBUTE TO SUCH
DIFFERENCES ARE SET FORTH BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING IN "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."
DEPENDENCE ON RELATIONSHIPS WITH LIMITED NUMBER OF BIOTECHNOLOGY DRUG
MANUFACTURERS. The Company's revenue and profitability are highly dependent on
its relationships with a limited number of biotechnology drug companies that
manufacture and supply drugs for the specific chronic diseases served by the
Company. The Company derives a substantial portion of its total revenue from its
relationships with its three largest suppliers, Genzyme, Biogen and Genentech.
The Company's revenue derived from these relationships represented 39%, 29% and
5%, respectively, of total revenue for the six months ended December 31, 1998;
46%, 23%, and 6%, respectively, for the fiscal year ended June 30, 1998 and 64%,
14% and 9%, respectively, for the fiscal year ended June 30, 1997. Due to the
Company's focus on a limited number of chronic diseases, the Company is likely
to continue to experience a high degree of concentration of business with
several suppliers, which concentration may increase from continuing
consolidation in the biotechnology industry. The Company's agreements with these
suppliers generally limit the Company's ability to supply competing drugs during
(and in some cases for up to five years after) the term of the agreement, allow
the supplier to distribute directly or through other parties, are generally
short-term and may be canceled by either party, without cause, upon between 60
and 90 days prior notice. The Company and its suppliers periodically adjust the
Company's purchase price and other terms for the drugs covered by such contracts
as well as the scope and pricing of services provided by the Company under such
contracts. Any termination, adverse adjustment of purchase price or other terms,
change in the supplier's distribution methods or adverse change in the Company's
relationship with any of its suppliers (including as a result of consolidation
among drug suppliers) could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Disease
Markets and Manufacturer Relationships" and "--Suppliers."
CONCENTRATION OF DRUGS AND CHRONIC DISEASES. The Company currently focuses
almost exclusively on a limited number of complex and expensive drugs that treat
certain specific chronic diseases: Gaucher Disease, for which the Company offers
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- supplied by
Genzyme; Multiple Sclerosis, for which the Company primarily offers Biogen's
Avonex-Registered Trademark- (Interferon Beta-1a)
("Avonex-Registered Trademark-"); growth hormone-related disorders, for which
the Company primarily offers Protropin-Registered Trademark-,
Nutropin-Registered Trademark- and Nutropin AQ-Registered Trademark- supplied by
Genentech; and hemophilia, for which the Company offers all currently approved
clotting factor products. In addition, in August 1998 the Company entered into a
contract with Centocor to distribute Remicade-TM- for the treatment of Crohn's
Disease and in October 1998 initiated sales and services with respect to
Remicade-TM-. The Company's revenue derived from its pharmacy services related
to Gaucher Disease, Multiple Sclerosis, growth hormone-related disorders and
hemophilia represented 39%, 29%, 6% and 23%, respectively, of total revenue for
the six months ended December 31, 1998; 46%, 23%, 7% and 23%, respectively, for
the fiscal year ended June 30, 1998 and 64%, 14%, 10% and 9%, respectively, for
the fiscal year ended June 30, 1997. The drugs
6
<PAGE>
offered by the Company are complex (generally requiring injection, special
handling and patient education), are expensive (with small numbers of patients
representing large amounts of revenue), serve small patient populations in the
United States and, other than drugs for hemophilia and growth hormone-related
disorders, are available only from single sources that generally restrict the
Company from offering competing drugs. Certain drugs handled by the Company have
been granted "orphan drug" status by the United States Food and Drug
Administration ("FDA") for the treatment of rare diseases or conditions with
small patient populations. The FDA provides drug manufacturers with special
incentives, including research tax credits and drug study design assistance, for
orphan drug development. Orphan drug status also provides that, once an orphan
drug receives FDA approval, the FDA cannot approve a second drug for the same
treatment indication for a period of seven years, unless the new drug is either
physiochemically different or clinically superior. The Company is not the
exclusive provider of pharmacy services for all patients in any particular
market or for any particular disease. In addition, there are alternative
treatment regimens, other than those offered by the Company, available for each
disease treated by the Company, except Gaucher Disease. As a result, the Company
could be materially and adversely affected by a variety of factors, such as
patients shifting to other currently available treatment regimens, the
development of a new treatment modality not requiring the Company's specialty
pharmacy services, an adverse reaction to or recall of a drug, the expiration of
or challenge to a drug patent, the loss of orphan drug status, the availability
of a competing treatment through a new drug or a new indication for an existing
drug, the loss of a managed care or other payor relationship covering a number
of high revenue patients, a disease cure or the death of a high revenue patient.
In July 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen
alleging patent infringement by Biogen in the production of
Avonex-Registered Trademark- and seeking, among other things, a permanent
injunction restraining Biogen from such alleged infringement. As of January
1999, the suit involving Berlex was still pending and a trial date is currently
set for September 1999. The granting of a permanent injunction that restrains
Biogen from manufacturing Avonex-Registered Trademark- or the inability of
Biogen to continue to supply Avonex-Registered Trademark- on terms favorable to
the Company could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, due to the small
patient populations of the diseases serviced by the Company, future growth is
highly dependent on the Company expanding the base of drugs for which it
provides its services, expanding its relationships with its current suppliers
and establishing relationships with new suppliers, none of which can be assured.
See "Business--Disease Markets and Manufacturer Relationships" and
"--Suppliers."
DEPENDENCE ON MEDICAL CENTER RELATIONSHIPS. The Company has certain joint
venture or business management relationships, as applicable, with seven medical
centers (or their affiliates) that involve services primarily related to
hemophilia and growth hormone-related disorders. For the six-month period ended
December 31, 1998 and the fiscal years ended June 30, 1998 and 1997, the Company
derived an aggregate of approximately 14%, 22% and 39%, respectively, of its
income before income taxes from its equity in the net income of these joint
ventures, and, in particular, 5%, 12% and 24%, respectively, from the Company's
joint venture with Alternative Care Systems, Inc. located in Dallas, Texas. The
Company and each of the medical centers with which it has a joint venture
typically share in the profits and losses of the venture in proportion to their
respective capital contributions, with neither party having voting control. The
agreements with these medical centers are short-term, ranging between one and
five years in duration, and may be cancelled by either party, without cause,
upon between one and twelve months prior notice. Any termination, adjustment to
terms or adverse change in the Company's relationships with these medical
centers, including as a result of consolidation within the hospital industry,
regulatory uncertainties inherent in the structure of the relationships or
restrictive changes to regulatory requirements, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Strategic Relationships with Medical Centers" and "--Government
Regulation."
DEPENDENCE ON BIOTECHNOLOGY DRUG INDUSTRY. The Company's business is highly
dependent on research, development, manufacturing and marketing expenditures of
biotechnology drug companies and the ability of such companies to develop,
supply and generate demand for drugs that meet the Company's service model. The
Company has benefited to date from the willingness of such companies to
outsource specialty pharmacy services such as those offered by the Company, but
there can be no assurance that this trend will continue. Furthermore,
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the Company would be materially and adversely affected by unfavorable
developments in the biotechnology drug industry generally, such as, among other
things, supply shortages, adverse drug reactions, drug recalls, increased
competition among biotechnology drug companies, the inability of drug companies
to obtain capital needed to finance product development, governmental or private
market initiatives to reduce the retail price of drugs, changes in the FDA
approval process or governmental or private initiatives to regulate the manner
in which drug manufacturers, health care providers or pharmacies promote or sell
their products and services. Any of these factors could result in a decline in
the development of drugs, a general decline in research, development and
marketing expenditures, a reduction in the retail price of drugs sold by the
Company, a shortage of drugs sold by the Company or a reduction in the use by
drug companies of the specialty pharmacy services offered by the Company, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Industry Background."
DEPENDENCE ON PAYORS AND REIMBURSEMENT RELATED RISKS. The profitability of
the Company depends on payment and reimbursement from governmental and
nongovernmental third-party payors. The primary trend in the United States
health care industry is toward cost containment. The increasing prevalence of
managed care, centralized purchasing decisions, consolidation among and
integration of health care providers and competition for patients is continuing
to affect pricing, purchasing and usage patterns in health care. Decisions
regarding the use of a particular drug treatment are increasingly influenced by
large private payors, managed care organizations, group purchasing
organizations, pharmacy benefits management companies, regional integrated
delivery systems and similar organizations, and are becoming more economically
focused, with decisions taking into account product cost and whether a product
reduces the overall cost of treatment. For the six-month period ended December
31, 1998 and the fiscal years ended June 30, 1998 and 1997, the Company derived
approximately 83%, 80% and 83%, respectively, of its gross patient service
revenue from private payors (including self-pay), which included 6%, 7% and 11%,
respectively, from sales to private physician practices whose ultimate payor is
typically Medicare. Prior to the Company acquiring an interest in Childrens
Hemophilia Services from Children's Home Care ("CHC"), the Company sold products
and services to CHC. At December 31, 1998, CHC owed the Company $3,454,986 of
which $2,536,982 had been outstanding for over 90 days. Furthermore, many other
private payors, including large managed care organizations and some private
physician practices, have recently experienced financial difficulty. There can
be no assurance that the Company will not be adversely affected by cost
containment measures exerted by its third party payors, the influence of such
organizations over decisions regarding the use of drug treatments or the
financial inability of any such payors, including private physician practices,
to satisfy their payment obligations to the Company. See "Business--Payors."
The Company also derives a significant portion of its revenue from
governmental programs such as Medicare and Medicaid. For the six-month period
ended December 31, 1998 and the fiscal years ended June 30, 1998 and 1997, the
Company received reimbursement payments from federal and state programs that
accounted for approximately 17%, 20% and 17%, respectively, of the Company's
gross patient service revenue, excluding sales to private physician practices
whose ultimate payor is typically Medicare. Such programs are highly regulated
and subject to frequent and substantial changes and cost containment measures.
In recent years, changes in these programs have limited and reduced
reimbursement to providers and Congress recently enacted the Balanced Budget Act
of 1997 which establishes a plan to balance the federal budget by fiscal year
2002 and which includes significant additional reductions in spending levels for
these programs. This legislation also replaced and relaxed the federal Medicaid
payment standard, thereby increasing state discretion over the financial
administration of Medicaid programs. Furthermore, federal and state proposals
are pending that would impose further limitations on governmental payments and
that would increase patient co-payments and deductibles. Additionally, a number
of states are considering legislation designed to reduce their Medicaid
expenditures and provide universal coverage and additional care for certain
populations, including proposals to impose additional taxes on providers to help
finance or expand such programs. Any of these changes could result in
significant reductions in payment levels for drugs handled and services provided
by the Company, which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Payors."
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VARIATION IN QUARTERLY OPERATING RESULTS; SEASONALITY. The Company's
results of operations historically have fluctuated on a quarterly basis and can
be expected to continue to be subject to quarterly fluctuations. In particular,
the Company typically increases its operating expenses in anticipation of the
launch of a new drug, and if the new drug does not generate the levels of sales
during the periods anticipated by management, the Company's results in that and
future quarters could be adversely affected. Quarterly results can also
fluctuate as a result of the timing of periodic adjustments to prices and other
terms with the Company's drug suppliers, the accuracy of estimates of resources
required for ongoing programs, the timing and integration of acquisitions,
changes in regulations related to biotechnology companies, physician prescribing
patterns, and general economic conditions, none of which can be adequately
predicted by the Company. Quarterly operating results also fluctuate as a result
of the annual renewal (on a calendar year basis) of deductible and co-payment
requirements, thereby affecting patient ordering patterns in a manner that
creates a seasonal reduction in revenue from existing drug programs for the
Company's third fiscal quarter ending March 31. Quarterly results may also
fluctuate as a result of the Company providing drugs, now or in the future, that
treat seasonal illnesses. The Company believes that quarterly comparisons of its
financial results may not necessarily be meaningful and should not be relied
upon as an indication of future performance. In addition, fluctuations in
quarterly results could affect the market price of the Common Stock in a manner
unrelated to the longer term operating performance of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Fluctuations and Seasonality."
JOINT VENTURE AND ACQUISITION RISKS. As part of its strategy, the Company
continually evaluates joint venture and acquisition opportunities. Such
transactions involve numerous risks, including difficulties in the assimilation
of operations, costs incurred in connection with the transaction, diversion of
management's attention from other business concerns, potential loss of key
employees of an acquired company and delays to address regulatory requirements.
There can be no assurance that the Company will complete any future acquisitions
or joint ventures, or that such transactions, if completed, will be integrated
successfully or will contribute favorably to the Company's operations and
financial condition. In addition, acquisitions and joint ventures can expose the
Company to unknown or contingent liabilities of acquired businesses, including
liabilities for failure to comply with health care or reimbursement laws. In May
1996 the Company acquired all of the outstanding capital stock of SHS, which had
four subsidiaries (including Nova Factor), each of which had prior operating
histories in one or more health care businesses. Prior to closing the
acquisition, SHS divested all of its subsidiaries other than Nova Factor.
However, there can be no assurance that the Company will not be held liable for
matters relating to the operations of the divested subsidiaries for periods
prior to the divestiture. In June 1997, the Company acquired all of the
outstanding capital stock of HHS, which had an extensive operating history, and
in November 1998 the Company acquired a 50% interest in two California general
partnerships. While the Company negotiates indemnification provisions that it
considers to be appropriate for the transactions that it enters into, there can
be no assurance that liabilities relating to the prior operations of these and
other acquired companies will not have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
future acquisitions or joint ventures may result in dilutive issuances of equity
securities, incurrence of additional debt, amortization of expenses related to
acquired goodwill and intangible assets and exposure to unknown or contingent
liabilities, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "The Company."
GOVERNMENT REGULATION. The conduct of marketing, selling and purchasing
drugs and medical supplies by and among manufacturers, distributors, health care
providers and patients is extensively regulated and periodically scrutinized by
state and federal governments for compliance with laws and regulations
regarding, among other things, inducements for referrals, prohibited financial
relationships with physicians, joint venture and management arrangements,
product discounts, incentives to patients and professional licensure. This
regulatory framework is complex and the laws are very broad in scope, subject to
differing interpretations and lack substantive court decisions addressing many
arrangements under which the Company has conducted and expects to conduct its
business. Any failure to comply or alleged failure to comply with applicable
laws and regulations could have a material adverse effect on the Company's
business, financial conditions and results of operations. See
"Business--Government Regulation."
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In particular, federal and state governments enforce a federal statute that
prohibits the offer, payment, solicitation or receipt of any remuneration,
directly or indirectly, overtly or covertly, to induce or in exchange for the
referral of patients covered by certain governmental programs, or the leasing,
purchasing, ordering or arranging for or recommending the lease, purchase or
order of any item, good, facility or service covered by such programs (the
"Anti-Kickback Law"). The Health Insurance Portability and Accountability Act of
1996 ("HIPAA") greatly expanded the prohibitions of the Anti-Kickback Law by
applying them to almost all health care programs that receive federal funding,
creating new violations for certain fraudulent activity applicable to both
public and private "health care benefit programs" and prohibiting inducements to
Medicare or Medicaid eligible patients. The Company is also subject to the
Ethics in Patient Referrals Act of 1989, as amended, commonly referred to as the
"Stark Law," which prohibits physician referrals for certain health-related
items, including those offered by the Company, to entities with which the
physician or an immediate family member has a "financial relationship," and
prohibits the recipient of any such referral from billing for the referred item.
Violations of these laws are punishable by civil sanctions, including
significant monetary penalties and exclusion from participation in the Medicare
and Medicaid programs, and criminal sanctions in the case of the Anti-Kickback
Law and HIPAA. Due to the breadth and complexity of these laws, there can be no
assurance that the Company, any of its personnel, or any significant customer or
business partner of the Company, will not become subject to sanctions that could
have a material adverse effect on the Company's business, financial condition
and results of operations. Additionally, the sanctioning or exclusion of a
manufacturer or recipient of the Company's products or services, even for
activities unrelated to those of the Company, could also have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Government Regulation."
In an attempt to clarify which arrangements are not subject to prosecution
under the Anti-Kickback Law, the Department of Health and Human Services
("DHHS") adopted certain "safe harbor" regulations and continues to publish
clarifications to such safe harbors. Arrangements that comply with all the
requirements of all applicable safe harbors are deemed not to violate the
Anti-Kickback Law. Several of the Company's business arrangements, such as joint
venture and management arrangements with medical centers, service arrangements
with physicians and product discount arrangements with its suppliers, do not
satisfy all of the requirements necessary to fall within the applicable safe
harbor. Furthermore, the Office of the Inspector General ("OIG") of DHHS has
published certain proposed regulations under HIPAA outlining certain permissible
patient incentives designed to promote preventative care or that are DE MINIMIS
under the HIPAA prohibition against beneficiary inducements. The Company
routinely provides certain items and services to its patients that may not fit
within the proposed regulation. It is possible that some of the Company's
practices could be challenged. Although failure of a transaction or arrangement
to fit within a specific safe harbor provision or the proposed regulation for
beneficiary inducements does not necessarily mean that the transaction or
arrangement is illegal or that prosecution will be pursued, there can be no
assurance that the Company's practices will not be challenged, or that the
Company will not be subject to sanctions or be required to alter or discontinue
certain of its practices, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Government Regulation."
State laws prohibit the practice of medicine, pharmacy and nursing without a
license. For example, many states interpret the practice of nursing to include
health teaching, health counseling, the provision of care supportive to or
restorative of life and well being and the administration of medical regimens
prescribed by a physician. Accordingly, to the extent that the Company assists
patients and providers in helping patients to comply with prescribed treatment
programs, such activities could be deemed by a state to be the practice of
medicine, pharmacy or nursing. There can be no assurance that the Company's
operations will not be challenged as constituting the unlicensed practice of
medicine or nursing or being outside the scope of its licensed pharmacists or
pharmacy licenses. If such a challenge were made successfully in any state, the
Company and its personnel could be subject to civil and criminal penalties under
such state's law and the Company could be required to reduce, restructure,
outsource or cease its business in that state. See "Business--Government
Regulation."
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Significant public attention recently has been focused on the health care
industry due to ongoing federal and state investigations related to among other
things joint ventures, referral and billing practices, product discount
arrangements, home health care services, dissemination of confidential patient
information, clinical drug research trials and gifts for patients. In addition,
state and federal agencies have initiated billing review projects in certain
states and are expected to extend such projects to additional states, including
states in which the Company does business. These enforcement actions increase
the likelihood of governmental investigations of the Company, its affiliates and
their respective predecessors and personnel, and parties with whom it conducts
business, and there can be no assurance that governmental investigators will not
take positions that are inconsistent with industry practices, including the
Company's or such other parties' practices. In addition to investigations and
enforcement actions by governmental agencies, QUI TAM (or "whistleblowers")
actions may be brought under the False Claims Act by private individuals on
behalf of the government. Because the health care industry will continue to be
subject to substantial regulation, there can be no assurance that the Company's
activities will not be challenged or that the Company will not be subject to
sanctions or be required to alter or discontinue certain of its practices, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
POSSIBLE HEALTH CARE REFORM. Health care reform measures have been
considered by Congress and other federal and state bodies during recent years.
The intent of the proposals generally has been to reduce health care costs and
the growth of total health care expenditures, to expand health care coverage for
the uninsured and to eliminate fraud, waste and financial abuse. Although
comprehensive health care reform has been considered, only limited proposals
have been enacted. Comprehensive health care reform may be considered again and
efforts to enact reform bills are likely to continue. Implementation of
government health care reform may adversely affect development and marketing
expenditures by biotechnology companies, which could decrease the business
opportunities available to the Company or the demand for its specialty services.
The Company is unable to predict the likelihood of such legislation or similar
legislation being enacted into law or the effects that any such legislation
would have on the Company.
MANAGEMENT OF GROWTH. The Company's business has grown rapidly in its last
two fiscal years with total revenue increasing from $115.2 million in fiscal
year 1997 to $181.0 million in fiscal year 1998, and from $85.6 million in the
first six months of fiscal year 1998 to $120.0 million in the first six months
of fiscal year 1999. This growth has resulted in a substantial increase in the
number of its employees (from 203 at June 30, 1997 to 332 at December 31, 1998),
the size of its programs and the scope of its operations. This growth has placed
and, if such growth continues, will continue to place a strain on operational,
human and financial resources and may necessitate relocation of certain
operations to one or more cities in which the Company does not currently have a
facility. The Company's ability to manage such growth effectively will depend
upon its ability to enhance its management team and its ability to attract and
retain skilled employees. The Company's success will also depend on the ability
of its officers and key employees to continue to implement and improve its
operational, management information and financial control systems, and to
expand, train and manage its work force. There can be no assurance that the
Company will be able to manage any future growth successfully or provide the
necessary resources to successfully manage its business. Failure to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION; INDUSTRY CONSOLIDATION. The specialty pharmacy industry is
highly competitive and is experiencing both horizontal and vertical
consolidation. All of the drugs, supplies and services that the Company provides
are available from sources other than the Company. Current and potential
competitors of the Company include specialty pharmacy divisions of wholesale
drug distributors; specialty pharmacy distributors; pharmacy benefit management
companies; hospital-based pharmacies; retail pharmacies; home infusion therapy
companies; comprehensive hemophilia treatment centers; and other alternate site
health care providers. In addition, the Company's drug suppliers or their
competitors have developed and may continue to develop and implement their own
direct specialty pharmacy service programs in lieu of using the Company. In
addition, managed care companies, pharmacy benefit managers and other payors can
influence the source from which their enrollees may obtain drugs through
required formularies and may desire to use full-line providers on their provider
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panels. Many of the Company's competitors and potential competitors have greater
financial, technical, marketing and managerial resources than the Company.
Furthermore, certain of the Company's competitors, such as hospitals and certain
hemophilia treatment centers, are eligible for federally mandated discounts for
drug purchases that are not available to the Company, and the Federal Health
Resources and Services Administration ("HRSA") is proposing to broaden the
number of centers eligible for such discounts by requiring participation in the
discount program as a condition to receiving HRSA grants. There are relatively
few barriers to entry into the Company's specialty contract pharmacy service
segment and there can be no assurance that, as the segment continues to evolve,
additional competitors with greater resources than the Company will not enter
the market or that the Company's suppliers will not choose to provide such
specialty services directly or through other businesses that have a broader
range of sales, marketing and support services. There can be no assurance that
competitive pressures will not increase, including as a result of further
industry consolidation, or that such pressures will not have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Competition."
RELIANCE ON TELEPHONE AND COMPUTER SYSTEMS; YEAR 2000 COMPLIANCE
RISK. Because the Company believes that its success depends, in part, upon its
services provided over the telephone on a real-time basis, any continuing
disruption in either its computer system or its telephone system could adversely
affect its ability to receive and process customer orders, provide its service
to patients and ship products on a timely basis, and could adversely affect the
Company's relations with its patients and suppliers.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. By the year 2000, these
date code fields will need to accept four-digit entries to distinguish 21st
century dates from 20th century dates. Computer systems that do not accept
four-digit entries could fail or produce erroneous results and cause disruptions
of operations. As a result, many software and computer systems may need to be
upgraded or replaced in order to comply with such "year 2000" requirements. The
Company is in the process of obtaining written verification from vendors to
determine whether the Company's computer systems and software products are year
2000 compliant. Also, the Company is upgrading its pharmacy management systems,
including its billing and accounts receivable systems, to address year 2000
issues. The failure of the Company's systems to be year 2000 compliant could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Issue."
In addition, the Company has ongoing relationships with third-party payors,
suppliers, vendors, and others that may have computer systems with year 2000
problems that the Company does not control. There can be no assurance that the
Company's payors, including the fiscal intermediaries and governmental agencies,
with which the Company transacts business and which are responsible for payment
to the Company will not experience significant problems with year 2000
compliance. According to testimony before a U.S. House of Representatives
subcommittee, the Health Care Financing Administration ("HCFA"), which
administers the Medicare and Medicaid programs, is far behind in remedying year
2000 problems, which could delay payment of claims to providers. The failure of
third parties to remedy year 2000 problems could have a material adverse effect
on the Company's business, financial condition and results of operations.
RISKS RELATED TO SHIPPING. Substantially all of the Company's revenues are
derived from the sale of drugs that are shipped to its patients. The Company
ships most of its orders by overnight delivery, and typically bears the cost of
shipment. Shipping is a significant expense in the operation of the Company's
business and principally all of the Company's products are shipped by a single
carrier, Federal Express Corporation ("FedEx"). Accordingly, any significant
increase in shipping rates could have an adverse effect on the Company's results
of operations. Similarly, strikes or other service interruptions by FedEx, or by
any other carrier that may indirectly affect FedEx, would adversely affect the
Company's ability to deliver products on a timely basis and therefore its
ability to generate revenue. FedEx pilots are unionized members of the FedEx
Pilot's Association, and are currently considering whether to ratify their first
collectively bargained contract. The drugs shipped by the Company require
special handling, including refrigeration to maintain temperatures within
certain ranges. The Company does not maintain insurance against product spoilage
during shipment. Due to their high cost,
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even small shipments of the Company's products can represent significant dollar
amounts of inventory. Accordingly, the spoilage of one or more shipments of the
Company's products could have a material adverse effect on the Company's results
of operations.
DEPENDENCE ON KEY PERSONNEL. The Company depends on a number of key
executives, the loss of the services of which could have a material adverse
effect on the Company. The Company does not maintain "key person" life insurance
policies on any of its executives. The Company also depends on its ability to
attract and retain qualified professional (including pharmacists) and technical
operating staff. There can be no assurance that the Company will be able to
continue to attract and retain such personnel, and its inability to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations.
NEED FOR FINANCING. In order to implement its growth strategy, the Company
will require substantial capital resources and will need to maintain its
existing capital resources and incur, from time to time, additional short- and
long-term indebtedness, including purchasing terms from its suppliers. The
Company also may need to issue, in public or private transactions, equity or
debt securities, the terms of which will depend on market and other conditions.
There can be no assurance that existing or additional financing will be
available on terms acceptable to the Company, if at all. As a result, the
Company may not be able to implement fully its growth strategy. In addition, any
such financing may result in dilutive issuances of equity securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RISKS RELATED TO INTANGIBLE ASSETS. The formation of the Company by WCAS
VII and certain of its affiliates (collectively, "Welsh Carson") and the
subsequent acquisitions by the Company of SHS and HHS have resulted in the
recording of a significant amount of goodwill on the Company's financial
statements. As of December 31, 1998, the Company had goodwill, net of
accumulated amortization, of approximately $55.9 million, or 41% of total assets
and 288% of stockholders' equity. Goodwill arises when an acquiror pays more for
a business than the fair value of the tangible and separately measurable
intangible net assets. Generally accepted accounting principles require that
goodwill and all other intangible assets be amortized over the period benefited
by such assets. Management has determined that period to be no less than 40
years for goodwill and, therefore, the Company amortizes goodwill on a straight
line basis over a period of 40 years. The use of an inappropriately long
amortization period for a material portion of goodwill would cause an
overstatement of earnings in periods immediately following the transaction and
in later periods would cause earnings to be understated by reason of an
amortization charge for an asset no longer providing a corresponding benefit to
the Company. Earnings in later years could also be significantly affected if
management determined then that the remaining balance of goodwill is impaired
and needed to be written off as a charge against earnings. Management has
reviewed with its independent accountants the allocation of consideration paid
for the assets (including goodwill) and liabilities of the acquired business.
Management has concluded that the anticipated future benefit associated with the
goodwill recognized to date will continue indefinitely, and is not presently
aware of any persuasive evidence that any material portion of goodwill will
dissipate over a period shorter than 40 years.
In addition, the Company's growth strategy will likely result in additional
goodwill on the Company's financial statements. There can be no assurance that
the value of goodwill will ever be realized by the Company. On an on-going
basis, the Company makes an evaluation to determine whether events and
circumstances indicate that all or a portion of the carrying value of goodwill
may no longer be recoverable, in which case a charge to earnings may be
necessary to write off unrecoverable goodwill. Any future determination
requiring the write-off of a significant portion of goodwill could have a
material adverse effect on the Company's business, financial condition and
results of operations. See Note 3 of Notes to the Company's Consolidated
Financial Statements as of and for the year ended June 30, 1998.
POTENTIAL LIABILITY; AVAILABILITY OF INSURANCE. The Company's business
exposes it to risks inherent in the provision of drugs and related services.
Although the Company currently maintains professional liability insurance, there
can be no assurance that the scope of coverage or limits of such insurance will
be adequate to protect it against future claims. In addition, there can be no
assurance that the Company will be able to maintain
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adequate liability insurance in the future on acceptable terms or with adequate
coverage against potential liabilities.
CONTROL BY AND USE OF PROCEEDS TO BENEFIT EXISTING STOCKHOLDERS. Upon the
completion of this Offering, the Company's directors and executive officers and
their affiliates as a group (including shares held by Welsh Carson) will
beneficially own approximately 60% of the outstanding voting Common Stock (or
approximately 56% if the Underwriters' over-allotment option is exercised in
full). As a result, these stockholders, if acting together, will have effective
control over the Company through their ability to control the election of
directors and all other matters that require a vote by the Company's
stockholders. Such control by the existing stockholders may have the effect of
preventing a change in control of the Company. The existing stockholders'
ability to prevent such a change in control of the Company may have an adverse
effect on the market price of the Common Stock. See "Management--Directors and
Executive Officers," "Principal Stockholders," and "Description of Capital
Stock."
The Company will use a portion of the net proceeds from this Offering to
redeem all outstanding shares of Series A Preferred Stock and to prepay in full
all principal and accrued interest on the Company's outstanding 10% Senior
Subordinated Notes due June 1, 2004 (the "Senior Subordinated Notes"). Welsh
Carson owns approximately 97% of the outstanding shares of Series A Preferred
Stock and substantially all outstanding Senior Subordinated Notes. In addition,
certain executive officers and directors of the Company own, in the aggregate,
approximately 2% of the outstanding shares of Series A Preferred Stock. See "Use
of Proceeds" and "Certain Transactions."
NO PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market for the Common Stock will develop or,
if one does develop, that it will be maintained. The initial public offering
price, which will be established by negotiations between the Company and the
representatives of the Underwriters, may not be indicative of prices that will
prevail in the trading market for the Common Stock. The market price of the
Common Stock could be subject to wide fluctuations in response to variations in
operating results from quarter to quarter, changes in earnings estimates by
analysts, market conditions in the industry and general economic conditions.
Furthermore, the stock market has experienced significant price and volume
fluctuations unrelated to the operating performance of particular companies.
These market fluctuations may have an adverse effect on the market price of the
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market, or the perception that such sales might occur, could
have a material adverse effect on the market price of the Common Stock.
Immediately following the Offering, the Company will have outstanding 8,625,587
shares of Common Stock (9,075,587 shares if the Underwriters' over-allotment
option is exercised in full), excluding 900,786 shares reserved for issuance
upon the exercise of outstanding stock options. The 3,000,000 shares of Common
Stock offered hereby (3,450,000 if the Underwriters' over-allotment option is
exercised in full) will be eligible for public sale without restriction under
the Securities Act by persons other than affiliates (as that term is defined in
Rule 144 under the Securities Act) of the Company. All of the remaining
5,625,587 shares of Common Stock outstanding will be "restricted" within the
meaning of Rule 144 and may not be resold in the absence of registration under
the Securities Act or the availability of an exemption from such registration,
including the exemption provided by Rule 144. Taking into consideration the
effect of the 180-day "lock-up" agreements described herein (covering an
aggregate of 5,625,587 shares and options to purchase an additional 900,786
shares held by executive officers, other employees, directors and certain
existing stockholders of the Company), no restricted shares of Common Stock will
be eligible for sale in the public market immediately after the Offering and all
restricted shares will be eligible for sale upon the expiration of the 180-day
lock-up agreements, subject to certain volume and other limitations of Rule 144.
Holders of 5,625,587 restricted shares of Common Stock have contractual rights
to have those shares registered for resale to the public. If such holders, by
exercising their registration rights after the 180-day lockup period, cause a
large number of shares to be registered and sold in the public market, the
market price of the Common Stock might be adversely affected.
14
<PAGE>
The Company intends to register on Form S-8 under the Securities Act, as
soon as practicable on or after the effective date of the Offering, 1,600,000
shares of Common Stock reserved for issuance under the Company's stock option
and employee stock purchase plans. This registration statement will be effective
upon filing. Shares registered and issued pursuant to such registration
statement will be freely tradable except to the extent that the holders thereof
are deemed to be affiliates of the Company, in which case the transferability of
such shares will be subject to the volume limitations of Rule 144. Options for
the purchase of 900,786 shares of Common Stock are currently outstanding under
the Company's stock option plans. See "Shares Eligible for Future Sale."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER, BYLAW AND OTHER
PROVISIONS. Certain provisions of the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws, including the
classification of the Board of Directors into three classes, could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Common Stock. Certain of such provisions
allow the Company to issue preferred stock with rights senior to those of the
Common Stock and impose various procedural and other requirements which could
make it more difficult for stockholders to effect certain corporate actions. In
addition, the Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law ("DGCL"), which restricts certain business
combinations with any "interested stockholder" and may delay, defer or prevent a
change in control of the Company. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchasers of shares of Common
Stock pursuant to the Offering will experience immediate and substantial
dilution of the net tangible book value per share of Common Stock from the
initial public offering price. At an assumed initial public offering price of
$16.00 per share, purchasers in the Offering will incur dilution of $15.49 per
share. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has not and does not expect to declare or
pay any cash dividends in the foreseeable future. The Company intends to retain
all earnings, if any, in order to expand its operations. Furthermore, the
Company's bank credit agreement presently prohibits the payment of cash
dividends. The payment of cash dividends, if any, in the future is within the
discretion of the Company's Board of Directors and will depend upon the
Company's earnings, if any, capital requirements, financial condition, credit
agreements and other relevant factors. See "Dividend Policy."
15
<PAGE>
THE COMPANY
Accredo provides specialized contract pharmacy and related services
beneficial to patients with certain costly, chronic diseases. Accredo's business
was founded in 1985 by Le Bonheur Health Systems, Inc., the former parent of a
not-for-profit children's hospital in Memphis, Tennessee ("Le Bonheur"). Le
Bonheur operated the business through its subsidiary, Southern Health Systems,
Inc. ("SHS"), and through Nova Factor, Inc., one of four subsidiaries of SHS
("Nova Factor"). In May 1996, Accredo (formerly known as Nova Holdings, Inc.)
was formed to acquire SHS and Nova Factor following the divestiture by SHS of
all of its subsidiaries other than Nova Factor. Accredo continues to own SHS as
a wholly owned subsidiary, and SHS continues to own Nova Factor as a wholly
owned subsidiary. In June 1997, Accredo acquired all of the outstanding stock of
Horizon Health Systems, Inc. (d/b/a Hemophilia Health Services) ("HHS"), which
became and continues to be a wholly owned subsidiary of Accredo. See "Risk
Factors--Joint Venture and Acquisition Risks" and Note 3 of Notes to the
Consolidated Financial Statements of the Company.
The Company's principal executive offices are located at 1640 Century Center
Parkway, Suite 101, Memphis, Tennessee 38134, and its telephone number is (901)
385-3688.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$16.00 per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, are estimated to be
$43,640,000 ($50,336,000 if the Underwriters' over-allotment option is exercised
in full).
The Company expects to use the net proceeds it receives from the Offering as
follows: (i) approximately $11.0 million will be used to prepay in full all
principal and accrued interest on the Company's outstanding Senior Subordinated
Notes; (ii) approximately $31.0 million will be used to redeem all outstanding
shares of Series A Preferred Stock, including all accrued dividends thereon; and
(iii) the balance will be used for working capital and other general corporate
purposes, including possible acquisitions. Pending such uses, the balance of the
net proceeds will be invested in short term, investment grade, interest bearing
obligations. The Company from time to time considers various acquisition
proposals, but currently has no commitments or agreements with respect to any
material acquisitions.
The Senior Subordinated Notes bear interest at 10.0% per annum and mature on
June 1, 2004. The Series A Preferred Stock accrues dividends at an annual rate
of $8.00 per share. Such dividends are cumulative and accrue from the date of
issue. The mandatory redemption date of the Series A Preferred Stock is May 31,
2004.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends in the forseeable future. The payment of cash dividends in the
future will be at the discretion of the Board of Directors and will depend upon
factors such as the Company's earnings levels, capital requirements, financial
condition and other factors deemed relevant by the Board of Directors. There can
be no assurance that the Company will pay any dividends in the future.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1998 (i) the actual
capitalization of the Company and (ii) the pro forma capitalization of the
Company as adjusted to give effect to (a) the exchange by WCAS VII of 1,100,000
shares of Common Stock for 1,100,000 shares of Non-Voting Common Stock pursuant
to the Recapitalization and (b) the sale by the Company of 3,000,000 shares of
Common Stock in the Offering at an assumed initial public offering price of
$16.00 per share and the application of the estimated net proceeds therefrom
(after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company). This table should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED
----------- ---------------
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Long-term notes payable.......................................... $ 27,498 $ 27,498
----------- -------
Senior Subordinated Notes payable................................ 9,040 --
----------- -------
Mandatorily redeemable cumulative preferred stock, at redemption
amount, 300,000 shares authorized, and 255,361 shares issued
and outstanding................................................ 30,814 --
----------- -------
Stockholders' equity:
Undesignated Preferred Stock, 5,000,000 shares authorized, no
shares issued.............................................. -- --
Non-Voting Common Stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding, actual;
1,100,000 shares issued and outstanding, pro forma as
adjusted................................................... -- 11
Common Stock, $.01 par value; 30,000,000 shares authorized;
5,625,587 shares issued and outstanding, actual; 7,525,587
shares issued and outstanding, pro forma as adjusted(1).... 56 75
Additional paid-in capital................................... 17,044 60,654
Retained earnings(2)......................................... 2,311 1,008
----------- -------
Total stockholders' equity............................... 19,411 61,748
----------- -------
Total capitalization................................. $ 86,763 $ 89,246
----------- -------
----------- -------
</TABLE>
- ------------------------
(1) Excludes 1,600,000 shares of Common Stock reserved for issuance under the
Company's stock option and employee stock purchase plans, of which 900,786
shares were subject to outstanding options as of December 31, 1998 at a
weighted average exercise price of $3.79 per share.
(2) The reduction in pro forma retained earnings is related to the extraordinary
charge for unamortized Original Issue Discount associated with the early
extinguishment of the Company's Senior Subordinated Notes Payable with part
of the Offering proceeds. At December 31, 1998, the Original Issue Discount
charge associated with these Notes was approximately $1,303,000, net of
income taxes of $755,000.
17
<PAGE>
DILUTION
As of December 31, 1998, the Company's net deficit in tangible book value
was ($37.9 million), or $(6.74) per share of Common Stock. Net deficit in
tangible book value per share represents the amount of the Company's total
tangible assets, less total liabilities and mandatorily redeemable cumulative
preferred stock, divided by the number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of 3,000,000 shares of Common
Stock in the Offering at an assumed initial public offering price of $16.00 per
share and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, the pro forma net tangible book value
of the Company as of December 31, 1998 would have been approximately $4.4
million, or $.51 per share. This represents an immediate increase in net
tangible book value of $7.25 per share to existing stockholders and an immediate
dilution in net tangible book value of $15.49 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $ 16.00
Net deficit in tangible book value per share before the
Offering(1)................................................. $ (6.74)
Increase per share attributable to new investors.............. 7.25
---------
Pro forma net tangible book value per share after the
Offering(1)................................................... 0.51
---------
Dilution per share to new investors(2).......................... $ 15.49
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1998, the differences between the existing stockholders and the new investors
with respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price per share paid
(based upon an assumed initial public offering price of $16.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 5,625,587 65.2% $18,428,763 27.7% $ 3.28
New investors 3,000,000 34.8 48,000,000 72.3 16.00
--------- ----- ---------- -----
Total.............. 8,625,587 100.0% $66,428,763 100.0%
--------- ----- ---------- -----
--------- ----- ---------- -----
</TABLE>
- ------------------------
(1) Excludes 1,600,000 shares of Common Stock reserved for issuance under the
Company's stock option and employee stock purchase plans, of which 900,786
shares are subject to outstanding options at a weighted average exercise
price of $3.79 per share. To the extent that options are exercised, there
could be further dilution to new investors.
(2) Dilution per share to new investors is determined by subtracting pro forma
net tangible book value per share after the Offering from the assumed
initial public offering price per share. Dilution per share to new investors
will be $14.77 if the Underwriters' over-allotment option is exercised in
full.
18
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize certain selected financial data, which are
qualified by and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Predecessor's
and the Company's Financial Statements and the Notes thereto included elsewhere
in this Prospectus. The selected financial data with respect to (a) Nova Factor
(Predecessor) as of and for the fiscal years ended June 30, 1994 and 1995, and
as of May 31, 1996 and for the period July 1, 1995 through May 31, 1996, and (b)
the Company as of June 30, 1996 and for the period from inception (May 24, 1996)
through June 30, 1996, and as of and for the fiscal years ended June 30, 1997
and 1998 has been derived from the audited financial statements of the
Predecessor and the Company. The selected financial data at December 31, 1998
and for the six months ended December 31, 1997 and 1998 has been derived from
the unaudited financial statements of the Company, which in the Company's
opinion, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The information set forth below is not necessarily indicative of the
results of future operations.
<TABLE>
<CAPTION>
PREDECESSOR(1) COMPANY(1)
--------------------------------- ------------------------------------------
SIX
MAY 24, MONTHS
JULY 1, 1996 ENDED
YEARS ENDED 1995 (INCEPTION) DECEMBER
JUNE 30, THROUGH THROUGH YEARS ENDED JUNE 30, 31,
-------------------- MAY 31, JUNE 30, -------------------- ---------
1994 1995(2) 1996 1996 1997 1998 1997
--------- --------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Net patient service revenue.......... $ 5,442 $ 71,513 $ 68,585 $ 6,647 $ 106,143 $ 170,002 $ 80,367
Other revenue........................ 756 6,710 6,346 597 8,049 9,806 4,680
Equity in net income (loss) of joint
ventures........................... 126 646 (139) 49 1,017 1,150 539
--------- --------- ----------- --------- --------- --------- ---------
Total revenues................... 6,324 78,869 74,792 7,293 115,209 180,958 85,586
Operating expenses:
Cost of services..................... 4,016 68,273 65,867 6,450 101,081 154,046 73,087
General and administrative........... 694 2,714 2,753 627 5,939 12,351 5,729
Bad debts............................ 74 1,322 1,860 251 2,977 3,165 1,582
Depreciation and amortization........ 11 76 104 126 1,599 2,528 1,245
Corporate overhead allocation(3)..... 413 1,900 4,206 -- -- -- --
--------- --------- ----------- --------- --------- --------- ---------
Total operating expenses......... 5,208 74,285 74,790 7,454 111,596 172,090 81,643
--------- --------- ----------- --------- --------- --------- ---------
Operating income (loss).................. 1,116 4,584 2 (161) 3,613 8,868 3,943
Interest expense, net.................... -- 943 266 106 983 3,552 1,781
--------- --------- ----------- --------- --------- --------- ---------
Income (loss) before income taxes........ 1,116 3,641 (264) (267) 2,630 5,316 2,162
Income tax expense (benefit)............. 428 1,387 (72) (29) 1,508 2,495 1,100
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss)........................ $ 688 $ 2,254 $ (192) (238) 1,122 2,821 1,062
--------- --------- -----------
--------- --------- -----------
Mandatorily redeemable cumulative
preferred stock dividends.............. (170) (2,043) (2,043) (1,021)
--------- --------- --------- ---------
Net income (loss) attributable to common
stockholders........................... $ (408) $ (921) $ 778 $ 41
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share attributable
to common stockholders--diluted........ $ (0.08) $ (.18) $ .13 $ .01
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares and dilutive
equivalents outstanding--diluted....... 5,107 5,418 5,875 5,852
<CAPTION>
DECEMBER
JUNE 30, JUNE 30, 31,
-------------------- MAY 31, ------------------------------- ---------
1994 1995 1996 1996 1997 1998 1997
--------- --------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 572 $ 645 $ 1,995 $ 3,576 $ 3,676 $ 5,087 $ 2,345
Working capital.......................... 1,234 13,523 1,148 1,384 16,894 23,377 21,797
Total assets(4).......................... 4,135 44,808 27,538 72,366 116,917 118,990 124,409
Long-term debt........................... -- 4,000 -- -- 35,195 36,418 37,778
Mandatorily redeemable cumulative
preferred stock........................ -- -- -- 25,706 27,749 29,792 28,771
Stockholders' equity..................... 1,476 11,315 3,327 14,913 16,393 17,671 16,934
<CAPTION>
1998
---------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Net patient service revenue.......... $ 113,748
Other revenue........................ 5,647
Equity in net income (loss) of joint
ventures........................... 631
---------
Total revenues................... 120,026
Operating expenses:
Cost of services..................... 101,909
General and administrative........... 8,299
Bad debts............................ 2,284
Depreciation and amortization........ 1,320
Corporate overhead allocation(3)..... --
---------
Total operating expenses......... 113,812
---------
Operating income (loss).................. 6,214
Interest expense, net.................... 1,730
---------
Income (loss) before income taxes........ 4,484
Income tax expense (benefit)............. 1,930
---------
Net income (loss)........................ 2,554
Mandatorily redeemable cumulative
preferred stock dividends.............. (1,021)
---------
Net income (loss) attributable to common
stockholders........................... $ 1,533
---------
---------
Net income (loss) per share attributable
to common stockholders--diluted........ $ .25
---------
---------
Weighted average shares and dilutive
equivalents outstanding--diluted....... 6,162
1998
---------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 1,636
Working capital.......................... 25,470
Total assets(4).......................... 135,256
Long-term debt........................... 36,538
Mandatorily redeemable cumulative
preferred stock........................ 30,814
Stockholders' equity..................... 19,411
</TABLE>
- ----------------------------------
(1) The Company was incorporated on May 24, 1996. On May 31, 1996, the Company
acquired SHS, a holding company, and its wholly-owned subsidiary, Nova
Factor (the "Predecessor"). Since the Company was newly formed at May 24,
1996, and because the Predecessor had been in existence for several years,
the Company is considered the successor to the Predecessor's operations. The
balance sheet data of the Predecessor represents the historical cost basis
of the Predecessor's assets and liabilities prior to its acquisition by the
Company. The acquisition of the Predecessor by the Company resulted in a new
basis of accounting such that the Predecessor's assets and liabilities were
recorded at their fair value in the Company's consolidated balance sheet
upon consummation of the acquisition. Additionally, the Company acquired HHS
on June 1, 1997. Accordingly, the Selected Financial Data are not strictly
comparable for the periods presented. See Notes 1 and 3 of Notes to the
Company's Consolidated Financial Statements.
(2) On July 1, 1994, the Predecessor was assigned contractual rights from a
subsidiary of SHS relating to the distribution of certain drugs.
(3) The Predecessor has been allocated expenses for certain services provided
by its parent, SHS, including cash management, tax reporting, risk
management and executive management services. Charges for these services
were based upon a general allocation methodology determined by SHS (used to
allocate all corporate overhead expenses to SHS subsidiaries), and were not
necessarily allocated based on specific identification of expenses.
Management believes the allocation methodology is reasonable. See Note 6 of
Notes to the Nova Factor, Inc. Financial Statements.
(4) In May 1996, the Predecessor settled various intercompany accounts with
subsidiaries of SHS.
(5) Historical diluted loss per share for 1996 and 1997 have been calculated
using the same denominator as used for basic loss per share because the
inclusion of dilutive securities in the denominator would have an
anti-dilutive effect.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE PREDECESSOR'S AND THE COMPANY'S FINANCIAL
STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE
DISCUSSION IN THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS
PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.
OVERVIEW
Accredo provides specialized contract pharmacy and related services for the
treatment of patients with certain costly, chronic diseases. The Company derives
revenues primarily from the sale of biotechnology drugs to patients.
Historically, the majority of the Company's revenues have been derived from
products and services provided with respect to four diseases: Gaucher Disease,
hemophilia, Multiple Sclerosis and growth hormone-related disorders. The
products provided by the Company are purchased directly from biotechnology drug
manufacturers pursuant to preferred relationship agreements in the case of
Gaucher Disease, Multiple Sclerosis, and growth hormone-related disorders and
purchase agreements in the case of hemophilia. Approximately 39%, 29% and 6% of
the Company's total revenues for the six-month period ended December 31, 1998
and 46%, 23% and 7% of total revenues in fiscal year 1998 were generated from
sales and services provided with respect to Gaucher Disease, Multiple Sclerosis
and growth hormone-related disorders, respectively, and which sales and services
were (and will continue to be) dependent upon the Company's preferred
relationships with Genzyme, Biogen and Genentech, respectively. Sales and
services provided with respect to hemophilia represented approximately 23% of
the Company's total revenues for the six-month period ended December 31, 1998
and for fiscal year 1998.
The Company's preferred relationship agreements describe certain services to
be provided by the Company, including contract pharmacy, information, clinical,
reimbursement and customized delivery services. The agreements generally limit
the Company's ability to supply competing drugs during (and in some cases for up
to five years after) the term of the agreement, allow the manufacturer to
distribute directly or through other parties, are generally short term and may
be cancelled by either party, without cause, upon between 60 and 90 days prior
notice. The agreements vary in level of exclusivity and scope of services
provided. The Company typically purchases products at prices below the
manufacturers' average wholesale sales prices, and the Company's resulting
contribution margins vary for each product line. Pricing is customized to
reflect specific services to be provided by Accredo and is subject to periodic
adjustments to reflect changing market conditions.
The Company recognizes revenue at the time the biotechnology drug is
dispensed or when the contractual service has been performed. While the Company
may experience some revenue changes from price fluctuations on its existing
product lines, its revenue growth will depend principally on the introduction of
new drugs and to a lesser extent on volume growth in existing drug lines. In May
1996, the Company entered into a preferred relationship with Biogen and
initiated sales and services with respect to Avonex-Registered Trademark- for
the treatment of Multiple Sclerosis. In August 1998, the Company entered into a
preferred relationship with Centocor and in October 1998 initiated sales and
services with respect to Remicade-TM- for the treatment of Crohn's Disease.
Although the introduction of new drugs is dependent on the regulatory approval
process, management believes the pipeline of biotechnology drugs for which the
Company's services may be utilized will continue to expand.
In response to growing demand, the Company has expanded its existing
relationships with biotechnology manufacturers through the development of new or
complementary services that fit the specialized needs of the manufacturer and
the patients they serve. For example, the Company has recently implemented a
referral triage service that refers patients to the appropriate provider based
on the patients insurance provider network. This
20
<PAGE>
service helps the manufacturers increase market penetration by obtaining access
to patients regardless of whether the Company is able to act as the provider.
Although the revenue received from the referral triage service is not material,
the referral triage service and the other complimentary services have provided
an additional source of revenue for the Company in fiscal years 1998 and 1997,
and management believes that the need for additional services will continue to
expand and will constitute an increasing percentage of the Company's revenues in
the future. See "Business--Services."
In addition to new services, Accredo may also grow through strategic
acquisitions and joint ventures. The acquisition of HHS in June 1997 enabled the
Company to significantly increase its presence in the hemophilia market.
Subsequent to the acquisition, the Company consolidated its existing hemophilia
operations into HHS to take advantage of volume purchasing discounts, disease
management systems and increased access to certain state Medicaid and managed
care relationships.
Accredo has five joint venture agreements with various medical centers (or
their affiliates) in which the Company owns 50% or less of the venture. Many of
the Company's patient populations have diseases that are discovered before or
during adolescence and require on-going care from physician specialists, many of
whom are based at pediatric, academic and other acute care medical centers. To
date, these ventures have primarily derived revenues from the treatment of
patients with hemophilia and growth hormone-related disorders. The Company and
its joint venture partners share profits and losses in equal proportion to their
respective equity ownership. The Company accounts for its interests in the net
income or loss in its joint ventures under the equity method of accounting. The
Company's equity interest in the net income of these joint ventures represented
approximately 14% and 22%, of the Company's income before income taxes for the
six-month period ended December 31, 1998 and for fiscal year 1998, respectively.
In addition to joint venture relationships, the Company has management
agreements with three medical centers (or their affiliates) for the provision of
specialized contract pharmacy services. The Company receives a management fee
for these services which is classified as other revenue.
Cost of services include drug acquisition costs, pharmacy and warehouse
personnel costs, freight and other direct costs associated with the delivery of
the products and costs of clinical services provided. General and administrative
expenses include the personnel costs of the reimbursement, sales, marketing,
administrative and support staffs as well as corporate overhead and other
general expenses. Bad debts include the Company's provision for patient accounts
receivable which prove to be uncollectable after routine collection efforts have
been exhausted. The Company typically hires personnel and incurs legal,
recruiting, marketing and other expenses in anticipation of the commercial
launch of a new biotechnology drug. In certain instances, a portion of these
expenses are reimbursed to the Company by the biotechnology drug manufacturer.
The Company historically has not capitalized any of these start up expenses.
Due to the increasing sensitivity to drug cost within governmental and
private payors, the Company is continuously susceptible to reimbursement and
operating margin pressures. In recent years, pharmacy benefit managers and other
private payors have aggressively attempted to discount their reimbursement rates
for the Company's products. While this aggressive discounting has resulted in
some reduced margins for the Company's services, its preferred agreements with
biotechnology manufacturers typically provide for terms which allow the Company
to compensate for much of these discounts through negotiated adjustments in
product acquisition cost. These relationships have allowed the Company to remain
price competitive while maintaining relatively stable product margins in recent
quarters. See "Risk Factors--Dependence on Payors and Reimbursement Related
Risks."
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentages of
total revenues represented by the respective financial items:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MAY 24, 1996 YEARS ENDED JUNE 30,
(INCEPTION) DECEMBER 31,
THROUGH -------------------- --------------------
JUNE 30, 1996 1997 1998 1997 1998
--------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Net patient service revenue.............. 91.1% 92.1% 94.0% 93.9% 94.8%
Other revenue............................ 8.2 7.0 5.4 5.5 4.7
Equity in net income of joint ventures... 0.7 0.9 0.6 0.6 0.5
----- --------- --------- --------- ---------
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of services......................... 88.5 87.7 85.1 85.4 84.9
General and administrative............... 8.6 5.2 6.8 6.7 6.9
Bad debts................................ 3.4 2.6 1.7 1.8 1.9
Depreciation and amortization............ 1.7 1.4 1.4 1.5 1.1
----- --------- --------- --------- ---------
Total operating expenses............. 102.2 96.9 95.0 95.4 94.8
----- --------- --------- --------- ---------
Operating income (loss)...................... (2.2) 3.1 5.0 4.6 5.2
Interest expense, net........................ 1.5 0.8 2.0 2.1 1.5
----- --------- --------- --------- ---------
Income (loss) before income taxes............ (3.7) 2.3 3.0 2.5 3.7
Income tax expense (benefit)................. (0.4) 1.3 1.4 1.3 1.6
----- --------- --------- --------- ---------
Net income (loss)............................ (3.3%) 1.0% 1.6% 1.2% 2.1%
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997.
REVENUES. Total revenues increased from $85.6 million to $120.0 million, or
40%, from the six-months ended December 31, 1997 to the six months ended
December 31, 1998. Approximately, $16.7 million, or 49%, of this increase was
attributable to the increased sales volume of Avonex-Registered Trademark-.
Approximately $7.8 million, or 23%, of this increase was attributed to the
increased hemophilia revenue associated with the increased patient volume and
wholesale sales. Cerezyme-Registered Trademark- and
Ceredase-Registered Trademark- drug sales increased approximately $5.1 million,
or 15% of the revenue increase, as a result of increased patient volume. The
remaining $4.8 million, or 14%, of the revenue increase was attributable
primarily to the increased sales volume of growth hormone, service fees
associated with the sales of Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- and the increased sales volume of other ancillary
drugs the Company dispenses as part of the patient's primary therapy or
contractually obligated within certain managed care contracts.
COST OF SERVICES. Cost of services increased from $73.1 million to $101.9
million, or 39%, from the six months ended December 31, 1997 to the six months
ended December 31, 1998. This increase was commensurate with the increase in
sales volume referred to above. As a percentage of revenues, cost of services
decreased from 85.4% to 84.9% from the six months ended December 31, 1997 to the
six months ended December 31, 1998 primarily as a result of an increase in
revenue from drugs with lower acquisition costs as a percentage of revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $5.7 million to $8.3 million, or 46%, from the six months ended December
31, 1997 to the six months ended December 31, 1998. This increase is primarily
the result of increased salaries and benefits associated with the expansion of
the
22
<PAGE>
Company's reimbursement, sales, marketing, administrative and support staffs in
anticipation of existing product line revenue growth and new product line
launches. General and administrative expenses represented 6.7% and 6.9% of
revenues for the six months ended December 31, 1997 and 1998, respectively.
BAD DEBTS. Bad debts increased from $1.6 million to $2.3 million from the
six-month period ended December 31, 1997 to the six-month period ended December
31, 1998. As a percentage of revenue, bad debt expense increased from 1.8% to
1.9% from the six-month period ended December 31, 1997 to the six-month period
ended December 31, 1998 primarily as a result of increased bad debt provision
associated with certain hemophilia sales.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased from $196,000
to $270,000 from the six-month period ended December 31, 1997 to the six-month
period ended December 31, 1998 as a result of purchases of property and
equipment associated with the Company's revenue growth and expansion of its
leasehold facility improvements. Amortization expense associated with the
goodwill and other intangible assets did not change from the six-month period
ended December 31, 1997 to the six-month period ended December 31, 1998.
INTEREST EXPENSE, NET. Interest expense, net, decreased from $1.78 million
to $1.73 million for the six months ended December 31, 1997 as compared to the
six months ended December 31, 1998 due to lower current interest rates and
margin rates payable under the Company's existing Loan and Security Agreement
with its lenders (the "Credit Agreement").
INCOME TAX EXPENSE. The Company's effective tax rate decreased from 50.9%
to 43.0% for the six months ended December 31, 1997 to the six months ended
December 31, 1998 as a result of the increase in income before taxes while
nondeductible amortization expense remained constant. The difference between the
recognized tax rate and the statutory tax rate was primarily attributed to
approximately $652,000 of nondeductible amortization expense for each period and
state income taxes.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR 1997
REVENUES. Total revenues increased from $115.2 million to $181.0 million,
or 57%, from fiscal 1997 to fiscal 1998. Approximately $25.1 million, or 38%, of
this increase was attributed to increased sales volume of
Avonex-Registered Trademark-, which was launched in May 1996. Approximately
$30.0 million, or 46%, of the increase was attributed to the increased
hemophilia revenue associated with the acquisition of HHS in June 1997 and
increased patient volume. The remaining $10.7 million, or 16%, of the revenue
increase was attributable primarily to growth in the Company's
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- drug sales and
associated service fees. The Company's equity in net income of joint ventures
increased from approximately $1.0 million to approximately $1.2 million from
fiscal 1997 to fiscal 1998.
COST OF SERVICES. Cost of services increased from $101.1 million to $154.0
million, or 52%, from fiscal 1997 to fiscal 1998. This increase was attributable
primarily to the expanded revenue volume of Avonex-Registered Trademark-,
hemophilia clotting factor and Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- along with personnel and other direct expenses
associated with this growth. As a percentage of revenues, cost of services
decreased from 87.7% to 85.1% from fiscal 1997 to fiscal 1998 primarily as a
result of an increase in revenue from drugs with lower acquisition costs as a
percentage of revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $5.9 million to $12.4 million, or 108%, from fiscal 1997 to fiscal 1998.
Approximately $4.2 million, or 66%, of this increase was associated with the
acquisition of HHS in June 1997. The remaining $2.3 million of this increase was
primarily the result of increased salaries and benefits associated with the
expansion of the Company's reimbursement, sales, marketing, administrative and
support staffs in anticipation of revenue growth and new strategic sales and
marketing efforts. As a percentage of revenues, general and administrative
expenses increased from 5.2% to
23
<PAGE>
6.8% from fiscal 1997 to fiscal 1998 primarily as a result of the acquisition of
HHS which involves a more cost intensive service model than that of the
Company's other drug therapies.
BAD DEBTS. Bad debts increased from $3.0 million to $3.2 million from
fiscal 1997 to fiscal 1998. As a percentage of revenue, bad debt expense
decreased from 2.6% to 1.7% from fiscal 1997 to fiscal 1998 primarily as a
result of the increased percentage of the Company's revenues being reimbursed by
prescription benefit managers and other payors which reduces the Company's
exposure to the uncollectability of patient co-payments.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased from $231,000
to $430,000 from fiscal 1997 to fiscal 1998. Of this increase, $94,000 was
attributable to the assets acquired as a result of the acquisition of HHS in
June 1997. The remaining increase is a result of approximately $992,000 of
capital expenditures made in fiscal 1998 for the purchases of property and
equipment associated with the Company's revenue growth and expansion of its
leasehold facility improvements. Amortization expense increased from $1.4
million to $2.1 million from fiscal 1997 to fiscal 1998, primarily as a result
of the acquisition of HHS, which resulted in approximately $24.4 million of
goodwill and other intangible assets. Approximately $628,000 of the increase was
attributable to the amortization of those intangibles.
INTEREST EXPENSE, NET. Interest expense, net, increased from $984,000 to
$3.6 million, from fiscal 1997 to fiscal 1998 primarily as a result of the
issuance of $27.5 million of long-term notes payable and $10.0 million of Senior
Subordinated Notes payable issued as part of the acquisition of HHS in June
1997. The Company generated interest income of approximately $169,000 in fiscal
1998 and $100,000 in fiscal 1997 resulting from cash management programs which
utilized the Company's increased short-term excess cash balances.
INCOME TAX EXPENSE. The Company's effective tax rate decreased from 57.3%
to 46.9% from fiscal 1997 to fiscal 1998 as a result of increased income before
income taxes while nondeductible amortization expense remained constant. The
difference between the recognized effective tax rate and the statutory tax rate
is primarily attributed to approximately $1.3 million of nondeductible
amortization expense and state income taxes.
PERIOD FROM INCEPTION (MAY 24, 1996) TO JUNE 30, 1996
Accredo was formed on May 24, 1996, for the purpose of acquiring SHS and its
wholly owned subsidiary Nova Factor, the Company's predecessor. This acquisition
was completed on May 31, 1996. Because the financial statements for the period
from inception (May 24, 1996) to June 30, 1996 reflect only one month of the
Company's operations, a comparison of the Company's financial statements for
that period to the Company's financial statements for fiscal year 1997 would not
be meaningful.
PERIOD FROM JULY 1, 1995 THROUGH MAY 31, 1996 (PREDECESSOR) COMPARED TO FISCAL
YEAR 1995 (PREDECESSOR)
The results of operations for the period July 1, 1995 through May 31, 1996
(eleven months) and for the fiscal year ended June 30, 1995 (fiscal year 1995)
are reflective of the operations of Nova Factor, the Company's predecessor. Due
primarily to the differences in the length of the reporting periods, the
comparison of the operating results may not be meaningful. In addition, the
results of operations for these periods may not be indicative of the results of
operations had the Predecessor been operated on a stand alone basis.
REVENUES. Total revenues were $74.8 million for the eleven-month period
ended May 31, 1996, and were $78.9 million for fiscal year 1995.
COST OF SERVICES. Cost of services were $65.9 million for the eleven-month
period ended May 31, 1996, and were $68.3 million for fiscal year 1995.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.8
million for the eleven-month period ended May 31, 1996, and were $2.7 million
for fiscal year 1995.
24
<PAGE>
BAD DEBTS. Bad debts were $1.9 million for the eleven-month period ended
May 31, 1996, and were $1.3 million for fiscal year 1995.
DEPRECIATION EXPENSE. Depreciation expense was $104,000 for the
eleven-month period ended May 31, 1996, and was $76,000 for fiscal year 1995.
CORPORATE OVERHEAD ALLOCATION. Corporate overhead allocation was $4.2
million for the eleven-month period ended May 31, 1996, and was $1.9 million for
fiscal year 1995.
INTEREST EXPENSE, NET. Interest expense, net, was $266,000 for the
eleven-month period ended May 31, 1996, and was $943,000 for fiscal year 1995.
INCOME TAX EXPENSE. The effective tax rate used to record the tax benefit
for the eleven-month period ended May 31, 1996 was approximately 27%, and was
approximately 38% for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, June 30, 1998 and 1997, the Company had working
capital of $25.5 million, $23.4 million and $16.9 million, respectively. The
increase in working capital for each period resulted principally from the
increase in patient accounts receivable in connection with the Company's revenue
growth. The Company's net cash used by operating activities was approximately
$1.4 million for the six-month period ended December 31, 1998, while $1.9
million was provided by operating activities for the fiscal year ended June 30,
1998. This variance was due primarily to the timing of receivables, inventory
purchases and payables resulting from the Company's continued growth. Net cash
used in investing activities was $2.2 million for the six-month period ended
December 31, 1998 and $967,000 for the fiscal year ended June 30, 1998. Such
cash was primarily used to acquire a 50% interest in two California partnerships
in November, 1998 and for the purchase of property and equipment during both
periods.
For the period from inception (May 24, 1996) through June 30, 1996, the
Company used cash in the amount of approximately $37.7 million to purchase the
outstanding stock of SHS. In fiscal year 1997, the Company used cash in the
amount of approximately $29.7 million to purchase the outstanding stock of HHS.
During fiscal 1997, the Company's cash distributions from its joint ventures in
excess of its equity in the net income from these joint ventures was $378,000.
During the six months ended December 31, 1998 and the fiscal year ended June 30,
1998, the Company received cash distributions from its joint ventures of
approximately $350,000 and $1.2 million, respectively, while its associated
equity in the net income of these joint ventures increased approximately
$631,000 and $1.2 million, respectively. In addition, a $150,000 capital
contribution was also made to the two California partnerships during the six
months ended December 31, 1998.
For the period from inception (May 24, 1996) to June 30, 1996, the Company
received $40.0 million from the issuance of common and preferred stock. For the
fiscal year ended June 30, 1997, the Company received approximately $27.5
million from the issuance of long-term notes payable and $10.0 million from the
issuance of the Senior Subordinated Notes which were used to refinance
approximately $7.2 million of long-term debt and to fund the acquisition of HHS.
The Company issued 400,000 shares of Common Stock to the purchasers of the
Senior Subordinated Notes. During fiscal year 1998, the Company elected to issue
additional Senior Subordinated Notes of approximately $1.0 million which
represented the accrued interest on the Senior Subordinated Notes then
outstanding. The Company also received $500,004 and $207,000 from the sale of
83,334 and 35,000 shares of Common Stock during fiscal year 1998 and the
six-month period ended December 31, 1998, respectively.
Historically, the Company has funded its operations and continued internal
growth through cash provided by operations. The Company anticipates its capital
expenditures for the year ending June 30, 1999 will consist primarily of
additional leasehold improvements and equipment for the continuing expansion of
the Company's leasehold to accommodate personnel necessary to manage the
Company's growth. The Company is currently in the process of negotiating a lease
for an additional 20,000 square feet of office and warehouse space. Since
25
<PAGE>
June 30, 1998, the Company has purchased or committed to purchase approximately
$800,000 of furniture and equipment. Upon consummation of the Offering, the
Company plans to redeem all outstanding shares of Series A Preferred Stock and
retire the Senior Subordinated Notes. In connection with the retirement of debt
with the Offering proceeds, the Company will incur an extraordinary charge of
approximately $1.3 million to its operations for early extinguishment of its
debt.
The Company has a $40.0 million revolving credit facility under the terms of
its existing Credit Agreement, which includes a subfacility for letters of
credit. The Credit Agreement contains a $20.0 million sublimit for working
capital loans and letters of credit and is subject to a borrowing base limit
that is based on the Company's cash flow. All outstanding principal and interest
on loans made under the Credit Agreement is due and payable on October 31, 2000.
Interest on loans under the Credit Agreement accrues at a variable rate index,
at the Company's option, based on the prime rate or London InterBank Offerred
Rate ("LIBOR") for one, two, three or six months (as selected by the Company),
plus an applicable margin. The Company has entered into an interest rate swap
agreement with NationsBank, N.A. to hedge against floating rate interest risk.
The swap agreement relates to borrowings under the Credit Agreement of up to
$25.0 million and expires on October 31, 2001. Accordingly, as of January 21,
1999, the effective interest rate on the first $25.0 million outstanding under
the Credit Agreement was 7.0% per annum, and the effective interest rate on
borrowings in excess of $25.0 million under the Credit Agreement was 6.65% per
annum. The Company's obligations under the Credit Agreement are secured by a
lien on substantially all of the assets of the Company, including a pledge of
all of the common stock of each direct or indirect wholly owned subsidiary of
the Company. Each wholly owned subsidiary has also guaranteed all of the
obligations of the Company under the Credit Agreement, which guarantee
obligations are secured by a lien on substantially all of the assets of each
such subsidiary.
The Credit Agreement contains operating and financial covenants, including
requirements to maintain a certain debt to equity ratio and certain leverage and
debt service coverage ratios. In addition, the Credit Agreement includes
customary affirmative and negative covenants, including covenants relating to
transactions with affiliates, use of proceeds, restrictions on subsidiaries,
limitations on indebtedness, limitations on liens, limitations on capital
expenditures, limitations on certain mergers, acquisitions and sales of assets,
limitations on investments, prohibitions on payment of dividends and stock
repurchases, and limitations on certain debt payments (including payment of
subordinated indebtedness) and other distributions. The Credit Agreement also
contains customary events of default, including certain events relating to
changes in control of the Company. The Company is also a guarantor of a loan
from NationsBank, N.A. made to Children's Hemophilia Services ("CHS"), a
California general partnership in which the Company owns a 50% interest. This
line of credit allows the partnership to borrow up to $1.5 million which is
repayable in full on November 24, 2000. At December 31, 1998, CHS had not
borrowed against the line of credit.
While the Company anticipates its cash from operations, along with the short
term use of the Credit Agreement and the net proceeds to be received from the
Offering, will be sufficient to meet its internal operating requirements and
growth plans for at least the next 12 months, the Company expects that
additional funds may be required in the future to successfully continue its
growth beyond that 12-month period or in the event that the Company grows more
than expected within such period. The Company may be required to raise
additional funds through sales of equity or debt securities or seek additional
financing from financial institutions. There can be no assurance, however, that
financing will be available on terms that are favorable to the Company or, if
obtained, will be sufficient for the Company's needs.
SELECTED QUARTERLY FINANCIAL RESULTS
The following table presents selected unaudited quarterly statements of
operations items, and the percentages of total revenues represented by those
respective items, for each of the ten quarters beginning July 1, 1996 and ending
December 31, 1998. This information has been prepared on the same basis as the
audited financial statements appearing elsewhere in this Prospectus, and
includes all adjustments, consisting only of normal recurring adjustments, that
the Company considers necessary for a fair presentation of the information when
26
<PAGE>
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1997 1997(1) 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:.....
Total revenues................ $ 24,543 $ 27,659 $ 28,538 $ 34,468 $ 40,886 $ 44,701 $ 44,813
Operating income.............. 663 817 859 1,274 1,892 2,051 2,246
Income before income taxes.... 452 642 686 849 1,000 1,162 1,325
Net income.................... 153 276 299 395 492 570 698
AS A PERCENTAGE OF TOTAL REVENUES:
Total revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating income.............. 2.7 3.0 3.0 3.7 4.6 4.6 5.0
Income before income taxes.... 1.8 2.3 2.4 2.5 2.4 2.6 3.0
Net income.................... 0.6 1.0 1.0 1.1 1.2 1.3 1.6
<CAPTION>
<S> <C> <C> <C>
JUNE 30, SEPT. 30 DEC. 31
1998 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:.....
Total revenues................ $ 50,559 $ 57,348 $ 62,678
Operating income.............. 2,680 3,088 3,126
Income before income taxes.... 1,830 2,223 2,261
Net income.................... 1,061 1,261 1,293
AS A PERCENTAGE OF TOTAL REVENUES:
Total revenues................ 100.0% 100.0% 100.0%
Operating income.............. 5.3 5.4 5.0
Income before income taxes.... 3.6 3.9 3.6
Net income.................... 2.1 2.2 2.1
</TABLE>
- ------------------------------
(1) On June 1, 1997, the Company acquired all of the stock of HHS.
QUARTERLY FLUCTUATIONS AND SEASONALITY
The Company's results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. In particular, the Company typically increases its operating
expenses in anticipation of the launch of a new drug, and if the new drug does
not generate the levels of sales during the periods anticipated by management,
the Company's results in that and future quarters could be adversely affected.
Quarterly results can also fluctuate as a result of the timing of periodic
adjustments to prices and other terms with the Company's drug suppliers, the
accuracy of estimates of resources required for ongoing programs, the timing and
integration of acquisitions, changes in regulations related to biotechnology
companies, physician prescribing patterns, and general economic conditions, none
of which can be adequately predicted by the Company. Quarterly operating results
also fluctuate as a result of the annual renewal (on a calendar year basis) of
deductible and co-payment requirements, thereby affecting patient ordering
patterns in a manner that creates a seasonal reduction in revenue from existing
drug programs for the Company's third fiscal quarter ending March 31. Quarterly
results may also fluctuate as a result of the Company providing drugs, now or in
the future, that treat seasonal illnesses. The Company believes that quarterly
comparisons of its financial results may not necessarily be meaningful and
should not be relied upon as an indication of future performance. In addition,
fluctuations in quarterly results could affect the market price of the Common
Stock in a manner unrelated to the longer term operating performance of the
Company.
THE YEAR 2000 ISSUE
INTRODUCTION. The term "year 2000 issue" is a general term used to describe
the various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems arise from hardware and software unable
to distinguish dates in the "2000's" from dates in the "1900's" and from other
sources such as the use of special codes and conventions in software that make
use of a date field.
THE COMPANY'S STATE OF READINESS. The Company's efforts in addressing the
year 2000 issue are focused in the following three areas: (i) implementing
procedures to determine whether the Company's software systems and hardware
platforms are year 2000 compliant; (ii) communicating with suppliers and third
party payors to determine whether there will be any interruption in their
systems that could affect the Company's ability to receive timely shipments of
inventory or payment for services as a result of the year 2000 issue; and (iii)
27
<PAGE>
evaluating and making necessary modifications to other systems that contain
imbedded chips, such as phone systems, which process dates and date sensitive
material.
The Company is in the process of obtaining written verification from vendors
to the effect that the Company's software applications and hardware platforms
acquired from such vendors will correctly manipulate dates and date-related data
as the year 2000 is approached and reached. By March 31, 1999, the Company
expects to have completed upgrades on its pharmacy management systems, including
its billing and accounts receivable systems, in order to address the year 2000
issue. Nevertheless, there can be no assurance that the software applications
and hardware platforms on which the Company's business relies will correctly
manipulate dates and date-related data as the year 2000 is approached and
reached. Such failures could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's business relies heavily upon its ability to obtain
pharmaceuticals from a limited number of biotechnology manufacturers and from
its ability to obtain reimbursement from third party payors, including Medicare
and Medicaid. The Company is in the process of obtaining written verification
from each of its suppliers, and certain significant third party payors, to
determine whether there will be any interruption in the provision of
pharmaceuticals or receipt of payment resulting from the year 2000 issue. The
Company expects to complete this process by June 30, 1999. At this time HCFA has
testified to a committee of the U.S. House of Representatives that it is far
behind in remedying year 2000 problems. The failure of HCFA or any of the
Company's other significant third party payors to remedy year 2000 related
problems could result in a delay in the Company's receipt of payments for
services which could have a material adverse impact on the Company's business,
financial condition and results of operations. Furthermore, a delay in receiving
pharmaceuticals from certain key biotechnology manufacturers could hinder the
Company's ability to provide services to its customers which could have a
material adverse impact on the Company's business, financial condition and
results of operations.
The Company is aware that certain of its systems, such as phone systems,
facsimile machines, heating and air conditioning, security systems and other
non-data processing oriented systems may include imbedded chips which process
dates and date sensitive material. These imbedded chips are both difficult to
identify in all instances and difficult to repair; often, total replacement of
the chips is necessary. The Company intends to perform an evaluation of its
systems to determine whether the Company needs to repair or replace any chips to
avoid year 2000 problems. Failure of the Company to identify or remediate any
embedded chips (either on an individual or an aggregate basis) on which
significant business operations depend, such as phone systems, could have a
material adverse impact on the Company's business, financial condition and
results of operations.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Based on current
information, the Company has budgeted $100,000 for the cost of repairing,
updating or replacing software and equipment. Because additional funds may be
required as a result of future findings, the Company is not currently able to
estimate the final aggregate cost of addressing the year 2000 issue. The Company
expects to fund the costs of addressing the year 2000 issue from cash flows
resulting from operations and does not expect such costs to have a material
effect on the financial condition of the Company or its results of operations.
RISKS PRESENTED BY YEAR 2000 ISSUES. The Company is still in the process of
evaluating potential disruptions or complications that might result from year
2000 related problems. However, at this time the Company has not identified any
specific business functions that will suffer material disruption as a result of
year 2000 related events. It is possible, however, that the Company may identify
business functions in the future that are specifically at risk of year 2000
disruption. The absence of any such determination at this point represents only
the Company's current status of evaluating potential year 2000 related problems
and facts presently known to the Company, and should not be construed to mean
that there is no risk of year 2000 related disruption. Moreover, due to the
unique and pervasive nature of the year 2000 issue, it is impracticable to
anticipate each of the wide variety of year 2000 events, particularly outside of
the Company, that might arise in a worst case scenario which might have a
material adverse impact on the Company's business, financial condition and
results of operations.
28
<PAGE>
THE COMPANY'S CONTINGENCY PLANS. The Company intends to develop contingency
plans for significant business risks that might result from year 2000 related
events. Since the Company has not identified any specific business function that
will be materially at risk of significant year 2000 related disruptions, and
because a full assessment of the Company's risk from potential year 2000
failures is still in process, the Company has not yet developed detailed
contingency plans specific to year 2000 problems. Development of these
contingency plans is currently scheduled to occur before June 30, 1999 and as
otherwise appropriate.
IMPACT OF INFLATION
Changes in prices charged by the biotechnology drug manufacturers for the
drugs dispensed by the Company, along with increasing labor costs, freight and
supply costs and other overhead expenses, affects the Company's cost of services
and general and administrative expenses. Historically, the Company has been able
to pass all, or a portion, of the effect of such increases to the biotechnology
drug manufacturers pursuant to negotiated adjustments made under its preferred
distribution agreements. As a result, changes due to inflation have not had
significant adverse effects on the Company's operations.
29
<PAGE>
BUSINESS
OVERVIEW
Accredo provides specialized contract pharmacy and related services pursuant
to agreements with biotechnology drug manufacturers relating to the treatment of
patients with certain costly, chronic diseases. Because of the unique needs of
these patients, biotechnology drug manufacturers have recognized the benefits of
customized treatment programs to facilitate alternate site drug administration,
ensure compliance with treatment regimens, provide reimbursement assistance and
capture valuable clinical and patient demographic information. The Company
addresses the needs of the manufacturers by providing specialized services that
facilitate product launch and patient acceptance, including the collection of
timely drug utilization and patient compliance information, patient education
and monitoring through the use of written materials and telephonic consultation,
reimbursement expertise and overnight drug delivery. The Company believes that
its ability to accelerate market penetration and increase revenues for new
biotechnology drugs makes it an attractive partner for drug manufacturers as
evidenced by its preferred relationships with Genzyme, Biogen, Genentech and
Centocor. While these relationships are not exclusive, the Company's preferred
status generally involves a designation of the Company as a preferred or
recommended provider of the manufacturer's drugs, direct marketing of the
Company's services, customized pricing reflecting the Company's specialized
services and flexibility in adjusting prices and other terms in the event of
changed market conditions or service levels.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic and
potentially life threatening diseases; (ii) are expensive, with annual therapy
costs generally ranging from $6,000 to $200,000 per patient; (iii) are
administered through injection; and (iv) require temperature control or other
specialized handling as part of their distribution process. Currently, the
Company provides services that address the needs of patients with the following
diseases: Gaucher Disease, a hereditary liver enzyme deficiency; hemophilia, a
hereditary bleeding disorder; Multiple Sclerosis, a debilitating disease of the
central nervous system; and growth hormone-related disorders. In August 1998 the
Company entered into an agreement with Centocor to provide its services to
patients with Crohn's Disease, a chronic inflammatory disease affecting the
gastrointestinal tract. These diseases generally require life-long therapy,
except for growth hormone-related disorders which typically require treatment
for six to ten years.
INDUSTRY BACKGROUND
The pace of drug discovery has accelerated in recent years due to
significant advances in disciplines such as molecular biology, genomics and
high-throughput screening. As a result, opportunities to develop therapies for
previously unmet needs are greater than ever before. The Company believes that
biotechnology products represent the most expensive and rapidly growing part of
the new drug pipeline. Unlike many traditional drugs, these products often
possess specific characteristics which make utilization and compliance
increasingly difficult. They are often composed of unstable proteins which must
be taken by injection and require timely, temperature maintained distribution,
dosage monitoring, and controlled inventory management. In addition, expert
reimbursement management is crucial as a result of the high cost and significant
support services associated with these products.
As a result of increasing competitive pressure to introduce new drugs to
market quickly and the unpredictability of the approval and launch process for
new drugs, many drug manufacturers have sought to preserve often limited
internal resources by outsourcing various stages of product development. This
has included discovery research by outsourcing genomics and screening functions
and clinical development through the utilization of contract research
organizations (CROs) and site management organizations (SMOs). This trend has
also extended beyond development to product commercialization and launch through
the outsourcing of manufacturing, sales and marketing, product detailing,
pharmacy and distribution services and patient support programs.
When addressing chronic diseases, the challenges facing biotechnology drug
manufacturers are often heightened by small patient populations, increased
difficulties in ensuring patient compliance and persistence
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with treatment programs, the need to realize a return on investment prior to the
expiration of any patent or orphan drug status exclusivity and the onset of
significant competition. In addition, many traditional distribution channels
including wholesalers, hospitals, physicians, pharmacies and pharmacy benefit
managers do not want to maintain an inventory of expensive biotechnology
products and lack the specialized knowledge often needed to manage chronic
disease patients. The Company believes that it is well positioned to take
advantage of a large drug development pipeline and an increasing trend toward
specialized outsourcing by the biotechnology drug industry.
ACCREDO STRATEGY
Accredo's objective is to be the leading provider of specialized contract
pharmacy and related services. Key elements of the Company's strategy include:
EXPAND NUMBER OF CHRONIC DISEASES SERVED. The Company closely monitors
biotechnology drugs in development and seeks to increase the number of chronic
diseases for which it provides its services by developing new relationships with
additional manufacturers and leveraging its existing relationships to include
new drugs and new FDA indications for existing drugs. For example, in August
1998 the Company established a new preferred relationship with Centocor in which
the Company provides its specialized services with respect to Remicade-TM- for
use in treating patients with Crohn's Disease.
LEVERAGE EXPERTISE TO EXPAND SERVICE OFFERINGS. The Company continually
seeks to develop new or complementary services that meet the specialized needs
of biotechnology drug manufacturers and the patients who use their products. The
Company believes that it is uniquely positioned to identify these needs and
develop customized solutions through its close relationships with leading drug
manufacturers. For example, the Company recently implemented a referral triage
service to provide a convenient single source for prescribing physicians and
help manufacturers increase market penetration. The Company believes that
biotechnology drug manufacturers will increasingly recognize the benefits of
outsourcing product development, launch and specialized pharmacy services as the
biotechnology market matures and competition increases.
ESTABLISH ADDITIONAL RELATIONSHIPS WITH MEDICAL CENTERS. The Company
intends to pursue additional strategic relationships with medical centers
through joint ventures and management contracts. Many of the Company's patient
populations have diseases that are discovered before or during adolescence and
require on-going care from physician specialists, who are often based at
pediatric, academic or other acute care medical centers. By establishing
strategic relationships with these centers, the Company believes it can obtain
access to a large number of patients and introduce them to the Company's
specialized services during the initial stages of their treatment program.
INCREASE NUMBER OF PAYOR CONTRACTS. The Company intends to pursue contracts
with additional payors, including managed care companies and employers, in order
to access and provide services to a greater number of patients. Because most
third party payor beneficiaries are restricted to using pharmacy providers
included in their plan's panel of providers, the Company is eligible to receive
reimbursement only for services provided to patients who are enrolled in plans
with which the Company maintains provider contracts. The Company maintains a
dedicated team of sales and marketing personnel that work exclusively on
pursuing additional payor relationships and has a variety of payor education
programs aimed at increasing awareness of the Company's specialized services
among private payors.
PURSUE ACQUISITIONS OF SIMILAR OR COMPLEMENTARY BUSINESSES. The Company
intends to pursue acquisitions that offer attractive growth opportunities and
that involve businesses that are similar to or that complement the Company's
present operations. For example, in June 1997 the Company significantly expanded
the scope of its hemophilia operations with the acquisition of HHS in Nashville,
Tennessee and in November 1998 the Company acquired a 50% interest in each of
two California general partnerships that service a number of patients with
hemophilia and growth hormone related disorders, respectively.
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SERVICES
The Company believes that its specialized services make it an attractive
partner for manufacturers of biotechnology drugs used in treating certain
costly, chronic diseases and an attractive provider for patients with these
diseases. These services include specialized contract pharmacy, clinical,
reimbursement and delivery services.
CONTRACT PHARMACY SERVICES. The Company offers customized services to
biotechnology drug manufacturers designed to meet specific needs that arise at
various stages in the life cycles of their products. During the pre-launch stage
of product development, the Company provides consulting services related to
strategic pricing decisions and the impact those decisions may have on private
insurance and Medicaid and Medicare reimbursement policies. The Company also
offers analyses and information to assist manufacturers in evaluating payor mix
and pricing strategies for their new drugs. The Company will test a
manufacturer's packaging to assess maintenance of product temperatures and to
determine whether the packaging system will maintain product integrity during
normal shipping conditions. In addition, the Company offers advice on ancillary
injection and infusion supplies and assists in procuring supplies and customized
packaging for infusion supply kits. The Company provides clinical protocols that
assist nurses and caregivers in learning how to safely and effectively
administer a drug, including aseptic techniques, supplies needed and infusion
time required. The Company also has extensive experience with patient assistance
programs for uninsured or underinsured patients and offers consulting services
that assist manufacturers in determining appropriate admission criteria for such
programs.
Following product launch, the Company offers: (i) clinical hotlines that
allow the physician or patient caregiver to inquire about product usage, adverse
drug reactions and other clinical questions; (ii) reimbursement hotlines for
patients and health care professionals; (iii) support for manufacturers' patient
assistance programs for patients without the financial ability to otherwise
acquire needed drugs and services; (iv) replacement drug and supply programs
that replenish patients' inventory of products or supplies that become damaged;
(v) home care coordination programs that provide patient assistance in training,
the identification of home care providers and the transfer of clinical
information to all caregivers; and (vi) triage services that refer patients to
the appropriate provider based on the patients' insurance provider network. When
a drug manufacturer contracts with the Company to provide one or more of these
services, such services (except for home care coordination programs) are made
available to all patients utilizing that manufacturer's drug therapy, regardless
of whether those patients obtain their drugs from the Company or from an
alternative source. Results of the Company's interaction with patients (which is
primarily via telephone) are coded and tracked to compile valuable information,
including side effects, drug interactions, administration problems, supply
issues, changes to new products, and reasons for therapy discontinuation and
non-compliance. The Company will also report on adverse drug reactions, log the
occurrence, and complete an initial preliminary report of the occurrence to
assist manufacturers in completing adverse event reports in a timely manner. The
Company can also create a wide variety of additional reports that can be custom
tailored to meet specific manufacturers' needs. Examples of reports include
sales by physician, sales by zip code, sales trending, first time patient
orders, Medicaid and Medicare sales, inventory status and reasons for patient
discontinuations. Due to the nature of the data it collects, the Company has
established procedures designed to ensure compliance with laws regarding
confidentiality of patient information.
CLINICAL SERVICES. At the initiation of service, the Company works with the
patient and the patient's physician to implement the prescribed plan of care.
Each patient is assigned to a team consisting of a pharmacist, a customer
service representative and a reimbursement specialist. Generally, each patient's
team members specialize only in that patient's disease and work only with payors
and providers in that patient's geographic region. In order to assist patients
with their complicated treatment program, the Company provides clinical
consultation and education regarding the patient's disease and treatment
program, helps patients set realistic expectations for their drug therapy, helps
coordinate backup care in the event of an acute episode, provides current
information on advances in technology and treatment regimens, coordinates
medication during travel and helps patients establish an inventory management
and record keeping system. These services are provided through a variety of
written materials and regular telephonic communication with patients. Due to
their limited
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stability, the drugs currently handled by the Company are not mixed or
reconstituted prior to shipment. Accordingly, the Company does not mix or
reconstitute any pharmaceuticals. This makes the Company's patient education
services particularly important for patients just beginning drug therapy because
they generally must learn to reconstitute and administer products themselves.
The Company maintains frequent communication with patients to monitor and
encourage compliance with the prescribed plan of care and persistence in staying
on therapy for the entire course of treatment. The Company also helps patients
understand their medication and manage the potential side effects and adverse
reactions that can occur so that patients are less likely to discontinue
therapy. In addition, the Company assists patients and their families in coping
with a variety of difficult social and emotional challenges presented by their
disease, participates in national, state and local patient advocacy
organizations, assists in the formation of patient support groups, advocates
legislation to advance specific patient interests and publishes newsletters
containing information relevant to its patients.
REIMBURSEMENT SERVICES. By focusing on specific chronic diseases, the
Company has developed significant expertise in managing reimbursement issues
related to the patient's condition and treatment program. Due to the long
duration and high cost of therapy generally required to treat chronic disorders,
the availability of adequate health insurance is a continual concern for
chronically ill patients and their families. Generally, the Company contacts the
payor prior to each shipment to determine the patient's health plan coverage and
the portion of costs that the payor will reimburse. The Company's reimbursement
specialists review such issues as pre-certification or other prior approval
requirements, lifetime limits, pre-existing condition clauses and the
availability of special state programs. By identifying coverage limitations as
part of its initial consultation, the Company can assist the patient in planning
for alternate coverage, if necessary. From time to time, the Company negotiates
with payors to facilitate or expand coverage for the chronic diseases served by
the Company. In addition, the Company accepts assignment of benefits from
numerous payors, which substantially eliminates the claims submission process
for many patients.
DELIVERY SERVICES. The Company provides timely delivery of drugs and
ancillary supplies directly to the patient or the patient's physician in
packaging specially designed to maintain appropriate temperatures and which
typically contains all of the supplies required for reconstitution and
administration in the patient's home or in other alternate sites. Substantially
all products are shipped from the Company's two primary pharmacy locations in
Memphis and Nashville, Tennessee. The Company also maintains satellite pharmacy
locations in Dallas-Ft. Worth, Texas and Birmingham, Alabama. The Company ships
its products via FedEx and believes that its proximity to FedEx's principal
"hub" location in Memphis provides the Company with a competitive advantage in
meeting the time-sensitive needs of its patients.
DISEASE MARKETS AND MANUFACTURER RELATIONSHIPS
Currently, the Company provides its specialty services with respect to the
following diseases:
GAUCHER DISEASE. Type I Gaucher Disease is the most common form of Gaucher
Disease, affecting about 90% of all Gaucher patients. Type I Gaucher Disease is
a seriously debilitating, sometimes fatal, genetic disorder caused by a
deficiency of an important enzyme in the body called glucocerebrosidase ("GCR").
This deficiency results in the accumulation of the glucocerebroside lipid in the
cells of organs in the body. The disease is characterized by an enlarged liver
or spleen, anemia, bleeding problems, fatigue, bone and joint pain and other
orthopedic complications such as repeated fractures and bone erosion. Genzyme's
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- products are
the only FDA approved products used for treating Gaucher Disease.
The Company (including former affiliates) has had a preferred relationship
with Genzyme relating to Ceredase-Registered Trademark- since the commercial
launch of Ceredase-Registered Trademark- in 1991 and relating to
Cerezyme-Registered Trademark- since the commercial launch of
Cerezyme-Registered Trademark- in 1994. Ceredase-Registered Trademark- is a
modified form of human GCR which uses glycoprotein remodeling technology to
target GCR to the cells where the lipid accumulation occurs.
Cerezyme-Registered Trademark- is a recombinant form of GCR which has been
remodeled in a similar manner. Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- are generally administered by intravenous
infusion. Dosing frequencies vary, but a typical dosing regimen involves
administration once every two weeks. The annual revenue to the Company during
its 1998 fiscal year from patients receiving this therapy
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was predominantly within the range of $150,000 to $200,000 per patient depending
on a patient's weight, stage in the therapy cycle and severity of condition. As
part of its preferred relationship with Genzyme, the Company and Genzyme have
entered into two agreements (the "Genzyme Agreements"), pursuant to which the
Company dispenses Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- in the United States and pursuant to which the
Company provides various information and other services to Genzyme. The pricing
of Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- under the
Genzyme Agreements, as well as the scope and pricing of services provided by the
Company under such agreements, are subject to periodic adjustment. The Genzyme
Agreements automatically renew on an annual basis unless either party provides
90 days prior notice of non-renewal, and are terminable by either party for any
reason with 60 days prior notice. In addition, the Genzyme Agreements provide
that during the term of the agreements and for a period of five years after
termination, the Company may not sell any prescription drug for the treatment of
Gaucher Disease other than Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark-. The Company does not have exclusive rights to
sell Ceredase-Registered Trademark- or Cerezyme-Registered Trademark-, and
Genzyme has reserved the right under the Genzyme Agreements to sell these
products directly or to appoint other distributors of these products.
HEMOPHILIA. Hemophilia is an inherited, genetic, lifelong bleeding disorder
caused by the absence or inactivity of an essential blood clotting protein or
"factor." Two major disease categories exist, hemophilia A, or Factor VIII
deficiency, and hemophilia B, or Factor IX deficiency. Hemophilia occurs almost
exclusively in males and severe cases are often diagnosed at birth or early
childhood. It is estimated that there are approximately 20,000 people with
hemophilia in the United States, and presently there is no known cure.
Individuals with hemophilia are susceptible to bleeding episodes which can occur
spontaneously or as a result of physical activity or trauma. While small surface
cuts can usually be treated with a pressure bandage, the most frequent
complication of hemophilia is internal bleeding into muscles and joints which
can cause arthritis and debilitating orthopedic problems. More serious
complications include internal bleeding in the head, neck, spinal cord or
internal organs which can cause death.
Hemophilia is generally treated by infusing anti-hemophilic factor
concentrates intravenously when the symptoms of a bleed are detected. Products
are dispensed as freeze-dried factor concentrates which are reconstituted with
sterile water prior to use and dosage is determined by the patient's weight.
This therapy is generally administered by the patient or his or her family
members, without the assistance of a nurse, in response to bleeding episodes.
Approximately 60% of the persons with hemophilia in the United States have a
severe form of the disorder as measured by the level of factor naturally present
in the body. In general, the more severe the factor deficiency, the more
frequently the bleeding episodes may occur. On average, someone with severe
hemophilia will need to infuse factor weekly. In many individuals with severe
hemophilia, factor therapy is administered prophylactically to maintain high
enough circulating factor levels to minimize the risk of bleeding. The annual
revenue to the Company during its 1998 fiscal year from patients receiving this
therapy generally ranged from $50,000 to $100,000 per patient depending on a
patient's weight, severity of condition and the presence of complications such
as inhibitors.
Today, with proper treatment, people with hemophilia can live relatively
long and healthy lives. However, in the recent past, many patients contracted
hepatitis or human immunodeficiency virus ("HIV") as a result of contaminated
plasma derivative therapies they received prior to the mid-1980's. Since then,
manufacturers of plasma-derived products have used advanced screening procedures
and viral inactivation methods. While such procedures and methods have
significantly reduced, if not eliminated, the risk of transmission of hepatitis
and HIV in current plasma-derived factor products, it is estimated that
approximately one-half of the hemophilia population who received anti-hemophilic
factor prior to the mid-1980's was exposed to HIV and is at risk of developing
acquired immune deficiency syndrome ("AIDS"). The Company offers medications
used in treating AIDS as a convenience to its hemophilia patients that have
contracted the HIV virus. In the early 1990's, recombinant clotting factor, a
biotechnological alternative to plasma-derived factor, was introduced and to
date has proved to be as effective as the plasma-derived products with virtually
no risk of viral transmission. Current utilization reflects increased use of
recombinant and monoclonal products by physicians because of the advantages of
increased purity. Issues related to the development of inhibitors, or antibodies
to the infused factor products, may influence future utilization of these
products.
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As one of the largest purchasers of clotting factor in the United States,
the Company has supply contracts with all major suppliers of factor in order to
maintain availability of adequate quantities of factor products and competitive
pricing. There are currently six major suppliers of FDA approved products used
for treating hemophilia. The Company purchases Kogenate-Registered Trademark-
from Bayer Corporation and Recombinate-Registered Trademark- from Baxter
Healthcare Corporation in larger quantities than any other factor product, but
no supplier is responsible for a majority of the Company's hemophilia product
purchases. In addition, the Company purchases factor products from Alpha
Therapeutic Corporation, Centeon LLC, Genetics Institute, Inc. and the American
Red Cross.
MULTIPLE SCLEROSIS. Multiple Sclerosis is a debilitating neurological
disease of the central nervous system that is characterized by episodic symptoms
followed by fixed neurologic deficits, increasing disability and physical
decline over a period of 30 to 40 years. The disease is believed to be caused by
the destruction of myelin sheaths by the body's own immune system. Myelin is the
fatty tissue that surrounds and protects the nerve fibers of the central nervous
system and facilitates the flow of nerve impulses to and from the brain. The
loss of myelin disrupts the conduction of nerve impulses, producing the symptoms
of Multiple Sclerosis including vision loss, incontinence, short-term memory
loss, fatigue, slurred speech, poor coordination, loss of balance, depression
and partial or complete paralysis. It is estimated that Multiple Sclerosis
affects between 250,000 and 350,000 people in the United States, approximately
two-thirds of whom are women. Ninety-five percent of the patients are caucasian
and the disease is more prevalent in the northern latitudes with the highest
rates in the Midwest and Northeast areas of the United States. The geography
risk for Multiple Sclerosis appears to be associated with where an individual
lived their first fifteen years of life. Disease onset typically occurs in young
adults between the ages of 20 and 40. Of the patients diagnosed with Multiple
Sclerosis in the United States, about 90% of patients initially have relapsing
Multiple Sclerosis and about half of those patients go on to develop a
progressive form of the disease. About 10% of patients exhibit a progressive
form of the disease at onset. There are currently three FDA approved products
used for treating relapsing Multiple Sclerosis: Avonex-Registered Trademark-,
which is manufactured by Biogen; Betaseron-Registered Trademark-, which is
manufactured by Chiron Corporation; and Copaxone-Registered Trademark-, which is
manufactured by Teva Pharmaceutical Industries Limited. Biogen's
Avonex-Registered Trademark- product is the only FDA approved product shown to
slow the accumulation of disability in patients with relapsing forms of Multiple
Sclerosis and, as a result, Avonex-Registered Trademark- is used by a majority
of such patients in the United States currently on drug therapy. The annual
revenue to the Company during its 1998 fiscal year from patients receiving this
therapy generally ranged from $10,000 to $11,000 per patient.
The Company has had a preferred relationship with Biogen relating to
Avonex-Registered Trademark- since its commercial launch in 1996.
Avonex-Registered Trademark- is a recombinant form of a protein produced by
fibroblast cells in response to viral infection. Avonex-Registered Trademark- is
generally administered via a single intramuscular injection once per week. As
part of its preferred relationship with Biogen, the Company and Biogen have
entered into an agreement (the "Biogen Agreement"), pursuant to which the
Company dispenses Avonex-Registered Trademark- and pursuant to which the Company
provides various services and information to Biogen. The scope of services
provided by the Company to Biogen has increased over the course of the Company's
relationship with the manufacturer as the Company has worked with Biogen to
further develop customized service offerings. The pricing of
Avonex-Registered Trademark- under the Biogen Agreement, as well as the scope
and pricing of services provided by the Company under such agreement, are
subject to periodic adjustment. The Biogen Agreement has an initial term of
three years ending May 1999 and is terminable by either party for any reason
with 90 days prior notice. In addition, the Biogen Agreement provides that as
long as the Company is the only preferred home delivery service provider
approved by Biogen (other than providers to Medicaid patients in certain
states), the Company may not without Biogen's approval sell any products that
compete with Avonex-Registered Trademark- for the treatment of Multiple
Sclerosis. The Company does not have any exclusive rights to sell
Avonex-Registered Trademark-, and Biogen has reserved the right under the Biogen
Agreement to sell Avonex-Registered Trademark- directly or to appoint other
providers of home delivery pharmacy services for Avonex-Registered Trademark-,
but such action would eliminate the Company's exclusivity obligations.
GROWTH HORMONE-RELATED DISORDERS. While growth delay in children may be
caused by a number of factors, including malnutrition, systemic illness,
psychosocial stress or endocrine deficiency, a major treatable cause of growth
delay is growth hormone deficiency. Growth hormone deficiency may result from
damage to or
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malfunction of the hypothalamus or pituitary gland. Growth hormone has been used
in a variety of conditions associated with short stature, including growth
retardation due to renal insufficiency and Turner's syndrome, but the major
indication for growth hormone therapy is growth hormone deficiency. It is
estimated that there are approximately 20,000 pediatric patients in the United
States who are candidates for growth hormone therapy. The use of growth hormone
to treat disorders caused by growth hormone deficiency has been commercially
available since 1985 and, therefore, the market for growth hormone products is
relatively mature. The annual revenue to the Company during its 1998 fiscal year
from pediatric patients receiving this therapy generally ranged from $15,000 to
$25,000 per patient depending on a patient's weight and severity of condition.
Currently, five manufacturers sell nine FDA-approved growth hormone products for
a variety of indications. However, a majority of patients currently being
treated with growth hormone products use one of Genentech's growth hormone
products, Protropin-Registered Trademark-, Nutropin-Registered Trademark- or
Nutropin AQ-Registered Trademark-.
The Company has purchasing relationships with all five manufacturers of
growth hormone products used in the United States, including a preferred
relationship with Genentech that dates back (through former affiliates of the
Company) to the launch of Genentech's original growth hormone product,
Protropin-Registered Trademark-, in 1985. Growth hormone products are
administered by injection several times per week, and in some cases daily.
Typically, patients or family members are trained to administer the medication
at home without the presence of a nurse. As part of its preferred relationship
with Genentech, the Company and Genentech have entered into a distribution
agreement (the "Genentech Agreement"), pursuant to which the Company dispenses
Genentech's human growth hormone products, Protropin-Registered Trademark-,
Nutropin-Registered Trademark- and Nutropin AQ-Registered Trademark-, in the
United States and pursuant to which the Company provides various information and
other services to Genentech. The pricing of Protropin-Registered Trademark-,
Nutropin-Registered Trademark- and Nutropin AQ-Registered Trademark- under the
Genentech Agreement, as well as the scope and pricing of the services provided
by the Company under such agreement, are subject to periodic adjustment. The
Genentech Agreement has an initial term expiring on December 31, 1999, unless
extended by mutual agreement, and may only be terminated by either party for
cause following a 60-day right to cure or in the event of bankruptcy, insolvency
or similar events affecting the other party. In addition, the Genentech
Agreement provides that during the term of the agreement, the Company can
(subject to certain conditions) sell human growth hormone products other than
Protropin-Registered Trademark-, Nutropin-Registered Trademark- and Nutropin
AQ-Registered Trademark-. The Company does not have any exclusive rights to
distribute Protropin-Registered Trademark-, Nutropin-Registered Trademark- and
Nutropin AQ-Registered Trademark-.
CROHN'S DISEASE. Crohn's Disease is a chronic and debilitating disorder
involving inflammation of the gastrointestinal tract. Symptoms include abdominal
pain, diarrhea, fever, general fatigue and weight loss. Some patients develop
draining fistulae. Remicade-TM-, a drug developed by Centocor, has recently been
approved by the FDA for commercialization for the treatment of moderately to
severely active Crohn's Disease for the reduction of its signs and symptoms in
patients who have an inadequate response to conventional therapy. It has also
been approved as a treatment for patients with fistulizing Crohn's Disease for
reduction in the number of draining fistulae. It is believed that Remicade-TM-
reduces intestinal inflammation in patients with Crohn's Disease by binding to
and neutralizing TNF-A on the cell membrane and in the blood and by destroying
TNF-A producing cells. TNF-A is a key biologic response mediator implicated in
the inflammation process.
Crohn's Disease is estimated to affect approximately 400,000 patients in the
United States, of which as many as 140,000 patients have moderate to severe
Crohn's Disease. Of those with moderate to severe Crohn's Disease, more than
40,000 suffer from fistulizing disease.
In August 1998, the Company established a preferred relationship with
Centocor relating to Remicade.-TM- Under an agreement between the Company and
Centocor (the "Centocor Agreement"), the Company dispenses Remicade-TM- and
provides various information and other services to Centocor. The pricing of
Remicade-TM- under the Centocor Agreement, as well as the scope and pricing of
the services provided by the Company under such agreement, are subject to
periodic adjustment. The Centocor Agreement also contemplates extending the
Company's relationship with Centocor to an additional indication for
Remicade-TM- if the additional indication receives all required approvals. This
additional indication is currently in Phase III clinical trials. The Centocor
Agreement has an initial term of three years ending August 2001, with a renewal
provision. The Company does not have any exclusive rights to sell Remicade-TM-,
and Centocor has reserved the right under the Centocor
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Agreement to sell Remicade-TM- directly or to appoint distributors or other
providers of pharmacy services for Remicade-TM-. Centocor's decision to appoint
other providers of pharmacy services would eliminate the Company's exclusivity
obligations.
BUSINESS DEVELOPMENT
The Company has 17 full-time and 7 part-time sales and marketing personnel
who sell the Company's therapies and services to physicians, patients and
private payors. The Company also creates special direct marketing programs to
potential referral sources who specialize in care and support of patients with
chronic disorders. The Company's sales and support personnel also work closely
with each of the referral sources with the goal of addressing the clinical and
reimbursement needs of their patients. The Company assists in clinical studies,
professional training seminars, distribution of patient support material,
development of patient support groups, and other programs designed to assist
patients, payors, manufacturers and physicians in enhancing the quality of care
and quality of life for patients and their families.
The Company continually seeks to obtain contracts with additional payors,
including managed care companies and employers, in order to access and provide
services for a greater number of patients. Because most third party payor
beneficiaries are restricted to using pharmacy providers included in their
payor's provider panel, the Company is eligible to receive reimbursement only
for services provided to patients covered by payors with whom the Company
maintains provider contracts. The Company maintains a dedicated team of sales
and marketing personnel that work exclusively on pursuing additional payor
relationships and has a variety of payor education programs aimed at increasing
awareness of the Company's specialized services among private payors.
In addition, the Company has a full time director of business development
whose responsibilities include tracking biotechnology drugs in development,
determining whether these drugs meet the Company's service criteria and are a
strategic fit for the Company, introducing the Company's services to the
manufacturers of these drugs and assisting in the development of customized
services for these manufacturers. There were an estimated 242 biotechnology
drugs in late stage development as of mid-1998. The Company targets
biotechnology drug manufacturers that have a need to outsource specialized
contract pharmacy and related services to an experienced provider of such
services rather than develop the capabilities internally.
SUPPLIERS
Substantially all of the biotechnology drugs sold by the Company, other than
clotting factor products, are available only from single sources: Genzyme, with
respect to Ceredase-Registered Trademark-, Cerezyme-Registered Trademark- and
Thyrogen-Registered Trademark-; Biogen, with respect to
Avonex-Registered Trademark-; Genentech, with respect to
Protropin-Registered Trademark-, Nutropin-Registered Trademark- and Nutropin
AQ-Registered Trademark-; and Centocor, with respect to Remicade-TM-. Although
there are four other manufacturers of FDA approved growth hormone products,
Genentech's products collectively enjoy a market share that exceeds the
aggregate of all other individual manufacturers of growth hormone products.
Accordingly, in the event that one or more of its current suppliers of products
(other than hemophilia products) were to cease selling products to the Company,
the Company's business, financial condition and results of operations would be
materially and adversely affected. Approximately 29%, 23% and 14% of the
Company's total revenues in the six months ended December 31, 1998 and the
fiscal years ended June 30, 1998 and 1997, respectively, were derived from sales
of Avonex-Registered Trademark- and related services. In addition, approximately
39%, 46% and 64% of the Company's total revenues in the six months ended
December 31, 1998 and the fiscal years ended June 30, 1998 and 1997,
respectively, were derived from sales of Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- and related services. The Company has supply
contracts with all five major suppliers of clotting factor in the United States,
and no supplier is responsible for a majority of the Company's hemophilia
product purchases.
The Company's agreements with its key suppliers (including Genzyme, Biogen,
Genentech and Centocor) generally may be canceled by either party, without
cause, upon between 60 and 90 days prior notice. Furthermore, the Company and
its suppliers periodically adjust the acquisition cost and other terms for the
drugs and
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related supplies covered by such contracts. In addition, the Company's
agreements with its suppliers generally provide that during the term of the
agreements (and in certain instances for as much as five years after termination
of the agreements), the Company may not distribute any competing products. The
Company does not have any exclusive rights to distribute its products, and its
suppliers have generally reserved the right under their agreements with the
Company to distribute their products directly or to appoint other distributors
of their products. See "Risk Factors--Dependence on Relationships with Limited
Number of Biotechnology Drug Manufacturers" and "Business--Disease Markets and
Manufacturer Relationships."
STRATEGIC RELATIONSHIPS WITH MEDICAL CENTERS
Many of the patients served by the Company have diseases that are discovered
before or during adolescence and require on-going care from specialist
physicians, who are often based at pediatric, academic or other acute care
medical centers. In order for the Company to obtain access to additional
patients and introduce them to the Company's specialized services during the
initial stages of their treatment program, the Company seeks to establish
strategic relationships, including joint ventures and management contracts, with
such medical centers.
The Company currently has joint ventures with four medical centers (or their
affiliates): Childrens Home Care located in Los Angeles, California; Alternative
Care Systems, Inc. located in Dallas, Texas; Cook Childrens Medical Center
located in Ft. Worth, Texas; and Children's Memorial Hospital located in
Chicago, Illinois. In the typical joint venture arrangement, the Company and a
medical center (or its affiliate) form a joint venture entity that then enters
into a management agreement with the Company to obtain specialized contract
pharmacy services. Under the terms of the joint venture agreement, the Company
manages the sales, marketing and provision of specialty pharmacy services in
exchange for a monthly management fee and the reimbursement of certain expenses.
Generally, the Company and the medical center share in the profits and losses of
the joint venture entity in proportion to their respective capital
contributions. The agreements generally have initial terms of between one and
five years and contain certain restrictive covenants and rights of first
refusal.
In addition to joint venture relationships, the Company has entered into
management agreements with medical centers (or their affiliates) to provide
specialized contract pharmacy services. The Company currently has contract
management relationships with three medical centers (or their affiliates):
LeBonheur Children's Medical Center located in Memphis, Tennessee; duPont
Hospital for Children located in Wilmington, Delaware and Children's National
Medical Center located in Washington D.C. Pursuant to these management
agreements, the Company provides goods and services used in the medical center's
specialized pharmacy business, including drugs and related supplies, patient
education, clinical consultation and certain reimbursement services. While the
payment terms under such management agreements vary, the Company is generally
reimbursed for its costs and is paid a monthly management fee from the sale of
those products and services. These agreements usually have terms of between one
and five years and are terminable by either party, with or without cause, with
between one and twelve months prior notice. See "Risk Factors--Dependence on
Medical Center Relationships."
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PAYORS
The following are the approximate percentages of the Company's gross patient
service revenue attributable to various payor categories for the fiscal year
ended June 30, 1998 and the six months ended December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1998 DECEMBER 31, 1998
--------------------- ---------------------
<S> <C> <C>
Private payors (including self
pay)(1)............................. 80% 83%
Medicaid and other state programs..... 17% 14%
Medicare and other federal programs... 3% 3%
-- --
Total............................. 100% 100%
-- --
-- --
</TABLE>
- ------------------------------
(1) Includes sales to private physician practices, whose ultimate payor is
typically Medicare, which accounted for approximately 7% of gross patient
service revenue for fiscal year 1998 and 6% of gross patient service revenue
for the six months ended December 31, 1998.
The Company typically agrees to furnish drugs and services to substantially
all patients recommended to the Company by its referral sources. The Company
believes this approach is important to maintain the confidence, support, and
loyalty of referral sources. The Company acts on behalf of the patients it
serves to assist them in obtaining reimbursement from third-party payors,
including managed care companies. Generally, the Company contacts third-party
payors before the commencement of services or delivery of product in order to
determine the patient's coverage and the percentage of costs that the payor will
cover. The Company's reimbursement staff reviews issues such as lifetime limits,
pre-existing condition clauses, the availability of special state programs, and
other reimbursement-related matters. The Company often will negotiate with
third-party payors on the patient's behalf to obtain or extend coverage. The
Company typically obtains assignment of benefits from patients that enable it to
file claims for its services and be paid directly for the covered amounts of its
charges. Due to the high cost of the products distributed by the Company and the
complexity of payor systems, claims often cannot be submitted electronically,
which increases labor costs associated with obtaining reimbursement. As with
most health care providers, the Company can experience lengthy collection
periods as a result of third party payment systems and, consequently, management
of accounts receivable through patient registration, billing, collection and
reimbursement procedures is critical to the Company.
The primary trend in the United States health care industry is toward cost
containment. The increasing prevalence of managed care, centralized purchasing
decisions, consolidation among and integration of health care providers and
competition for patients has and continues to affect pricing, purchasing and
usage patterns in health care. Decisions regarding the use of a particular drug
treatment are increasingly influenced by large private payors, including managed
care organizations, pharmacy benefit managers, group purchasing organizations,
regional integrated delivery systems and similar organizations and are becoming
more economically focused, with decisions taking into account product cost and
whether a product reduces the cost of treatment. Efforts by payors to eliminate,
contain or reduce costs through coverage exclusions, lower reimbursement rates,
greater claims scrutiny, closed provider panels, restrictions on required
formularies, claim delays or denials and other similar measures could adversely
affect the Company's revenues, profitability and cash flow. Certain payors set
lifetime limits on the amount reimbursable to patients for medical costs.
Certain of the Company's patients may reach these limits because of the high
cost of their medical treatment and associated pharmaceutical regimens. To date,
the Company has not had significant experience with patients reaching lifetime
limits. Certain payors may attempt to further control costs by selecting certain
firms to be their exclusive providers of pharmaceutical or other medical product
benefits. If any such arrangements were with the Company's competitors, the
Company would be unable to be reimbursed for purchases made by such patients.
The Company derives a significant portion of its revenue from governmental
programs such as Medicare and Medicaid. Such programs are highly regulated and
subject to frequent and substantial changes and cost containment measures. In
recent years, changes in these programs have limited and reduced reimbursement
to providers and Congress recently enacted the Balanced Budget Act of 1997
(which establishes a plan to balance
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the federal budget by 2002) that includes significant additional reductions in
spending levels for these programs. This legislation also replaced and relaxed
the federal Medicaid payment standard thereby increasing state discretion over
administration of Medicaid programs. Furthermore, federal and state proposals
are pending that would impose further limitations on governmental payments and
that would increase patient co-payments and deductibles. Additionally, a number
of states are considering legislation designed to reduce their Medicaid
expenditures and provide universal coverage and additional care for certain
populations, including proposals to impose additional taxes on providers to help
finance or expand such programs. Any of these changes could result in
significant reductions in payment levels for drugs handled and services provided
by the Company, which would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company may be required to maintain a licensed pharmacy in certain states in
order to qualify for reimbursement under state administered reimbursement plans.
See "Risk Factors--Dependence on Payors and Reimbursement Risks."
Certain of the medical centers with which the Company has a joint venture or
management relationship have hemophilia treatment centers ("HTC") that are
eligible to purchase factor from manufacturers at a discount pursuant to a
provision of the Public Health Service Act as enacted by the Veteran's Health
Care Act of 1992 ("PHS Pricing"). Manufacturers that sell outpatient drugs to
eligible entities sign an agreement with DHHS under which they agree to not
charge a price for covered outpatient drugs in excess of a statutorily set
amount. The Company does not directly own or operate an HTC that is eligible for
PHS Pricing, which may place it at a competitive disadvantage as a provider of
factor, except in the limited circumstances where its affiliated medical centers
are eligible for PHS Pricing. Under DHHS contract pharmacy guidelines, an
eligible HTC may obtain factor at PHS Pricing, and dispense it to patients of
the HTC through a contract pharmacy. However, eligible centers which fail to
comply with the contract pharmacy guidelines, or divert PHS Pricing factor to
non-patients of the HTC in violation of DHHS guidelines, may incur civil
penalties, or liability to drug manufacturers for the amount of discount
provided.
The HRSA published notice in October 1998 proposing to change current grant
award requirements for certain entities eligible under the Section 340B Drug
Discount Program (centers eligible for PHS Pricing). This notice proposes
imposing a grant award requirement in which all entities that receive HRSA
grants listed in Section 340B(a)(4) of the Public Health Service Act and that
purchase or reimburse for covered outpatient drugs must participate in PHS
pricing or demonstrate good cause for nonparticipation. If the proposed change
in the grant award requirement is finalized, the number of treatment centers and
hospitals accessing PHS pricing is expected to increase, thereby providing
additional competition to the Company's sale of clotting factor.
COMPETITION
The specialty pharmacy services industry is highly competitive and is
experiencing both horizontal and vertical consolidation. The industry is
fragmented, with many public and private companies focusing on different product
or customer niches. Some of the Company's current and potential competitors
include specialty pharmacy divisions of national wholesale drug distributors;
specialty pharmacy distributors, such as Caremark Therapeutic Services (a
subsidiary of MedPartners, Inc.) and Olsten Corporation; pharmacy benefit
management companies; hospital-based pharmacies; retail pharmacies; home
infusion therapy companies; certain manufacturers that sell their products both
to distributors and directly to users, including clinics and physician offices;
and hospital-based comprehensive hemophilia care centers and other alternate
site health care providers. Some of the Company's competitors have greater
financial, technical, marketing and managerial resources than the Company.
While competition is often based primarily on price and quality of care and
service, it can also be affected by the ability to develop and maintain
relationships with patients and referral sources, depth of product line,
technical support systems, specific patient requirements and reputation. There
can be no assurance that competitive pressures will not have a material adverse
affect on the Company's business, financial condition and results of operations.
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Through federal legislation such as the Social Security Act, as amended, the
Veterans Health Care Act of 1992, and the Public Health Services Act, and the
rules and regulations thereunder, manufacturers of certain types of outpatient
drugs, including clotting factor, are required to provide price discounts for
such drugs to various types of federally funded hemophilia treatment centers,
which is a competitive advantage to such providers not available to the Company.
COMPLIANCE PROGRAM
The Company adopted a new corporate compliance program, entitled "Code of
Ethics and Business Conduct," in February 1998 (the "Compliance Program"). The
Compliance Program was implemented to detect and prevent inappropriate or
dishonest conduct in the workplace, including violations of antitrust laws,
dishonest or misleading dealings with suppliers, patients, payors, and
competitors, and the disclosure of confidential or sensitive information. Upon
accepting a job with the Company, employees receive a written copy of the
Compliance Program and are asked to read the document prior to their first day
of employment. A training session is conducted during new employee orientation
and all employees are required to sign a written acknowledgment that he or she
has read and understands the Compliance Program and will adhere to the standards
set forth therein. The Company has a corporate compliance officer and a
compliance committee with representation from each operating subsidiary. The
compliance officer is responsible for administering the program, which includes
training, internal audits and reviews, and responding to reported issues with
the assistance of the compliance committee. Employees are encouraged to ask
questions or reveal potential compliance issues to either their supervisor or
their compliance committee member or via a toll free hotline number. These calls
can be made anonymously, if so desired. Employees also receive corporate
compliance training periodically with respect to potential compliance issues.
Issues that are reported to the committee will normally be handled at the
committee level unless the compliance officer believes that the Company's Board
of Directors should be involved. At least once a year, the corporate compliance
officer will meet with or submit a written report to the Company's Board of
Directors. While there is not a standing compliance committee of the Board of
Directors, an outside director, Kenneth R. Masterson, has been designated as a
liaison from whom the compliance officer may seek advice.
GOVERNMENT REGULATION
The conduct of marketing, selling and purchasing drugs and medical supplies
by and among manufacturers, distributors, health care providers and patients is
extensively regulated and periodically scrutinized by state and federal
governments for compliance with laws and regulations regarding, among other
things, inducements for referrals, prohibited financial relationships with
physicians, joint venture and management arrangements, product discounts,
incentives to patients and professional licensure. This regulatory framework is
complex and the laws are very broad in scope, subject to differing
interpretations and lack substantive court decisions addressing many
arrangements under which the Company has and expects to conduct its business.
Because civil and criminal sanctions may be imposed for violations of these
laws, compliance is a significant operational requirement for the Company.
Because of the nature of this regulatory framework, there can be no assurance
that all of the Company's business practices would be construed to comply with
these laws in all respects, and any violation or alleged violation of these laws
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is unable to predict the future course of federal, state and
local regulation, legislation or enforcement, and changes in this complex
regulatory framework or in the interpretation of these laws, rules and
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations.
LICENSURE AND REGISTRATION. In general, the Company's pharmacy operations
are regulated by the statutes and regulations of Tennessee, where it is licensed
as a retail pharmacy and wholesale distributor of pharmaceuticals, as well as
the states of Alabama, and Texas, where it operates satellite retail pharmacies.
In addition, the Company currently delivers prescription products from its
licensed pharmacies to patients in other states in
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<PAGE>
which the Company does not operate a pharmacy. Many of these states have laws or
regulations requiring out-of-state pharmacies to be licensed as a condition to
the delivery of prescription products to patients in such states. The Company
believes that it is in substantial compliance with such laws as are applicable.
Various federal and state pharmacy associations and some boards of pharmacy
have attempted to promote laws or regulations directed at restricting the
activities of out-of-state pharmacies, thereby benefiting local pharmacies with
which the Company competes from time to time. In addition, a number of states
have laws or regulations which, if successfully enforced, would effectively
limit some of the financial incentives available to third-party payors that
offer managed care prescription drug programs. To the extent such laws or
regulations are found to be applicable to the Company, there is no assurance the
Company could comply, and noncompliance could adversely affect the Company's
pharmacy service operations.
The federal and state controlled substances laws and regulations govern
manufacturers, distributors and dispensers of controlled substances. Any person
who manufactures, distributes, or dispenses controlled substances must obtain a
registration from the United States Attorney General and, where required, from
the appropriate state agency. A separate registration is required at each
principal place of business where the applicant manufactures, distributes, or
dispenses controlled substances. The laws and regulations also specify label and
packaging requirements for manufacturers and distributors and record-keeping and
reporting requirements for all registrants. Although the Company maintains
federal and applicable state regulations under these laws, it handles small
amounts of inventory that are subject to controlled substances laws.
PROFESSIONAL PRACTICE. State laws prohibit the practice of pharmacy without
a license. Accordingly, the Company's pharmacists are all licensed in Tennessee,
and other states where required. The Company monitors the professional aspects
of their practice. However, to the extent that the Company's employees assist
patients and providers in helping patients comply with prescribed treatment
programs, such activities could be deemed by a state to be the practice of
medicine, nursing, or outside the scope of permitted pharmacy practice.
PHARMACY COUNSELING LAW. Federal support of state Medicaid programs for
covered outpatient drugs is conditioned on the state having a drug use review
("DUR") program. The DUR program must consist of prospective drug review,
retrospective drug use review, the application of predetermined standards, and
an educational program. The purpose of the DUR program is to improve the quality
of pharmaceutical care by ensuring that prescriptions are appropriate and
medically necessary, and that they are not likely to result in adverse medical
events. As part of the program, the state must develop standards containing the
minimum specified requirements for the counseling by pharmacists of patients or
their caregivers. The standards must address special situations where the
patient or the patient's representative is not readily available to receive an
offer to counsel, such as prescriptions delivered through the mail. The Company
believes that its pharmacists monitor these requirements and provide the
requisite counseling in the ordinary course of their activities.
FEDERAL MAIL ORDER. In addition to state regulations of pharmacies and
pharmacists, federal statutes and regulations establish standards for the
labeling, packaging, repackaging, advertising and adulteration of prescription
drugs and the dispensing of "controlled" substances and prescription drugs. To
the extent that the Company were to use the federal postal service, Federal
Trade Commission and United States Postal Service regulations require mail order
sellers to engage in truthful advertising, to stock a reasonable supply of
drugs, to fill mail orders within thirty days and, if that is impossible, to
inform the consumer of his or her right to a refund. The Company believes that
it is in substantial compliance with the above requirements.
THE PRESCRIPTION DRUG MARKETING ACT. The federal Prescription Drug
Marketing Act ("PDMA") provides that certain drugs and devices, generally those
requiring a prescription by a physician, are exempted from the federal labeling
and packing requirements, upon the condition that such drugs are not adulterated
or misbranded. The PDMA also generally prohibits the selling, purchasing, or
trading of any drug sample, which is not intended to be sold or intended to
promote the sale of the drug. The PDMA imposes certain documentation and record
keeping requirements, as well as proper drug storage and maintenance
requirements, in connection with the distribution of drug samples. In those
instances where the PDMA applies to drugs or services provided by
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the Company, the Company believes that it complies with the PDMA through its
ordinary course of documentation, record keeping and storage procedures.
ANTI-KICKBACK AND SELF-REFERRAL. As a health care company, the Company is
subject to various federal laws that regulate the relationship between providers
of health care services and referral sources such as physicians and hospitals.
Under Medicare, Medicaid and other programs of government payment and
reimbursement of health-related costs, the federal and state governments enforce
a federal statute that prohibits the offer, payment, solicitation or receipt of
any remuneration, directly or indirectly, overtly or covertly, in cash or in
kind to induce or in exchange for (i) the referral of patients covered by the
programs, or (ii) the leasing, purchasing, ordering or arranging for or
recommending the lease, purchase or order of any item, good, facility or service
covered by the programs (the "Anti-Kickback Law"). Penalties include criminal
fines, civil monetary penalties, and imprisonment, and the exclusion of anyone,
including an individual or an entity who has committed any of the prohibited
acts, from participation in the Medicare and Medicaid programs whether such
individual or entity participates in such governmental programs directly or
indirectly. If applied to the Company, any of its personnel, or any significant
customer or business partner of the Company, such sanctions could have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, the sanctioning or exclusion of a
manufacturer or a recipient of the Company's services from those programs, for
activities unrelated to those of the Company, could also have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, numerous states have existing or proposed laws that prohibit
financial arrangements among health care providers. These state laws are not
necessarily limited to items or services for which payment is made by Medicare
or Medicaid. Violations of these laws include civil and criminal penalties, as
well as the suspension or termination of a provider's ability to continue to
provide services in the state. Federal and state court decisions interpreting
these federal and state statutes are limited, but some courts have construed the
statutes to apply if "one purpose" of remuneration is to induce referrals or
other conduct within the proscriptions of the statute.
In an effort to curb health care fraud, Congress included several anti-fraud
measures in the Health Insurance Portability and Accountability Act of 1996
("HIPAA"). HIPAA, among other things, amends existing crimes and criminal
penalties for Medicare fraud and enacts new federal health care fraud crimes.
HIPAA also expands the federal Anti-Kickback Law to apply to all federal health
care programs, which is any plan or program that provides health benefits
through insurance funded by the federal government. Under HIPAA, the Secretary
of the Department of Health and Human Services ("the Secretary") may exclude
from the Medicare program any individual who has a direct or indirect ownership
or control interest in a health care entity that has been convicted of a health
care fraud crime or that has been excluded from the Medicare program, if the
individual knew or should have known of the action constituting the basis for
the conviction or exclusion of the entity. HIPAA directs the Secretary to
establish a program to collect information on health care fraud and abuse to
encourage individuals to report information concerning fraud and abuse against
the Medicare program and provides for payment of a portion of amounts collected
to such individuals. HIPAA mandates the establishment of a Fraud and Abuse
Program, among other programs, to control fraud and abuse with respect to health
plans and to conduct investigations, audits, evaluations, and inspections
relating to the delivery of and payment for health care in the United States.
HIPAA prohibits any person or entity from knowingly and willfully committing
a federal health care offense relating to a health care benefit program. Under
HIPAA, a "health care benefit program" broadly includes "any public or private
plan or contract, affecting commerce, under which any medical benefit, item, or
service is provided to any individual." Among the "federal health care offenses"
prohibited by HIPAA are health care fraud and making false statements relative
to health care matters. Any person or entity that knowingly and willfully
defrauds or attempts to defraud a health care benefit program or obtains by
means of false or fraudulent pretenses, representations, or promises, any of the
money or property of any health care benefit program in connection with the
delivery of health care services is subject to a fine and/or imprisonment. In
addition, HIPAA provides that any person or entity that knowingly and willfully
falsifies or conceals or covers up a material fact or
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makes any materially false or fraudulent statements in connection with the
delivery of or payment of health care services by a health care benefit plan is
subject to a fine and/or imprisonment. These provisions of HIPAA represent the
criminalization of situations which previously would have been handled civilly
through the administrative processes of repayments of overpayments, offsets, and
fines.
The Anti-Kickback Law and similar state statutes are broad in scope, subject
to frequent modification and differing interpretations. In an attempt to clarify
which arrangements are not subject to prosecution under the Anti-Kickback Law,
the Department of Health and Human Services ("DHHS") adopted a set of "safe
harbor" regulations and continues to publish clarifications to such safe
harbors. Arrangements that comply with all the requirements of all applicable
safe harbors are deemed not to violate the Anti-Kickback Law. The Company has
several business arrangements, such as, without limitation, joint venture and
management arrangements with medical centers, service arrangements with
physicians and product pricing arrangements with suppliers that do not satisfy
all of the requirements necessary to fall within the safe harbors, and there is
not safe harbor protection for each and every Company arrangement. Due to the
breadth and complexity of these laws and regulations, and the absence in many
instances of court decisions addressing arrangements by which the Company has
conducted and expects to conduct its business, it is possible that some of the
Company's practices could be challenged. Although failure of a transaction or
arrangement to fit within a specific safe harbor provision does not necessarily
mean that the structure of the transaction is illegal or that prosecution under
the Anti-Kickback Law will be pursued, there can be no assurance that the
Company's practices will not be challenged, or that the Company will not be
subject to sanctions or be required to alter or discontinue certain of its
practices, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
OIG FRAUD ALERTS. The Office of Inspector General ("OIG") has issued "Fraud
Alerts" identifying certain arrangements and practices which it believes may
implicate the federal fraud and abuse laws. The OIG has issued a Fraud Alert
providing its views on certain joint venture and contractual arrangements
between health care providers. The OIG has issued a Fraud Alert concerning
prescription drug marketing practices that could potentially violate federal
fraud and abuse laws. Pharmaceutical marketing activities may implicate the
federal fraud and abuse laws because drugs are often paid for by Medicare and
the Medicaid program. According to the Fraud Alert, examples of practices that
may implicate the fraud and abuse laws include arrangements under which
remuneration is made to pharmacists to recommend the use of a particular
pharmaceutical product. In addition, a number of states have recently undertaken
enforcement actions against pharmaceutical manufacturers involving
pharmaceutical marketing programs, including programs containing incentives for
pharmacists to dispense one particular product rather than another. These
enforcement actions arise under state consumer protection laws which generally
prohibit false advertising, deceptive trade practices and the like. Further, a
number of the states involved in these enforcement actions have requested that
the FDA exercise greater regulatory oversight in the area of pharmaceutical
promotional activities by pharmacists. It is not possible to determine whether
the FDA will act in this regard or what effect, if any, FDA involvement would
have on the Company's operations.
THE STARK LAW. The Company and any physician (or the physician's immediate
family members) with whom the Company may have business dealings are also
subject to the Ethics in Patient Referrals Act of 1989, commonly called the
"Stark Law." Unless excepted, the Stark Law prohibits physicians from making a
referral for the rendering of certain health-related items or services if such
practitioner or his or her family member has a financial relationship with the
entity receiving the referral. Correspondingly, such entity cannot bill for a
service or item provided pursuant to a prohibited referral. The prohibitions of
the Stark Law apply to the products and services provided by the Company. Among
other sanctions, a civil monetary penalty may be levied for each product or
service provided pursuant to a prohibited referral upon both the person making
the referral and the provider rendering the service. Such persons or entities
are also subject to exclusion from Medicare and Medicaid. The prohibitions of
the Stark Law apply to the Company's products and services. Due to the breadth
and complexity of the Stark Law and the absence of court decisions construing
such law, it is possible that some of the Company's practices could be
challenged and there can be no assurance that the Company will not be
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subject to sanctions or be required to alter or discontinue certain of its
practices, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
BENEFICIARY INDUCEMENT. HIPAA created new civil monetary penalties for
individuals and entities that offer remuneration or other inducements to the
beneficiaries of federal health care programs, such as Medicare, Medicaid and
CHAMPUS, which the provider knows or should know will influence the
beneficiaries' decision to seek specific governmentally reimbursable items or
services or to choose a particular provider to provide those items or medical
services. HIPAA provides an exception to this prohibition by excluding items
provided to promote the delivery of preventive care. Under the statutory
exemption, it would not be considered impermissible remuneration for a provider
to give certain types of incentives to a beneficiary to encourage the
beneficiary to receive preventive care. The statutory exception would apply
where "such care is provided or directly supervised by the medical provider that
has provided the incentive."
The OIG has issued proposed regulations concerning the HIPAA prohibition
against inducements to beneficiaries (the "Proposed Regulations"). In contrast
to the statute, the OIG has taken the position that the statutory exception for
incentives to promote preventive care does not include the "direct rendering of
preventive medical care." The Preamble of the Proposed Regulations provides
examples of the type of preventive care incentives the OIG would consider
permissible under this statutory exemption: (i) transportation to and from
preventive care services; (ii) car seats, formula and other items for those
participating in prenatal or postnatal classes; and (iii) tee shirts, videos and
water bottles for those participating in post-cardiac care fitness programs. The
OIG has indicated that items and services related to general health promotion
such as health club memberships, vitamins, nutritional supplements and the like
would not be permissible incentives under the statutory exception. The OIG has
also stated that permissible incentives would not include cash or cash
equivalents. As the OIG noted in the Preamble, the committee report on these
provisions had stated that the provision of items and services of nominal value
was permissible, offering as examples, "refreshments, medical literature,
complimentary local transportation services, or participation in free health
fairs." The OIG has interpreted this statement restrictively to mean that the
aggregate value of such services is nominal and that the provision of even
nominally priced incentives on a frequent basis would be impermissible. The
Company from time to time provides certain items at no charge to its patients in
connection with their drug therapies. Although the Company believes these items
fall within the scope of the statutory preventive care exception, or are
otherwise of nominal value, there can be no assurance regarding the scope of any
final regulations, or that the Company will not be challenged on its practices
and suffer applicable sanctions or be required to alter or discontinue its "no
charge" practices, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
THE FALSE CLAIMS ACT. The Company is also subject to federal and state
laws, including the federal False Claim Act, prohibiting an individual or entity
from knowingly and willfully presenting claims for payment (by Medicare,
Medicaid, or other third party payors) that contain false or fraudulent
information. These laws also provide for both criminal and civil penalties.
Furthermore, providers found to have submitted claims which they knew or should
have known were false, fraudulent, or for items or services that were not
provided as claimed, may be excluded from Medicare and Medicaid participation,
required to repay previously collected amounts, and subject to substantial civil
monetary penalties.
GOVERNMENT INVESTIGATIONS. There is increasing scrutiny by law enforcement
authorities, the OIG, the courts, and Congress of arrangements between health
care providers and potential referral sources to ensure that the arrangements
are not designed as a mechanism to exchange remuneration for patient care
referrals and opportunities. Investigators have demonstrated a willingness to
look behind the formalities of a business transaction to determine the
underlying purpose of payments between health care providers and potential
referral sources. Enforcement actions have increased, as evidenced by recent
highly publicized enforcement investigations. Although, to its knowledge, the
Company is not currently the subject of any investigation, there can be no
assurance that the Company will not be the subject of investigations or
inquiries in the future nor that
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any such investigation would not have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to investigations and enforcement actions initiated by
governmental agencies, health care companies may also be the subject of qui tam
actions brought under the False Claims Act by private individuals on behalf of
the government. Furthermore, actions under the False Claims Act, commonly known
as "whistleblower" lawsuits are generally filed under seal to allow the
government adequate time to investigate and determine whether it will intervene
in the action, and defendant health care providers are often without knowledge
of such actions until the government has completed its investigation and the
seal is lifted.
CONFIDENTIALITY. Various federal and state laws establish minimum standards
for the maintenance of medical records and protect the confidentiality of
patient medical information. In the course of its business, the Company
maintains medical records for each patient to whom it dispenses drugs. As a
result, it is subject to one or more of these medical record and patient
confidentiality laws. In addition, the Company may become subject to new rules
recently mandated by HIPAA, and proposed by HCFA to ensure the integrity and
confidentiality of patient data by creating mandatory security standards for
entities which maintain or transmit health information electronically. The
Company maintains written procedures and provides regular training to its
employees in an effort to comply with all of the medical record and patient
confidentiality laws to which the Company is subject. Unauthorized disclosure of
confidential patient information, or other failure to comply with any applicable
laws and regulations regarding the maintenance of patient records and the
confidentiality of medical information, could have a material adverse effect on
the Company's business, financial condition and results of operation.
BALANCED BUDGET ACT. Each state has its own Medicaid program that is funded
jointly by the state and Federal government. Federal law governs how each state
manages its Medicaid program, but there is wide latitude for states to customize
Medicaid programs to fit the needs and resources to their citizens. As a result,
each state Medicaid plan has its own payment formula and recipient eligibility
criteria. In recent years, changes in Medicare and Medicaid programs have
resulted in limitations on, and reduced levels of, payment and reimbursement for
a substantial portion of health care goods and services. Congress recently
enacted the Balanced Budget Act of 1997, which establishes a plan to balance the
federal budget by fiscal year 2002, and includes significant additional
reductions in spending levels for the Medicare and Medicaid programs.
The Medicare, Medicaid, CHAMPUS and other governmental programs are subject
to statutory and regulatory changes, administrative rulings, interpretations and
determinations, requirements for utilization review and new governmental funding
restrictions, all of which may materially increase or decrease program payments
as well as affect the cost of providing services and the timing of payments. The
final determination of amounts earned under the programs often requires many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical provisions. The Company
believes adequate provision has been made for such adjustments. Until final
adjustment, however, significant issues remain unresolved and payments received
could be recouped.
REFORM. Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. A variety of
new approaches have been proposed, including mandated basic health care
benefits, controls on health care spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid spending, and the
creation of large purchasing groups. In addition, some of the states in which
the Company operates have adopted or are considering various health care reform
proposals. The Company anticipates that Congress and state legislatures will
continue to review and assess alternative health care delivery systems and
payment methods and that public debate of these issues will likely continue in
the future. Because of uncertainty regarding the ultimate features of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, of such reform proposals will be adopted, when they may be
adopted, or what impact they may have on the Company.
46
<PAGE>
FACILITIES
The Company's corporate headquarters is located in Memphis, Tennessee and
its primary pharmacy locations are in Memphis and Nashville, Tennessee. In
addition, the Company has a satellite pharmacy location in the Birmingham,
Alabama area and two satellite pharmacy locations in the Dallas/Ft. Worth, Texas
area that are leased by partnerships in which the Company is a general partner.
MEMPHIS, TENNESSEE. The Company currently leases an aggregate of
approximately 42,000 square feet of space in an office/warehouse business park
in Memphis, Tennessee pursuant to two lease agreements that expire in 2003, each
with an option to extend the lease term for one additional five year period. The
Company is negotiating to lease an additional 20,000 square feet of space.
NASHVILLE, TENNESSEE. The Company currently leases approximately 24,000
square feet of space in Nashville, Tennessee pursuant to a lease agreement that
expires in October 1999, with an option to extend the lease term for one
additional five year period.
BIRMINGHAM, ALABAMA. The Company currently leases approximately 2,400
square feet of space in the Birmingham, Alabama area pursuant to a lease
agreement that expires in February 2000.
DALLAS/FORT WORTH, TEXAS. Partnerships in which the Company is a general
partner currently lease an aggregate of approximately 2,400 square feet of space
in two locations in the Dallas/Fort Worth, Texas area pursuant to two lease
agreements that expire in May 2002, each with an option to extend the lease term
for one additional three year period.
EMPLOYEES
The Company had 296 full-time and 36 part-time employees as of December 31,
1998, which included 29 full-time and four part-time pharmacists. None of the
Company's employees are represented by a labor union, and management considers
its relations with its employees to be good.
LIABILITY INSURANCE
Providing health care services and products entails an inherent risk of
liability. In recent years, participants in the health care industry have become
subject to an increasing number of lawsuits, many of which involve large claims
and significant defense costs. The Company may from time to time be subject to
such suits as a result of the nature of its business. The Company maintains
general liability insurance, including professional and product liability, in an
amount deemed adequate by management. There can be no assurance, however, that
claims in excess of, or beyond the scope of, the Company's insurance coverage
will not arise. In addition, the Company's insurance policies must be renewed
annually. Although the Company has not experienced difficulty in obtaining
insurance coverage in the past, there can be no assurance that it will be able
to do so in the future on acceptable terms or at all.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of Company management, although outcomes of
these lawsuits and claims are uncertain, in the aggregate they should not have a
material adverse effect on the Company's business, financial condition or
results of operations.
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
David D. Stevens.......................... 45 Chairman of the Board of Directors and
Chief Executive Officer
John R. ("Randy") Grow.................... 50 President and Director
Joel R. Kimbrough......................... 41 Senior Vice President, Chief Financial
Officer and Treasurer
Kyle J. Callahan.......................... 32 Senior Vice President and Director
Thomas W. Bell, Jr........................ 47 Senior Vice President, General Counsel and
Secretary
Kenneth R. Masterson(1)................... 54 Director
Kenneth J. Melkus(1)...................... 52 Director
Andrew M. Paul(2)......................... 42 Director
Patrick J. Welsh(2)....................... 54 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
DAVID D. STEVENS has served as Chief Executive Officer and Director of
Accredo since it was acquired from Le Bonheur in 1996. Previously, Mr. Stevens
served as Chief Operating Officer of SHS since its inception in 1983. Mr.
Stevens has served as President of SHS since 1993 and Director since 1996. He
has served as Chief Executive Officer of Nova Factor since 1996 and as a
Director since 1990.
JOHN R. ("RANDY") GROW has served as President and Director of Accredo since
it was acquired from Le Bonheur in 1996. Mr. Grow has also served as President
of Nova Factor since 1996, and Chief Operating Officer and Director since 1990.
Previously, Mr. Grow was employed in the home infusion industry as President of
Curaflex Health Infusion Services, Inc. from 1988 to 1989 and as Area Vice
President of Caremark, Inc. from 1985 to 1988.
JOEL R. KIMBROUGH has served as Senior Vice President and Chief Financial
Officer and Treasurer of Accredo since it was acquired from Le Bonheur in 1996.
He has also served as Chief Financial Officer and Director of Nova Factor since
its inception in 1990, as Chief Financial Officer of SHS since 1989, and as a
Director of SHS since 1996. Previously, Mr. Kimbrough, a certified public
accountant, was employed by Ernst & Young LLP from 1980 to 1989.
KYLE J. CALLAHAN has served as Senior Vice President and a Director of
Accredo since HHS was acquired by the Company in June 1997. Mr. Callahan has
served as President of HHS since June 1997. From HHS's inception in 1990 until
June 1997, Mr. Callahan served in several management and executive positions
with HHS, including Vice President of Operations.
THOMAS W. BELL, JR. joined Accredo as Senior Vice President and General
Counsel in July 1998 and was elected Secretary of the Company in October 1998.
Prior to joining the Company, Mr. Bell practiced law from 1976 to 1998 as a
member of the firm of Armstrong Allen Prewitt Gentry Johnston & Holmes, PLLC in
48
<PAGE>
Memphis, Tennessee, where Mr. Bell represented Nova Factor and SHS since their
inception in 1990 and 1983, respectively.
KENNETH R. MASTERSON has been a Director of Accredo since April 1998. Mr.
Masterson joined FedEx in 1980 and in 1996 he became Executive Vice President,
General Counsel and Secretary of FedEx. In 1998, Mr. Masterson assumed the same
duties for FDX Corporation, a transportation holding company and the parent
company of FedEx. Mr. Masterson is also a director of Thomas & Betts
Corporation.
KENNETH J. MELKUS has been a Director of Accredo since October 1997. Mr.
Melkus currently serves as a consultant to WCA Management Corporation, an
affiliate of WCAS VII. From its founding in 1993 to its sale in 1996, Mr. Melkus
served as Chairman of the Board and Chief Executive Officer of HealthWise of
America, Inc., an operator of health maintenance organizations. From 1986 until
1993, Mr. Melkus served as Vice Chairman and President of Surgical Care
Affiliates, Inc., an operator of outpatient surgery centers. Mr. Melkus is also
a director of Quorum Health Group, Inc.
ANDREW M. PAUL has been a Director of the Accredo since 1996. Mr. Paul
joined Welsh Carson in 1984 and is a general partner of the sole general partner
of WCAS VII and an affiliated entity that are stockholders of the Company. Mr.
Paul also is a director of Lincare, Inc., Centennial HealthCare Corporation and
several privately held companies.
PATRICK J. WELSH has been a Director of Accredo since 1996. Mr. Welsh was a
founder of Welsh Carson in 1979 and is a general partner of the sole general
partner of WCAS VII and an affiliated entity that are stockholders of the
Company. Prior to 1979, Mr. Welsh was president and a Director of Citicorp
Venture Capital, Ltd., an affiliate of Citicorp engaged in venture capital
investing. Mr. Welsh also serves as a director of several private companies.
Upon completion of the Offering, the Board of Directors will be divided into
three classes, each consisting of approximately one-third of the total number of
directors. There are currently seven directors. Class I directors, consisting of
Messrs. Stevens and Melkus, will hold office until the 1999 annual meeting of
stockholders; Class II directors, consisting of Messrs. Paul and Callahan, will
hold office until the 2000 annual meeting of stockholders; and Class III
directors, consisting of Messrs. Welsh, Grow and Masterson, will hold office
until the 2001 annual meeting of stockholders. See "Description of Capital
Stock--Special Provisions of the Certificate of Incorporation, Bylaws and
Delaware Law."
Mr. Callahan was elected to the Board of Directors in connection with the
Company's acquisition of HHS in 1997. Mr. Callahan's employment agreement
provides that he may terminate his employment for "good reason" (as defined in
the employment agreement) if he is willing to serve but is not elected to the
Board of Directors of the Company while WCAS VII owns a majority of the
outstanding Common Stock of the Company and the Company has not consummated an
initial public offering. Pursuant to a letter dated June 3, 1997, WCAS VII
agreed to vote its shares of Common Stock to elect Mr. Callahan to the Board of
Directors of the Company, and Mr. Callahan was elected to the Board on June 30,
1997. See "Certain Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently includes a Compensation Committee and an
Audit Committee. The Compensation Committee, which is composed of Messrs. Welsh
and Paul, is responsible for the approval of compensation arrangements for
executive officers of the Company and administers the Company's stock option and
employee stock purchase plans. The Audit Committee, which is composed of Messrs.
Masterson and Melkus, reviews the scope and results of audits and other services
performed by the independent public accountants of the Company and reviews the
adequacy of the Company's internal controls.
49
<PAGE>
COMPENSATION OF DIRECTORS
Employees of the Company who are members of the Board of Directors do not
receive any compensation for serving on the Board of Directors. Each
non-employee member of the Board of Directors receives a fee of $1,500 for each
meeting attended. All directors of the Company, including members who are
employees, receive reimbursement of out-of-pocket expenses incurred in
connection with attending meetings. In addition, all directors of the Company
are eligible to receive grants of stock options or other awards pursuant to the
Company's stock option plans. During the fiscal year ended June 30, 1998,
Messrs. Welsh, Paul, Melkus and Masterson each received a grant of a ten-year
non-qualified stock option for 20,000 shares of Common Stock at an exercise
price of $6.00 per share. All of such options vest at an annual rate of 25%,
with the first 25% vesting on the first anniversary of the date of grant.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company for
services rendered for the fiscal year ended June 30, 1998 with respect to the
Company's Chief Executive Officer and the Company's other executive officers
whose total salary and bonus for the fiscal year ended June 30, 1998 exceeded
$100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------------------
------------------------------------------ RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) AWARD(S)($) OPTIONS(#)
- -------------------------- ----------- ---------- --------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
David D. Stevens.......... 1998 $ 250,938 $ 45,360 -- --
Chairman of the Board
and
Chief Executive Officer
John R. Grow.............. 1998 167,269 30,600 -- --
President
Joel R. Kimbrough......... 1998 159,306 29,430 -- --
Senior Vice President,
Chief Financial Officer
and Treasurer
Kyle J. Callahan.......... 1998 160,621 29,430 -- -- 40,000
Senior Vice President
<CAPTION>
NAME AND PRINCIPAL ALL OTHER
POSITION COMPENSATION($)(2)
- -------------------------- -------------------
<S> <C>
David D. Stevens.......... $ 4,657
Chairman of the Board
and
Chief Executive Officer
John R. Grow.............. 4,525
President
Joel R. Kimbrough......... 3,587
Senior Vice President,
Chief Financial Officer
and Treasurer
Kyle J. Callahan.......... 3,740
Senior Vice President
</TABLE>
- ------------------------
(1) Excludes perquisites and other personal benefits which for each Named
Executive Officer during any such year did not exceed the lesser of $50,000
or 10% of such individual's salary plus annual bonus.
(2) Includes contributions by the Company under its 401(k) Plan on behalf of
Messrs. Stevens, Grow, Kimbrough and Callahan in the amount of $3,749;
$3,192; $2,909; and $3,592, respectively. Also includes insurance premiums
paid by the Company with respect to term life insurance for the benefit of
Messrs. Stevens, Grow, Kimbrough and Callahan in the amount of $908; $1,333;
$678; and $148, respectively.
50
<PAGE>
OPTION GRANTS
The following table sets forth certain information regarding options granted
by the Company to the Named Executive Officers during the fiscal year ended June
30, 1998.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SHARES OPTIONS GRANTED TO EXERCISE GRANT DATE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED(#) FISCAL YEAR ($/SHARE) DATE VALUE($)(1)
- ----------------------------- ------------------- --------------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
David D. Stevens............. -- -- -- -- --
John R. Grow................. -- -- -- -- --
Joel R. Kimbrough............ -- -- -- -- --
Kyle J. Callahan(2).......... 30,000 28.2% $6.00 9/3/07 $ 97,950
10,000 9.4% 6.00 2/9/08 32,300
</TABLE>
- ------------------------
(1) These values were determined using the Black-Scholes methodology and the
assumptions described in Note 10 to the Company's Consolidated Financial
Statements included in this Prospectus.
(2) Mr. Callahan was granted an incentive stock option to purchase 30,000 shares
of Common Stock (divided into 15,000 Tranche A option shares and 15,000
Tranche B option shares) and an incentive stock option to purchase 10,000
shares of Common Stock (divided into 7,000 Tranche A option shares and 3,000
Tranche B option shares) on September 3, 1997 and February 9, 1998,
respectively. The exercise price per share of each option was equal to the
fair market value of the Common Stock on the respective dates of grant, as
determined by the Board of Directors. Pursuant to each option, the option
shares subject to Tranche A will vest at an annual rate of 25%, and the
option shares subject to Tranche B will vest in 2002 (or at an annual rate
of 25% in the event the Company meets certain performance goals based upon
target earning levels). The options will vest immediately upon certain
changes in control of the Company. The term of each option expires ten years
from the date of grant (or earlier, in the event the optionee ceases to be
employed by the Company or any subsidiary or parent thereof).
OPTION EXERCISES AND YEAR END OPTION VALUES
The following table provides information with respect to options exercised
by the Named Executive Officers during the fiscal year ended June 30, 1998 and
the value of unexercised options held by the Named Executive Officers as of June
30, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE AT FISCAL YEAR END 1998(#) FISCAL YEAR END 1998($)(1)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- --------------------- ----------------- ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
David D. Stevens......... -- -- 95,000/176,429 $ 1,235,000/$2,293,577
John R. Grow............. -- -- 47,500/88,214 617,500/1,146,782
Joel R. Kimbrough........ -- -- 47,500/88,214 617,500/1,146,782
Kyle J. Callahan......... -- -- 3,750/36,250 37,500/362,500
</TABLE>
- ------------------------
(1) For purposes of this calculation, value is based upon the difference between
the exercise price and the assumed initial public offering price of $16.00
per share.
51
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Welsh and Paul, who presently serve as members of the Compensation
Committee of the Board of Directors, served on the Compensation Committee during
the fiscal year ended June 30, 1998. Neither Messrs. Welsh or Paul, nor any
executive officer of the Company, serves as a member of a board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Stevens,
Grow and Kimbrough as of May 31, 1996, and with Mr. Bell as of July 10, 1998.
HHS, a wholly owned subsidiary of the Company, entered into an employment
agreement with Mr. Callahan as of June 5, 1997. The terms of such employment
agreements expire on May 31, 1999 (with respect to Messrs. Stevens, Grow and
Kimbrough), June 1, 2000 (with respect to Mr. Callahan), and June 30, 2001 (with
respect to Mr. Bell), although each employment agreement is subject to automatic
one-year renewals. The Company may terminate the employment agreements at any
time. Each employment agreement provides that in the event the Company
terminates the executive's employment without "cause" (as defined therein) and
other than by reason of his death or disability, or in the event the executive
terminates his or her employment for "good reason" (as defined therein), the
executive shall continue to receive his or her salary as a severance payment for
a certain period of time (one year, with respect to Messrs. Stevens, Grow,
Kimbrough and Bell, and 18 months, with respect to Mr. Callahan). In addition,
upon such termination, Messrs. Stevens, Grow, Kimbrough and Bell would be
entitled to continue to participate in the Company's benefit plans for a period
of one year (or until the commencement of other full-time employment, whichever
is earlier).
The employment agreements entitle Messrs. Stevens, Grow, Kimbrough, Bell and
Callahan to annual base salaries presently set at $264,600, $178,500, $173,300,
$168,000 and $171,675, respectively. Each employment agreement also provides for
the payment of an annual bonus of up to 50% of salary with respect to Messrs.
Stevens, Grow, Kimbrough and Callahan and up to 40% of salary with respect to
Mr. Bell, based upon the extent to which the Company achieves certain
performance goals based upon target earning levels established by the Board of
Directors. Each of the employment agreements entitles the executive to all
benefits provided by the Company for its senior executives. In addition, the
Company has agreed to maintain $500,000 in term life insurance for each of
Messrs. Stevens, Grow, Kimbrough and Bell, payable to their respective named
beneficiaries.
Each of the employment agreements prohibits the executive's disclosure and
use of confidential information and restricts, for certain periods of time
following termination of employment (12 months, with respect to Messrs. Stevens,
Grow, Kimbrough and Bell, and 36 months, with respect to Mr. Callahan), his
solicitation of certain employees of the Company, conduct of certain business
with the Company's five largest suppliers, or competition with the Company.
LONG-TERM INCENTIVE PLAN
Prior to the completion of the Offering, the Accredo Health, Incorporated
1998 Long-Term Incentive Plan (the "Incentive Plan") will be adopted by the
Board of Directors of the Company and will be approved by the Company's
stockholders. A summary of the Incentive Plan is set forth below. The summary is
qualified in its entirety by reference to the full text of the Incentive Plan, a
copy of which is included as an exhibit to the Registration Statement of which
this Prospectus is a part.
The purpose of the Incentive Plan is to promote the success, and enhance the
value, of the Company by linking the personal interests of employees, officers,
consultants and directors to those of the stockholders, and by providing such
persons with an incentive for outstanding performance. As of December 31, 1998,
there were approximately 40 persons eligible to participate in the Incentive
Plan.
52
<PAGE>
The Incentive Plan authorizes the granting of awards ("Awards") to
employees, officers, consultants and directors of the Company or its
subsidiaries in the following forms: (i) options to purchase shares of Common
Stock ("Options"), which may be incentive stock options that meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") ("ISOs") or non-qualified stock options ("NQSOs"), (ii) stock
appreciation rights ("SARs"); (iii) performance units ("Performance Units");
(iv) restricted stock ("Restricted Stock"); (v) dividend equivalent rights; and
(vi) other stock-based awards. Subject to adjustment as provided in the
Incentive Plan, the aggregate number of shares of Common Stock reserved and
available for Awards or which may be used to provide a basis of measurement for
or to determine the value of an Award (such as with a SAR or Performance Share)
is 500,000. The maximum number of shares of Common Stock with respect to one or
more Options and/or SARs that may be granted during any one calendar year under
the Incentive Plan to any one participant is 500,000. The maximum fair market
value of any Awards (other than Options and SARs) that may be received by a
participant (less any consideration paid by the participant for such Award)
during any one calendar year under the Incentive Plan is $2,000,000.
The Incentive Plan is administered by the Compensation Committee, which has
the power, authority and discretion to designate participants; determine the
type or types of Awards to be granted to each participant and the terms and
conditions thereof; establish, adopt or revise any rules and regulations as it
may deem necessary or advisable to administer the Incentive Plan; and make all
other decisions and determinations that may be required under, or as it deems
necessary or advisable to administer, the Incentive Plan. The Board or the
Compensation Committee may, at any time and from time to time, terminate, amend
or modify the Incentive Plan without stockholder approval. No termination,
amendment, or modification of the Incentive Plan may adversely affect any Award
previously granted under the Incentive Plan, without the consent of the
participant.
Upon the participant's death or disability during his or her employment or
his or her service as a director, all outstanding Options, SARs, and other
Awards in the nature of rights that may be exercised will become fully vested
and exercisable and all restrictions on outstanding Awards will lapse. In
addition, in the event of a Change in Control of the Company (as defined in the
Incentive Plan), all outstanding Options, SARs, and other Awards in the nature
of rights that may be exercised will become fully vested and exercisable and all
restrictions on all outstanding Awards will lapse. Unexercised or restricted
Awards generally will not be assignable or transferable by a participant other
than by will or the laws of descent and distribution or, except in the case of
an ISO, pursuant to a qualifying domestic relations order.
Pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), the Company may not deduct compensation in excess of $1.0 million
paid to the Chief Executive Officer and the four next most highly compensated
executive officers of the Company. The Incentive Plan is designed to comply with
Code Section 162(m) so that the grant of Options and SARs under the Incentive
Plan, and other Awards, such as Performance Shares, that are conditioned on the
performance goals described in the Incentive Plan, will be excluded from the
calculation of annual compensation for purposes of Code Section 162(m) and will
be fully deductible by the Company.
STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
The Nova Holdings, Inc. and its Subsidiaries Stock Option and Restricted
Stock Purchase Plan, as amended and restated (the "Option Plan"), became
effective as of May 31, 1996, the date of its original adoption by the Board of
Directors of the Company. The amendment and restatement of the Option Plan was
approved by the Company's stockholders on June 30, 1997. A summary of the Plan
is set forth below. The summary is qualified in its entirety by reference to the
full text of the Plan, a copy of which is included as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Option Plan authorizes the granting of options to purchase shares of
Common Stock, which may be ISOs or NQSOs, and other related awards, to
employees, officers, and directors of the Company or its subsidiaries. Subject
to adjustment as provided in the Option Plan, the aggregate number of shares of
Common
53
<PAGE>
Stock for which Options or awards may be granted under the Option Plan is
965,000. As of December 31, 1998, there were approximately 35 persons eligible
to participate in the Plan.
The Option Plan is administered by the Compensation Committee, which has the
power, authority and discretion to designate participants, determine the type or
types of awards to be granted to each participant and the terms and conditions
thereof, and establish any other terms, restrictions and conditions applicable
to any option or award not inconsistent with the provisions of the Option Plan.
The Board or the Compensation Committee may, at any time and from time to time,
terminate, amend or modify the Option Plan without stockholder approval;
provided that stockholder approval shall be required in the case of an amendment
to increase the aggregate number of shares issuable subject to the Option Plan,
to decrease the minimum exercise price in respect of ISOs, or to change the
class of employees eligible to receive ISOs under the Option Plan. No
termination, amendment, or modification of the Option Plan may adversely affect
any option or award previously granted under the Option Plan, without the
consent of the participant.
EMPLOYEE STOCK PURCHASE PLAN
Prior to the completion of the Offering, the Accredo Health, Incorporated
1998 Employee Stock Purchase Plan (the "ESPP") will be adopted by the Board of
Directors of the Company and approved by the Company's stockholders. The purpose
of the ESPP, which is intended to qualify as an employee stock purchase plan
under Section 423 of the Code, is to enhance the proprietary interest among the
employees of the Company and its participating subsidiaries through ownership of
Common Stock of the Company. A summary of the ESPP is set forth below. The
summary is qualified in its entirety by reference to the full text of the ESPP,
a copy of which is included as an exhibit to the Registration Statement of which
this Prospectus is a part.
Pursuant to the ESPP, eligible employees make contributions, through payroll
deductions, to a plan account during a six-month "offering period." The offering
periods commence and end on or about January 1 to June 30 and July 1 to December
31 of each year. On the first business day of each offering period, the Company
will grant to each participant in the ESPP an option to purchase, on the last
day of such offering period, a maximum of 2,500 shares of Common Stock. No
option will be granted to a participant if such option, when combined with all
other options granted under all of the Code Section 423 employee stock purchase
plans of the Company, its parents and its subsidiary corporations, would permit
such participant to purchase shares of Common Stock of the Company having a fair
market value in excess of $25,000 per year.
The participant will be entitled to exercise such option to the extent of
the participant's accumulated payroll deductions on the last day of such
offering period; provided, however, that if the participant's accumulated
payroll deductions on the last day of the offering period would enable the
participant to purchase more than 2,500 shares, the excess of the amount of the
accumulated payroll deductions over the aggregate purchase price of the shares
will be refunded to the participant, without interest. The option price for each
offering period will be the lesser of (i) 85% of the fair market value of the
Common Stock on the first business day of the offering period, or (ii) 85% of
the fair market value of the Common Stock on the last business day of the
offering period. Employees may authorize payroll deductions in amounts not less
than one percent (1%) but not more than ten percent (10%) of their respective
total compensation, including base pay or salary and any bonuses or commissions.
Each employee of the Company and each employee of any participating
subsidiary is eligible to participate in the ESPP, provided such employee: (i)
is regularly scheduled to work at least 20 hours each week and at least five
months in the calendar year, and (ii) immediately after the grant of an option
to him or her under the ESPP would own less than five percent of the total
combined voting power or value of all classes of stock of the Company or any of
its subsidiaries. As of December 31, 1998, there were approximately 300
employees eligible to participate in the ESPP.
Shares subject to the ESPP may be authorized but unissued shares or shares
that were once issued and subsequently reacquired by the Company. The total
number of shares of Common Stock for which options may be granted under the ESPP
is 135,000 shares, subject to adjustment in accordance with the ESPP.
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<PAGE>
The ESPP will be administered by the Compensation Committee or the Board of
Directors, which will have authority to interpret and administer the ESPP. The
ESPP may be terminated at any time by the Board, but such termination will not
affect options then outstanding. The ESPP will terminate in any case when all or
substantially all of the unissued shares of stock reserved for the purposes of
the ESPP have been purchased. If at any time shares of stock reserved for the
ESPP remain available for purchase but not in sufficient number to satisfy all
then unfilled purchase requirements, the available shares will be apportioned
among participants in proportion to their options and the ESPP will terminate.
Upon termination, all payroll deductions not used to purchase stock will be
refunded. The Committee or the Board may from time to time amend the ESPP
provided that, without the approval of the stockholders, no amendment may (i)
materially affect the eligibility requirements or the definition of "Employer,"
(ii) increase the number of shares of Common Stock subject to any options issued
to participants, or (iii) materially increase the benefits to participants under
the Plan.
An employee's rights under the ESPP will terminate when he or she ceases to
be an employee for any reason, and the cash balance in his or her contribution
account will be distributed to such employee (or his or her designated
beneficiary). An employee's rights under the ESPP may not be transferred other
than by will or the laws of descent and distribution. Any option granted under
the ESPP to an employee may be exercised, during the employee's lifetime, only
by the employee.
401(K) PLAN
The Company sponsors a defined contribution plan (the "401(k) Plan") for
eligible employees of the Company under Section 401(k) of the Code.
Substantially all the Company's employees who have attained the age of 21 and
who have completed at least three months of service are eligible to participate
in the 401(k) Plan. Participants may contribute up to 18% of their annual
compensation to the 401(k) Plan, subject to certain limitations. All
contributions made by participants are fully vested and are not subject to
forfeiture. The Company makes matching contributions to the 401(k) Plan on
behalf of each eligible participant based upon the participant's total years of
service with the Company. The Company matches 25% of "eligible contributions"
(as defined in the 401(k) Plan) made by participants with less than five years
of service, and 50% of eligible contributions made by participants with five or
more years of service.
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CERTAIN TRANSACTIONS
INITIAL FORMATION, CAPITALIZATION AND ACQUISITION OF SHS
In May 1996, the Company (formerly known as Nova Holdings, Inc.) was formed
for the purpose of acquiring all of the outstanding equity securities of SHS,
then a subsidiary of Le Bonheur. In connection with the initial capitalization
of the Company, Welsh Carson purchased an aggregate of 4,972,534 shares of the
Company's Common Stock for $14,917,602 and an aggregate of 248,624 shares of
Series A Preferred Stock for $24,862,400. Additional investors purchased a total
of 27,466 shares of the Company's Common Stock for $82,398 and 1,376 shares of
Series A Preferred Stock for $137,600. In connection with the Recapitalization,
Welsh Carson will exchange 1,100,000 shares of Common Stock for 1,100,000 shares
of Non-Voting Common Stock. All outstanding shares of Series A Preferred Stock
will be redeemed by the Company with a portion of the net proceeds from the
Offering.
On May 31, 1996, the Company acquired all of the outstanding Class A Common
Stock and Class B Common Stock of SHS (the "SHS Common Stock"). Prior to the
Company's purchase of the SHS Common Stock, SHS spun-off its three subsidiaries
other than Nova Factor and repurchased certain shares of SHS Common Stock held
by persons other than Le Bonheur. In addition, Messrs. Grow, Kimbrough and
Stevens (in addition to certain other holders of SHS Common Stock) exchanged
their shares of SHS Common Stock for 19,560, 12,225 and 61,125 shares of the
Company's Common Stock, respectively, and 978 shares, 611 shares and 3,056
shares of Series A Preferred Stock, respectively.
REGISTRATION RIGHTS AGREEMENT
In connection with the formation of the Company in May 1996, Welsh Carson
entered into a Registration Rights Agreement with the Company (the "Registration
Rights Agreement"). The Registration Rights Agreement provides for demand
registration rights that may be exercised on up to two occasions by the holders
of Restricted Stock (as defined therein, which definition includes substantially
all shares of Common Stock outstanding prior to the Offering) constituting at
least a majority of the total Restricted Stock outstanding at the time of
exercise. The Registration Rights Agreement also provides unlimited demand
registration rights to holders of Restricted Stock for registrations on Form
S-3, so long as the reasonably anticipated aggregate price to the public of such
offering is at least $1.0 million; provided, however, that such demand
registrations may not be exercised more than once every 180 days. No
registration effected pursuant to these unlimited demand registration rights on
Form S-3 will be counted toward the limit of two demand registration rights
referred to above.
The Registration Rights Agreement also provides that, subject to certain
limitations including the discretion of the managing underwriter in an
underwritten offering, holders of Restricted Stock may request inclusion of
their shares in a registration of securities initiated by the Company. The
Company is required to pay all costs of any registration pursuant to the
Registration Rights Agreement, subject to certain limitations provided in the
agreement. All of the parties to the Registration Rights Agreement have waived
any right to participate in this Offering.
All shares of Common Stock owned by the executive offices and directors of
the Company are shares of Restricted Stock as such term is defined in the
Registration Rights Agreement and are, therefore, subject to the above described
registration rights.
ACQUISITION OF HHS
In June 1997, the Company purchased all of the outstanding shares of common
stock of HHS for an aggregate purchase price of approximately $29,996,000.
Dianne R. Griffith, the mother of Mr. Callahan, was a significant stockholder of
HHS and received a material economic benefit from the transaction. See Note 3 of
the Notes to the Company's Consolidated Financial Statements. Of the
consideration received by the selling shareholders, $2,070,400 is currently
being held in two escrow accounts to secure potential indemnification
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claims for breaches of the sellers' representations and warranties and to
satisfy certain accounts payable of HHS that had not been resolved at closing.
Absent a claim for indemnification, $1,450,000 will be paid out of escrow to the
selling shareholders on June 5, 1999. Any remaining amounts in escrow will be
paid to the selling shareholders, including Ms. Griffith, upon a resolution of
the accounts payable amount. Ms. Griffith also entered into a three month
consulting agreement with the Company pursuant to which she provided certain
consulting services to the Company in exchange for a total of $26,500.
Ms. Griffith leases approximately 24,000 square feet of office space located
in Nashville, Tennessee to HHS pursuant to a lease that expires on October 31,
1999. The Company is obligated under the lease to make annual rent payments to
Ms. Griffith in the amount of $302,277.
Also in connection with the acquisition of HHS, the Company entered into an
employment agreement and a stock option agreement with Mr. Callahan. See
"Management--Executive Compensation" and "--Employment Agreements." Mr.
Callahan's employment agreement permits him to terminate his employment for
"good reason", including if he is willing to serve and he is not elected to the
Board of Directors of the Company while WCAS VII owns a majority of the
outstanding Common Stock and the Company has not consummated an initial public
offering. Pursuant to a letter dated June 3, 1997, WCAS VII agreed to vote its
shares of Common Stock to elect Mr. Callahan to the Board of Directors of the
Company, and Mr. Callahan was elected to the Board on June 30, 1997. Also, on
October 1, 1997, Mr. Callahan purchased 41,667 shares of Common Stock for a
total purchase price of $250,002 and was granted registration rights covering
those shares with the same terms and conditions as those granted to Welsh Carson
in the Registration Rights Agreement.
10% SENIOR SUBORDINATED NOTES DUE JANUARY 1, 2004
On June 4, 1997, Welsh Carson purchased $10.0 million of the Company's
Senior Subordinated Notes. The Senior Subordinated Notes bear interest at 10%
and are due and payable in full on June 1, 2004, with interest payable thereon
quarterly in arrears on the first day of March, June, September and December of
each year commencing on September 1, 1997. At the option of the Company, the
amount of interest due and payable through June 1, 1999 may be added to the
unpaid principal balance of the Senior Subordinated Notes.
Upon the Company's prior written notice to the holders of the Senior
Subordinated Notes, the Company may prepay all or any portion of the Senior
Subordinated Notes. The Company is required to make certain mandatory
prepayments of the Senior Subordinated Notes in full if at any time while the
Senior Subordinated Notes are outstanding: (i) the Company merges or
consolidates with or into another entity (subject to certain exceptions); (ii)
the Company sells or otherwise disposes of substantially all of its assets to a
third-party; or (iii) the Company consummates a public offering of equity
securities pursuant to an effective registration statement under the Securities
Act of 1933. The Company intends to prepay in full the entire principal balance
of the Senior Subordinated Notes and all accrued interest thereon with a portion
of the net proceeds of this Offering. See "Use of Proceeds."
In connection with the issuance of the Senior Subordinated Notes, the
Company also issued to purchasers of the Senior Subordinated Notes 1 share of
Common Stock for each $25 principal amount of Senior Subordinated Notes
purchased, for a total of 400,000 shares of Common Stock.
COMMON STOCK PURCHASES BY AFFILIATES
In connection with the appointment of Mr. Melkus to the Company's Board of
Directors, his daughter, Lauren Melkus, acquired 41,667 shares of Common Stock
for $250,002 on October 27, 1997. In addition, Mr. Masterson, upon his
appointment to the Company's Board of Directors, acquired 34,000 shares of
Common Stock for $204,000 on July 24, 1998 pursuant to a subscription agreement
entered into by Mr. Masterson in April 1998. Both Ms. Melkus and Mr. Masterson
were granted registration rights covering those shares with the same terms and
conditions as those granted to Welsh Carson in the Registration Rights
Agreement. See "-- Registration Rights Agreement."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1998, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by (i) each
person known to the Company to beneficially own more than 5% percent of the
outstanding Common Stock, (ii) each of the Company's directors, (iii) each of
the Company's Named Executive Officers, and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES --------------------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED(1) OFFERING OFFERING
- ---------------------------------------------------- ----------- --------------- ---------------
<S> <C> <C> <C>
Welsh, Carson, Anderson & Stowe VII, L.P.(2)(3)..... 5,372,534 95.5% 62.3%
David D. Stevens.................................... 156,125 2.7% 1.8%
Joel R. Kimbrough................................... 59,725 1.1% *
Kyle J. Callahan.................................... 45,417 * *
John R. ("Randy") Grow.............................. 67,060 1.2% *
Thomas W. Bell, Jr.................................. -- -- --
Kenneth R. Masterson................................ 34,000 * *
Kenneth J. Melkus(4)................................ 46,667 * *
Andrew W. Paul(2)(5)................................ 5,135,088 91.2% 59.5%
Patrick J. Welsh(2)(6).............................. 5,177,656 92.0% 60.0%
All directors and executive officers as a group (9
persons).......................................... 5,611,891 96.2% 63.5%
</TABLE>
- ------------------------------
* Less than one percent.
(1) The percentages shown are based on 5,625,587 shares of Common Stock
outstanding prior to the Offering and 8,625,587 shares of Common Stock
(including Non-Voting Common Stock) outstanding after the Offering. Pursuant
to the rules of the Commission, shares of Common Stock which a person has
the right to acquire within 60 days pursuant to the exercise of stock
options are deemed to be outstanding for the purpose of computing the
percentage ownership of such person but are not deemed outstanding for the
purpose of computing percentage ownership of any other person. Accordingly,
the totals for the following persons include the following shares
represented by options exercisable within 60 days of December 31, 1998: Mr.
Stevens, 95,000 shares; Mr. Kimbrough, 47,500 shares; Mr. Callahan, 3,750
shares; Mr. Grow, 47,500 shares; Mr. Melkus, 5,000 shares; Mr. Paul, 5,000
shares; Mr. Welsh, 5,000 shares; and all directors and executive officers as
a group, 208,750 shares.
(2) The business address of the named person is One World Financial Center,
Suite 3601, New York, New York 10281.
(3) Includes 101,273 shares of Common Stock owned by WCAS Healthcare Partners,
L.P. , 1,100,000 shares of Non-Voting Common Stock held by WCAS VII and
262,687 shares of Common Stock held by individual general partners of a
general partnership that is the sole general partner of WCAS VII. WCAS
Healthcare Partners, L.P. is a limited partnership with two general
partners: Russell L. Carson and Patrick J. Welsh. The sole general partner
of WCAS VII is a general partnership with thirteen general partners,
including Messrs. Carson, Welsh and Paul. The additional general partners of
the sole general partner of WCAS VII are Bruce K. Anderson, Richard H.
Stowe, Thomas E. McInerney, Laura VanBuren, James B. Hoover, Robert A.
Minicucci, Anthony J. deNicola, Paul B. Queally, Lawrence B. Sorrel, and
Priscilla A. Newman.
(4) Includes 41,667 shares of Common Stock held by Mr. Melkus' daughter, Lauren
Melkus.
(5) Includes those shares held directly and indirectly by WCAS VII except for
shares owned by the individual general partners of the sole general partner
of WCAS VII other than Mr. Paul. See footnote (3) above. Mr. Paul is a
director of the Company and a general partner of the sole general partner of
WCAS VII. Mr. Paul disclaims beneficial ownership of the shares owned by
WCAS VII.
(6) Includes those shares held directly and indirectly by WCAS VII except for
shares owned by the individual general partners of the sole general partner
of WCAS VII other than Mr. Welsh. See footnote (3) above. Mr. Welsh is a
director of the Company and a general partner of the sole general partner of
WCAS VII. Mr. Welsh disclaims beneficial ownership of the shares owned by
WCAS VII.
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DESCRIPTION OF CAPITAL STOCK
The following summary is a description of certain provisions of the
Company's Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation"). Such summary does not purport to be complete and is subject to,
and is qualified in its entirety by, all of the provisions of the Certificate of
Incorporation, a copy of which is included as an exhibit to the Registration
Statement of which this Prospectus is a part.
Upon completion of the Offering, the Company's authorized capital stock will
consist of 30,000,000 shares of Common Stock, $0.01 par value per share,
5,000,000 shares of Non-Voting Common Stock, $0.01 par value per share
("Non-Voting Common Stock"), and 5,000,000 shares of preferred stock, $1.00 par
value per share ("Preferred Stock"), Currently, there are outstanding 5,625,587
shares of Common Stock and 255,361 shares of Series A Preferred Stock. All
outstanding shares of Series A Preferred Stock will be redeemed by the Company
using a portion of the net proceeds from the Offering. Upon completion of the
Offering, the Company will have outstanding 8,625,587 shares of Common Stock
(including 1,100,000 shares of Non-Voting Common Stock) and no shares of
Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and are not entitled to cumulative voting
in the election of directors. The holders of Common Stock are entitled to share
ratably in dividends, if any, as may be declared from time to time by the Board
of Directors in its discretion out of funds legally available therefor. The
Company currently anticipates that all of its earnings will be retained to
finance the growth and development of its business and, therefore, does not
anticipate that any cash dividends will be declared on the Common Stock in the
foreseeable future. See "Dividend Policy". The holders of Common Stock are
entitled to share ratably in any assets remaining after satisfaction of all
prior claims upon liquidation of the Company. The Certificate of Incorporation
gives holders of Common Stock no preemptive or other subscription or conversion
rights, and there are no redemption provisions with respect to such shares. All
outstanding shares of Common Stock are, and the shares offered hereby will be,
when issued and paid for, fully paid and nonassessable. The rights, preferences,
and privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of Preferred Stock
which the Company may designate and issue in the future.
NON-VOTING COMMON STOCK
The shares of Non-Voting Common Stock to be issued to WCAS VII pursuant to
the Recapitilization will be fully paid and nonassessable. Subject to the prior
rights of the holders of any Preferred Stock, and on a pro rata basis with the
holders of Common Stock, the holders of outstanding shares of Non-Voting Common
Stock will be entitled to receive dividends out of assets legally available
therefor at such time and in such amounts as the Board of Directors may from
time to time determine. The shares of Non-Voting Common Stock will be
convertible into Common Stock at any time provided that WCAS VII will not own
50% or more of the Common Stock after such conversion. In the event WCAS VII
sells any Non-Voting Common Stock to third parties, such shares shall
automatically convert to Common Stock. The holders of Non-Voting Common Stock
will have no preemptive or subscription rights to purchase any securities of the
Company. Upon liquidation, dissolution or winding up of the Company, and on a
pro rata basis with the holders of Common Stock, the holders of Non-Voting
Common Stock would be entitled to receive pro rata the assets of the Company
that are legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. Holders of outstanding shares of Non-Voting Common Stock will
not be entitled to vote such shares on any matter submitted to a vote of
stockholders.
PREFERRED STOCK
Subject to conditions specified in the Certificate of Incorporation, the
DGCL and other applicable law, the Board of Directors has the authority to issue
undesignated Preferred Stock in one or more class or series and to determine the
dividend rights, dividend rate, conversion rights, voting rights, redemption
rights and terms,
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liquidation preferences, sinking fund provisions, number of shares constituting
any class or series, and designations of such class or series without any
further vote or action by the stockholders of the Company. The Company has no
present intention to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock is to enable the Board of
Directors to render more difficult or to discourage an attempt to obtain control
of the Company by means of a tender offer, proxy contest, merger or otherwise,
and thereby to protect the continuity of the Company's management. For example,
the Company could issue a series of Preferred Stock having characteristics that
would make a takeover prohibitively expensive. The issuance of shares of the
Preferred Stock pursuant to the Board of Directors' authority described above
may adversely affect the rights of the holders of Common Stock. For example,
Preferred Stock issued by the Company may rank senior to the Common Stock as to
dividend rights, liquidation preference or both, may have full or unlimited
voting rights and may be convertible into shares of Common Stock. Accordingly,
the issuance of shares of Preferred Stock may discourage bids for the Common
Stock or may otherwise adversely affect the market price of the Common Stock.
SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
Certain provisions of the Certificate of Incorporation and the Company's
Amended and Restated Bylaws (the "Bylaws") may be deemed to have an
anti-takeover effect or may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider in such stockholder's best interest,
including those attempts that might result in a premium over the market price
for the shares held by such stockholder.
DELAWARE ANTI-TAKEOVER LAW. Section 203 of the DGCL ("Section 203") applies
to the Company and generally provides that a person who, together with
affiliates and associates owns, or within three years did own, 15% or more of
the outstanding voting stock of a corporation subject to the statute (an
"Interested Stockholder"), but less than 85% of such stock, may not engage in
certain business combinations with the corporation for a period of three years
after the date on which the person became an Interested Stockholder unless (i)
prior to such date, the corporation's board of directors approved either the
business combination or the transaction in which the stockholder became an
Interested Stockholder, (ii) the Interested Stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an Interested Stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans), or (iii) subsequent to such date, the
business combination is approved by the corporation's board of directors and
authorized at a stockholders' meeting by a vote of at least two-thirds of the
corporation's outstanding voting stock not owned by the Interested Stockholder.
Section 203 defines the term "business combination" to encompass a wide variety
of transactions with or caused by an Interested Stockholder, including mergers,
asset sales, and other transactions in which the Interested Stockholder receives
or could receive a benefit on other than a pro rata basis with other
stockholders.
The Company's stockholders, by adopting an amendment to the Certificate of
Incorporation, may elect not to be governed by Section 203, which election would
be effective 12 months after such adoption. Neither the Certificate of
Incorporation nor the Bylaws presently exclude the Company from the restrictions
imposed by Section 203, and the restrictions imposed by Section 203 apply to the
Company. The provisions of Section 203 could delay or frustrate a change in
control of the Company, deny stockholders the receipt of a premium on their
Common Stock and have a depressing effect on the market price of the Common
Stock. The provisions also could discourage, impede or prevent a merger, tender
offer or proxy contest, even if such event would be favorable to the interests
of stockholders.
CLASSIFIED BOARD OF DIRECTORS. Prior to the completion of the Offering, the
Certificate of Incorporation will provide for the Board of Directors to be
divided into three classes of directors serving staggered three-year terms. A
director may be removed from office prior to the expiration of his or her term
only "for cause," so any person acquiring control of the Company would need
three annual meetings to replace all of the members of the Board of Directors.
The classified board provision of the Certificate of Incorporation could have
the effect of making the removal of incumbent directors more time-consuming and
difficult, and, therefore discouraging a
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third party from making a tender offer or otherwise attempting to obtain control
of the Company, even though such an attempt might be beneficial to the Company
and its stockholders. Thus, the classified board provision could increase the
likelihood that incumbent directors will retain their positions. The Company
believes that a classified Board of Directors will help to assure the continuity
and stability of the Board of Directors and of the business strategies and
policies of the Company as determined by the Board of Directors. See
"Management."
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES. The Certificate of
Incorporation and Bylaws provide that the number of directors will be fixed from
time to time with the consent of two-thirds of the Board of Directors. Moreover,
the Certificate of Incorporation provides that directors may only be removed
with cause by the affirmative vote of the holders of at least a majority of the
outstanding shares of capital stock of the Company then entitled to vote at an
election of directors. This provision prevents stockholders from removing any
incumbent director without cause and allows two-thirds of the incumbent
directors to add additional directors without approval of stockholders until the
next annual meeting of stockholders at which directors of that class are
elected.
ADVANCE NOTICE OF NOMINATIONS AND STOCKHOLDER PROPOSALS. The Bylaws contain
a provision requiring at least 60 but no more than 90 days advance notice by a
stockholder of a proposal or director nomination that such stockholder desires
to present at any annual or special meeting of stockholders, which would prevent
a stockholder from making a proposal or a director nomination at a stockholder
meeting without the Company having advance notice of the proposal or director
nomination. This provision could make a change in control more difficult by
providing the directors of the Company with more time to prepare an opposition
to a proposed change in control.
VOTE REQUIREMENT FOR CALLING SPECIAL MEETING. The Bylaws also contain a
provision requiring the vote of the holders of two-thirds of the outstanding
Common Stock in order to call a special meeting of stockholders. This provision
would prevent a stockholder with less than a two-thirds interest from calling a
special meeting to consider a merger unless such stockholder had first garnered
adequate support from a sufficient number of other stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
LIMITATIONS OF DIRECTOR LIABILITY. Section 102(b)(7) of the DGCL authorizes
corporations to limit or to eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. Although Section 102(b) of the DGCL does not
change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Certificate
of Incorporation limits the liability of directors to the Company or its
stockholders to the full extent permitted by such Section 102(b). Specifically,
directors of the Company are not to be personally liable for monetary damages
for breach of a director's fiduciary duty as a director, except for liability:
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit.
INDEMNIFICATION. To the maximum extent permitted by law, the Certificate of
Incorporation provides for mandatory indemnification of directors and officers
of the Company against any expense, liability or loss to which they may become
subject, or which they may incur, as a result of being or having been a director
or officer of the Company. In addition, the Company must advance or reimburse
directors and officers for expenses incurred by them in connection with
indemnifiable claims.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 8,625,587
shares of Common Stock (9,075,587 shares, if the Underwriters' over-allotment
option is exercised in full, excluding 900,786 shares reserved for issuance upon
the exercise of outstanding stock options). Of these shares, all of the
3,000,000 shares sold in the Offering (3,450,000 shares, if the Underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction or further registration under the Securities Act, unless held by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. The remaining 5,625,587 shares outstanding are "restricted
securities" as that term is defined under Rule 144 and were issued by the
Company in one or more private transactions in reliance upon one or more
exemptions under the Securities Act. Such restricted securities may not be
resold in the public market in the absence of registration under the Securities
Act or the availability of an exemption from such registration, including the
exemption provided by Rule 144.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
restricted securities for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of the
average weekly trading volume during the four calendar weeks preceding such sale
or 1% of the then outstanding shares of Common Stock, provided certain manner of
sale and notice requirements and requirements as to the availability of current
public information about the Company are satisfied. In addition, affiliates of
the Company must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period, to sell unrestricted shares of Common
Stock. A person who is deemed not to have been an "affiliate" of the Company at
any time during the 90 days preceding a sale by such person, and who has
beneficially owned such shares for at least two years, would be entitled to sell
such shares without regard to the limitations described above. Taking into
consideration the effect of the 180-day lock-up agreements described below, no
restricted shares of Common Stock will be eligible for sale in the public market
immediately after the Offering. However, restricted shares will be eligible for
sale upon the expiration of the 180-day lock-up agreements, subject to the
volume and other limitations of Rule 144.
In addition to the outstanding shares of Common Stock, the Company has
reserved for issuance 1,600,000 shares of Common Stock pursuant to the Company's
stock option and employee stock purchase plans, under which options to purchase
900,786 shares will be outstanding upon completion of the Offering. The Company
intends to register on Form S-8 under the Securities Act as soon as practicable
on and after the effective date of the Offering all of the 1,600,000 shares
reserved for issuance pursuant to these plans. This registration statement will
be effective upon filing. Shares registered and issued pursuant to this
registration statement will be freely tradable except to the extent that the
holders thereof are deemed to be affiliates of the Company, in which case the
transferability of such shares will be subject to the volume limitations of Rule
144, and except to the extent that the holders thereof are subject to the
lock-up agreements described below.
Subject to certain exceptions, the Company, its directors and executive
officers and certain holders of outstanding shares of Common Stock and optionees
holding options to purchase a total of 900,786 shares of Common Stock have
agreed, subject to certain exceptions, with the Underwriters not to sell or
otherwise dispose of any shares of Common Stock, any options to purchase Common
Stock or any securities convertible into, or exchangeable for, shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Hambrecht & Quist LLC.
Following the consummation of the Offering and subject to the lock-up
agreements, certain stockholders will be entitled to require the Company to
register under the Securities Act a total of 5,625,587 shares of outstanding
Common Stock (the "Registrable Shares"). In addition, in the event the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of a security holder, such stockholders may
be entitled to include the Registrable Shares in such registration, subject to
certain limitations on the number of shares to be included in the registration
by the underwriter of such Offering. See "Certain Transactions--Registration
Rights Agreement."
Sales of substantial amounts of shares of Common Stock in the public market,
or the perception that such sale might occur, could adversely affect the market
price of the Common Stock and could impair the Company's future ability to raise
capital through an offering of its equity securities. See "Risk Factors-Shares
Eligible for Future Sale."
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below through their Representatives, Hambrecht & Quist LLC,
NationsBanc Montgomery Securities LLC and SunTrust Equitable Securities
Corporation have severally agreed to purchase from the Company the following
respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ----------------------------------------------------------------- -----------
<S> <C>
Hambrecht & Quist LLC............................................
NationsBanc Montgomery Securities LLC............................
SunTrust Equitable Securities Corporation........................
-----------
Total...................................................... 3,000,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share to certain other dealers. After
the initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives. The Representatives have informed
the Company that the Underwriters do not intend to confirm sales to accounts
over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by it shown in the
table above bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.
The Offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
63
<PAGE>
The executive officers and directors of the Company and certain
stockholders, have executed lock-up agreements in which they have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
directly or indirectly, offer, sell, pledge, contract to sell (including any
short sale), grant any option to purchase or otherwise dispose of any shares of
Common Stock (including, without limitation, shares of Common Stock which may be
deemed to be beneficially owned by the parties to the lock-up agreements in
accordance with the rules and regulations of the Commission and shares of Common
Stock which may be issued upon exercise of a stock option or warrant or
conversion of any convertible securities) or enter into any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including
without limitation, any put or call option) with respect to any security (other
than a broad-based market basket or index) that includes, relates to or derives
any significant part of its value from the Common Stock (each of the foregoing
referred to as a "Disposition") for a period continuing until 180 days after the
effective date of the registration statement relating to the Offering (the
"Lock-Up Period"). The lock-up agreements are intended to preclude the Company's
officers, directors and certain of its stockholders from engaging in any
transaction which is designed to or reasonably expected to lead to or result in
a Disposition during the Lock-Up Period even if the securities would be disposed
of by someone other than the parties to the lock-up agreements. Sales of such
shares in the future could adversely affect the market price of the Common
Stock. Hambrecht & Quist LLC may, in its sole discretion, release any of the
shares subject to the lock-up agreements at any time without notice.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation between the Company and the Representatives. Among the factors
considered in determining the initial public offering price will be prevailing
market conditions, revenues and earnings of the Company, market valuations of
other companies engaged in activities similar to those of the Company, estimates
of the business potential and prospects of the Company, the present state of the
Company's business operations, the Company's management and other factors deemed
relevant. The estimated initial public offering price range set forth on the
cover of this preliminary prospectus is subject to change as a result of market
conditions and other factors.
Certain persons participating in this Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Alston & Bird LLP, Atlanta, Georgia. Certain other matters in connection with
this Offering will be passed upon for the Underwriters by Goodwin, Procter &
Hoar LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and schedule of Accredo Health,
Incorporated as of and for the years ended June 30, 1997 and 1998, and for the
period May 24, 1996 through June 30, 1996; the statement of operations and
schedule of the Predecessor for the period July 1, 1995 through May 31, 1996;
the financial statements of Horizon Health Systems, Inc. as of and for the years
ended December 31, 1995 and 1996; the financial statements and schedule of Texas
Health Pharmaceutical Resources as of and for the year ended June 30, 1997
included in this Prospectus and in the Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
64
<PAGE>
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NO.
-----
<S> <C>
ACCREDO HEALTH, INCORPORATED
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheets--June 30, 1997 and 1998................................ F-3
Consolidated Statements of Operations--for the period from inception (May 24, 1996)
through June 30, 1996, for years ended June 30, 1997 and 1998.................... F-4
Consolidated Statements of Stockholders' Equity and Mandatorily Redeemable
Cumulative Preferred Stock--for the period from inception (May 24, 1996) through
June 30, 1996, for the years ended June 30, 1997 and 1998........................ F-5
Consolidated Statements of Cash Flows--for the period from inception (May 24, 1996)
through June 30, 1996, for the years ended June 30, 1997 and 1998................ F-6
Notes to Consolidated Financial Statements......................................... F-7
Condensed Consolidated Balance Sheet at December 31, 1998 (unaudited).............. F-18
Condensed Consolidated Statements of Income for the six months ended December 31,
1997 and 1998 (unaudited)........................................................ F-19
Condensed Consolidated Statement of Stockholders' Equity for the six months ended
December 31, 1998 (unaudited).................................................... F-20
Condensed Consolidated Statements of Cash Flows for the six months ended December
31, 1997 and 1998 (unaudited).................................................... F-21
Notes to Condensed Consolidated Financial Statements (unaudited)................... F-22
NOVA FACTOR, INC.
Report of Independent Auditors..................................................... F-24
Statement of Operations--for the period July 1, 1995 through May 31, 1996.......... F-25
Statement of Stockholder's Equity--for the period July 1, 1995 through May 31,
1996............................................................................. F-26
Statement of Cash Flows--for the period July 1, 1995 through May 31, 1996.......... F-27
Notes to Financial Statements--for the period July 1, 1995 through May 31, 1996.... F-28
HORIZON HEALTH SYSTEMS, INC.
Report of Independent Auditors..................................................... F-32
Statements of Income--for the years ended December 31, 1995 and 1996 and for the
three months ended March 31, 1996 (unaudited) and 1997 (unaudited)............... F-33
Statements of Stockholders' Equity--for the years ended December 31, 1995 and 1996
and for the three months ended March 31, 1997 (unaudited)........................ F-34
Statements of Cash Flows--for the years ended December 31, 1995 and 1996 and for
the three months ended March 31, 1996 (unaudited) and 1997 (unaudited)........... F-35
Notes to Financial Statements...................................................... F-36
TEXAS HEALTH PHARMACEUTICAL RESOURCES
Report of Independent Auditors..................................................... F-38
Balance Sheets as of June 30, 1997 and 1998 (unaudited)............................ F-39
Statements of Operations for the years ended June 30, 1996 (unaudited), 1997 and
1998 (unaudited)................................................................. F-40
Statements of Partners' Equity for the years ended June 30, 1996 (unaudited), 1997
and 1998 (unaudited)............................................................. F-41
Statements of Cash Flows for the years ended June 30, 1996 (unaudited), 1997 and
1998 (unaudited)................................................................. F-42
Notes to Financial Statements...................................................... F-43
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Accredo Health, Incorporated
We have audited the accompanying consolidated balance sheets of Accredo
Health, Incorporated (formerly Nova Holdings, Inc.) (the "Company") as of June
30, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and mandatorily redeemable cumulative preferred stock, and
cash flows for the period from inception (May 24, 1996) through June 30, 1996,
and for the years ended June 30, 1997 and 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Accredo
Health, Incorporated at June 30, 1997 and 1998, and the results of its
operations and its cash flows for the period from inception (May 24, 1996)
through June 30, 1996, and for the years ended June 30, 1997 and 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 12, 1998
F-2
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
<S> <C> <C>
1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 3,675,819 $ 5,087,135
Receivables:
Patient accounts............................................. 33,922,326 40,062,375
Allowance for doubtful accounts.............................. (3,802,326) (3,429,863)
----------- -----------
30,120,000 36,632,512
Due from affiliates.......................................... 414,272 321,487
Other........................................................ 2,077,950 2,921,672
----------- -----------
32,612,222 39,875,671
Recoverable income taxes....................................... -- 150,893
Inventories.................................................... 16,016,166 12,131,032
Prepaids and other current assets.............................. 452,093 309,587
Deferred income taxes.......................................... 1,488,227 323,986
----------- -----------
Total current assets............................................. 54,244,527 57,878,304
Property and equipment, net...................................... 1,565,682 2,127,749
Other assets:
Joint venture investments...................................... 652,374 627,728
Goodwill, net.................................................. 58,158,549 56,679,141
Other intangible assets, net................................... 2,296,181 1,677,005
----------- -----------
Total assets..................................................... $116,917,313 $118,989,927
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $33,420,517 $31,304,771
Accrued expenses............................................... 2,127,784 3,196,977
Income taxes payable........................................... 1,802,161 --
----------- -----------
Total current liabilities........................................ 37,350,462 34,501,748
Long-term notes payable.......................................... 27,497,725 27,497,725
Senior subordinated notes payable................................ 7,696,984 8,920,180
Deferred income taxes............................................ 230,131 607,161
Mandatorily redeemable cumulative preferred stock, at redemption
amount, 300,000 shares authorized, and 255,361 shares issued
and outstanding in 1997 and 1998............................... 27,749,221 29,792,109
Stockholders' equity:
Common Stock, $.01 par value; 7,000,000 shares authorized,
5,507,253 in 1997 and 5,590,587 in 1998 issued and
outstanding................................................ 55,073 55,906
Common stock subscribed--83,334 shares in 1997 and 34,000
shares in 1998............................................. 500,004 204,000
Additional paid-in capital................................... 16,337,717 16,836,888
Retained earnings............................................ -- 778,210
----------- -----------
16,892,794 17,875,004
Subscription receivable.......................................... (500,004) (204,000)
----------- -----------
Total stockholders' equity....................................... 16,392,790 17,671,004
----------- -----------
Total liabilities and stockholders' equity....................... $116,917,313 $118,989,927
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 24,
1996) YEARS ENDED JUNE 30,
THROUGH ------------------------
JUNE 30, 1996 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Net patient service revenue..................... $6,647,165 $106,143,403 $170,001,733
Other revenue................................... 597,283 8,048,870 9,806,296
Equity in net income of joint ventures.......... 49,255 1,016,518 1,150,122
------------- ----------- -----------
Total revenues.................................... 7,293,703 115,208,791 180,958,151
Operating expenses:
Cost of services................................ 6,450,279 101,080,589 154,045,458
General and administrative...................... 626,688 5,938,874 12,350,717
Bad debts....................................... 251,538 2,976,718 3,165,292
Depreciation.................................... 17,300 230,887 429,702
Amortization.................................... 108,604 1,368,299 2,098,584
------------- ----------- -----------
Total operating expenses.......................... 7,454,409 111,595,367 172,089,753
------------- ----------- -----------
Operating income (loss)........................... (160,706) 3,613,424 8,868,398
Other expense (income):
Interest expense................................ 106,014 1,083,431 3,721,528
Interest income................................. -- (99,890) (169,398)
------------- ----------- -----------
106,014 983,541 3,552,130
------------- ----------- -----------
Income (loss) before income taxes................. (266,720) 2,629,883 5,316,268
Income tax expense (benefit)...................... (28,420) 1,507,430 2,495,170
------------- ----------- -----------
Net income (loss)................................. (238,300) 1,122,453 2,821,098
Mandatorily redeemable cumulative preferred stock
dividends....................................... (170,233) (2,042,888) (2,042,888)
------------- ----------- -----------
Net income (loss) attributable to common
stockholders.................................... $(408,533) $ (920,435) $ 778,210
------------- ----------- -----------
------------- ----------- -----------
Net income (loss) per share attributable to common
stockholders:
Basic........................................... $ (0.08) $ (0.18) $ 0.14
Diluted......................................... $ (0.08) $ (0.18) $ 0.13
Weighted average number of shares and dilutive
share equivalents outstanding
Basic........................................... 5,107,253 5,140,586 5,566,281
Diluted......................................... 5,107,253 5,417,721 5,875,275
</TABLE>
See accompanying notes.
F-4
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL RETAINED TOTAL
STOCK COMMON STOCK SUBSCRIPTION PAID-IN EARNINGS STOCKHOLDERS'
SHARES STOCK SUBSCRIBED RECEIVABLE CAPITAL (DEFICIT) EQUITY
---------- --------- ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization..... 5,000,000 $ 50,000 $ -- $ -- $ 14,950,000 $ -- $ 15,000,000
Issuance of common stock
and mandatorily
redeemable preferred
stock for acquired
Company.................. 107,253 1,073 -- -- 320,685 -- 321,758
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... -- -- -- -- (170,233) -- (170,233)
Net loss................... -- -- -- -- -- (238,300) (238,300)
---------- --------- ---------- ----------- ------------- ------------ -------------
Balance at June 30, 1996... 5,107,253 51,073 -- -- 15,100,452 (238,300) 14,913,225
Issuance of common stock... 400,000 4,000 -- -- 2,396,000 -- 2,400,000
Common stock subscribed
(83,334 shares).......... -- -- 500,004 -- -- -- 500,004
Subscription receivable.... -- -- -- (500,004) -- -- (500,004)
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... -- -- -- -- (1,158,735) (884,153) (2,042,888)
Net income................. -- -- -- -- -- 1,122,453 1,122,453
---------- --------- ---------- ----------- ------------- ------------ -------------
Balance at June 30, 1997... 5,507,253 55,073 500,004 (500,004) 16,337,717 -- 16,392,790
Issuance of common stock... 83,334 833 (500,004) 500,004 499,171 -- 500,004
Common stock subscribed
(34,000 shares).......... -- -- 204,000 -- -- -- 204,000
Subscription receivable.... -- -- -- (204,000) -- -- (204,000)
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... -- -- -- -- -- (2,042,888) (2,042,888)
Net income................. -- -- -- -- -- 2,821,098 2,821,098
---------- --------- ---------- ----------- ------------- ------------ -------------
Balance at June 30, 1998... 5,590,587 $ 55,906 $ 204,000 $(204,000) $ 16,836,888 $ 778,210 $ 17,671,004
---------- --------- ---------- ----------- ------------- ------------ -------------
---------- --------- ---------- ----------- ------------- ------------ -------------
<CAPTION>
MANDATORILY
REDEEMABLE
CUMULATIVE
PREFERRED
STOCK
-------------
<S> <C>
Initial capitalization..... $ 25,000,000
Issuance of common stock
and mandatorily
redeemable preferred
stock for acquired
Company.................. 536,100
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... 170,233
Net loss................... --
-------------
Balance at June 30, 1996... 25,706,333
Issuance of common stock... --
Common stock subscribed
(83,334 shares).......... --
Subscription receivable.... --
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... 2,042,888
Net income................. --
-------------
Balance at June 30, 1997... 27,749,221
Issuance of common stock...
Common stock subscribed
(34,000 shares).......... --
Subscription receivable.... --
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... 2,042,888
Net income................. --
-------------
Balance at June 30, 1998... $ 29,792,109
-------------
-------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 24,
1996) YEARS ENDED JUNE 30,
THROUGH ----------------------
JUNE 30, 1996 1997 1998
------------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $ (238,300) $1,122,453 $2,821,098
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 125,904 1,599,186 2,528,286
Original issue discount amortization............. -- 11,975 177,370
Interest added to long-term obligations.......... -- 85,009 1,045,826
Provision for losses on accounts receivable...... 251,538 2,976,718 3,165,292
Deferred income tax expense (benefit)............ (150,260) 116,865 1,541,271
Changes in operating assets and liabilities, net of
effect from purchase of companies:
Patient receivables and other.................. (900,707) (11,059,965) (10,521,526)
Due from affiliates............................ (39,392) 478,512 92,785
Inventories.................................... (5,349,168) (5,260,633) 3,885,134
Prepaids and other current assets.............. (26,480) (216,048) 142,506
Recoverable income taxes....................... 23,264 -- (150,893)
Accounts payable and accrued expenses.......... 7,230,569 9,378,288 (1,046,553)
Income taxes payable........................... 305,289 261,340 (1,802,161)
------------- ---------- ----------
Net cash provided by (used in) operating
activities......................................... 1,232,257 (506,300) 1,878,435
INVESTING ACTIVITIES
Purchases of property and equipment.................. (23,326) (349,049) (991,769)
Purchase of Horizon Health Systems, Inc. in 1997 and
Southern Health Systems, Inc. in 1996, net of cash
acquired........................................... (37,733,715) (29,721,000) --
Change in joint venture investments, net............. 100,745 378,482 24,646
------------- ---------- ----------
Net cash used in investing activities................ (37,656,296) (29,691,567) (967,123)
FINANCING ACTIVITIES
Proceeds from long-term obligations.................. -- 27,897,725 --
Issuance of preferred stock.......................... 25,000,000 -- --
Issuance of common stock............................. 15,000,000 2,400,000 500,004
------------- ---------- ----------
Net cash provided by financing activities............ 40,000,000 30,297,725 500,004
------------- ---------- ----------
Increase in cash and cash equivalents................ 3,575,961 99,858 1,411,316
Cash and cash equivalents at beginning of period..... -- 3,575,961 3,675,819
------------- ---------- ----------
Cash and cash equivalents at end of period........... $ 3,575,961 $3,675,819 $5,087,135
------------- ---------- ----------
------------- ---------- ----------
SUPPLEMENTARY CASH FLOW DISCLOSURES:
Income taxes paid.................................... $ 204,687 $ 858,840 $1,531,692
------------- ---------- ----------
------------- ---------- ----------
Cash paid for interest............................... $ 105,854 $ 567,999 $2,675,701
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Accredo Health, Incorporated (formerly Nova Holdings, Inc.) (the Company)
was incorporated on May 24, 1996. As more fully described in Note 3, on May 31,
1996, the Company acquired Southern Health Systems, Inc. (a holding company) and
its wholly-owned subsidiary, Nova Factor, Inc. Since the Company was newly
formed at May 24, 1996, and because Nova Factor, Inc. had been in existence for
several years, the Company is considered the successor to Nova Factor Inc.'s
operations.
The consolidated financial statements include the accounts and transactions
of the Company and its subsidiaries for the period from inception (May 24, 1996)
through June 30, 1998, and its subsidiary Horizon Health Systems, Inc. (HHS) for
the period from its acquisition, June 1, 1997, through June 30, 1998.
Significant intercompany accounts have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company provides specialized contract pharmacy and related services
pursuant to agreements with biotechnology drug manufacturers relating to the
treatment of patients with certain costly chronic diseases. Because of the
unique needs of patients suffering from chronic diseases, biotechnology drug
manufacturers have recognized the benefits of customized programs to facilitate
alternate site drug administration, ensure compliance with treatment regimens,
provide reimbursement assistance and capture valuable clinical and patient
demographic information. The Company addresses the needs of the manufacturers by
providing specialized services that facilitate product launch and patient
acceptance including the collection of timely drug utilization and patient
compliance information, patient education and monitoring through the use of
written materials and telephonic consultation, reimbursement expertise and
overnight drug delivery.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic,
and potentially life threatening diseases; (ii) are expensive; (iii) are
administered through injection; and (iv) require temperature control or other
specialized handling as part of their distribution process. Currently, the
Company provides specialized contract pharmacy and related services that address
the needs of patients with the following diseases: Gaucher Disease, a hereditary
liver enzyme deficiency; hemophilia, a hereditary bleeding disorder; Multiple
Sclerosis, a debilitating disease of the central nervous system; and growth
hormone related disorders. These diseases generally require life-long therapy,
except for the treatment of growth hormone-related disorders which typically
require treatment for six to ten years.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity
of three months or less to be cash equivalents.
PATIENT ACCOUNTS RECEIVABLE
The Company's primary concentration of credit risk is patient accounts
receivable, which consists of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages the receivables by
regularly reviewing its accounts and contracts and by providing appropriate
F-7
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
allowances for uncollectible amounts. Significant concentrations of gross
patient accounts receivable consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1998
--- ---
<S> <C> <C>
Medicare....................................................... 5% 3%
Medicaid....................................................... 17% 23%
</TABLE>
Concentration of credit risk relating to accounts receivable is limited to
some extent by the diversity and number of patients and payors and the
geographic dispersion of the Company's operations The Company grants credit
without collateral to its patients.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables, accounts payable and notes payable
approximates fair value of these financial instruments at June 30, 1997 and
1998.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Provisions for depreciation are
computed primarily by the straight-line method based on the estimated useful
lives of the related assets of 2 to 7 years.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of businesses acquired over fair
value of net tangible and identifiable intangible assets at the date of
acquisition. The Company recorded $23,396,095 in goodwill and $1,000,000 in
non-compete agreements on June 1, 1997, and $35,780,242 in goodwill, $1,117,783
in non-compete agreements and $361,416 in other intangible assets on May 31,
1996, in connection with business acquisitions. These assets are being amortized
using the straight-line method over their estimated useful lives of 40 years for
goodwill, 3 and 10 years for the non-compete agreements, and 10 years for the
other intangible assets. Goodwill is net of accumulated amortization of
$1,017,788 and $2,497,196 at June 30, 1997 and 1998, respectively. Non-compete
agreements and other intangible assets are net of accumulated amortization of
$459,115 and $1,078,291 at June 30, 1997 and 1998, respectively.
VALUATION OF LONG-LIVED ASSETS
Management periodically evaluates carrying values of long-lived assets,
including property and equipment, strategic investments, goodwill and other
intangible assets, to determine whether events and circumstances indicate that
these assets have been impaired. An asset is considered impaired when
undiscounted cash flows to be realized from such asset are less than its
carrying value. In that event, a loss is determined based on the amount the
carrying value exceeds the fair market value of such asset.
F-8
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
The Company is authorized to issue up to 300,000 shares of nonvoting
mandatorily redeemable cumulative preferred stock (Series A). In connection with
its formation, the Company issued, at the $100 redemption amount, 250,000 shares
of the preferred stock on May 31, 1996, and 5,361 shares on the same date in
connection with the acquisition (see note 3), for a total of $25,536,100. The
nonvoting mandatorily redeemable cumulative preferred stock is entitled to an $8
per share annual dividend. Accumulated unpaid dividends of $2,213,121 and
$4,256,009 at June 30, 1997 and 1998, respectively, are included in the
mandatorily redeemable cumulative preferred stock in the accompanying
consolidated balance sheets. Accumulated unpaid dividends are $16.67 per share
at June 30, 1998.
The Company may, at its option, redeem at any time a portion or all of the
preferred stock at the redemption price of $100 per share, plus any accrued but
unpaid dividends, with the consent of the bank holding the senior debt. On May
31, 2004, the Company must purchase and redeem, at the redemption price of $100
plus any accrued and unpaid dividends, all the then outstanding shares of the
redeemable preferred stock. If at any time the Company consummates a public
offering of its common stock, the Company shall apply any net cash proceeds of
such offering to redeem, at the redemption price, shares of the preferred stock.
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation using the intrinsic value
method as permitted by Financial Accounting Standards Board Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION (Statement 123). Accordingly, no
compensation expense is recorded for stock-based awards issued at market value
at the date such awards are granted. The Company makes pro forma disclosures of
net income as if the market-value method was followed.
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Company has agreements with certain third-party payors that provide for
payments to the Company at amounts discounted from its established rates.
Approximately 18%, 17% and 20% of gross patient service revenues for the
periods ended June 30, 1996, 1997 and 1998, respectively, is from participation
in the Medicare and state-sponsored Medicaid programs.
Other revenues primarily consist of management fees from biotech
manufacturers and various management agreements with hospitals and joint
ventures. The Company recognizes revenues in the period the services are
rendered.
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements as a means of managing
its interest rate exposure. The differential to be paid or received is
recognized over the life of the agreement as an adjustment to interest expense.
NET EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128. Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted
F-9
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to Statement 128 requirements.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. Estimates are used primarily in recording the allowance for
doubtful accounts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The
Statement changes the way public companies report segment information in
financial statements and also requires those companies to report selected
segment information in interim financial reports to shareholders. The Statement
is effective for the Company beginning with its June 30, 1999, financial
statements. The Statement affects only disclosures presented in the financial
statements and will have no effect on consolidated financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is
required to be adopted in years beginning after June 15, 1999. Management of the
Company does not anticipate that the adoption of the new Statement will have a
significant effect on results of operations or the financial position of the
Company.
3. BUSINESS ACQUISITIONS
On May 31, 1996, the Company acquired all of the outstanding shares of
Southern Health Systems, Inc. (SHS) common stock. SHS was a holding company
whose wholly-owned operating subsidiary was Nova Factor, Inc. In connection with
the acquisition of SHS common stock, the Company paid cash of $39,169,291 and
issued 107,253 shares of the Company's common stock and 5,361 shares of the
Company's mandatorily redeemable preferred stock with a value of $857,858. Total
assets acquired and liabilities assumed were $27,537,936 and $24,210,786,
respectively. This transaction was recorded by the Company using the purchase
method of accounting. The excess of the total purchase price of $40,586,591,
including acquisition costs of $559,442, over the fair market value of the net
assets acquired of $3,327,150 was allocated to goodwill and other identifiable
intangible assets. The Company recorded $35,780,242 in goodwill, $1,117,783 in
non-compete agreements and $361,416 in other intangible assets which are
included in the accompanying consolidated balance sheet.
On June 1, 1997, the Company acquired substantially all the assets of HHS, a
Company engaged in the sale and distribution of blood clotting factors and
ancillary supplies to hemophilia patients, through an acquisition accounted for
using the purchase method of accounting. The consideration paid by the Company
related to this acquisition was $29,996,127. Total assets acquired and
liabilities assumed were $9,018,540 and $3,152,031, respectively. This
transaction was recorded by the Company using the purchase method of accounting.
The excess of the purchase price of $24,396,095, including acquisition costs of
$266,477, over the fair market value of the net assets acquired, was allocated
to goodwill and other identifiable intangible assets. The operating results of
HHS are included in the Company's consolidated statement of operations beginning
June 1, 1997.
F-10
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS (CONTINUED)
Pro forma amounts for the periods ended June 30, 1996 and 1997, as if the
acquisition had occurred on May 24, 1996 (inception), are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Pro forma total revenues........................... $8,971,000 $142,777,000
Pro forma net (loss) attributable to common
shareholders..................................... $(510,000) $(1,197,000)
Pro forma (loss) per share attributable to common
shareholders..................................... $ (0.10) $ (0.23)
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Equipment............................................ $ 817,142 $1,304,935
Furniture and fixtures............................... 996,727 1,487,585
--------- ---------
1,813,869 2,792,520
Accumulated depreciation............................. (248,187) (664,771)
--------- ---------
$1,565,682 $2,127,749
--------- ---------
--------- ---------
</TABLE>
5. NOTES PAYABLE
At June 30, 1998, the Company has a revolving line of credit agreement for
up to $40 million with banks, which expires October 31, 1999. The Company's
borrowing base, as defined in the agreement, was approximately $33,155,000 and
$39,843,000 at June 30, 1997 and 1998, respectively. Amounts outstanding under
the line of credit bear interest at varying rates based upon a LIBOR or prime
rate of interest at the periodic election of the Company plus a variable margin
rate based on the Company's debt to cash flow ratio as defined by the banks (the
combination of a 2% margin and LIBOR base rate resulted in effective rates of
7.69% at June 30, 1997 and 7.625% at June 30, 1998). The Company entered into an
interest rate swap agreement with a bank in October 1997 in order to fix a
portion of its interest rate exposure on this line of credit. The terms of the
agreement require the Company to pay a fixed interest rate of 6.15% on a $15
million notional amount and receive the 30 day LIBOR rate in exchange. The
interest rate swap agreement terminates October 29, 1999. The line of credit is
secured by substantially all assets of the Company. The bank's security interest
in a portion of the Company's inventory is subordinate to the liens on that
inventory under the terms of a security agreement between the Company and one of
its vendors. The same vendor has a security interest in certain accounts
receivable of the Company which is subordinate to the rights of the banks. At
June 30, 1998, the balance outstanding under this line of credit was
$27,497,725.
As defined in the credit agreements, the line of credit contains financial
covenants which require the Company to maintain certain levels of net worth,
tangible net worth, working capital, debt to net worth and liquidity ratios. The
credit agreement also restricts certain changes in management and ownership of
the Company.
During June 1997, the Company issued $10 million in senior subordinated
notes (the Notes) to certain stockholders of the Company in connection with the
purchase of HHS. The Notes, which are due June 1, 2004,
F-11
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
have a stated interest rate of 10% and an effective rate of 16%. The Notes are
unsecured. Concurrently with the issuance of the Notes, the Company issued
400,000 shares of its common stock to the Noteholders. The excess of the fair
market value of the 400,000 shares of common stock issued over the purchase
price of $4,000 was recorded as an original issue discount. This original issue
discount, which accretes over the life of the related obligation using the
effective interest method, is reflected as a reduction of the Notes in the
accompanying consolidated balance sheets.
At the option of the Company, the amount of interest due and payable
September 1, 1998; December 1, 1998; March 1, 1999 and June 1, 1999, may be
added to the unpaid principal balance of the Notes. During 1997 and 1998, the
Company added $85,009 and $1,045,826, respectively, of accrued interest due
during 1997 and 1998 to the unpaid principal balance of the Notes.
If at any time while the Notes are outstanding, the Company shall consummate
a public offering, as defined in the note purchase agreement, or merge or
consolidate, as defined in the note purchase agreement, the Company shall use
the net proceeds of such offering to repay the principal amount of the Notes,
plus accrued interest (see Note 12). On any interest payment date on or after
June 1, 2002, the Company shall pay an amount of accrued original issue discount
on the Notes as shall be necessary to ensure that such Notes shall not be
considered applicable high yield discount obligations as defined in the note
purchase agreement.
6. INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company is indemnified for income tax
liabilities arising prior to May 31, 1996, by its former parent.
Income tax expense (benefit) consist of the following for the periods ended
June 30:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................. $ 121,840 $1,159,425 $ 850,062
State.................................... -- 231,140 103,837
--------- --------- ---------
121,840 1,390,565 953,899
Deferred:
Federal.................................. (142,852) 100,172 1,303,935
State.................................... (7,408) 16,693 237,336
--------- --------- ---------
(150,260) 116,865 1,541,271
--------- --------- ---------
$ (28,420) $1,507,430 $2,495,170
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes differed from the amount computed
by applying the statutory federal income tax rate of 34% for the periods ended
June 30 due to the following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate.......... $ (90,685) $ 894,107 $1,807,496
State income tax expense (benefit), net of federal
income tax expense (benefit).......................... (4,889) 164,903 225,174
Goodwill amortization................................... 36,925 443,104 443,104
Other................................................... 30,229 5,316 19,396
--------- ---------- ----------
Income tax expense (benefit)............................ $ (28,420) $1,507,430 $2,495,170
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves....................... $1,350,846 $1,197,657
Accrued expenses................................... 84,505 96,904
Joint venture investments.......................... 20,322 17,129
Other.............................................. 32,554 34,316
--------- ---------
1,488,227 1,346,006
Deferred tax liabilities:
Property and equipment............................. (99,863) (150,458)
Intangible assets.................................. (43,391) (372,606)
Joint venture investments.......................... (86,877) (84,097)
Accounts receivable................................ -- (1,022,020)
--------- ---------
(230,131) (1,629,181)
--------- ---------
Net deferred tax assets (liabilities)................ $1,258,096 $(283,175)
--------- ---------
--------- ---------
</TABLE>
7. OPERATING LEASES
The Company leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $24,000,
$429,000 and $758,000 for the periods ended June 30, 1996, 1997 and 1998,
respectively.
F-13
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OPERATING LEASES (CONTINUED)
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial terms of one year or more consist of the following
at June 30, 1998 (including executed lease extensions through August 12, 1998):
<TABLE>
<S> <C>
1999............................................................ $ 780,000
2000............................................................ 522,000
2001............................................................ 360,000
2002............................................................ 388,000
2003............................................................ 361,000
---------
$2,411,000
---------
---------
</TABLE>
8. INVESTMENT IN JOINT VENTURES
Texas Health Pharmaceutical Resources, Teddy Bear Home Care/Drug Therapies
and Children's Memorial Home Hemophilia Services are partnerships in which the
Company has a 50% ownership interest. Campus Home Health Care-Home Hemophilia is
a limited liability company in which the Company has a 25% ownership interest.
These joint ventures are accounted for by the Company under the equity method of
accounting. Amounts due from these joint ventures to the Company are classified
as due from affiliates in the accompanying consolidated balance sheets. The
portion of the Company's retained earnings at June 30, 1998, attributable to
undistributed earnings of these joint ventures is $628,000.
The Company provided management services to these joint ventures of $21,000,
$362,000 and $413,000 for the periods ended June 30, 1996, 1997 and 1998,
respectively, which are recorded as other revenues in the accompanying
consolidated statements of operations.
Summary financial information for affiliated joint ventures (20 percent to
50 percent owned) accounted for by the equity method is as follows as of and for
the periods ended June 30:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Current assets.......................... $3,222,000 $2,629,000 $2,160,000
Property and equipment and other
assets................................ 96,000 84,000 78,000
Current liabilities..................... 1,260,000 1,392,000 971,000
Total revenues.......................... 729,000 12,736,000 10,215,000
Net income.............................. 99,000 2,050,000 2,315,000
</TABLE>
9. DEFINED CONTRIBUTION PLAN
The Company has a qualified defined contribution plan under Section 401(k)
of the Internal Revenue Code. Substantially all employees with a minimum of
three months of service qualify for participation in the plan. The Company
matches employee contributions, as defined in the plan. The Company made annual
matching contributions of approximately $2,000, $41,000 and $43,000 for the
periods ended June 30, 1996, 1997 and 1998, respectively.
F-14
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN
The Company's Amended and Restated Stock Option and Restricted Stock
Purchase Plan has authorized the grant of options to selected employees,
officers, and directors for up to 965,000 shares of the Company's common stock.
All options granted have 10 year terms and vest and become fully exercisable
over a period of 1 to 6 years of continued employment. Certain options granted
with up to 6 year vesting terms also have provisions for accelerated vesting
over the first 4 years if certain Company income targets are achieved during
that period. Otherwise, these options become fully exercisable at the end of up
to 6 years of continued employment.
Pro forma information regarding net income is required by Statement 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of Statement 123. Significant assumptions
used by the Company in the Black-Scholes option pricing model computations are
as follows for the periods ended June 30:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Risk-free interest rates..... 6.25% to 6.40% 6.08% to 6.93% 5.48% to 6.22%
Dividend yield............... 0% 0% 0%
Volatility factor............ .60 .60 .60
Weighted-average expected 4.6 years 4.5 years 4.45 years
life.......................
</TABLE>
The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the periods ended June 30 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) "as reported"............ $(238,300) $1,122,453 $2,821,098
Pro forma net income (loss)................ $(253,387) $ 914,795 $2,515,336
</TABLE>
These pro forma disclosures are not necessarily representative of the
effects of stock options on reported pro forma net income for future years.
F-15
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN (CONTINUED)
A summary of the Company's stock option activity and related information for
the periods ended June 30 follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ------------- ----------- ------------- ----------- -------------
Outstanding at beginning of period.... -- $ -- 542,857 $ 3 670,858 $ 3
Granted............................... 542,857 3 130,001 3 186,428 6
Exercised............................. -- -- -- -- -- --
Forfeited............................. -- -- (2,000) 3 (857) 3
----------- ----- ----------- ----- ----------- -----
Outstanding at end of period.......... 542,857 $ 3 670,858 $ 3 856,429 $ 4.84
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
Exercisable at end of period.......... -- $ -- 116,000 $ 3 247,001 $ 3.17
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
Weighted-average fair value of options
granted during the year............. $ 1.64 $ 1.63 $ 2.61
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The range of exercise prices for the Company's stock options outstanding at
June 30, 1998, is $3.00 to $6.00. The weighted-average remaining contractual
life of those outstanding options is 8.3 years at June 30, 1998.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the periods ended June 30:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Numerator for basic and diluted income (loss) per
share attributable to common stockholders:
Net income (loss).............................. $(238,300) $1,122,453 $2,821,098
Less preferred stock dividends................. (170,233) (2,042,888) (2,042,888)
--------- ---------- ----------
Net income (loss) attributable to common
stockholders................................. $(408,533) $ (920,435) $ 778,210
--------- ---------- ----------
--------- ---------- ----------
Denominator:
Denominator for basic income (loss) per share
attributable to common
stockholders--weighted-average shares........ 5,107,253 5,140,586 5,566,281
Effect of dilutive stock options............... -- 277,135 308,994
--------- ---------- ----------
Denominator for diluted income (loss) per share
attributable to common stockholders--adjusted
weighted-average shares...................... 5,107,253 5,417,721 5,875,275
--------- ---------- ----------
--------- ---------- ----------
Net income (loss) per share attributable to
common stockholders--basic..................... $ (0.08) $ (0.18) $ 0.14
--------- ---------- ----------
--------- ---------- ----------
Net income (loss) per share attributable to
common stockholders--diluted (1)............... $ (0.08) $ (0.18) $ 0.13
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-16
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE (CONTINUED)
(1) Historical diluted loss per share amounts for 1996 and 1997 have been
calculated using the same denomination as used in the basic loss per share
calculation as the inclusion of dilutive securities in the denominator would
have an anti-dilutive effect.
F-17
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 1,636,058
Patient accounts receivable, less allowance for doubtful accounts of $4,460,770................. 53,092,303
Inventories..................................................................................... 16,012,130
Prepaids and other current assets............................................................... 1,037,413
Deferred income taxes........................................................................... 1,469,475
--------------
Total current assets.............................................................................. 73,247,379
Property and equipment, net....................................................................... 2,346,423
Other assets:
Joint venture investments....................................................................... 2,355,229
Goodwill and other intangible assets, net....................................................... 57,306,854
--------------
Total assets...................................................................................... $ 135,255,885
--------------
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................ $ 43,433,520
Accrued expenses................................................................................ 4,344,067
--------------
Total current liabilities......................................................................... 47,777,587
Long-term notes payable........................................................................... 27,497,725
Senior subordinated notes payable................................................................. 9,040,438
Deferred income taxes............................................................................. 715,265
Mandatorily redeemable cumulative preferred stock, at redemption amount, 300,000 shares
authorized, 255,361 shares issued and outstanding............................................... 30,813,553
Stockholders' equity:
Common Stock, $.01 par value; 7,000,000 shares authorized, 5,625,587 shares issued and
outstanding................................................................................... 56,256
Additional paid-in capital...................................................................... 17,043,538
Retained earnings............................................................................... 2,311,523
--------------
Total stockholders' equity........................................................................ 19,411,317
--------------
Total liabilities and stockholders' equity........................................................ $ 135,255,885
--------------
--------------
</TABLE>
See accompanying notes.
F-18
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
1997 1998
------------- --------------
<S> <C> <C>
Revenues:
Net patient service revenue...................................................... $ 80,366,889 $ 113,747,690
Other revenue.................................................................... 4,679,634 5,647,678
Equity in net income of joint ventures........................................... 539,642 631,155
------------- --------------
Total revenues..................................................................... 85,586,165 120,026,523
Operating expenses:
Cost of services................................................................. 73,086,872 101,909,318
General and administrative....................................................... 5,728,899 8,299,017
Bad debts........................................................................ 1,582,203 2,283,627
Depreciation..................................................................... 195,830 270,374
Amortization..................................................................... 1,049,292 1,049,292
------------- --------------
Total operating expenses........................................................... 81,643,096 113,811,628
------------- --------------
Operating income................................................................... 3,943,069 6,214,895
Other expense (income):
Interest expense................................................................. 1,859,783 1,816,846
Interest income.................................................................. (78,464) (86,381)
------------- --------------
1,781,319 1,730,465
------------- --------------
Income before income taxes......................................................... 2,161,750 4,484,430
Income tax expense................................................................. 1,099,254 1,929,673
------------- --------------
Net income......................................................................... 1,062,496 2,554,757
Mandatorily redeemable cumulative preferred stock dividends........................ (1,021,444) (1,021,444)
------------- --------------
Net income attributable to common stockholders..................................... $ 41,052 $ 1,533,313
------------- --------------
------------- --------------
Net income per share attributable to common stockholders:
Basic............................................................................ $ 0.01 $ 0.27
Diluted.......................................................................... $ 0.01 $ 0.25
Weighted average number of shares and share equivalents outstanding:
Basic............................................................................ 5,543,033 5,620,842
Diluted.......................................................................... 5,852,030 6,161,608
</TABLE>
See accompanying notes.
F-19
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
(UNAUDITED)
<TABLE>
<CAPTION>
MANDATORILY
REDEEMABLE
COMMON COMMON ADDITIONAL TOTAL CUMULATIVE
STOCK COMMON STOCK SUBSCRIPTION PAID-IN RETAINED STOCKHOLDERS' PREFERRED
SHARES STOCK SUBSCRIBED RECEIVABLE CAPITAL EARNINGS EQUITY STOCK
--------- ----------- ----------- ----------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998....... 5,590,587 $ 55,906 $ 204,000 ($204,000) $16,836,888 $ 778,210 $17,671,004 2$9,792,109
Issuance of common stock....... 34,000 340 (204,000) 204,000 203,660 -- 204,000 --
Exercise of stock options...... 1,000 10 -- -- 2,990 -- 3,000 --
Accrued dividends on
mandatorily redeemable
cumulative preferred stock... -- -- -- -- -- (1,021,444) (1,021,444) 1,021,444
Net income..................... -- -- -- -- -- 2,554,757 2,554,757 --
--------- ----------- ----------- ----------- ---------- ---------- ------------ -----------
Balance at December 31, 1998... 5,625,587 $ 56,256 $ -0- $ -0- $17,043,538 $2,311,523 $19,411,317 3$0,813,553
--------- ----------- ----------- ----------- ---------- ---------- ------------ -----------
--------- ----------- ----------- ----------- ---------- ---------- ------------ -----------
</TABLE>
See accompanying notes.
F-20
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
------------------------------
<S> <C> <C>
1997 1998
-------------- --------------
OPERATING ACTIVITIES
Net income........................................................................ $ 1,062,496 $ 2,554,757
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization................................................... 1,245,122 1,319,666
Original issue discount amortization............................................ 73,405 120,257
Interest added to long-term obligations......................................... 510,096 --
Provision for losses on accounts receivable..................................... 1,582,203 2,283,627
Deferred income tax expense (benefit)........................................... 28,544 (1,037,385)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Patient receivables and other................................................. (7,962,893) (14,883,446)
Due from affiliates........................................................... 79,140 (616,813)
Inventories................................................................... (3,446,839) (3,881,098)
Prepaids and other current assets............................................. 274,880 (727,823)
Recoverable income taxes...................................................... (35,570) 150,893
Accounts payable and accrued expenses......................................... 5,098,330 13,143,072
Income taxes payable.......................................................... (1,802,161) 132,765
-------------- --------------
Net cash used in operating activities............................................. (3,293,247) (1,441,528)
INVESTING ACTIVITIES
Purchases of property and equipment............................................... (553,099) (489,048)
Purchase of joint venture investments............................................. (1,297,667)
Change in joint venture investments, net.......................................... 15,358 (429,834)
-------------- --------------
Net cash used in investing activities............................................. (537,741) (2,216,549)
FINANCING ACTIVITIES
Proceeds from long-term obligations............................................... 2,000,000 --
Issuance of common stock.......................................................... 500,004 207,000
-------------- --------------
Net cash provided by financing activities......................................... 2,500,004 207,000
-------------- --------------
Decrease in cash and cash equivalents............................................. (1,330,984) (3,451,077)
Cash and cash equivalents at beginning of period.................................. 3,675,819 5,087,135
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 2,344,835 $ 1,636,058
-------------- --------------
-------------- --------------
SUPPLEMENTARY CASH FLOW DISCLOSURES
Income taxes paid................................................................. $ 2,775,182 $ 2,618,000
-------------- --------------
-------------- --------------
Cash paid for interest............................................................ $ 1,279,536 $ 2,148,469
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-21
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended December 31, 1998, are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 1999. For further information, refer to the June 30, 1998
consolidated financial statements and footnotes thereto included elsewhere
herein.
2. JOINT VENTURE INVESTMENTS
On November 10, 1998, the Company acquired a 50% general partnership
interest in Childrens Hemophilia Services, a partnership established to engage
in the sale and distribution of blood clotting factors and ancillary supplies to
hemophilia patients, for an initial purchase price of $916,667. In addition to
the purchase price paid on the acquisition date, the Company will pay up to an
additional $833,333 in two installments if targeted earnings specified in the
purchase agreement are achieved for the twelve month periods ending twenty-four
months and thirty-six months from the acquisition date. This transaction was
recorded by the Company as a joint venture investment and is being accounted for
by the equity method.
On November 10, 1998, the Company acquired a 50% general partnership
interest in Childrens Home Services, a partnership established to engage in the
sale and distribution of human growth hormone and ancillary supplies to patients
with growth hormone-related disorders, for a purchase price of $381,000. This
transaction was recorded by the Company as a joint venture investment and is
being accounted for by the equity method.
3. NOTES PAYABLE
During the six months ended December 31, 1998, the Company extended the term
of its $40 million revolving line of credit agreement. The terms of the
agreement were extended for one year from the original expiration date of
October 31, 1999 to October 31, 2000. Amounts outstanding under the line of
credit bear interest at varying rates based upon a LIBOR or prime rate of
interest at the periodic election of the Company plus a variable margin rate
based on the Company's debt to cash flow ratio as defined by the banks. Due to
the Company's improved debt to cash flow ratio during the six months ended
December 31, 1998, the variable margin rate charged by the banks in addition to
LIBOR decreased from 2% to 1.5% effective November 1, 1998. The Company also
recently entered into a new interest rate swap agreement with a bank on January
21, 1999. The new agreement cancels the old agreement. The terms of the new
agreement require the Company to pay a lower fixed interest rate of 5.5% on an
increased notional amount of $25 million and receive the 30 day LIBOR rate in
exchange. The terms of the new interest rate swap agreement have also been
extended from the original termination date of October 29, 1999 to October 31,
2001.
F-22
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
DECEMBER 31, 1998
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the six-month periods ended December 31:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Numerator for basic and diluted income per share attributable to common stockholders:
Net income.......................................................................... $ 1,062,496 $ 2,554,757
Less preferred stock dividends...................................................... (1,021,444) (1,021,444)
------------ ------------
Net income attributable to common stockholders...................................... $ 41,052 $ 1,533,313
------------ ------------
------------ ------------
Denominator:
Denominator for basic income per share attributable to common stockholders-
weighted-average shares........................................................... 5,543,033 5,620,842
Effect of dilutive stock options.................................................... 308,997 540,766
------------ ------------
Denominator for diluted income per share attributable to common
stockholders-adjusted weighted-average shares..................................... 5,852,030 6,161,608
------------ ------------
------------ ------------
Net income per share attributable to common stockholders--basic....................... $ 0.01 $ 0.27
------------ ------------
------------ ------------
Net income per share attributable to common stockholders--diluted..................... $ 0.01 $ 0.25
------------ ------------
------------ ------------
</TABLE>
5. SUBSEQUENT EVENTS
PUBLIC OFFERING
The Company is currently in the process of an initial public offering of its
common stock (the "Offering"). The net proceeds from the Offering are planned to
be used primarily to repay the Notes and redeem Series A mandatorily redeemable
cumulative preferred stock.
CHANGES IN COMMON STOCK
Immediately prior to the consummation of the Offering, the Company completed
a recapitalization pursuant to which 1,100,000 shares of Common Stock held by
the Company's principal stockholder were exchanged for 1,100,000 shares of
Non-voting Common Stock of the Company. In addition, the Company increased the
number of authorized shares of Common Stock to 30,000,000 shares.
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Nova Factor, Inc.
We have audited the accompanying statements of operations, stockholder's
equity and cash flows for Nova Factor, Inc. (the "Company") for the period July
1, 1995 through May 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations, changes in stockholder's
equity and cash flows of Nova Factor, Inc. for the period July 1, 1995 through
May 31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 30, 1996
F-24
<PAGE>
NOVA FACTOR, INC.
STATEMENT OF OPERATIONS
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
<TABLE>
<S> <C>
Revenues:
Net patient service revenue.................................................. $68,584,991
Other revenue................................................................ 6,346,546
Equity in net loss of joint ventures......................................... (138,970)
----------
Total revenues................................................................. 74,792,567
Operating expenses:
Cost of services............................................................. 65,867,240
General and administrative................................................... 2,753,353
Bad debts.................................................................... 1,860,253
Depreciation................................................................. 103,352
Corporate overhead allocation................................................ 4,206,274
----------
Total operating expenses....................................................... 74,790,472
----------
Operating income............................................................... 2,095
Other (expense) income:
Interest expense............................................................. (1,281,683)
Interest income.............................................................. 1,015,664
----------
(266,019)
----------
Loss before income tax benefit................................................. (263,924)
Income tax benefit: 72,090
----------
Net loss....................................................................... $ (191,834)
----------
----------
</TABLE>
See accompanying notes.
F-25
<PAGE>
NOVA FACTOR, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995........... 100 $ 1,000 $7,585,731 $3,728,265 $11,314,996
Dividend to SHS.................. -- -- (4,259,581) (3,536,431) (7,796,012)
Net loss for the period ended May
31, 1996....................... -- -- -- (191,834) (191,834)
----------- ----------- ---------- ---------- ----------
Balance at May 31, 1996............ 100 $ 1,000 $3,326,150 $ -- $3,327,150
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-26
<PAGE>
NOVA FACTOR, INC.
STATEMENT OF CASH FLOWS
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss........................................................................ $ (191,834)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation.................................................................. 103,352
Provision for losses on patient receivables................................... 1,860,253
Provision for deferred income taxes........................................... 78,778
Changes in operating assets and liabilities:
Patient receivables and other............................................... (720,568)
Recoverable income taxes.................................................... 23,264
Due to affiliates........................................................... 1,048,753
Inventories................................................................. 5,027,002
Prepaids and other current assets........................................... (59,462)
Accounts payable and accrued expenses....................................... (5,089,028)
Income taxes payable........................................................ (161,972)
----------
Net cash provided by operating activities....................................... 1,872,010
INVESTING ACTIVITIES
Purchases of property and equipment............................................. (880,057)
Increase in other assets........................................................ (12,346)
Change in joint venture investments, net........................................ 401,570
----------
Net cash used in investing activities........................................... (490,833)
FINANCING ACTIVITIES
Payments on notes payable....................................................... (30,883)
----------
Increase in cash................................................................ 1,350,294
Cash at beginning of period..................................................... 644,723
----------
Cash at end of period........................................................... $1,995,017
----------
----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest.......................................................... $ 366,000
----------
----------
Cash paid for income taxes...................................................... $ 193,000
----------
----------
</TABLE>
See accompanying notes.
F-27
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Nova Factor, Inc. (the Company) is a wholly-owned subsidiary of Southern
Health Systems, Inc. (SHS), a holding company. Prior to May 31, 1996, Le Bonheur
Health Systems, Inc. was the majority shareholder of SHS. On May 31, 1996,
Accredo Health, Incorporated (Accredo) (formerly Nova Holdings, Inc.) purchased
from Le Bonheur Health Systems, Inc. all of the outstanding shares of SHS common
stock. The financial statements reflect the historical cost-basis financial
statements of the Company, the predecessor to Accredo, prior to the acquisition.
DESCRIPTION OF BUSINESS
The Company provides specialized contract pharmacy and related services
beneficial to patients with certain costly chronic diseases. Because of the
unique needs of patients suffering from chronic diseases, biotechnology drug
manufacturers have recognized the benefits of customized programs to facilitate
alternate site drug administration, ensure compliance with treatment regimens,
provide reimbursement assistance and capture valuable clinical and patient
demographic information. The Company addresses the needs of the manufacturers by
providing specialized services that facilitate product launch and patient
acceptance including timely drug utilization and patient compliance information,
patient education and monitoring, reimbursement expertise and overnight drug
delivery.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic,
and potentially life threatening diseases; (ii) are expensive; (iii) are
administered through injection; and (iv) require temperature control or other
specialized handling as part of their distribution process.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Company has agreements with certain third party-payors that provide for
payments to the Company at amounts discounted from its established rates.
Approximately 18% of gross patient service revenue for the eleven-month
period ended May 31, 1996, is from participation in the Medicare and
state-sponsored Medicaid programs. The Company grants credit without collateral
to its patients.
Other revenues primarily consist of management fees from biotech
manufacturers and various management agreements with hospitals and joint
ventures. The Company recognizes revenues in the period the services are
rendered.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
F-28
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Provisions for depreciation are computed by the straight-line method based
on the estimated useful lives of the related assets of 2 to 7 years.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Estimates are used primarily in recording the allowance for doubtful
accounts.
3. INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company is indemnified for income tax
liabilities arising prior to May 31, 1996, by Le Bonheur Health Systems, Inc.,
SHS's former parent.
SHS files a consolidated federal income tax return. Financial Accounting
Standards Board Statement 109, ACCOUNTING FOR INCOME TAXES, requires the
allocation of federal income tax expense to the members of a control group that
file a consolidated income tax return for federal income tax purposes.
Therefore, SHS allocated federal income tax benefits of $72,090 to the Company
for the eleven-month period ended May 31, 1996, as if a separate federal income
tax return were filed for the Company.
Income tax (expense) benefit consists of the following for the period ended
May 31, 1996:
<TABLE>
<S> <C>
Current federal benefit.......................................... $ 150,868
Deferred federal expense......................................... (78,778)
---------
$ 72,090
---------
---------
</TABLE>
The benefit for income taxes differed from the amount computed by applying
the statutory federal income tax rate of 34% for the eleven-month period ended
May 31, 1996, due to the following:
<TABLE>
<S> <C>
Income tax benefit at statutory rate.............................. $ 89,734
Nondeductible expenses............................................ (17,644)
---------
Income tax benefit $ 72,090
---------
---------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
4. OPERATING LEASES
The Company leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $162,000 for the
eleven-month period ended May 31, 1996.
F-29
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
4. OPERATING LEASES (CONTINUED)
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with terms of one year or more consist of the following for the
years ended June 30:
<TABLE>
<S> <C>
1997............................................................ $ 287,000
1998............................................................ 287,000
1999............................................................ 287,000
2000............................................................ 287,000
2001............................................................ 263,000
---------
$1,411,000
---------
---------
</TABLE>
5. DEFINED CONTRIBUTION PLAN
The Company participates in a qualified defined contribution plan of SHS,
under Section 401(k) of the Internal Revenue Code (IRC). Substantially all full
time employees qualify for participation in the plan. The Company makes matching
contributions to the employees' accounts, as defined in the plan. The Company
made matching contributions of approximately $7,500 in the eleven-month period
ended May 31, 1996.
6. RELATED PARTIES
In connection with the sale of SHS by Le Bonheur Health Systems, Inc. on May
31, 1996, the Company declared a non-cash dividend consisting of the amount owed
to the Company by SHS at May 31, 1996 of $7,796,012 by forgiving such amounts
due from SHS. This dividend was recorded as a reduction of stockholder's equity.
Dividends on a per share basis do not provide meaningful information and are not
disclosed herein.
The Company received certain services provided by SHS that include cash
management, tax reporting, risk management and executive management. Allocated
expenses for such services, amounting to $2,753,268 for the eleven-month period
ended May 31, 1996, have been included in the accompanying statement of
operations. Charges for these corporate services were based upon a general
allocation methodology determined by SHS (used to allocate all corporate
overhead expenses to SHS subsidiaries), and were not necessarily allocated based
on specific identification of expenses. Management believes the allocation
methodology is reasonable, and results in amounts that approximate the amounts
that would have been incurred on a stand-alone basis. Additionally, SHS
allocated expenses of $1,453,006 incurred in connection with the sale of the
Company to Accredo.
Texas Health Pharmaceutical Resources, Teddy Bear Home Care/Drug Therapies
and Children's Memorial Home Hemophilia Services are joint ventures in which the
Company has a 50% ownership interest. These joint ventures are accounted for by
the Company under the equity method of accounting.
The Company provided management services to these joint ventures of
approximately $342,000 for the eleven-month period ended May 31, 1996. The
management fees are recorded as other revenues in the accompanying statement of
operations.
7. INVESTMENT IN JOINT VENTURES
Texas Health Pharmaceutical Resources, Teddy Bear Home Care/Drug Therapies
and Children's Memorial Home Hemophilia Services are partnerships in which the
Company has a 50% ownership interest. Campus
F-30
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
7. INVESTMENT IN JOINT VENTURES (CONTINUED)
Home Health Care-Home Hemophilia is a limited liability company in which the
Company has a 25% ownership interest. These joint ventures are accounted for by
the Company under the equity method of accounting. The portion of the Company's
retained earnings at May 31, 1996, attributable to undistributed earnings of
these joint ventures is $1,130,000.
The Company provided management services to these joint ventures of $578,000
for the eleven-month period ended May 31, 1996, which are recorded as other
revenues in the accompanying statement of operations.
Summary financial information for affiliated joint ventures (20 percent to
50 percent owned) accounted for by the equity method is as follows as of and for
the period ended May 31, 1996:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Current assets.................................................. $3,372,000
Property and equipment and other assets......................... 14,000
Current liabilities............................................. 1,127,000
Total revenues.................................................. 10,498,000
Net loss........................................................ (278,000)
</TABLE>
F-31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Horizon Health Systems, Inc.
We have audited the accompanying statements of income, stockholders' equity
and cash flows for Horizon Health Systems, Inc. (the "Company") for the years
ended December 31, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations, changes in stockholders'
equity and cash flows of Horizon Health Systems, Inc. for the years ended
December 31, 1995 and 1996, in conformity with generally accepted accounting
principles.
Memphis, Tennessee /s/ Ernst & Young LLP
July 30, 1998
F-32
<PAGE>
HORIZON HEALTH SYSTEMS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------------
------------------------- MARCH 31, MARCH 31,
1995 1996 1996 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net patient service revenues............ 2$3,834,480 $27,427,988 $6,311,473 $7,196,407
Operating expenses:
Cost of services...................... 16,820,301 19,757,939 4,514,174 5,141,500
General and administrative............ 4,138,634 4,595,068 911,187 1,062,323
Depreciation and amortization......... 101,866 82,086 22,759 21,079
----------- ------------ ----------- -----------
Total operating expenses................ 21,060,801 24,435,093 5,448,120 6,224,902
----------- ------------ ----------- -----------
Operating income........................ 2,773,679 2,992,895 863,353 971,505
Other expense (income):
Interest income....................... (19,532) (80,653) (17,281) (17,149)
Interest expense...................... 100,831 17,384 14,515 --
----------- ------------ ----------- -----------
81,299 (63,269) (2,766) (17,149)
----------- ------------ ----------- -----------
Income before income taxes.............. 2,692,380 3,056,164 866,119 988,654
State income taxes...................... 112,574 143,562 51,967 40,853
----------- ------------ ----------- -----------
Net income.............................. $2,579,806 $2,912,602 $ 814,152 $ 947,801
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
See accompanying notes.
F-33
<PAGE>
HORIZON HEALTH SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON COMMON RETAINED STOCKHOLDERS'
SHARES STOCK EARNINGS EQUITY
------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995.................... 100 $ 150,100 $1,479,488 $1,629,588
Net income.................................. -- -- 2,579,806 2,579,806
Dividends paid.............................. -- -- (1,148,650) (1,148,650)
--
----------- ---------- ------------
Balance at December 31, 1995.................. 100 150,100 2,910,644 3,060,744
Net income.................................. -- -- 2,912,602 2,912,602
Dividends paid.............................. -- -- (1,800,000) (1,800,000)
--
----------- ---------- ------------
Balance at December 31, 1996.................. 100 150,100 4,023,246 4,173,346
Net income.................................. -- -- 947,801 947,801
Dividends paid.............................. -- -- (400,000) (400,000)
--
----------- ---------- ------------
Balance at March 31, 1997 (unaudited)......... 100 $ 150,100 $4,571,047 $4,721,147
--
--
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
See accompanying notes.
F-34
<PAGE>
HORIZON HEALTH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------------
------------------------- MARCH 31, MARCH 31,
1995 1996 1996 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income.............................. $2,579,806 $2,912,602 $ 814,152 $ 947,801
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 101,866 82,086 22,759 21,079
Loss on abandoned property............ -- 32,516 -- --
Changes in operating assets and
liabilities:
Patient receivables and other....... 596,058 (1,291,267) 734,136 577,996
Inventories......................... (625,878) (210,472) 36,206 133,674
Prepaids and other assets........... (55,039) (6,456) 44,482 28,388
Accounts payable and accrued
expenses.......................... 230,304 715,371 (580,217) (710,628)
Refunds payable..................... (33,523) 620,400 -- --
Income taxes payable................ 10,625 (61,655) (40,120) (64,997)
----------- ------------ ----------- -----------
Net cash provided by operating
activities............................ 2,804,219 2,793,125 1,031,398 913,313
INVESTING ACTIVITIES
Purchases of property and equipment..... (65,630) (70,981) (42,758) (112,317)
FINANCING ACTIVITIES
Proceeds from long term obligations..... 750,000 -- -- --
Net payments on line of credit.......... (1,768,000) -- -- --
Principal payments on long-term debt.... (125,000) (625,000) (37,500) --
Payment of dividends.................... (1,148,650) (1,800,000) (600,000) (400,000)
----------- ------------ ----------- -----------
Net cash used in financing activities... (2,291,650) (2,425,000) (637,500) (400,000)
----------- ------------ ----------- -----------
Increase in cash and cash equivalents... 446,939 297,144 351,140 400,996
Cash and cash equivalents at beginning
of period............................. 729,722 1,176,661 1,176,661 1,473,805
----------- ------------ ----------- -----------
Cash and cash equivalents at end of
period................................ $1,176,661 $1,473,805 $1,527,801 $1,874,801
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
SUPPLEMENTARY CASH FLOW DISCLOSURES:
Cash paid for interest.................. $ 100,831 $ 17,384 $ 14,515 $ --
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Income taxes paid....................... $ 101,949 $ 113,130 $ 40,484 $ 105,851
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
See accompanying notes.
F-35
<PAGE>
HORIZON HEALTH SYSTEM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Prior to June 1, 1997, Horizon Health Systems, Inc. d/b/a Hemophilia Health
Services (the Company) was organized as an S corporation. On June 1, 1997,
Accredo Health, Incorporated (formerly Nova Holdings, Inc.) acquired
substantially all of the assets of the Company and the Company became a
wholly-owned subsidiary of Accredo Health, Incorporated.
DESCRIPTION OF BUSINESS
The Company is engaged in the sale and distribution of clotting factors and
ancillary supplies to hemophilia patients located throughout the United States.
The Company provides value-added clinical and distribution services to patients
and payors such as insurance companies, health maintenance organizations, self
insured employers and through the federal Medicare and state-funded health care
programs.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Company has agreements with certain third-party payors that provide for
payments to the Company at amounts discounted from its established rates. The
Company grants credit without collateral to its patients.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
DEPRECIATION AND AMORTIZATION
Provisions for depreciation and amortization are computed principally by
accelerated and straight-line methods based on the estimated useful lives of the
related assets of 5 to 7 years.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. INCOME TAXES
The Company, with the consent of its shareholders, has elected to be an S
Corporation under the Internal Revenue Code. Instead of the Company paying
federal corporate income taxes, the stockholders are taxed individually on the
Company's taxable income. Therefore no provision for federal income taxes has
been made. The Company is liable for state franchise and excise taxes and,
accordingly, a provision has been made for such taxes.
F-36
<PAGE>
HORIZON HEALTH SYSTEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
4. OPERATING LEASES
The Company leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $274,000 and
$226,000 for the years ended December 31, 1995 and 1996, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial terms of one year or more consist of the following
at December 31, 1996:
<TABLE>
<S> <C>
1997.............................................................. $ 251,000
1998.............................................................. 226,000
1999.............................................................. 198,000
---------
$ 675,000
---------
---------
</TABLE>
5. RELATED PARTIES
The Company leased office space from the President and 79% owner of the
Company prior to June 1, 1997. Monthly payments on the lease, which expires
November 1999, are $17,988.
6. NOTES PAYABLE
At December 31, 1995, the Company had a promissory note with a bank for
$750,000. The note carried interest at the bank's prime rate plus an additional
amount based on the Company's leverage rate, ranging from 0.25% to 1.0% (9.5% at
December 31, 1995). The note was paid in full during 1996.
7. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements for the three-month periods ended March
31, 1996 and 1997, have been prepared in accordance with generally accepted
accounting principles for interim financial information and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of recurring adjustments, necessary for a fair presentation have been included.
Operating results for the three-month periods ended March 31, 1996 and 1997, are
not necessarily indicative of the results that may be expected for the entire
year.
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Texas Health Pharmaceutical Resources
We have audited the accompanying balance sheet of Texas Health
Pharmaceutical Resources (the Partnership) as of June 30, 1997, and the related
statements of operations, partners' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Texas Health Pharmaceutical
Resources at June 30, 1997, and the results of its operations and cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 21, 1998
F-38
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 198,728 $ 53,979
------------ ------------
Receivables:
Patient accounts.................................................................. 602,827 520,806
Allowance for doubtful accounts................................................... (123,003) (170,160)
------------ ------------
479,824 350,646
Due from affiliates............................................................... 183,239 192,096
Other............................................................................. 39,515 124,765
------------ ------------
702,578 667,507
Inventories......................................................................... 413,371 252,731
Prepaids and other current assets................................................... 3,860 1,159
------------ ------------
Total current assets.................................................................. 1,318,537 975,376
Furniture and equipment, net of accumulated depreciation of $24,397 and $30,356 for
1997 and 1998, respectively......................................................... 56,575 55,385
------------ ------------
Total assets.......................................................................... $ 1,375,112 $ 1,030,761
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 583,026 $ 388,156
Accrued expenses.................................................................... 10,173 29,281
Due to partner...................................................................... 7,851 13,896
------------ ------------
Total current liabilities............................................................. 601,050 431,333
Partners' equity...................................................................... 774,602 599,428
------------ ------------
Total liabilities and partners' equity................................................ $ 1,375,112 $ 1,030,761
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-39
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Net patient service revenue............................. $7,465,691 $7,217,045 $3,840,253
Other revenue........................................... -- 43,315 718,469
--------- --------- ---------
Total revenues............................................ 7,465,691 7,260,360 4,558,722
Expenses:
Cost of services........................................ 5,480,648 5,300,908 2,771,129
General and administrative.............................. 144,005 162,534 166,626
Management, accounting and reimbursement fees........... 771,085 245,967 194,198
Bad debts............................................... 223,369 283,357 177,351
Depreciation............................................ 2,120 13,350 13,857
--------- --------- ---------
Total operating expenses.................................. 6,621,227 6,006,116 3,323,161
--------- --------- ---------
Operating income.......................................... 844,464 1,254,244 1,235,561
Other income (expense):
Interest income......................................... -- 19,691 14,268
Forgiveness of amounts due from affiliates.............. (1,635,143) -- --
--------- --------- ---------
(1,635,143) 19,691 14,268
--------- --------- ---------
Net income (loss)......................................... $(790,679) $1,273,935 $1,249,829
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-40
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
Balance at June 30, 1995 (unaudited)............................................ $2,240,806
Net loss (unaudited).......................................................... (790,679)
---------
Balance at June 30, 1996........................................................ 1,450,127
Distributions to partners..................................................... (1,950,000)
Net income.................................................................... 1,273,935
---------
Balance at June 30, 1997........................................................ 774,062
Distributions to partners (unaudited)......................................... (1,424,463)
Net income (unaudited)........................................................ 1,249,829
---------
Balance at June 30, 1998 (unaudited)............................................ $ 599,428
---------
---------
</TABLE>
See accompanying notes.
F-41
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)......................................... $(790,679) $1,273,935 $1,249,829
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 2,120 13,350 13,857
Gain on sale of equipment............................... -- -- (2,000)
Forgiveness of amounts due from affiliates.............. 1,635,143 -- --
Provision for losses on patient accounts receivable..... 223,369 283,357 177,351
Changes in operating assets and liabilities:
Patient receivables and other......................... (612,037) 645,220 (133,423)
Due from affiliates................................... (485,375) (107,636) (8,857)
Inventories........................................... 310,329 (1,104) 160,640
Prepaids and other current assets..................... (10,551) 6,691 2,701
Accounts payable and accrued expenses................. (517,463) 333,754 (175,762)
Due to partner........................................ 425,652 (410,736) 6,045
--------- --------- ---------
Net cash provided by operating activities................. 180,508 2,036,831 1,290,381
INVESTING ACTIVITIES
Purchases of furniture and equipment...................... (62,276) (6,335) (12,667)
Proceeds from sale of equipment........................... -- -- 2,000
--------- --------- ---------
Net cash used in investing activities..................... (62,276) (6,335) (10,667)
FINANCING ACTIVITIES
Distributions to general partners......................... -- (1,950,000) (1,424,463)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.......... 118,232 80,496 (144,749)
Cash and cash equivalents at beginning of year............ -- 118,232 198,728
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 118,232 $ 198,728 $ 53,979
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-42
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Texas Health Pharmaceutical Resources (the Partnership) is a general
partnership formed on July 1, 1994. The Partnership has two general partners,
Nova Factor, Inc. (NFI) and Alternative Care Systems, Inc. (ACS), each of which
has a 50% ownership interest and shares equally in the profits and losses of the
Partnership. Under the partnership agreement, the partnership term will end on
March 31, 1999, unless extended by mutual agreement of the partners.
DESCRIPTION OF BUSINESS
The purpose of the Partnership is to provide specialized contract pharmacy
services beneficial to patients with certain costly chronic diseases. The
Partnership markets, sells and distributes drugs such as growth hormone and
provides hemophilia therapy services and supplies.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents.
PATIENT ACCOUNTS RECEIVABLE
The Partnership's primary concentration of credit risk is patient accounts
receivable, which consists of amounts owed by various governmental agencies,
insurance companies and private patients. The Partnership manages the
receivables by regularly reviewing its accounts and contracts and by providing
appropriate allowances for uncollectible accounts. Significant concentrations of
gross patient accounts receivable are as follows at June 30:
<TABLE>
<CAPTION>
1997
--------- 1998
-----------
(UNAUDITED)
<S> <C> <C>
Medicare................................................................ 24% 14%
Medicaid................................................................ 29% 32%
</TABLE>
Concentration of credit risk relating to accounts receivable is limited to
some extent by the diversity and number of patients and payors, and could be
adversely affected by the geographic service area of the business which, under
the partnership agreement, is the area encompassed within the 50-mile radius of
Dallas, Texas, and within the city limits of Lubbock, Texas. The Partnership
grants credit without collateral to its patients.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables and accounts payable approximates fair
value of these financial instruments.
F-43
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Provisions for depreciation are
computed by the straight-line method based on the estimated useful lives of the
related assets of three to seven years.
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Partnership has agreements with certain third-party payors that provide for
payments to the Partnership at amounts discounted from its established rates.
Approximately 59% (unaudited), 63% and 63% (unaudited) of gross patient service
revenues for the years ended June 30, 1996, 1997 and 1998, respectively, are
from participation in the Medicare and state-sponsored Medicaid programs.
Other revenues primarily consist of management fees. Management fees are
primarily based upon the amount of patient service revenues generated by a
hospital program managed by the Partnership.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Estimates are used primarily in recording the allowances for doubtful
accounts.
3. OPERATING LEASES
The Partnership leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $1,700
(unaudited), $15,000 and $15,000 (unaudited), for the years ended June 30, 1996,
1997 and 1998, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with terms of one year or more, consist of the following for
the years ended June 30:
<TABLE>
<S> <C>
1999............................................................... $ 14,000
2000............................................................... 13,000
---------
$ 27,000
---------
---------
</TABLE>
4. RELATED PARTIES
During 1996, the Partnership forgave $1,635,143 (unaudited) of amounts due
from affiliates in which ACS and an affiliate of NFI were each 50% partners. Due
from affiliates of $183,239 and $192,096 (unaudited) at June 30, 1997 and 1998,
respectively, consists of accounts receivable from other entities affiliated
with NFI.
The Partnership receives certain services provided by NFI that include cash
management, tax reporting, risk management, executive management, computer
processing, and accounting and reimbursement services. For these services, the
Partnership pays management, reimbursement and accounting fees to NFI.
Management, accounting and reimbursement fees were $771,085 (unaudited),
$245,967 and $194,198 (unaudited) for the years ended June 30, 1996, 1997 and
1998, respectively. The Partnership received management fees of approximately
$708,000 (unaudited) from an affiliate of ACS for the year ended June 30, 1998.
F-44
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
5. INCOME TAXES
No provision is made in the accounts of the Partnership for federal and
state income taxes, as such taxes are liabilities of the partners. The
Partnership's tax returns and amounts of allocable Partnership revenues and
expenses are subject to examination by federal and state taxing authorities. If
such examinations occur and result in changes, the portion of the Partnership's
income or loss reported by the partners may also change.
F-45
<PAGE>
- ---------------------------------------------------------
---------------------------------------------------------
- ---------------------------------------------------------
---------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
The Company.......................... 16
Use of Proceeds...................... 16
Dividend Policy...................... 16
Capitalization....................... 17
Dilution............................. 18
Selected Financial Information....... 19
Management's Discussion and
Analysis............................ 20
Business............................. 30
Management........................... 48
Certain Transactions................. 56
Principal Stockholders............... 58
Description of Capital Stock......... 59
Shares Eligible for Future Sale...... 62
Underwriting......................... 63
Legal Matters........................ 64
Experts.............................. 64
Index to Financial Statements........ F-1
</TABLE>
--------------
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY
SECURITIES LLC
SUNTRUST EQUITABLE
SECURITIES
, 1999
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by the
Company in connection with the issuance and distribution of the securities being
registered hereby, other than underwriting discounts and commissions. The
Company is paying all of these expenses in connection with the issuance and
distribution of the securities.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 25,774
NASD Filing Fee................................................. 7,000
Nasdaq Original Listing Fee.....................................
Accountants' Fees and Costs.....................................
Legal Fees and Costs............................................
Printing and Engraving Costs....................................
Blue Sky Fees and Costs.........................................
Transfer Agent and Registrar fees...............................
Miscellaneous...................................................
---------
Total....................................................... $1,000,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Certificate of Incorporation provides
that the Company shall, to the fullest extent permitted by Section 145 of the
DGCL, as amended from time to time, indemnify its officers and directors.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of any action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
The Company's Amended and Restated Certificate of Incorporation contains a
provision which eliminates, to the fullest extent permitted by the DGCL,
director liability for monetary damages for breaches of the fiduciary duty of
care or any other duty as a director.
The Company intends to purchase a policy of director's and officer's
insurance that would in certain instances provide the funds necessary for the
Company to meet its indemnification obligations under its Amended and Restated
Certificate of Incorporation.
Reference is hereby made to Section of the Underwriting Agreement, the form
of which is filed as Exhibit 1.1 hereto, in which the Company has agreed to
indemnify the Underwriters and certain other persons against certain
liabilities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Company's original capitalization, on May 31, 1996
the Company sold to Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS VII") and
certain of its affiliates an aggregate of 4,972,534 shares of Common Stock for
$14,917,602 and an aggregate of 248,624 shares of Series A Preferred Stock for
$24,862,400. In addition, certain other investors acquired 27,466 shares of
Common Stock for $82,398 and 1,376 shares of Series A Cumulative Preferred Stock
for $137,600.
In connection with the Company's acquisition of Southern Health Systems,
Inc. ("SHS") on May 31, 1996, Messrs. Grow, Kimbrough and Stevens (in addition
to certain other holders of SHS common stock) exchanged their shares of SHS
common stock for 19,560, 12,225 and 61,125 shares of the Company's Common Stock,
respectively, and 978 shares, 611 shares and 3,056 shares of the Series A
Preferred Stock, respectively.
In order to finance the acquisition of Horizon Health Systems, Inc. ("HHS")
and to provide working capital, the Company issued $10.0 million in Senior
Subordinated Notes to WCAS VII and certain of its affiliates on June 4, 1997. In
connection with the issuance of the Senior Subordinated Notes, the Company
issued an aggregate of 400,000 shares of Common Stock to the holders of the
Senior Subordinated Notes. Furthermore, as a condition to the acquisition of HHS
and the appointment of Kyle J. Callahan to the Company's Board of Directors, Mr.
Callahan acquired 41,667 shares of the Company's Common Stock for $250,002 on
October 1, 1997.
In connection with the appointment of Kenneth J. Melkus to the Company's
Board of Directors, Lauren Melkus acquired 41,667 shares of Common Stock for
$250,002 on October 27, 1997.
In connection with the appointment of Kenneth R. Masterson to the Company's
Board of Directors, the Company sold 34,000 shares of Common Stock to Mr.
Masterson for $204,000 on July 24, 1998 pursuant to a subscription agreement
entered into by Mr. Masterson in April 1998.
Except as otherwise noted, all issuances of securities described above were
made in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended, as transactions by an issuer not
involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Exhibits
<TABLE>
<C> <S>
*1.1 Underwriting Agreement
*3.1 Amended and Restated Certificate of Incorporation of the Registrant
*3.2 Amended and Restated Bylaws of the Registrant
*4.1 Form of Common Stock Certificate
*5.1 Opinion of Alston & Bird LLP with respect to validity of Common Stock
+10.1 Employment Agreement dated May 31, 1996 between the Company and David D. Stevens
+10.2 Employment Agreement dated May 31, 1996 between the Company and John R. Grow
+10.3 Employment Agreement dated May 31, 1996 between the Company and Joel R.
Kimbrough
+10.4 Employment Agreement dated June 5, 1997 between the Company and Kyle J. Callahan
+10.5 Employment Agreement dated July 10, 1998 between the Company and Thomas W. Bell
Jr.
*10.6 Accredo Health 1998 Long-Term Incentive Plan
*10.7 Accredo Health 1998 Employee Stock Purchase Plan
+10.8 Nova Holdings, Inc. and its Subsidiaries Stock Option and Restricted Purchase
Plan, as amended and restated
+10.9 Note Purchase Agreement dated June 4, 1997 among the Company, Welsh, Carson,
Anderson & Stowe VII, L.P. and certain other investors
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
+10.10 Registration Rights Agreement dated May 31, 1996 among the Company, Welsh,
Carson, Anderson & Stowe VII, L.P. and certain other investors
+10.11 Amendment Number One to the Registration Rights Agreement dated October 27, 1997
among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. and certain other
investors.
+10.12 Amendment Number Two to the Registration Rights Agreement dated July 24, 1998
among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. and certain other
investors.
+10.13 Subscription and Exchange Agreement dated May 31, 1996 among the Company and
certain purchasers and exchanging shareholders
+10.14 Stock Purchase Agreement dated May 31, 1996 among Le Bonheur Health Systems,
Inc., Southern Health Systems, Inc., the Company and Welsh, Carson, Anderson &
Stowe VII, L.P.
+10.15 Modification Agreement dated May 31, 1996 among Le Bonheur Health Systems, Inc.,
Southern Health Systems, Inc., Nova Holdings, Inc. and Welsh, Carson Anderson &
Stowe VII, L.P.
+10.16 Non-Disclosure and Non-Competition Agreement dated May 31, 1996 by and among Le
Bonheur Health Systems, Inc., PharmaThera, Inc., Welsh, Carson, Anderson & Stowe
VII, L.P., Southern Health Systems, Inc., Nova Factor, Inc. and Nova Holdings,
Inc.
+10.17 Stock Purchase Agreement dated as of June 5, 1997 among Dianne R. Martz, A.B.
Charlton, III, the Company and Horizon Health Systems, Inc.
+10.18 Non-Disclosure and Non-Compete Agreement dated as of June 5, 1997 by and among
Horizon Health Systems, Inc., the Company and Dianne R. Martz
+10.19 Grant Agreement dated as of June 5, 1997 by and between Kyle Callahan and the
Company
+10.20 Subscription and Restriction Agreement dated as of June 5, 1997 by and between
the Company and Kyle Callahan
+10.21 Consulting and Transition Agreement dated as of June 5, 1997 by and between
Dianne Martz and Horizon Health Systems, Inc.
+10.22 Letter Agreement dated as of June 3, 1997 from Andrew M. Paul to Kyle Callahan
regarding Mr. Callahan's election to the Board of Directors of the Company
+10.23 Lease Agreement dated September 1, 1994 between Dianne Martz and Horizon Health
Systems, Inc.
+10.24 Addendum to Lease Agreement dated September 1, 1994 amending the square footage
of Premises and annual rental payments
+10.25 Escrow Agreement dated June 5, 1997 among First American National Bank, Nova
Holdings, Inc. and Dianne Martz and A. B. Charlton, III
+10.26 Refunds Payable Escrow Agreement dated June 5, 1997 among First American
National Bank, Nova Holdings, Inc. and Dianne Martz and A. B. Charlton, III
+10.27 Contract for the Sale and Distribution of Genentech Human Growth Hormone dated
March 1, 1997 by and between Genentech, Inc. and Nova Factor, Inc. (The Company
has requested confidential treatment of certain portions of this Exhibit.)
+10.28 Distribution Agreement dated September 30, 1994 by and between Nova Factor, Inc.
and Genzyme Corporation (The Company has requested confidential treatment of
certain portions of this Exhibit.)
+10.29 Amendment No. 1 to Distribution Agreement dated January 1, 1995 by and between
Nova Factor, Inc. and Genzyme Corporation (The Company has requested
confidential treatment of certain portions of this Exhibit.)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
+10.30 Second Amended and Restated Distribution Agreement dated July 1, 1994 by and
among PharmaThera, Inc., Nova Factor, Inc. and Genzyme Corporation (The Company
has requested confidential treatment of certain portions of this Exhibit.)
+10.31 Amendment No. 1 to Second Amended and Restated Distribution Agreement dated
September 30, 1994 by and between PharmaThera, Inc., Nova Factor, Inc. and
Genzyme Corporation (The Company has requested confidential treatment of certain
portions of this Exhibit.)
+10.32 Amendment No. 2 to Second Amended and Restated Distribution Agreement dated
January 1, 1995 by and between Nova Factor, Inc. and Genzyme Corporation (The
Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.33 Distribution and Services Agreement dated November 1, 1995 by and between
Biogen, Inc. and Nova Factor, Inc. (The Company has requested confidential
treatment of certain portions of this Exhibit.)
+10.34 Amendment No. 1 to Distribution and Services agreement dated May 17, 1996 by and
between Biogen, Inc. and Nova Factor, Inc. (The Company has requested
confidential treatment of certain portions of this Exhibit.)
+10.35 Addendum and Amendment No. 2 to Distribution and Services Agreement dated May
21, 1997 by and between Biogen, Inc. and Nova Factor, Inc. (The Company has
requested confidential treatment of certain portions of this Exhibit.)
+10.36 Addendum and Amendment No. 3 to Distribution and Services Agreement dated July
1, 1997 by and between Biogen, Inc. and Nova Factor, Inc. (The Company has
requested confidential treatment of certain portions of this Exhibit.)
+10.37 Addendum and Amendment No. 4 to Distribution and Services Agreement dated
January 1, 1998 by and between Biogen, Inc. and Nova Factor, Inc. (The Company
has requested confidential treatment of certain portions of this Exhibit.)
10.38 Loan and Security Agreement, dated as of June 5, 1997 among Nova Holdings, Inc.
and its Subsidiaries and NationsBank of Tennessee, N.A. and First Tennessee Bank
National Association
10.39 Swing Line Note, dated December 1, 1997, entered into by Nova Holdings, Inc.
with NationsBank of Tennessee, N.A.
+10.40 ISDA Master Agreement, dated August 7, 1997, between NationsBank of Tennessee,
N.A. and Nova Holdings, Inc.
+10.41 Texas Health Pharmaceutical Resources Partnership Agreement dated July 1, 1994
(The Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.42 Distribution Business Management and Service Agreement, dated July 1, 1994 by
and among Southern Health Systems, Inc. and Texas Health Pharmaceutical
Resources (The Company has requested confidential treatment of certain portions
of this Exhibit.)
+10.43 Amendment No. 1 to Distribution Business Management and Service Agreement, dated
July 1, 1994 by and among Southern Health Systems, Inc. and Texas Health
Pharmaceutical Resources (The Company has requested confidential treatment of
certain portions of this Exhibit.)
+10.44 Hemophilia Therapy Pharmacy Management Agreement, dated May 9, 1997, by and
among Texas Health Pharmaceutical Resources and Children's Medical Center of
Dallas (The Company has requested confidential treatment of certain portions of
this Exhibit.)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
+10.45 Amendment No. 1 to Hemophilia Therapy Pharmacy Management Agreement, dated
February 28, 1998, by and among Texas Health Pharmaceutical Resources and
Children's Medical Center of Dallas (The Company has requested confidential
treatment of certain portions of this Exhibit.)
+10.46 Incentive Stock Option Agreement of David Stevens dated May 31, 1996
+10.47 Incentive Stock Option Agreement of Joel R. Kimbrough dated May 31, 1996
+10.48 Incentive Stock Option Agreement of John R. Grow dated May 31, 1996
+10.49 Incentive Stock Option Agreement of Kyle Callahan dated September 3, 1997
+10.50 Non-Qualified Stock Option Agreement of Patrick J. Welsh dated February 9, 1998
+10.51 Non-Qualified Stock Option Agreement of Ken Melkus dated February 9, 1998
+10.52 Incentive Stock Option Agreement of Kyle Callahan dated February 9, 1998
+10.53 Non-Qualified Stock Option Agreement of Andrew M. Paul dated February 9, 1998
+10.54 Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated April 30,
1998
+10.55 Incentive Stock Option Agreement of Thomas W. Bell, Jr. dated July 10, 1998
10.56 Amendment No. 1 Loan and Security Agreement dated as of August 28, 1998, among
Nova Holdings, Inc., Delaware Corporation and its Subsidiaries and NationsBank
of Tennessee, N.A. and First Tennessee Bank National Association
10.57 Loan Agreement, dated November 24, 1998, between NationsBank, N.A. and
Children's Hemophilia Services, a California general partnership composed of
Children's Home Care, a California not-for-profit public benefit corporation and
Horizon Health Systems, Inc., a Tennessee Corporation
10.58 Limited Guaranty, dated November 24, 1998, between NationsBank, N.A. and Accredo
Health, Incorporated
10.59 Promissory Note, Dated December 24, 1998, between NationsBank, N.A. and
Children's Hemophilia Services
10.60 Amended and Restated General Partnership Agreement of Children's Home Services.
10.61 Amended and Restated General Partnership Agreement of Children's Hemophilia
Services
10.62 Growth Hormone Drug Therapy Business Management, Service and Sales Agreement
dated November 10, 1998, between Nova Factor, Inc., a Tennessee corporation and
Children's Home Services, a California general partnership (The Company has
requested confidential treatment of certain portions of this Exhibit.)
10.63 Hemophilia Therapy Business Management, Services and Sales Agreement, dated
November 10, 1998, between Horizon Health Systems, Inc., a Tennessee corporation
and Children's Hemophilia Services, a California general partnership (The
Company has requested confidential treatment of certain portions of this
Exhibit.)
10.64 Product Supply and Service Agreement, dated November 10, 1998, between Nova
Factor, Inc., a Tennessee corporation and Children's Home Care, a California
non-profit benefit corporation (The Company has requested confidential treatment
of certain portions of this Exhibit.)
*10.65 Distribution and Services Agreement, dated August 28, 1998, between Centocor,
Inc. and its affiliates and Nova Factor, Inc.
21.1 Subsidiaries of the Company
*23.1 Consent of Alston & Bird LLP (included in opinion filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
+24.1 Power of Attorney (included on the signature page)
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
+27.1 Financial Data Schedule
</TABLE>
(B) Financial Statement Schedules
Accredo Health, Incorporated
Schedule II--Valuation and Qualifying Accounts
Nova Factor, Inc.
Schedule II--Valuation and Qualifying Accounts
Texas Health Pharmaceutical Resources
Schedule II--Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
respective financial statements or notes thereto.
- ------------------------
* To be filed by amendment.
+ Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the
Representatives of the Underwriters at the closing specified in the underwriting
agreements certificates in such denominations and registered in such names as
required by the Representatives of the Underwriters to permit prompt delivery to
each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Memphis, State of
Tennessee, on January 29, 1999.
<TABLE>
<S> <C> <C>
ACCREDO HEALTH, INCORPORATED
By: /s/ DAVID D. STEVENS
-----------------------------------------
David D. Stevens
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on January 29, 1999.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ DAVID D. STEVENS Chief Executive Officer and
- ------------------------------ Chairman of the Board of
David D. Stevens Directors
* President and Director
- ------------------------------
John R. Grow
Senior Vice President and
/s/ JOEL R. KIMBROUGH Chief Financial Officer
- ------------------------------ (principal financial and
Joel R. Kimbrough accounting officer)
* Senior Vice President and
- ------------------------------ Director
Kyle J. Callahan
* Director
- ------------------------------
Patrick J. Welsh
* Director
- ------------------------------
Andrew M. Paul
* Director
- ------------------------------
Kenneth J. Melkus
* Director
- ------------------------------
Kenneth R. Masterson
/s/ JOEL R. KIMBROUGH
------------------------------
Joel R. Kimbrough
By:ATTORNEY-IN-FACT
II-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Accredo Health, Incorporated
We have audited the consolidated financial statements of Accredo Health,
Incorporated as of June 30, 1997 and 1998, and for the period from inception
(May 24, 1996) through June 30, 1996, and for the years ended June 30, 1997 and
1998, and have issued our report thereon dated August 12, 1998 (included
elsewhere in this Registration Statement). Our audit also included the financial
statement schedule of the Company listed in Item 16(b) of this Registration
Statement. This Schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 12, 1998
S-1
<PAGE>
ACCREDO HEALTH, INCORPORATED
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
------------------------
ADDITIONS
COL. B ------------------------ COL. E
---------- CHARGED TO COL. D ----------
COL. A BALANCE AT CHARGED TO OTHER ------------ BALANCE AT
- ------------------------------------- BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------- ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Period from inception (May 24, 1996)
through June 30, 1996:
Allowance for doubtful accounts.... $ -- $ 251,538 $2,749,847 (1) $291,370 (2) $2,710,015
Year ended June 30, 1997:
Allowance for doubtful accounts.... 2,710,015 2,976,718 -- 1,884,407 (2) 3,802,326
Year ended June 30, 1998:
Allowance for doubtful accounts.... 3,802,326 3,165,292 -- 3,537,755 (2) 3,429,863
</TABLE>
- --------------------------
(1) Allowance as a result of acquisition of Nova Factor, Inc.
(2) Uncollectible accounts written off, net of recoveries.
S-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Nova Factor, Inc.
We have audited the statements of operations, stockholder's equity and cash
flows of Nova Factor, Inc. for the period July 1, 1995 through May 31, 1996, and
have issued our report thereon dated August 30, 1996 (included elsewhere in this
Registration Statement). Our audit also included the financial statement
schedule of the Company listed in Item 16(b) of this Registration Statement.
This Schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 30, 1996
S-3
<PAGE>
NOVA FACTOR, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
-----------------------
ADDITIONS
COL. B ----------------------- COL. E
---------- CHARGED TO COL. D ----------
COL. A BALANCE AT CHARGED TO OTHER ------------ BALANCE AT
- --------------------------------------- BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- --------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Period from July 1, 1995 through May
31, 1996:
Allowance for doubtful accounts...... $3,982,980 $1,860,253 $ -- 3$,093,386 (1) $2,749,847
</TABLE>
- --------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Texas Health Pharmaceutical Resources
We have audited the financial statements of Texas Health Pharmaceutical
Resources as of June 30, 1997, and for the year then ended, and have issued our
report thereon dated August 21, 1998 (included elsewhere in this Registration
Statement). Our audit also included the information for the year ended June 30,
1997, in the financial statement schedule of the Partnership listed in Item
16(b) of this Registration Statement. This Schedule is the responsibility of the
Partnership's management. Our responsibility is to express an opinion based on
our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein for
the year ended June 30, 1997.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 21, 1998
S-5
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
------------------------
ADDITIONS
COL. B ------------------------ COL. E
----------- CHARGED TO COL. D -----------
COL. A BALANCE AT CHARGED TO OTHER ------------ BALANCE AT
- ------------------------------------------ BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996 (unaudited):
Allowance for doubtful accounts......... $ 248,912 $ 223,369 $ -- $358,995 (1) $ 113,286
Year ended June 30, 1997:
Allowance for doubtful accounts......... 113,286 283,357 -- 273,640 (1) 123,003
Year ended June 30, 1998 (unaudited):
Allowance for doubtful accounts......... 123,003 177,351 -- 130,194 (1) 170,160
</TABLE>
- --------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT INDEX NUMBERED PAGE
- --------- -------------------------------------------------------------------------------- ----------------
<C> <S> <C>
*1.1 Underwriting Agreement
*3.1 Amended and Restated Certificate of Incorporation of the Registrant
*3.2 Amended and Restated Bylaws of the Registrant
*4.1 Form of Common Stock Certificate
*5.1 Opinion of Alston & Bird LLP with respect to validity of Common Stock
+10.1 Employment Agreement dated May 31, 1996 between the Company and David D. Stevens
+10.2 Employment Agreement dated May 31, 1996 between the Company and John R. Grow
+10.3 Employment Agreement dated May 31, 1996 between the Company and Joel R.
Kimbrough
+10.4 Employment Agreement dated June 5, 1997 between the Company and Kyle J. Callahan
+10.5 Employment Agreement dated July 10, 1998 between the Company and Thomas W. Bell
Jr.
*10.6 Accredo Health 1998 Long-Term Incentive Plan
*10.7 Accredo Health 1998 Employee Stock Purchase Plan
+10.8 Nova Holdings, Inc. and its Subsidiaries Stock Option and Restricted Purchase
Plan, as amended and restated
+10.9 Note Purchase Agreement dated June 4, 1997 among the Company, Welsh, Carson,
Anderson & Stowe VII, L.P. and certain other investors
+10.10 Registration Rights Agreement dated May 31, 1996 among the Company, Welsh,
Carson, Anderson & Stowe VII, L.P. and certain other investors
+10.11 Amendment Number One to the Registration Rights Agreement dated October 27, 1997
among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. and certain other
investors.
+10.12 Amendment Number Two to the Registration Rights Agreement dated July 24, 1998
among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. and certain other
investors.
+10.13 Subscription and Exchange Agreement dated May 31, 1996 among the Company and
certain purchasers and exchanging shareholders
+10.14 Stock Purchase Agreement dated May 31, 1996 among Le Bonheur Health Systems,
Inc., Southern Health Systems, Inc., the Company and Welsh, Carson, Anderson &
Stowe VII, L.P.
+10.15 Modification Agreement dated May 31, 1996 among Le Bonheur Health Systems, Inc.,
Southern Health Systems, Inc., Nova Holdings, Inc. and Welsh, Carson Anderson &
Stowe VII, L.P.
+10.16 Non-Disclosure and Non-Competition Agreement dated May 31, 1996 by and among Le
Bonheur Health Systems, Inc., PharmaThera, Inc., Welsh, Carson, Anderson & Stowe
VII, L.P., Southern Health Systems, Inc., Nova Factor, Inc. and Nova Holdings,
Inc.
+10.17 Stock Purchase Agreement dated as of June 5, 1997 among Dianne R. Martz, A.B.
Charlton, III, the Company and Horizon Health Systems, Inc.
+10.18 Non-Disclosure and Non-Compete Agreement dated as of June 5, 1997 by and among
Horizon Health Systems, Inc., the Company and Dianne R. Martz
+10.19 Grant Agreement dated as of June 5, 1997 by and between Kyle Callahan and the
Company
+10.20 Subscription and Restriction Agreement dated as of June 5, 1997 by and between
the Company and Kyle Callahan
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT INDEX NUMBERED PAGE
- --------- -------------------------------------------------------------------------------- ----------------
<C> <S> <C>
+10.21 Consulting and Transition Agreement dated as of June 5, 1997 by and between
Dianne Martz and Horizon Health Systems, Inc.
+10.22 Letter Agreement dated as of June 3, 1997 from Andrew M. Paul to Kyle Callahan
regarding Mr. Callahan's election to the Board of Directors of the Company
+10.23 Lease Agreement dated September 1, 1994 between Dianne Martz and Horizon Health
Systems, Inc.
+10.24 Addendum to Lease Agreement dated September 1, 1994 amending the square footage
of Premises and annual rental payments
+10.25 Escrow Agreement dated June 5, 1997 among First American National Bank, Nova
Holdings, Inc. and Dianne Martz and A. B. Charlton, III
+10.26 Refunds Payable Escrow Agreement dated June 5, 1997 among First American
National Bank, Nova Holdings, Inc. and Dianne Martz and A. B. Charlton, III
+10.27 Contract for the Sale and Distribution of Genentech Human Growth Hormone dated
March 1, 1997 by and between Genentech, Inc. and Nova Factor, Inc.
+10.28 Distribution Agreement dated September 30, 1994 by and between Nova Factor, Inc.
and Genzyme Corporation
+10.29 Amendment No. 1 to Distribution Agreement dated January 1, 1995 by and between
Nova Factor, Inc. and Genzyme Corporation
+10.30 Second Amended and Restated Distribution Agreement dated July 1, 1994 by and
among PharmaThera, Inc., Nova Factor, Inc. and Genzyme Corporation
+10.31 Amendment No. 1 to Second Amended and Restated Distribution Agreement dated
September 30, 1994 by and between PharmaThera, Inc., Nova Factor, Inc. and
Genzyme Corporation
+10.32 Amendment No. 2 to Second Amended and Restated Distribution Agreement dated
January 1, 1995 by and between Nova Factor, Inc. and Genzyme Corporation
+10.33 Distribution and Services Agreement dated November 1, 1995 by and between
Biogen, Inc. and Nova Factor, Inc.
+10.34 Amendment No. 1 to Distribution and Services agreement dated May 17, 1996 by and
between Biogen, Inc. and Nova Factor, Inc.
+10.35 Addendum and Amendment No. 2 to Distribution and Services Agreement dated May
21, 1997 by and between Biogen, Inc. and Nova Factor, Inc.
+10.36 Addendum and Amendment No. 3 to Distribution and Services Agreement dated July
1, 1997 by and between Biogen, Inc. and Nova Factor, Inc.
+10.37 Addendum and Amendment No. 4 to Distribution and Services Agreement dated
January 1, 1998 by and between Biogen, Inc. and Nova Factor, Inc.
10.38 Loan and Security Agreement, dated as of June 5, 1997 among Nova Holdings, Inc.
and its Subsidiaries and NationsBank of Tennessee, N.A. and First Tennessee Bank
National Association
10.39 Swing Line Note, dated December 1, 1997, entered into by Nova Holdings, Inc.
with NationsBank of Tennessee, N.A.
+10.40 ISDA Master Agreement, dated August 7, 1997, between NationsBank of Tennessee,
N.A. and Nova Holdings, Inc.
+10.41 Texas Health Pharmaceutical Resources Partnership Agreement dated July 1, 1994
+10.42 Distribution Business Management and Service Agreement, dated July 1, 1994 by
and among Southern Health Systems, Inc. and Texas Health Pharmaceutical
Resources
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT INDEX NUMBERED PAGE
- --------- -------------------------------------------------------------------------------- ----------------
<C> <S> <C>
+10.43 Amendment No. 1 to Distribution Business Management and Service Agreement, dated
July 1, 1994 by and among Southern Health Systems, Inc. and Texas Health
Pharmaceutical Resources
+10.44 Hemophilia Therapy Pharmacy Management Agreement, dated May 9, 1997, by and
among Texas Health Pharmaceutical Resources and Children's Medical Center of
Dallas
+10.45 Amendment No. 1 to Hemophilia Therapy Pharmacy Management Agreement, dated
February 28, 1998, by and among Texas Health Pharmaceutical Resources and
Children's Medical Center of Dallas
+10.46 Incentive Stock Option Agreement of David Stevens dated May 31, 1996
+10.47 Incentive Stock Option Agreement of Joel R. Kimbrough dated May 31, 1996
+10.48 Incentive Stock Option Agreement of John R. Grow dated May 31, 1996
+10.49 Incentive Stock Option Agreement of Kyle Callahan dated September 3, 1997
+10.50 Non-Qualified Stock Option Agreement of Patrick J. Welsh dated February 9, 1998
+10.51 Non-Qualified Stock Option Agreement of Ken Melkus dated February 9, 1998
+10.52 Incentive Stock Option Agreement of Kyle Callahan dated February 9, 1998
+10.53 Non-Qualified Stock Option Agreement of Andrew M. Paul dated February 9, 1998
+10.54 Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated April 30,
1998
+10.55 Incentive Stock Option Agreement of Thomas W. Bell, Jr. dated July 10, 1998
10.56 Amendment No. 1 Loan and Security Agreement dated as of August 28, 1998, among
Nova Holdings, Inc., Delaware Corporation and its Subsidiaries and NationsBank
of Tennessee, N.A. and First Tennessee Bank National Association
10.57 Loan Agreement, dated November 24, 1998, between NationsBank, N.A., and
Children's Hemophilia Services, a California general partnership composed of
Children's Home Care, a California not-for-profit public benefit corporation and
Horizon Health Systems, Inc., a Tennessee Corporation
10.58 Limited Guaranty, dated November 24, 1998, between NationsBank, N.A. and Accredo
Health, Incorporated
10.59 Promissory Note, Dated December 24, 1998, between NationsBank, N.A. and
Children's Hemophilia Services
10.60 Amended and Restated General Partnership Agreement of Children's Home Services.
10.61 Amended and Restated General Partnership Agreement of Children's Hemophilia
Services
10.62 Growth Hormone Drug Therapy Business Management, Service and Sales Agreement
dated November 10, 1998 between Nova Factor, Inc., a Tennessee corporation and
Children's Home Services, a California general partnership (The Company has
requested confidential treatment of certain portions of this Exhibit.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT INDEX NUMBERED PAGE
- --------- -------------------------------------------------------------------------------- ----------------
<C> <S> <C>
10.63 Hemophilia Therapy Business Management, Services and Sales Agreement, dated
November 10, 1998 between Horizon Health Systems, Inc., a Tennessee corporation
and Children's Hemophilia Services, a California general partnership (The
Company has requested confidential treatment of certain portions of this
Exhibit.)
10.64 Product Supply and Service Agreement, dated November 10, 1998, between Nova
Factor, Inc., a Tennessee corporation and Children's Home Care, a California
non-profit benefit corporation (The Company has requested confidential treatment
of certain portions of this Exhibit.)
*10.65 Distribution and Services Agreement, dated August 28, 1998, between Contocor,
Inc. and its affiliates and Nova Factor, Inc.
21.1 Subsidiaries of the Company
*23.1 Consent of Alston & Bird LLP (included in Opinion filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
+24.1 Power of Attorney (included on the signature page)
+27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 10.38
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
DATED AS OF JUNE 5, 1997
AMONG
NOVA HOLDINGS, INC.
AND ITS SUBSIDIARIES
AND
NATIONSBANK OF TENNESSEE, N.A., AND
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
AND
NATIONSBANK OF TENNESSEE, N.A., AS AGENT
- --------------------------------------------------------------------------------
<PAGE>
NOVA HOLDINGS, INC.
AND ITS SUBSIDIARIES
LOAN AND SECURITY AGREEMENT
DATED AS OF JUNE 5, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph Number Page
- ---------------- ----
<S> <C>
I. DEFINITIONS...................................................................................................1
II. THE LOANS...................................................................................................19
2.1 The Revolving Loan Commitments.................................................................19
2.2 Borrowing Notices, Interest Rates and Payments of Interest.....................................20
2.3 Letters of Credit..............................................................................23
2.4 Nonuse Fee.....................................................................................29
2.5 Reduction of Commitment........................................................................30
2.6 Alternate Rate of Interest.....................................................................30
2.7 Change in Circumstances........................................................................30
2.8 Change in Legality.............................................................................32
2.9 Optional Prepayment - Premiums in Certain Events...............................................33
2.10 Payment to the Agent...........................................................................33
III. CONDITIONS PRECEDENT.......................................................................................34
3.1 Documents Required for the Closing.............................................................34
3.2 Requirements for all Subsequent Advances.......................................................36
3.3 Legal Matters..................................................................................37
IV. COLLATERAL SECURITY.........................................................................................37
4.1 Composition of the Collateral..................................................................37
4.2 Rights in Property Held by the Banks...........................................................37
4.3 Rights in Property of the Borrower and Guarantors..............................................37
4.4 Priority of Liens..............................................................................38
4.5 Financing Statements...........................................................................38
4.6 Collection of Receivables......................................................................38
V. REPRESENTATIONS AND WARRANTIES...............................................................................39
5.1 Due Organization and Qualification.............................................................39
<PAGE>
5.2 No Conflicting Agreement.......................................................................39
5.3 Capacity.......................................................................................40
5.4 Binding Obligations............................................................................40
5.5 Pledged Stock..................................................................................40
5.6 Litigation.....................................................................................40
5.7 Title..........................................................................................40
5.8 Financial Statements...........................................................................40
5.9 No Additional Indebtedness.....................................................................41
5.10 Taxes..........................................................................................41
5.11 Licenses; Compliance with Laws.................................................................41
5.12 Environmental Compliance.......................................................................41
5.13 Full Disclosure................................................................................42
5.14 Consents.......................................................................................42
5.15 Existing Borrowings............................................................................42
5.16 Material Contracts.............................................................................42
5.17 No Commissions.................................................................................42
5.18 ERISA..........................................................................................42
5.19 Survival.......................................................................................42
VI. AFFIRMATIVE COVENANTS.......................................................................................43
6.1 Use of Proceeds................................................................................43
6.2 Financial Statements and Reports...............................................................43
6.3 Good Condition.................................................................................45
6.4 Insurance......................................................................................45
6.5 Taxes; Copies of Returns.......................................................................45
6.6 Records and Inspection.........................................................................45
6.7 Maintenance of Existence and Business; Licenses................................................46
6.8 Reimbursement Eligibility......................................................................46
6.9 Ordinary Course; Pledge of Notes...............................................................46
6.10 Payment of Indebtedness........................................................................46
6.11 Notice of Litigation or Loss of Licenses.......................................................46
6.12 Notice to Banks of Default.....................................................................47
6.13 Notice of Name Change or Location..............................................................47
6.14 Environmental Compliance.......................................................................47
6.15 Notice of Environmental Action.................................................................48
6.16 ERISA Compliance...............................................................................48
6.17 Financial Ratios...............................................................................48
VII. NEGATIVE COVENANTS.........................................................................................49
7.1 Merger or Reorganization.......................................................................49
7.2 Sale of Assets.................................................................................49
7.3 Encumbrances...................................................................................49
7.4 Debts and Other Obligations....................................................................49
<PAGE>
7.5 Untrue Certificate.............................................................................50
7.6 Margin Stock...................................................................................50
7.7 Sale-Leaseback.................................................................................50
7.8 Guarantee Obligation...........................................................................50
7.9 Dividends and Distributions....................................................................50
7.10 Redemptions and Capital Stock..................................................................50
7.11 Prepayments....................................................................................50
7.12 Subsidiary.....................................................................................50
7.13 Loans and Advances.............................................................................51
7.14 Investments....................................................................................51
7.15 Acquisitions...................................................................................51
7.16 Capital Expenditures...........................................................................52
7.17 Accounts Payable...............................................................................52
7.18 Inventory Locations............................................................................53
7.19 Affiliate Transactions.........................................................................53
VIII. DEFAULT...................................................................................................53
8.1 Events of Default..............................................................................53
8.2 Acceleration...................................................................................55
8.3 Remedies.......................................................................................55
IX. THE AGENT..................................................................................................56
9.1 Authorization..................................................................................56
9.2 Standard of Care...............................................................................57
9.3 No Waiver of Rights............................................................................57
9.4 Payments.......................................................................................57
9.5 Indemnification................................................................................58
9.6 Exculpation....................................................................................58
9.7 Credit Investigation...........................................................................58
9.8 Resignation....................................................................................59
9.9 Proration of Payments..........................................................................59
9.10 No Liability For Errors........................................................................60
9.11 Offset.........................................................................................60
X. MISCELLANEOUS................................................................................................60
10.1 Construction...................................................................................60
10.2 Further Assurance..............................................................................60
10.3 Enforcement and Waiver by the Banks............................................................60
10.4 Expenses of the Banks..........................................................................61
10.5 Notices........................................................................................61
10.6 Waiver and Release.............................................................................62
10.7 Indemnification................................................................................62
<PAGE>
10.8 Participations and Assignments.................................................................63
10.9 Applicable Laws................................................................................66
10.10 Binding Effect, Assignment and Entire Agreement................................................66
10.11 Severability...................................................................................66
10.12 Counterparts...................................................................................66
10.13 Venue..........................................................................................66
10.14 Waiver of Jury Trial...........................................................................66
</TABLE>
<PAGE>
SCHEDULE OF EXHIBITS
--------------------
EXHIBIT
-------
A Form of Notes
B Borrowing/Conversion Notice
C Existing Indebtedness and Liens
D Subordinated Indebtedness
E Form of Stock Pledge Agreement
F Form of Guaranty and Suretyship Agreements
G Form of Opinion Letter
H Corporate Matters
(States of Incorporation and Qualification; Stock Ownership)
I Addresses and Inventory Locations
J Litigation and Claims
K Compliance with Laws
L Material Leases, Contracts and Commitments
M Borrowing Base Calculation Certificate
N Compliance Certificate
O Form of Assignment and Acceptance
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT is made as of the 5th day of
June, 1997, by and among Nova Holdings, Inc., a Delaware corporation (the
"Borrower"); the Subsidiaries and Guarantors, jointly and severally, as such
term is defined herein; each of the undersigned lenders as the Banks herein; and
NationsBank of Tennessee, N.A. (the "Agent"), individually and as Agent for such
Banks.
W I T N E S S E T H:
--------------------
WHEREAS, Borrower has requested the Banks to lend up to the
sum of Forty Million Dollars ($40,000,000.00), on a revolving loan basis to
refinance certain existing indebtedness owed by a Subsidiary of the Borrower, to
enable certain acquisitions, and for other general corporate purposes, and the
Banks are willing to do so upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and obligations herein contained, and each intending to be
legally bound hereby, the parties agree as follows:
SECTION I. DEFINITIONS
----------------------
As used herein:
"Accounts", "Chattel Paper", "Documents", "Equipment",
"Fixtures", "General Intangibles", "Goods", "Instruments" and "Inventory" shall
have the same respective meanings as are given to those terms in the UCC.
"Acquisition" means any transaction, or any series of related
transactions, by which any Person, in the transaction or as of the most recent
transactions in a series of transactions, directly or indirectly acquires any
going concern or all or a substantial part of the assets of any corporation,
partnership or other entity or any division of any such entity, or any such
entity or any division of such an entity becomes a Subsidiary of such Person.
"Acquisition Advance" means an advance under the Revolving
Loan for a Permitted Acquisition.
"Acquisition Cash Flow" means for any Person who is the
subject of an Acquisition by the Borrower, such Person's net income as
calculated in accordance with generally accepted accounting principles
consistently applied for the four (4) quarters immediately prior to the
anticipated Acquisition date plus Interest Expense, Rental Expense,
depreciation, amortization, federal and state taxes, and such other adjustments
thereto as the Agent may consent to in its sole discretion after consultation
with the Borrower.
"Affiliates" means as to any Person (A) any Person which,
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with
<PAGE>
such Person, or (B) any Person who is a director or executive officer (i) of
such Person, (ii) of any Subsidiary of such Person or (iii) of any Person
described in clause (A) above. For purposes of this definition, "control" of
a Person shall mean the power, direct or indirect, (i) to vote or direct the
voting of more than five percent (5%) of the outstanding shares of voting
stock of such Person, or (ii) to direct or cause the direction of the
management and policies of such Person whether by contract or otherwise. In
no event shall any of the Banks be deemed to be Affiliates of the Borrower.
"Agent" means NationsBank of Tennessee, N.A. in its capacity
as agent for the Banks pursuant to Section IX hereof, and not in its individual
capacity as a Bank, and any successor Agent appointed pursuant to Section IX.
"Agreement" means this Loan and Security Agreement, as it may
be amended, restated, renewed or extended from time to time.
"Applicable Lending Office" means, for each Bank and for each
type of Loan, the "Lending Office" of such Bank (or of an affiliate of such
Bank) designated for such type of Loan in Paragraph 10.5 hereof or such other
office of such Bank (or of an affiliate of such Bank) as such Bank may from time
to time specify to the Agent and the Borrower as the office for its Loans of
such type.
"Applicable LIBO Rate Margin" means two and one-half percent
(2.50%) per annum; provided however, that during any fiscal quarter of the
Borrower where the Borrower shall have satisfied the Funded Debt to Cash Flow
ratio test indicated in the table below, then the Applicable LIBO Rate Margin
for the Effective Period (as defined below) shall be the percentage rate per
annum set forth opposite the appropriate test in the table below:
<TABLE>
<CAPTION>
Funded Debt to Cash Flow Applicable LIBO Rate Margin
- ------------------------ ---------------------------
<S> <C>
Greater than 3.0 to 1.0 2.50% per annum
Equal to or Less than 3.0:1.0 and 2.00% per annum
Greater than 2.25:1.0
Equal to or Less than 2.25:1.0 and 1.50% per annum
Greater than 1.5:1.0
Equal to or Less than 1.5 to 1.0 0.75% per annum
</TABLE>
The Funded Debt to Cash Flow ratio shall be computed generally as set forth in
Paragraph 6.17(C) with Cash Flow being computed on a rolling four (4) quarter
basis after giving Pro-Forma Effect to any Permitted Acquisition or Indebtedness
associated therewith, and the Applicable LIBO Rate Margin shall be confirmed by
the Agent on the basis of quarter-annual financial statements of the Borrower
delivered to the Banks pursuant to Paragraph 6.2(B) and year end financial
statements delivered pursuant to Paragraph 6.2(C). The "Effective Period" shall
be the period commencing on the first Business Day of the first month following
delivery to the Agent of the financial statements of the Borrower pursuant to
Paragraphs 6.2(B) and 6.2(C), which financial statements indicate that the
applicable test set forth above has been
2
<PAGE>
satisfied for the preceding fiscal quarter, and ending on the date that is
three months after such commencement date. At the end of any Effective
Period, the Applicable LIBO Rate Margin shall automatically become two and
one-half percent (2.50%) per annum unless at or prior to such time the next
Effective Period shall have commenced.
"Applicable Prime Rate Margin" means one percent (1.0%) per
annum; provided however, that during any fiscal quarter of the Borrower where
the Borrower shall have satisfied the Funded Debt to Cash Flow ratio test
indicated in the table below, the Applicable Prime Rate Margin for the Effective
Period (as defined below) shall be the percentage rate per annum set forth
opposite the appropriate test in the table below:
<TABLE>
<CAPTION>
Funded Debt to Cash Flow Applicable Prime Rate Margin
- ------------------------ ----------------------------
<S> <C>
Greater than 3.0 to 1.0 1.0% per annum
Equal to or Less than 3.0:1.0 and 0.50% per annum
Greater than 2.25:1.0
Equal to or Less than 2.25:1.0 and 0.00% per annum
Greater than 1.5:1.0
Equal to or Less than 1.5 to 1.0 0.00% per annum
</TABLE>
The Funded Debt to Cash Flow ratio shall be computed generally as set forth in
Paragraph 6.17(C) with Cash Flow being computed on a rolling four (4) quarter
basis after giving Pro-Forma Effect to any Permitted Acquisition or Indebtedness
associated therewith, and the Applicable Prime Rate Margin shall be confirmed by
the Agent on the basis of the quarter-annual financial statements of the
Borrower delivered to the Banks pursuant to Paragraph 6.2(B) and year end
financial statements delivered pursuant to Paragraph 6.2(C). The "Effective
Period" shall be the period commencing on the first Business Day of the first
month following delivery to the Agent of the financial statements of the
Borrower pursuant to Paragraphs 6.2(B) and 6.2(C), which financial statements
indicate that the applicable test set forth above has been satisfied for the
preceding fiscal quarter, and ending on the date that is three months after such
commencement date. At the end of any Effective Period, the Applicable Prime Rate
Margin shall automatically become one percent (1.0%) per annum unless at or
prior to such time the next Effective Period shall have commenced.
"Assignment and Acceptance" means an Assignment and
Acceptance, substantially in the form of Exhibit O.
"Bank" means each lending institution and/or Bank listed on
the signature pages of this Agreement and their respective successors and
assigns, and "Banks" means all of such lender(s) and Banks collectively.
"Borrowing Base" means that amount which is equal to three and
one-half times (3.5x) Cash Flow as calculated for the Borrower and its
Subsidiaries over the most recent Borrowing Base Reference Period.
3
<PAGE>
"Borrowing Base Adjustment Date" means that date following
each Borrowing Base Reference Period which occurs on the earlier of: (A) the
date on which the Banks actually receive the Borrowing Base calculations from
the Borrower as required by Subparagraph 6.2(D) hereof, or (B) thirty (30) days
after the last day of the previous Borrowing Base Reference Period.
"Borrowing Base Reference Period" means, for any period of
determination, the period of twelve (12) consecutive monthly periods of the
Borrower and/or its Subsidiaries (i.e., rolling 12 months) ending on the last
day of the immediately preceding monthly period. The Borrowing Base Reference
Period when first measured after the date of this Agreement shall be measured
from July 1, 1996 through June 30, 1997 and shall incorporate the preceding 12
months of Acquisition Cash Flow of Horizon.
"Business Day" means any day on which the state banks and
national banking associations in Nashville, Tennessee and New York, New York are
open for the conduct of ordinary business; provided however, that when used in
connection with determining the LIBO Rate or notices in connection therewith,
the term "Business Day" shall also exclude any day on which banks are not open
for dealings in U.S. Dollar deposits in the London Interbank Market.
"Capital Expenditures" means all amounts paid by the Borrower
and its Subsidiaries in connection with the purchase of property, plant,
machinery, equipment or other similar expenditures (including capital leases of
any of the foregoing) which would be required to be capitalized and shown on the
balance sheet of Borrower and its Subsidiaries in accordance with generally
accepted accounting principles consistently applied.
"Cash Flow" means, as to the Borrower and its Subsidiaries,
for any period of determination, the Consolidated Net Income of the Borrower and
its Subsidiaries for such period plus (A) Interest Expense for such period
deducted in the determination of Consolidated Net Income, (B) Rental Expense for
such period deducted in the determination of Consolidated Net Income, (C)
depreciation, (D) amortization, and (E) Federal and state taxes for such period
deducted in the determination of Consolidated Net Income, all as determined for
any period in accordance with generally accepted accounting principles
consistently applied. Notwithstanding the foregoing or any other provision
hereof, Cash Flow attributable to Non-Corporate Unperfected Subsidiaries shall
not be included in computing Cash Flow if Non-Corporate Unperfected Subsidiaries
would account for more than fifteen percent (15%) of total Cash Flow.
"CHAMPUS" means Civilian Health and Medical Program of the
Uniformed Services.
"Change of Control" means the occurrence, after the date of
this Agreement, of (i) any Person or two or more Persons acting in concert
acquiring beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended), directly or indirectly, of securities of Borrower (or other securities
convertible into such securities) representing 51% or more of the combined
voting power of all securities of Borrower entitled to vote in the election of
directors; or (ii) commencing after the date of this Agreement, individuals who
at the beginning of this
4
<PAGE>
Agreement were directors of Borrower ceasing for any reason to constitute a
majority of the Board of Directors of Borrower unless the Persons replacing
such individuals were nominated by the Board of Directors of Borrower; or
(iii) any Person or two or more Persons acting in concert acquiring by
contract or otherwise, or entering into a contract or arrangement which upon
consummation will result in its or their acquisition of, or control over,
securities of Borrower (or other securities convertible into such securities)
representing 51% or more of the combined voting power of all securities of
Borrower entitled to vote in the election of directors; provided, an IPO
shall not be considered a Change of Control even if it results in 51% or more
of the voting securities being acquired by other Persons.
"Closing" means the valid execution and delivery of the Notes,
this Agreement, and Collateral Documents to the Agent, or as the Banks otherwise
direct.
"Collateral" has the meaning set forth in Paragraph 4.1.
"Collateral Documents" means the documents specified in
Paragraphs 3.1 (D) through (F).
"Commitment Percentage" means, as to any Bank at any time, the
percentage of the Total Commitments then constituted by such Bank's Commitment.
"Commitments" means the Revolving Loan Commitments in the
aggregate principal amount of $40,000,000.00 described in Paragraph 2.1 hereof
and "Commitment" means, for each Bank, the obligation of such Bank to make Loans
and extend credit in an aggregate amount at any one time outstanding up to but
not exceeding the amount(s) set out beside the name of such Bank in Paragraph
2.1 or, in the case of any Person who hereafter becomes a Bank, the amount as
reflected on the signature page of the Assignment and Acceptance executed by
such Person; and provided further, that the Commitment of each Bank shall be
decreased (or increased, as the case may be) to reflect any assignments by such
Bank in accordance with Paragraph 10.8 hereof. The original aggregate principal
amount of the Total Commitments is $40,000,000.00.
"Consolidated Accounts" means, at any time, all Accounts that
in accordance with generally accepted accounting principles consistently applied
should be classified as accounts receivable on a consolidated balance sheet of
the Borrower and its Subsidiaries.
"Consolidated Allowance for Doubtful Accounts" means, for any
period of determination, that amount shown on the consolidated balance sheet of
the Borrower and its Subsidiaries as an allowance for doubtful accounts.
"Consolidated Assets" means, at any time, all assets that in
accordance with generally accepted accounting principles should be classified as
assets on a consolidated balance sheet of the Borrower and its Subsidiaries.
5
<PAGE>
"Consolidated Capital" means, as to both the Borrower and its
Subsidiaries at any time of determination, the sum of Shareholders' Equity plus
Funded Debt.
"Consolidated Current Assets" and "Consolidated Current
Liabilities" mean, at any time, all assets or liabilities, respectively, that,
in accordance with generally accepted accounting principles consistently
applied, should be classified as current assets or current liabilities,
respectively, on a consolidated balance sheet of the Borrower and its
Subsidiaries.
"Consolidated Fixed Assets" means, at any time, all tangible,
fixed assets (other than Consolidated Current Assets) that should, in accordance
with generally accepted accounting principles consistently applied, be
classified as property, plant and equipment on a consolidated balance sheet of
the Borrower and its Subsidiaries.
"Consolidated Liabilities" means all Indebtedness that, in
accordance with generally accepted accounting principles consistently applied,
should be classified as liabilities on a consolidated balance sheet of the
Borrower and its Subsidiaries.
"Consolidated Net Income" means, for any particular fiscal
period, the after tax net income (or deficit) of the Borrower and its
Subsidiaries on a consolidated basis, determined in accordance with generally
accepted accounting principles consistently applied excluding, however any gains
from the write-up of assets or any extraordinary or nonrecurring gains.
"Consolidated Revenues" means, for any period of
determination, the gross revenues less contractual adjustments (i.e., net
revenues) of the Borrower and its Subsidiaries as shown on their consolidated
income statement as computed in accordance with generally accepted accounting
principles consistently applied.
"Contingent Obligation" means, with respect to any Person, any
direct or indirect liability of such Person with respect to any Funded Debt,
lease, dividend, guaranty, letter of credit (other than a standby letter of
credit with no reasonable likelihood of draw, in the reasonable opinion of the
Agent) or other obligation (the "primary obligation") of another Person (the
"primary obligor"), whether or not contingent, (a) to purchase, repurchase or
otherwise acquire such primary obligations or any property constituting direct
or indirect security therefor, (b) to advance or provide funds (i) for the
payment or discharge of any such primary obligation or (ii) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency or any balance sheet item, level of income or financial
condition of the primary obligor, (c) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor in respect thereof to make
payment of such primary obligation, or (d) otherwise to assure or hold harmless
the owner of any such primary obligation against loss or failure or inability to
perform in respect thereof. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith.
6
<PAGE>
"Debt Service" means for any given period, the sum of the
amounts due from both the Borrower and its Subsidiaries for (A) Interest
Expense, exclusive of original issue discount on the Subordinated Indebtedness
owed to Welsh, Carson, Anderson & Stowe VII, L.P. and WCAS Healthcare Partners,
L.P. and their partners and affiliates, (B) Letter of Credit Fees, (C) Rental
Expense, and (D) one-seventh (1/7th) of the amount of Funded Debt.
"Debt Service Coverage Ratio" means, as to the Borrower and
its Subsidiaries, for any period of determination, that ratio consisting of Cash
Flow divided by Debt Service.
"Eligible Assignee" means (A) a commercial bank organized
under the laws of the United States, or any State thereof, and having a combined
capital and surplus of at least $1,000,000,000.00; (B) a commercial bank
organized under the laws of any other country which is a member of the
Organization for Economic Cooperation and Development (the "OECD"), or a
political subdivision of any such country, and having a combined capital and
surplus of at least $1,000,000,000.00, provided that such bank is acting through
a branch or agency located in the United States; (C) any Bank and any Affiliate
of a Bank; and (D) any Federal Reserve Bank.
"Environmental Laws" means the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA) and the Superfund Amendments
and Reauthorization Act (SARA); the Resource Conservation and Recovery Act
(RCRA); the Emergency Planning and Community Right to Know Act; the Clean Water
Act (Federal Water Pollution Control Act); the Safe Drinking Water Act; the
Clean Air Act; the Surface Mining Control and Reclamation Act; the Coastal Zone
Management Act; the Noise Control Act; the Occupational Safety and Health Act;
the Toxic Substances Control Act (TSCA); the Federal Insecticide, Fungicide and
Rodenticide Act (FIFRA); any so-called "Superfund" or "Superlien" law; or any
other federal, state or local statute, law, ordinance, code, rule, regulation,
order, decree or other requirements of any governmental body regulating,
relating to or imposing liability or standards of conduct concerning any
Hazardous Materials or toxic or dangerous chemical, waste, substance or
material.
"Eurodollar Liabilities" has the meaning assigned to that term
in Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
"Eurodollar Loan" means any Loan which bears interest based on
the LIBO Rate.
"Eurodollar Rate Reserve Percentage" means the reserve
percentage applicable during any Eurodollar Loan Interest Period (or if more
than one such percentage shall be so applicable, the daily average of such
percentages for those days in such Interest Period during which any such
percentage shall be so applicable) under regulations issued from time to time by
the Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including, without limitation, any
emergency, supplemental or other marginal reserve requirement) for Banks with
respect to liabilities or assets consisting of or including Eurodollar
Liabilities having a term equal to such Interest Period.
7
<PAGE>
"Event of Default" has the meaning set forth in Paragraph 8.1.
"Federal Funds Rate" means, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day; provided that (a) if the day for which such rate is to
be determined is not a Business Day, the Federal Funds Rate for such day shall
be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day and (b) if such rate is not so
published for any Business Day, the Federal Funds Rate for such Business Day
shall be the average rate charged to the Agent on such Business Day on such
transactions as determined by the Agent.
"Fee Letter" means that letter agreement between the Agent and
the Borrower dated May 28, 1997.
"Financial Statements" means the consolidated balance sheets
of the Borrower as of June 30, 1996 and March 31, 1997, the statements of income
and shareholders equity of the Borrower for the years or months ended on such
dates, and the balance sheet of Horizon as of December 31, 1996 and March 31,
1997, together with the statements of income and shareholders equity of Horizon
for the years or months ended on such dates.
"Financing Statements" means any one or more filings made
pursuant to the UCC to perfect the security interests in the Collateral granted
to Agent for the benefit of the Banks pursuant to Section IV hereof.
"Floating Rate Loan" means any Loan which bears interest based
on the Prime Rate.
"Funded Debt" means at any date, with respect to the Borrower
and its Subsidiaries, all of the following obligations (without duplication) of
Borrower and its Subsidiaries as of such date: (a) all obligations for borrowed
money, (b) all obligations evidenced by bonds, debentures, notes or other
similar instruments, (c) all obligations to pay the deferred purchase price of
property, except trade accounts payable arising in the ordinary course of
business, including those payable to Genzyme, Inc., (d) all obligations as
lessee under capitalized leases, (e) all obligations to purchase securities or
other property which arise out of or in connection with the sale of the same or
substantially similar securities or property, such as bankers acceptances or
similar instruments, (f) all non-contingent obligations to reimburse any bank or
other person in respect of amounts paid under a letter of credit or similar
instrument, (g) all obligations under any Interest Rate Contract or other
interest rate or hedging arrangement, (h) all debt of others secured by a lien
on any asset of Borrower and its Subsidiaries, whether or not such debt is
assumed, and (h) all debt of others guaranteed by Borrower and/or its
Subsidiaries, and (i) any Contingent Obligation; provided, there shall be
excluded from the Funded Debt calculation all Subordinated Indebtedness owed to
Welsh, Carson, Anderson &
8
<PAGE>
Stowe VII, L.P. and WCAS Healthcare Partners, L.P., their partners,
affiliates, and the heirs, successors and assigns thereof.
"Guarantee Obligation" means with respect to any Person, any
contract, agreement or understanding of such Person pursuant to which such
Person guarantees, or in effect guarantees, any Indebtedness of any other person
(the "primary obligor") in any manner, whether directly or indirectly,
including, without limitation, agreements (a) to purchase such Indebtedness or
any asset constituting security therefor, (b) to advance or supply funds for the
purchase or payment of such Indebtedness or to maintain net worth or working
capital or other balance sheet conditions, or otherwise to advance or make
available funds for the purchase or payment of such Indebtedness, (c) to
purchase an asset or service primarily for the purpose of assuring the holder of
such Indebtedness of the ability of the primary obligor to make payment of the
Indebtedness, or (d) otherwise to assure the holder of the Indebtedness of the
primary obligor against loss with respect thereto; provided, however, that such
term shall not include the endorsement by Borrower or a Subsidiary of negotiable
instruments or documents for deposit or collection in the ordinary course of
business. The amount of any Guarantee Obligation of any guaranteeing person
shall be deemed to be the lower of (a) an amount equal to the stated or
determinable amount of the primary obligation in respect of which such Guarantee
Obligation is made and (b) the maximum amount for which such guaranteeing person
may be liable pursuant to the terms of the instrument embodying such Guarantee
Obligation, unless such primary obligation and the maximum amount for which such
guaranteeing person may be liable are not stated or determinable, in which case
the amount of such Guarantee Obligation shall be such guaranteeing person's
maximum reasonably anticipated liability in respect thereof as determined by the
Banks in good faith.
"Guarantor" individually means any Person who guarantees
payment of the Obligations from time to time, including without limitation any
one of the following corporations, each of which is also a Subsidiary for the
purposes of this Agreement, and "Guarantors" means all of such corporations from
time to time jointly and severally:
(A) Nova Factor, Inc., a Tennessee corporation;
(B) Southern Health Systems, Inc., a Tennessee corporation;
(C) Horizon Health Systems, Inc., a Tennessee corporation.
"Hazardous Materials" means any hazardous, toxic or dangerous
chemical, substance, waste or material defined as such in any of the
Environmental Laws, and petroleum, petroleum products, oil, asbestos and PCB's.
"Horizon" means Horizon Health Systems, Inc., a Tennessee
corporation.
"Horizon Acquisition" means the purchase of all the
outstanding stock of Horizon by Borrower pursuant to that certain Stock Purchase
Agreement by and among Borrower, Dianne Martz, A.B. Charlton and Horizon Health
Systems, Inc., dated June 5, 1997 for a purchase price not to exceed
$32,000,000, subject to closing adjustments as therein set forth.
9
<PAGE>
"Indebtedness" means, as to the Borrower or any Subsidiary,
all items of indebtedness, obligation or liability, whether matured or
unmatured, liquidated or unliquidated, direct or contingent, joint or several,
including without limitation:
(A) All indebtedness guaranteed, directly or
indirectly, in any manner, or endorsed (other than for collection or deposit in
the ordinary course of business) or discounted with recourse;
(B) All indebtedness in effect guaranteed, directly
or indirectly, through agreements, contingent or otherwise: (1) to purchase such
indebtedness; or (2) to purchase, sell or lease (as lessee or lessor) property,
products, materials or supplies or to purchase or sell services, primarily for
the purpose of enabling the debtor to make payment of such indebtedness or to
assure the owner of the indebtedness against loss; or (3) to supply funds to or
in any other manner invest in the debtor;
(C) All indebtedness secured by (or for which the
holder of such indebtedness has a right, contingent or otherwise, to be secured
by) any mortgage, deed of trust, pledge, lien, security interest or other charge
or encumbrance upon property owned or acquired subject thereto, whether or not
the liabilities secured thereby have been assumed; and
(D) All indebtedness incurred as the lessee of
facilities, goods or services under leases that, in accordance with generally
accepted accounting principles consistently applied, should not be reflected on
the Borrower's or any Subsidiary's balance sheet.
"Interest Expense" means, with respect to any Person for any
period of determination, the gross interest expenses of such Person and its
Subsidiaries net of any interest income determined in accordance with generally
accepted accounting principles consistently applied as shown on their income
statement.
"Interest Payment Date" shall mean, as to any Loan, the last
day of the Interest Period applicable to such Loan and, in addition, in the case
of a Eurodollar Loan with an Interest Period of six (6) months' duration, each
day which is three (3) months, or a whole multiple thereof, after the first day
of such Interest Period and the last day of such Interest Period.
"Interest Period" shall mean: (a) as to any Eurodollar Loan,
the period commencing on the date of such Eurodollar Loan and ending on the
numerically corresponding day (or, if there is no numerically corresponding day,
on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter,
as the Borrower may elect, and (b) as to any Floating Rate Loan, the period
commencing on the date of such Loan and ending on the earliest of (i) the first
(1st) day of the next succeeding calendar month, and (ii) the Loan Termination
Date, as applicable; provided, however, that (x) if any Interest Period would
end on a day that shall not be a Business Day, such Interest Period shall be
extended to the next succeeding Business Day unless, with respect to Eurodollar
Loans only, such next succeeding Business Day would fall in the next calendar
month, in which case such Interest Period shall end on the next preceding
10
<PAGE>
Business Day and (y) no Interest Period with respect to any Loan shall end later
than the Loan Termination Date. Interest shall accrue from and including the
first day of an Interest Period to but excluding the last day of such Interest
Period.
"Interest Rate and Foreign Exchange Contracts" means interest
rate and foreign exchange swap agreements, interest rate cap agreements,
interest rate collar agreements, interest rate and foreign exchange insurance
and other agreements or arrangements designed to provide protection against
fluctuations in interest rates and currency exchange rates.
"IPO" means a public offering by Borrower pursuant to a filed
registration statement of any series of common stock of Borrower under the
Securities Act of 1933, as amended.
"Issuing Bank" means NationsBank of Tennessee, N.A. or any
successor thereto, as the issuer of Letters of Credit under Paragraph 2.3,
together with its successors and assigns in each capacity; provided that no
successor or assign may have a letter of credit risk rating less than that
accorded to letters of credit issued by NationsBank or its affiliates.
"Laws" means all ordinances, statutes, rules, regulations,
orders, injunctions, writs or decrees of any government or political subdivision
or agency thereof, or any court or similar entity established by any thereof.
"Letter of Credit" shall have the meaning assigned to such
term in Paragraph 2.3.
"Letter of Credit Documents" means, with respect to any Letter
of Credit, collectively, any application for any Letter of Credit and any other
agreements, instruments, guarantees or other documents (whether general in
application or applicable only to such Letter of Credit) governing or providing
for (a) the rights and obligations of the parties concerned or at risk with
respect to such Letter of Credit or (b) any collateral security for any of such
obligations.
"Letter of Credit Interest" means, for each Bank, such Bank's
participation interest (or, in the case of the Issuing Bank, the Issuing Bank's
retained interest) in the Issuing Bank's liability under Letters of Credit and
such Bank's rights and interests in Reimbursement Obligations and fees, interest
and other amounts payable in connection with Letters of Credit and Reimbursement
Obligations.
"Letter of Credit Liability" means, without duplication, at
any time and in respect of any Letter of Credit, the sum of (a) the undrawn face
amount of such Letter of Credit plus (b) the aggregate unpaid principal amount
of all Reimbursement Obligations of the Borrower at such time due and payable in
respect of all drawings made under such Letter of Credit. For purposes of this
Agreement, a Bank (other than the Issuing Bank) shall be deemed to hold a Letter
of
11
<PAGE>
Credit Liability in an amount equal to its participation interest in the
related Letter of Credit under Paragraph 2.3, and the Issuing Bank shall be
deemed to hold a Letter of Credit Liability in an amount equal to its retained
interest in the related Letter of Credit after giving effect to the acquisition
by the Banks (other than the Issuing Bank) of their participation interests
under Paragraph 2.3.
"LIBO Rate" means, with respect to any Eurodollar Loan for any
Interest Period, the interest rate per annum (rounded upwards, if necessary, to
the next higher 1/100 of 1%) at which dollar deposits approximately equal in
principal amount to such Eurodollar Loan and with a maturity comparable to such
Interest Period are offered to first-class banks in immediately available funds
in the London Interbank Market for Eurodollars at approximately 12:00 noon,
Nashville time, on the date two (2) Business Days prior to the commencement of
such Interest Period, as determined by the Agent pursuant to the TELERATE
Reporting System.
"Loan" means any funds which any Bank has advanced or will
advance to the Borrower pursuant to this Agreement, and "Loans" means all such
advances by all Banks.
"Loan Documents" means this Agreement, the Notes, the Fee
Letter, the Letter of Credit Documents, and the Collateral Documents, or any
other document executed or delivered by or on behalf of the Borrower or any
Subsidiary evidencing or securing the Obligations.
"Loan Termination Date" means October 31, 1999.
"Majority Banks" means, at any time there are no more than two
(2) Banks hereunder, those Banks having one hundred (100%) percent or more of
the aggregate unpaid principal amount of the outstanding Loans, and, at any time
there are more than two (2) Banks hereunder, those Banks having sixty-six and
two-thirds percent (66-2/3%) or more of the aggregate outstanding principal
amount of the outstanding Loans.
"Material Adverse Change" means a material adverse change in
the business or conditions (financial or otherwise) or in the results of
operations of the Borrower and its Subsidiaries (unless otherwise indicated),
taken as a whole as reasonably determined in good faith by the Majority Banks.
"Material Adverse Effect" means, when referring to the taking
of an action or the omission to take an action, that such action, if taken, or
omission, would have a material adverse effect on the business, condition
(financial or otherwise) or results of operations of the Borrower and its
Subsidiaries (unless otherwise indicated), or might materially impair the value
of the Collateral, each taken as a whole as reasonably determined in good faith
by the Majority Banks.
"Material Supplier Agreements" means those distribution
agreements from time to time in effect between any Subsidiary of the Borrower
and Biogen, Inc., Genzyme Corporation or Genentech, Inc. to purchase and
distribute certain specified biotech drugs manufactured by the respective
biotech drug companies.
12
<PAGE>
"NationsBank" means NationsBank of Tennessee, N.A. and its
successors.
"Non-Corporate Subsidiary" means a Subsidiary that is other
than a corporation.
"Non-Corporate Unperfected Subsidiary" means a Non-Corporate
Subsidiary, Borrower's interest in which is not subject to a perfected security
interest to secure the Obligations.
"Note" means a promissory note substantially in the form of
Exhibit A attached hereto, duly executed and delivered to any Bank by Borrower
and payable to the order of a Bank in the amount of one or more of its
Commitments, including any amendment, modification, renewal, extension, or
replacement thereof, and "Notes" means the Notes payable to each of the Banks
collectively.
"Note Purchase Agreement" means that Note Purchase Agreement
among Nova Holdings, Inc., Welsh, Carson, Anderson & Stowe VII, L.P. and WCAS
Healthcare Partners, L.P. and certain partners thereof dated June 2, 1997.
"Obligations" means, respectively, all of the obligations of
the Borrower:
(A) To pay the principal of and interest on the
Notes in accordance with the terms thereof and to satisfy all of the Borrower's
other liabilities to the Banks under the Agreement, whether now existing or
hereafter incurred, matured or unmatured, direct or contingent, joint or
several, including any extensions, modifications, and renewals thereof and
substitutions therefor;
(B) To pay all Letter of Credit Liabilities,
including any Reimbursement Obligations and any other amounts owed by Borrower
under any Letter of Credit Documents;
(C) To repay to the Banks all amounts advanced by the
Banks hereunder on behalf of the Borrower, including, but without limitation,
amounts owed under Interest Rate and Foreign Exchange Contracts to one or more
of the Banks, advances for overdrafts, principal or interest payments to prior
secured parties, mortgagees, or lienors, or for taxes, levies, insurance, rent,
repairs to or maintenance or storage of any of the Collateral; and
(D) To reimburse the Agent and the Banks, on demand,
for all of the Agent's and each Banks' reasonable out-of-pocket expenses and
costs, including the reasonable fees and expenses of its counsel, in connection
with the enforcement of this Agreement and the documents required hereunder,
including, without limitation, any proceeding brought or threatened to enforce
payment of any of the obligations referred to in the foregoing paragraphs (A),
(B) and (C), or any suits or claims against any Bank whatsoever as a result of
such Bank's execution of this Agreement and making of its Loan, except as
limited by Paragraph 10.7 hereof; and in addition, to reimburse the Agent for
its expenses and attorneys' fees in connection with the preparation,
administration, amendment, modification or waiver of this Agreement and the
other Loan Documents.
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<PAGE>
"Permitted Acquisition" means any business, enterprise or
operation of any Person which is the subject of an acquisition permitted under
Paragraph 7.15.
"Permitted Acquisition Indebtedness" means purchase money
indebtedness incurred by the Borrower or any Subsidiary in connection with the
purchase of a Permitted Acquisition which Acquisition and purchase money
indebtedness is approved by the Banks pursuant to Paragraph 7.15.
"Permitted Acquisition Price" means the aggregate purchase
price of any Permitted Acquisition, including without limitation the value of
any stock, notes, assumed debt, amounts allocated to non-compete agreements and
the minimum amounts reasonably expected to be paid under any earn-out
agreements.
"Permitted Investments" means all expenditures made and all
liabilities incurred (contingent or otherwise) by any Borrower or any Subsidiary
for:
(A) obligations issued or guaranteed as to principal and
interest by the United States of America and having a maturity of not more than
twelve (12) months from the date of purchase;
(B) certificates of deposit, issued by banks organized under
the laws of the United States of America or any State thereof and foreign
subsidiaries of such banks, having a rating of not less than A or its equivalent
by Standard & Poor's Corporation, or its successor;
(C) commercial paper or finance company paper which is rated
not less than prime-one or A-1 or their equivalents by Moody's Investor
Services, Inc. or Standard & Poor's Corporation or their successors;
(D) repurchase agreements related to an investment of the type
described in Clause (A) above, provided that the counter-party thereto is a
government securities dealer designated by the Federal Reserve Bank of New York
as a "Reporting Dealer" and whose financial statements indicate that it has a
capital of at least $50,000,000.00 and that the investment which is the subject
of such repurchase agreement shall be at all times during the term of the
repurchase agreement in the possession of the Borrower (or the Agent) or the
interest of such Borrower therein shall be appropriately recorded in accordance
with the United States Federal Regulations regarding Book Entry Treasury
Securities;
(E) bankers acceptances issued by banks that qualify for the
NationsBank of Tennessee, N.A. Federal Funds List, not to exceed $500,000.00 per
issuer and a maximum maturity of 180 days;
(F) Eurodollar time deposits with banks having a minimum
rating by Keefe Bankwatch of A for domestic banks and I for foreign banks,
provided the maximum deposit with any bank does not exceed $500,000.00, the
concentration in any individual country does not exceed $250,000.00 or 25% of
the total amount of all Permitted Investments, whichever is
14
<PAGE>
greater, and the aggregate amount of Eurodollar time deposits does not exceed
$500,000.00 or 75% of the amount of all Permitted Investments, whichever is
greater;
(G) money market funds which invest in money market
instruments consistent with the guidelines herein set forth for other Permitted
Investments provided the same do not exceed 25% of the total amount of all
Permitted Investments nor exceed $500,000.00 in any one money market fund;
(H) state and municipal general obligation bonds rated A or
better by S & P or Moody's for long term issues and Moody's MIG-1 for short term
issues, provided no security shall have a maturity in excess of one year, no
more than $500,000.00 shall be invested with any single issuer, and the
concentration in any one type of issue (states, local governments, school
districts, municipal power authorities, hospitals, housing authorities, etc.)
shall be limited to 25% of the total amount of all Permitted Investments or
$250,000.00, whichever is greater; and
(I) other investments approved by the Banks in writing in
advance.
"Permitted Liens" means:
(A) Liens in favor of the Agent for the benefit
of the Banks;
(B) Security interests in assets (not stock) granted
to secure equipment notes and capitalized leases provided such security
interests secure not more than the amount of the purchase price financed
thereby, and provided further that the purchase is either permitted by Paragraph
7.16 or approved by the Banks pursuant to Paragraph 7.15 in connection with a
Permitted Acquisition;
(C) Liens for taxes, assessments, or similar charges,
incurred in the ordinary course of business that are not yet delinquent;
(D) Pledges or deposits made in the ordinary course
of business to secure payment of workmen's compensation, or to participate in
any fund in connection with workmen's compensation, unemployment insurance,
old-age pensions or other social security programs;
(E) Liens of mechanics, materialmen, warehousemen,
carriers, or other like liens, securing obligations incurred in the ordinary
course of business that are not yet delinquent;
(F) Good faith pledges or deposits made in the
ordinary course of business to secure performance of bids, tenders, contracts
(other than for the repayment of borrowed money) or leases, not in excess of ten
percent (10%) of the aggregate amount due thereunder, or to secure statutory
obligations, or surety, appeal, indemnity, performance or other similar bonds
required in the ordinary course of business;
15
<PAGE>
(G) Encumbrances consisting of zoning restrictions,
easements or other restrictions on the use of real property, none of which
materially impairs the use of such property by the Borrower or any Subsidiary in
the operations of its business, and none of which is violated in any material
respect by existing or proposed structures or land use;
(H) Existing liens set forth or described on Exhibit
C, attached hereto and made a part hereof, and renewals thereof;
(I) Landlord's liens on Fixtures retained in any
lease;
(J) The following, if the validity or amount
thereof is being contested in good faith by appropriate and lawful proceedings,
so long as levy and execution thereon have been stayed and continue to be
stayed; if Borrower or any Subsidiary has posted such security as may be
required by Laws or as is reasonably satisfactory to Banks; and if the following
do not, in the aggregate, materially detract from the value of the properties of
the Borrower or any Subsidiary taken as a whole, or materially impair the use
thereof in the operation of their respective businesses:
(1) Claims or liens for taxes,
assessments or charges due and payable and subject to interest or penalty;
(2) Claims, liens and encumbrances upon,
and defects of title to, real or personal property, including any attachment of
personal or real property or other legal process prior to adjudication of a
dispute on the merits;
(3) Claims or liens of mechanics,
materialmen, warehousemen, carriers, or other like liens; and
(4) Adverse judgments on appeal.
"Person" means any individual, corporation, partnership,
association, joint-stock company, estate, trust, unincorporated organization,
limited liability company, joint venture, court or government or political
subdivision or agency thereof.
"Pledged Stock" means the stock and other interests pledged
pursuant to the Stock Pledge Agreements described in Paragraph 3.1.
"Pledgor" means the Borrower and each other owner of the
Pledged Stock as set forth in the Stock Pledge Agreements.
"Prime Rate" means that rate announced by NationsBank of
Tennessee, N.A. from time to time as the NationsBank Prime Rate. No
representation is made herein that the NationsBank Prime Rate is the lowest rate
at which any Bank will lend to its customers.
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<PAGE>
"Pro-Forma Effect" means, in making any calculation to
determine if Borrower and its Subsidiaries are in compliance with Subparagraphs
6.17(B) and (C) or to determine if the conditions precedent to an Acquisition
Advance under Subparagraph 7.15(A) have been met, that the calculation will be
made assuming that (a) any Permitted Acquisition made during the twelve-month
period ending on the date of determination (the "Reference Period") was made on
the first day of the Reference Period, and (b) any Indebtedness associated with
(a) incurred during the Reference Period or to be incurred as of the date of
determination was made or incurred on the closing date of the Permitted
Acquisition. Acquisition Cash Flow for the Reference Period associated with the
assets acquired or to be acquired in any Permitted Acquisition will be included
in the calculation of Cash Flow for Borrower and its Subsidiaries. Any
Indebtedness incurred or to be incurred by Borrower or any Subsidiary in
connection with the consummation of any Permitted Acquisition will be assumed to
have been incurred on the closing date of the Permitted Acquisition. All
Interest Expense actually incurred during the Reference Period whether or not
attributable to Indebtedness assumed, refinanced or paid off in the Acquisition,
will be included in the calculation for which a Pro-Forma Effect is being given.
"Quarterly Dates" means the first day of each January, April,
July, or October, the first of which shall be the first such day after July 1,
1997.
"Quarterly Period" means (a) the Period from the Closing Date
to the next succeeding Quarterly Date and (b) thereafter, any period from the
first day after a Quarterly Date to the next succeeding Quarterly Date.
"Records" means correspondence, memoranda, tapes, books,
discs, paper, magnetic storage and other documents or information of any type,
whether expressed in ordinary or machine language.
"Reimbursement Obligations" means, at any time, the obligation
of the Borrower then outstanding, or which may thereafter arise in respect of
any or all Letters of Credit then outstanding, to reimburse amounts paid by the
Issuing Bank and the other Banks with respect to their Letter of Credit
Interests in respect of any drawings under a Letter of Credit.
"Rental Expense" means, with respect to the Borrower and its
Subsidiaries for any period, the gross real estate rental expenses of the
Borrower and its Subsidiaries for such period determined in accordance with
generally accepted accounting principles consistently applied, excluding all
personal property rental expense.
"Revolving Loan" means Loans made pursuant to
Paragraph 2.1(A).
"Shareholders' Equity" means, at any time, the accounts
required to be set forth in a balance sheet of the Borrower and its
Subsidiaries, prepared in accordance with generally accepted accounting
principles consistently applied, including but not limited to: (A) the par or
stated value of all outstanding capital stock, including preferred stock that is
not redeemable prior to the then stated Loan Termination Date and any accrued
dividends thereon; (B) capital surplus, including additional paid-in capital;
and (C) retained earnings.
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<PAGE>
"Subordinated Indebtedness" means all Indebtedness incurred
pursuant to the Note Purchase Agreement and any Indebtedness incurred at any
time by the Borrower or any Subsidiary, the repayment of which is subordinated
to the Obligations in form and manner satisfactory to the Banks. All existing
Subordinated Indebtedness is so specified in Exhibit D attached hereto.
"Subsidiary" means any corporation, partnership, joint
venture, or limited liability company of which fifty percent (50%) or more of
the outstanding voting securities or other ownership interests shall, at the
time of determination, be owned directly, or indirectly through one or more
intermediaries, by the Borrower, and "Subsidiaries" means all such entities
together with each of the Guarantors including Horizon, if different.
"Subsidiary Advances" means any advances of any kind made
(regardless of the form, whether equity or debt, cash or property) by the
Borrower or a Subsidiary to a Subsidiary, whether such advances are to fund the
purchase price of any Person that will upon the completion of the acquisition
become a Subsidiary, to fund working capital advances, or otherwise.
"Total Commitments" means from time to time the aggregate
Commitments of all of the Banks hereunder, which initially is $40,000,000,
subject to reduction as provided in Paragraph 2.5 hereof.
"UCC" means the Uniform Commercial Code as in effect on the
date hereof in the State of Tennessee, as it may be amended from time to time;
provided that if by reason of mandatory provisions of law, the perfection or the
effect of perfection or non-perfection of a security interest in any Collateral
is governed by the Uniform Commercial Code as in effect in a jurisdiction other
than Tennessee, "UCC" means the Uniform Commercial Code as in effect in such
other jurisdiction for purposes of the provisions hereof relating to such
perfection or effect of perfection or non-perfection.
"Unmatured Default" means an event which but for the lapse of
time or the giving of notice, or both, would constitute an Event of Default.
"Unutilized Revolving Commitment" means, with respect to any
Bank at any time, such Bank's maximum Commitment at such time without regard to
any Borrowing Base limitations less the sum of (i) the aggregate principal
amount of all Revolving Loans made by such Bank that are outstanding at such
time, and (ii) such Bank's Commitment Percentage of all Letter of Credit
Liabilities at such time.
"Working Capital" means those advances used for general
corporate purposes in the ordinary course of business, but excluding the costs
of the Acquisition of any Person, permitted or otherwise.
The definitions in this Section I shall apply equally to both
the singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the
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<PAGE>
corresponding masculine, feminine and neuter forms. The words "include",
"includes" and "including" shall be deemed to be followed by the phrase
"without limitation". All references herein to Articles, Sections, Exhibits
and Schedules shall be deemed references to Articles and Sections of, and
Exhibits and Schedules to, this Agreement unless the context shall otherwise
require. Except as otherwise expressly provided herein, all terms of an
accounting or financial nature shall be construed in accordance with
generally accepted accounting principles, as in effect from time to time;
provided however, in determining compliance with any covenant set forth in
Section VI, such term shall be construed in accordance with generally
accepted accounting principles as in effect on the date of this Agreement
consistently applied.
SECTION II. THE LOANS
---------------------
2.1 The Revolving Loan Commitments. (A) Subject to the
terms and conditions of and relying on the representations, warranties and
covenants contained in this Agreement, through the day prior to the Loan
Termination Date, each Bank agrees to fund severally but not jointly to the
Borrower the amount set out below their names, which for all of the Banks
shall be initially an aggregate maximum principal amount of up to Forty
Million Dollars ($40,000,000.00), provided the principal balance of the
Revolving Loans outstanding shall not exceed the Borrowing Base. The maximum
Commitment of each of the Banks and its respective percentage of the Total
Commitments (the "Commitment Percentage" of each Bank) are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Bank Acquisition Loan Commitment
Commitment Amount Percentage
- ---------------------------------------------------------------------------------------
<S> <C> <C>
NationsBank of Tennessee, N.A. $25,000,000 62.50%
- ---------------------------------------------------------------------------------------
First Tennessee Bank National Association $15,000,000 37.50%
- ---------------------------------------------------------------------------------------
TOTAL COMMITMENTS $40,000,000 100%
- ---------------------------------------------------------------------------------------
</TABLE>
The Revolving Loans shall be evidenced by the (i) Twenty Five Million Dollar
($25,000,000.00) Note of Borrower to NationsBank of Tennessee, N.A., and (ii)
the Fifteen Million Dollar ($15,000,000.00) Note of Borrower to First Tennessee
Bank National Association, which Notes are substantially in the form set forth
in Exhibit A attached hereto, with each Note payable in accordance with its
terms. The Borrower may obtain Loans, repay without penalty or premium except as
set forth in Paragraph 2.9 below and reborrow hereunder, from the date of this
Agreement up to the day prior to the Loan Termination Date, the then available
Revolving Loan Commitments or any lesser sum which is in the minimum amount of
Two Hundred Fifty Thousand Dollars ($250,000.00) and in an integral multiple of
Fifty Thousand Dollars ($50,000.00) if in excess thereof; provided, however,
Borrower may not borrow more than two
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<PAGE>
(2) times in any calendar week. Each advance of the Revolving Loans hereunder
shall be made by each Bank ratably in accordance with its respective
Commitment Percentage of such advance.
(B) The obligations of each Bank to make advances to
Borrower pursuant to its respective Loan Commitment shall not exceed at any time
such Bank's Commitment Percentage multiplied by the applicable Borrowing Base as
in effect during the term of this Agreement. The Borrowing Base shall be
adjusted on July 31, 1997 and on each Borrowing Base Adjustment Date thereafter,
with the initial Borrowing Base amount in effect from the date hereof through
July 31, 1997 being $32,400,000.00. If at any time the aggregate outstanding
principal balances of the Loans exceeds the Borrowing Base, then Borrower shall
immediately pay to Agent for the account of the Bank any such excess principal
to reduce such outstanding principal balances to the applicable Borrowing Base
amount, subject to any penalty set forth in Paragraph 2.9.
(C) Revolving Loan advances may be used by the
Borrower to refinance the existing Indebtedness of Nova Factor, Inc. on the date
hereof and for Permitted Acquisitions, Working Capital, Reimbursement
Obligations and other general corporate purposes; provided however, no more than
an aggregate of Twenty Million Dollars ($20,000,000.00) may be outstanding at
any one time for Working Capital and Letter of Credit Liabilities; and provided
further, that the Banks shall have no obligation to fund if the conditions
precedent in Paragraph 3.2 below have not been satisfied.
(D) The failure of any Bank to make any advances
hereunder pursuant to its Revolving Loan Commitment shall not relieve any other
Bank of its obligation, if any, hereunder to make its advances pursuant to its
Revolving Loan Commitment. However, no Bank shall be responsible for any other
Bank's failure or refusal to make any advances pursuant to such other Bank's
Revolving Loan Commitment.
(E) All outstanding principal and interest on each
such Revolving Loan shall be due and payable in full in a balloon installment on
the Loan Termination Date. In addition, all outstanding principal in excess of
the then available Borrowing Base shall be due on demand.
2.2 Borrowing Notices, Interest Rates and Payments of
Interest.
(A) Loans made hereunder may be either Eurodollar
Loans, Floating Rate Loans, or a combination thereof; provided, Eurodollar Loans
shall be in the minimum amount of $1,000,000.00 and shall be in an integral
multiple of $100,000.00.
(B) The Borrower shall give the Agent irrevocable
notice in the form attached hereto as Exhibit B (a "Borrowing Notice") not later
than 10:00 a.m. Nashville time at least three (3) Business Days prior to the
date of any requested disbursement of Eurodollar Loans and one (1) Business Day
prior to any requested disbursement of Floating Rate Loans. Each Borrowing
Notice shall be filled in and signed and may be made by telecopier, telex or
cable in addition to the means set forth for giving notice in Paragraph 10.5.
Each Borrowing
20
<PAGE>
Notice shall specify the requested date of such requested disbursement; the
aggregate amount of such disbursement; the type of Loan, i.e., Eurodollar or
Floating Rate; and if a Eurodollar Loan, the designated Interest Period. The
Agent shall promptly advise the other Banks of any Borrowing Notice given
pursuant to this Subparagraph and each Bank's portion of the requested Loan.
Not later than noon (12:00 a.m.) Nashville time on each disbursement date,
and subject to the terms and conditions hereof, Agent will credit the
proceeds of the Loans received by Agent from the Banks to the Borrower's
deposit account with Agent. Each such Borrowing Notice shall obligate the
Borrower to accept the Loan disbursement requested thereby.
(C) The Borrower shall have the right at any time, on
prior irrevocable written, faxed or telex notice to the Agent not later than
10:00 a.m., Nashville time, three (3) Business Days prior to the date of any
requested conversion, to convert any Floating Rate or Eurodollar Loan into a
Loan of another type, or to continue any Eurodollar Loan for another Interest
Period (specifying in each case the Interest Period to be applicable thereto),
subject in each case to the following:
(1) Each conversion or continuation
shall be made prorata among the Banks in accordance with the respective
principal amounts of the Loan converted or continued;
(2) No Eurodollar Loan shall be
converted at any time other than at the end of the Interest Period applicable
thereto;
(3) Each conversion shall be effected by
applying the proceeds of the new Eurodollar and/or Floating Rate Loan, as the
case may be, to the Loan (or portion thereof) being converted;
(4) The number of Eurodollar Loans
outstanding at one time may not exceed six (6); and
(5) No Interest Period may be selected
for any Eurodollar Loan that would end later than a repayment date occurring on
or after the first day of such Interest Period if the aggregate outstanding
amount of Eurodollar Loans with Interest Periods ending prior to such repayment
date plus the aggregate outstanding amount of all Floating Rate Loans is not
equal to or greater than the principal amount(s) of the Loan(s) to be paid on
such repayment date.
(D) Each notice pursuant to this Paragraph shall be
irrevocable and shall refer to this Agreement and specify (1) the identity and
principal amount of the particular Loan that the Borrower requests be converted
or continued, (2) if such notice requests conversion, the date of such
conversion (which shall be a Business Day), and (3) if a Loan is to be converted
to a Eurodollar Loan or a Eurodollar Loan is to be continued, the Interest
Period with respect thereto. In the event that the Borrower shall not give
notice to continue any Eurodollar Loan for a subsequent period, such Eurodollar
Loan (unless repaid) shall automatically be converted into a Floating Rate Loan.
If the Borrower shall fail to specify in any Borrowing Notice the
21
<PAGE>
type of borrowing or, in the case of a Eurodollar Loan, the applicable
Interest Period, the Borrower will be deemed to have requested a Floating
Rate Loan. If Agent reasonably believes that any failure by Borrower to
specify the type of borrowing or the applicable Interest Period shall have
resulted from failure of communications equipment or clerical error, then
prior to funding any such borrowing the Agent shall use reasonable efforts to
obtain confirmation from Borrower of the contents of such Borrowing Notice;
however, in the absence of prompt confirmation by Borrower which specifies
the type of borrowing and/or the applicable Interest Period, the Borrower
will be deemed to have requested a Floating Rate Loan. Notwithstanding
anything to the contrary contained above, if an Event of Default shall have
occurred and be continuing, no Eurodollar Loan may be continued and no
Floating Rate Loan may be converted into a Eurodollar Loan.
(E) Interest shall be charged and paid on each Loan
from the date of the initial advance thereunder until such Loan is paid or
converted as follows:
(1) For a Floating Rate Loan, at an
annual rate equal to the Prime Rate plus the Applicable Prime Rate Margin, said
rate to change contemporaneously with any change in the Prime Rate.
(2) For a Eurodollar Loan, at a rate
equal to the LIBO Rate plus the Applicable LIBO Rate Margin.
(3) The Borrower shall pay to any Bank,
if and so long as such Bank shall be required under regulations of the Board of
Governors of the Federal Reserve System to maintain reserves with respect to
liabilities or assets consisting of or including Eurodollar Liabilities,
additional interest on the unpaid principal amount of each Eurodollar Loan, from
the date of such advance until said principal amount is paid in full, at an
interest rate per annum equal at all times to the remainder obtained by
subtracting (i) the LIBO Rate for the Interest Period from (ii) the rate
obtained by dividing the LIBO Rate by a percentage equal to 100% minus the
Eurodollar Rate Reserve Percentage for such Interest Period, payable on each
date on which interest is payable. Such additional interest shall be determined
by such Bank who shall notify Borrower thereof.
(4) Interest for both Floating Rate
Loans and Eurodollar Loans shall be computed on the basis of a 360-day year
counting the actual number of days elapsed, and shall be due and payable without
notice on each Interest Payment Date. On each change in interest rate pursuant
to this Agreement, the rate of interest charged as a result of such change shall
not exceed the maximum rate of interest allowed by applicable Laws at the time
of such change.
(F) Notwithstanding the foregoing, upon the
occurrence of an Event of Default interest may be charged at the Default Rate as
defined and set forth in the Notes if the Majority Banks so elect, regardless of
whether the Majority Banks have elected to exercise any other remedies under
Section VIII hereof, including without limitation acceleration of the maturity
of the outstanding principal of the Notes. All such interest shall be paid at
the time of
22
<PAGE>
and as a condition precedent to the curing of any such default to
the extent any right to cure is given.
(G) All agreements herein made are expressly limited
so that in no event whatsoever shall the interest and loan charges agreed to be
paid to the Banks for the use of the money advanced or to be advanced pursuant
to this Agreement exceed the maximum amounts collectible under applicable laws
in effect from time to time. There is no intent to evade applicable Laws
pertaining to usury and applicable loan charges, and if for any reason
whatsoever the interest or loan charges paid or contracted to be paid in respect
of the Loans shall exceed the maximum amounts collectible under applicable laws
in effect from time to time, then, ipso facto, the obligation to pay such
interest and/or loan charges shall be reduced to the maximum amounts collectible
under applicable laws in effect from time to time, and any amounts collected by
the Banks that exceed such maximum amounts shall be applied to the reduction of
the principal balance of the Loans and/or refunded to Borrower so that at no
time shall the interest or loan charges paid or payable in respect of the Loans
exceed the maximum amounts permitted from time to time by applicable law. This
provision shall control every other provision herein and in any and all other
agreements and instruments now existing or hereafter arising between Borrower
and the Banks with respect to the Loans.
2.3 Letters of Credit. Subject to the terms and
conditions of this Agreement, the Commitments may be utilized, upon the
request of the Borrower, in addition to the Loans provided for by Paragraph
2.1, for the issuance by the Issuing Bank of letters of credit ("Letters of
Credit") for the account of the Borrower; provided that in no event shall (i)
the aggregate amount of all Letter of Credit Liabilities, together with the
aggregate principal amount of the Loans exceed the aggregate amount of the
Commitments as in effect from time to time, (ii) the outstanding aggregate
amount of all Letter of Credit Liabilities and Loan advances for Working
Capital exceed $20,000,000.00 and (iii) the expiration date of any Letter of
Credit extend beyond the earlier of the Loan Termination Date and the date
twelve months following the issuance of such Letter of Credit. The following
additional provisions shall apply to Letters of Credit:
(A) The Borrower shall give the Agent at least three
Business Days' irrevocable prior notice (effective upon receipt) specifying the
Business Day (which shall be no later than 30 days preceding the Loan
Termination Date) each Letter of Credit is to be issued and describing in
reasonable detail the proposed terms of such Letter of Credit (including its
beneficiary) and the nature of the transactions or obligations proposed to be
supported (including whether such Letter of Credit is to be a commercial letter
of credit or a standby letter of credit). The Borrower shall be the account
party for each Letter of Credit, including Letters of Credit issuable to a
beneficiary having a claim or potential claim against a Subsidiary of the
Borrower.
(B) On each day during the period commencing with the
issuance by the Issuing Bank of any Letter of Credit and until such Letter of
Credit shall have expired or been terminated or, if drawn upon, until the
resulting Reimbursement Obligations have been reimbursed in full by the Borrower
(whether by a borrowing under this agreement or otherwise), the Commitment of
each Bank shall be deemed to be utilized for all purposes of this Agreement
23
<PAGE>
in an amount equal to such Bank's Commitment Percentage of the then Letter of
Credit Liabilities associated with such Letter of Credit. Each Bank (other
than the Issuing Bank) agrees that, upon the issuance of any Letter of Credit
it shall automatically acquire a participation in the Issuing Bank's
liability under such Letter of Credit in an amount equal to such Bank's
Commitment Percentage of such liability, and each Bank (other than the
Issuing Bank) thereby shall absolutely, unconditionally and irrevocably
assume, as primary obligor and not as surety, and shall be unconditionally
obligated to the Issuing Bank to pay and discharge when due, its Commitment
Percentage of the Issuing Bank's liability under such Letter of Credit.
(C) Upon receipt from the beneficiary of any
Letter of Credit or any demand for payment under such Letter of Credit, the
Issuing Bank shall promptly notify the Borrower (through the Agent) of the
amount to be paid by the Issuing Bank as a result of such demand and the date on
which payment is to be made by the Issuing Bank to such beneficiary in respect
of such demand. The Borrower hereby unconditionally agrees to pay and reimburse
the Agent for the account of the Issuing Bank and the other Banks with respect
to their Letter of Credit Interest for the amount of each demand for payment
under such Letter of Credit at or prior to the date on which payment is to be
made by the Issuing Bank to the beneficiary under such Letter of Credit, without
presentment, demand, protest or other formalities of any kind. Any amounts not
so paid or borrowed as set forth in (D) below shall bear interest at the rate(s)
specified in the Letter of Credit Documents or, if higher, at the rate(s)
specified on the Notes (including the Default Rate, if applicable).
(D) Forthwith upon its receipt of a notice
referred to in clause (C) of this Paragraph 2.3, the Borrower shall advise the
Agent whether or not the Borrower intends to borrow under Paragraph 2.1 to
finance its obligation to reimburse the Issuing Bank for the amount of the
related demand for payment and, if it does, submit a notice of such borrowing as
provided in Paragraph 2.2. In the event that the Borrower fails to so advise the
Agent, and if the Borrower fails to reimburse the Issuing Bank for a demand for
payment under a Letter of Credit by the date of such payment, the Agent shall
give each Bank prompt notice of the amount of the demand for payment, specifying
such Bank's Commitment Percentage of the amount of the related demand for
payment, and the Borrower shall be deemed in default hereunder for breaching
Subparagraph 2.3(C) above.
(E) Each Bank (other than the Issuing Bank)
shall pay to the Agent for the account of the Issuing Bank in Dollars and in
immediately available funds, the amount of such Bank's Commitment Percentage of
any payment under a Letter of Credit upon notice by the Agent to such Bank
requesting such payment and specifying such amount as provided in clause (D) of
this Paragraph 2.3. Each such Bank's obligation to make such payments to the
Agent for the account of the Issuing Bank under this clause (E), and the Issuing
Bank's right to receive the same, shall be absolute and unconditional and shall
not be affected by any circumstance whatsoever, including (i) the failure of any
other Bank to make its payment under this clause (E), the financial condition of
the Borrower (or any other account party), the existence of any Default or (ii)
the termination of the Commitments. Each such payment to the Issuing Bank shall
be made without any offset, abatement, withholding or reduction whatsoever.
24
<PAGE>
(F) Upon the making of each payment by a Bank
to the Issuing Bank pursuant to clause (E) above in respect of any Letter of
Credit, such Bank shall, automatically and without any further action on the
part of the Agent, the Issuing Bank or such Bank, acquire (i) a participation in
any amount equal to such payment in the Reimbursement Obligation owing to the
Issuing Bank by the Borrower under this Agreement and under the Letter of Credit
Documents relating to such Letter of Credit and (ii) a participation in a
percentage equal to such Bank's Commitment Percentage in any interest or other
amounts payable by the Borrower under such Letter of Credit Documents and the
other Loan Documents in respect of such Reimbursement Obligation (other than the
commissions, charges, costs and expenses payable to the Issuing Bank pursuant to
clause (G) of this Paragraph 2.3). Upon receipt by the Issuing Bank from or for
the account of the Borrower of any payment in respect of any Reimbursement
Obligation or any such interest or other amount (including by way of set-off or
application of proceeds of any collateral security) the Issuing Bank shall
promptly pay to the Agent for the account of each Bank who shall have previously
assumed a participation in such payment under clause (ii) above, such Bank's
Commitment Percentage of such payment, each such payment by the Issuing Bank to
be made in the same money and funds in which received by the Issuing Bank. In
the event any payment received by the Issuing Bank and so paid to the Banks is
rescinded or must otherwise be returned by the Issuing Bank, each Bank shall,
upon the request of the Issuing Bank (through the Agent), repay to the Issuing
Bank (through the Agent) the amount of such payment paid to such Bank, with
interest at the rate specified in clause (J) of this Paragraph 2.3.
(G) Borrower shall pay to the Agent for the
account of each Bank a letter of credit fee in respect of each Letter of Credit
on the undrawn face amount of such Letter of Credit at its date of issuance and
on each Quarterly Date occurring thereafter until such Letter of Credit is drawn
in full, expires or is terminated (such fee to be non-refundable, to be paid in
advance on its issuance for the period of time until the next Quarterly Date and
thereafter on each Quarterly Date and on the Loan Termination Date) in an amount
equal to 2.5% per annum or, for any Quarterly Period prior to the first day of
which (and in any event no later than 45 days after the end of the fiscal
quarter most recently ended) the Borrower has delivered to the Agent a
compliance certificate of the Borrower calculating the Funded Debt to Cash Flow
ratio as set forth in Paragraph 6.17(C) below for the last day of such fiscal
quarter (other than such portion of such period during which a Default shall be
continuing), the percentage per annum set forth below opposite the Funded Debt
to Cash Flow ratio for the Borrower reflected on such certificate:
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<PAGE>
<TABLE>
<CAPTION>
Funded Debt to Cash Flow Percentage Rate
- ------------------------ ---------------
<S> <C>
Greater than 3.0 to 1.0 2.5% per annum
Equal to or Less than 3.0:1.0 and Greater than 2.25:1.0 2.0% per annum
Equal to or Less than 2.25:1.0 and Greater than 1.5:1.0 1.5% per annum
Equal to or Less than 1.5 to 1.0 0.75% per annum
</TABLE>
All calculations of Letter of Credit fees shall be based on a 360 day year
counting the actual number of elapsed days. Notwithstanding the foregoing,
following the occurrence of an Event of Default and for so long as any such
Default remains uncured, the Letter of Credit fee otherwise applicable as
hereinabove set forth shall be increased by two percent (2%) per annum.
(H) Upon the request of any Bank from time to
time, the Issuing Bank shall deliver any information reasonably requested by
such Bank with respect to each Letter of Credit then outstanding.
(I) The issuance by the Issuing Bank of each
Letter of Credit shall be subject, in addition to the conditions precedent set
forth in Paragraph 3.2, to the conditions precedent that (i) such Letter of
Credit shall be in such form, contain such terms and support such transactions
as shall be satisfactory to the Issuing Bank consistent with its then current
practices and procedures with respect to letters of credit of the same type and
(ii) the Borrower shall have executed and delivered such applications,
agreements and other instruments relating to such Letter of Credit as the
Issuing Bank shall have reasonably requested consistent with its then current
practices and procedures with respect to letters of credit of the same type;
provided that in the event of any conflict between any such application,
agreement or other instrument and the provisions of this Agreement, the
provisions of this Agreement shall control.
(J) To the extent that any Bank fails to
pay any amount required to be paid pursuant to clause (E) or (F) of this
Paragraph 2.3 when due, such Bank shall pay interest to the Issuing Bank
(through the Agent) on such amount from and including such due date to but
excluding the date such payment is made (i) during the period from and including
such due date to but excluding the date three Business Days thereafter, at a
rate per annum equal to the Federal Funds Rate (as in effect from time to time)
and (ii) thereafter, at a rate per annum equal to the Prime Rate plus 1.0%.
(K) The issuance by the Issuing Bank of any
modification or supplement to any Letter of Credit shall be subject to the same
conditions applicable under this Paragraph 2.3 to the issuance of new Letters of
Credit, and no such modification or supplement shall be issued unless either (x)
the respective Letter of Credit as affected by such action would have complied
with such conditions had it originally been issued in such modified or
supplemented form or (y) each Bank shall have consented to such modification or
supplement.
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<PAGE>
(L) The obligations of the Borrower under this
Paragraph 2.3 shall be unconditional and absolute and shall not be affected,
modified or impaired, upon the happening at any time or from time to time of any
event, including any of the following, whether or not with notice to or the
consent of the Borrower:
(1) the compromise, settlement, release,
modification, amendment (whether material or otherwise) or termination of any or
all of the obligations, conditions covenants or agreements of any Person in
respect of any of the Loan Documents;
(2) the occurrence, or the failure by
the Agent, any Bank or any other Person to give notice to the Borrower of the
occurrence, of any Event of Default or any default under any of the other Loan
Documents;
(3) the waiver of the payment,
performance or observance of any of the obligations, conditions, covenants or
agreements of any Person contained in any of the Loan Documents;
(4) the extension of the time for
performance of any other obligations, covenants or agreements of any Person
under or arising out of any of the Loan Documents;
(5) the taking or the omission of any of
the actions referred to in any of the Loan Documents;
(6) any failure, omission or delay on
the part of the Agent, any Bank, the Borrower or the beneficiary of any Letter
of Credit to enforce, assert or exercise any right, remedy, power or privilege
conferred by this Agreement or any of the Loan Documents, or any other act or
acts on the part of the Agent, any Bank, the Borrower or the beneficiary of any
Letter of Credit;
(7) the voluntary or involuntary
liquidation, dissolution, sale or other disposition of all or substantially all
the assets of, the marshalling of assets and liabilities, receivership,
insolvency, bankruptcy, assignment for the benefit of creditors, reorganization,
arrangement, composition with creditors or readjustment of, or other similar
proceedings which affect, the Borrower or any other party to any of the Loan
Documents;
(8) any lack of validity or
enforceability of this Agreement, any Letter of Credit or any other Loan
Document, or any allegation of invalidity or unenforceability or any contest of
such validity or enforceability;
(9) the existence of any claim, set-off,
defense or other right which the Borrower may have at any time against the
Agent, any Bank or any beneficiary or any transferee of any Letter of Credit (or
any persons or entities for whom the Bank or any such beneficiary or transferee
may be acting), or any other Person, whether in connection with this
27
<PAGE>
Agreement or any of the other Loan Documents or any of the transactions
contemplated by any Loan Document or any unrelated transaction;
(10) any statement in any certificate or
any other document presented under any Letter of Credit proving to be forged,
fraudulent, invalid or insufficient in any respect or any such statement being
untrue or inaccurate in any respect whatsoever;
(11) payment by the Issuing Bank under
any Letter of Credit against presentation of a demand or certificate which does
not comply with the terms of such Letter of Credit;
(12) the release or discharge by
operation of law of the Borrower from the performance or observance of any
obligation, covenant or agreement contained in any of the Loan Documents; or
(13) any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing.
(M) Without affecting the Borrower's liability
under Paragraph 10.7, the Borrower agrees to indemnify each of the Issuing Bank,
the Agent and the Banks and their respective affiliates, directors, officers,
employees, attorneys and agents from, and hold each of them harmless against,
any and all losses, liabilities, damages or expenses incurred by any of them in
connection with or by reason of any actual or threatened investigation,
litigation or other proceeding (including, in respect of the Issuing Bank and
the Agent, any such investigations, litigation or other proceeding between the
Issuing Bank or the Agent and any Bank) relating to (a) the execution and
delivery of any Letter of Credit; (b) the use of the proceeds of any drawing
under any Letter of Credit; or (c) the transfer or substitution of, or payment
or failure to pay under, any Letter of Credit, including the reasonable fees and
disbursements of counsel incurred in connection with any such investigation,
litigation or other proceeding, but excluding damages, losses, liabilities or
expenses to the extent, but only to the extent, incurred by reason of (x) the
willful misconduct or gross negligence of the Issuing Bank, including without
limitation in determining whether a document presented under any Letter of
Credit complies with the terms of such Letter of Credit or (y) in the case of
the Issuing Bank, such Bank's failure to pay under any Letter of Credit after
presentation to it of documents strictly complying with the terms and condition
of such Letter of Credit. It shall not be a condition to any such
indemnification that the Issuing Bank, the Agent or any Bank shall be a party to
any such investigations, litigation or other proceeding. Nothing in this
Paragraph 2.3 is intended to limit the Borrower's payment obligations under this
Agreement.
(N) The Borrower assumes all risks of the acts
or omissions of any beneficiary of any Letter of Credit with respect to the use
of the Letter of Credit. None of the Agent, any Bank nor any of their respective
affiliates, officers, directors, employees, attorneys or agents shall be liable
or responsible for: (a) the use which may be made of the Letter of Credit or for
any acts or omissions of any beneficiary of any Letter of Credit in connection
with such Letter of Credit; (b) the validity, sufficiency or genuineness of
documents presented to the
28
<PAGE>
Issuing Bank, or of any endorsement on such documents, even if such documents
should in fact prove to be in any or all respects invalid, insufficient,
fraudulent or forged; (c) payment by the Issuing Bank against presentation of
documents which do not comply with the terms of any Letter of Credit,
including failure of any documents to bear any reference or adequate
reference to such Letter of Credit; or (d) any other circumstances whatsoever
in making or failure to make payment under any Letter of Credit; provided
that the Borrower shall have a claim against the Issuing Bank to the extent,
but only to the extent, of any direct, as opposed to consequential, damages
suffered by the Borrower which the Borrower proves were caused by (i) the
Issuing Bank's willful misconduct or gross negligence in determining whether
a document presented under any Letter of Credit complies with the terms of
such Letter of Credit or (ii) the Issuing Bank's willful failure to pay under
the Letter of Credit after presentation to it of documents strictly complying
with the terms and conditions of such Letter of Credit. In furtherance and
not in limitation of the foregoing, the Issuing Bank may accept documents
that appear on their face to be in order, without responsibility for further
investigation, regardless of any notice or information to the contrary.
2.4 Nonuse Fee. The Borrower shall pay to the Agent
for the account of each Bank a nonuse fee on the average daily Unutilized
Revolving Commitment of such Bank for the period from and including the
Closing to but not including the earlier of the date such Commitment is
terminated and the Loan Termination Date, at the rate of (a) for the first
Quarterly Period, 0.30% per annum and (b) thereafter, 0.30% per annum or, for
any Quarterly Period prior to the first day of which (and in any event no
later than 45 days after the end of the fiscal quarter most recently ended)
the Borrower has delivered to the Agent a compliance certificate of the
Borrower calculating the Funded Debt to Cash Flow ratio as set forth in
Paragraph 6.17(C) below for the last day of such fiscal quarter (other than
such portion of such period during which an Event of Default shall be
continuing), the percentage per annum set forth below opposite the Funded
Debt to Cash Flow ratio for the Borrower reflected on such certificate:
<TABLE>
<CAPTION>
Funded Debt to Cash Flow Percentage Rate
- ------------------------ ---------------
<S> <C>
Greater than 3.0 to 1.0 30% per annum
Equal to or Less than 3.0:1.0 and Greater than 2.25:1.0 25% per annum
Equal to or Less than 2.25:1.0 and Greater than 1.5:1.0 25% per annum
Equal to or Less than 1.5 to 1.0 20% per annum
</TABLE>
Nonuse fees shall be calculated on a 360-day year counting the actual number of
elapsed days.
Accrued nonuse fees shall be payable in arrears on each Quarterly Date and on
the earlier of each of the date the relevant Commitments are terminated and the
Loan Termination Date.
29
<PAGE>
2.5 Reduction of Commitment. The Borrower shall have
the right to reduce the amount of the aggregate Commitments, at any time and
from time to time, in any integral multiple of One Million Dollars
($1,000,000.00), which reduction shall, unless otherwise agreed in writing,
reduce each Bank's Commitment pro rata in accordance with its Commitment
Percentage. Contemporaneously with each such reduction, the Borrower shall
repay to the Agent for the account of each Bank in accordance with its
respective Commitment Percentage the amounts, if any, by which the then
outstanding principal balance of each Note exceeds each Commitment as so
reduced. After each such reduction: (i) the Borrower shall immediately pay
the Agent any Nonuse Fee provided for in Paragraph 2.4 with respect to the
amount by which the Commitments are so reduced, but only with respect to the
time any such Commitment existed and only to the extent not previously paid;
(ii) the Nonuse Fee provided for in Paragraph 2.4 shall be calculated with
respect to the aggregate Commitments as so reduced; and (iii) the Commitments
may not be increased without the written consent of the Banks.
2.6 Alternate Rate of Interest
(A) In the event, and on each occasion, that on
the date of commencement of any Interest Period for a Eurodollar Loan, any Bank
shall have determined:
(1) That dollar deposits in the amount
of the requested principal amount of such Eurodollar Loan are not generally
available in the London Interbank Market;
(2) That the rate at which such dollar
deposits are being offered will not adequately and fairly reflect the cost to
Bank of making or maintaining such Eurodollar Loan during such Interest Period;
or
(3) That reasonable means do not exist
for ascertaining the LIBO Rate, such Bank shall, as soon as practicable
thereafter, give written or telephonic notice of such determination to the Agent
and Borrower. In the event of any such determination, any request by the
Borrower for a Eurodollar Loan pursuant to Paragraph 2.2 shall, until the
circumstances giving rise to such notice no longer exist, be deemed to be a
request for a Floating Rate Loan. Each determination by a Bank hereunder shall
be conclusive absent manifest error.
2.7 Change in Circumstances
(A) Notwithstanding any other provision
herein, if after the date of this Agreement any change in applicable Laws or
regulation or in the interpretation or administration thereof by any
governmental authority charged with the interpretation or administration thereof
(whether or not having the force of law) shall change the basis of taxation of
payments to a Bank under any Eurodollar Loan made by a Bank or any other fees or
amounts payable hereunder (other than taxes imposed on the overall net income of
such Bank by the country in which such Bank is located, or by the jurisdiction
in which such Bank has its principal office, or by any political subdivision or
taxing authority therein), or shall impose, modify or deem applicable any
30
<PAGE>
reserve requirement, special deposit, insurance charge (including FDIC insurance
on Eurodollar deposits) or similar requirement against assets of, deposits with
or for the account of, or credit extended by, such Bank or shall impose on such
Bank or the London Interbank Market any other condition affecting this Agreement
or Eurodollar Loans made by such Bank, and the result of any of the foregoing
shall be to increase the cost to such Bank of making or maintaining any
Eurodollar Loan or to reduce the amount of any sum received or receivable by
such Bank hereunder (whether of principal, interest or otherwise) in respect
thereof by an amount reasonably deemed by such Bank in good faith to be
material, then the Borrower will pay to such Bank such additional amount or
amounts as will compensate such Bank for such additional costs of reduction.
(B) If either:
(1) The introduction of, or any change
in, or in the interpretation of, any United States or foreign law, rule or
regulation; or
(2) Compliance with any directive,
guidelines or request from any central bank or other United States or foreign
governmental authority (whether or not having the force of law) promulgated or
made after the date hereof (but excluding, however, any law, rule, regulation,
interpretation, directive, guideline or request contemplated by or resulting
from the report dated July, 1988, entitled "International Convergence of Capital
Measurement and Capital Standards" issued by the Basle Committee on Banking
Regulations and Supervisory Practices), affects or would affect the amount of
capital required or expected to be maintained by a Bank (or any lending office
of such Bank) or any corporation directly or indirectly owning or controlling
such Bank (or any lending office of such Bank) based upon the existence of this
Agreement, and such Bank shall have determined that such introduction, change or
compliance has or would have the effect of reducing the rate of return on Bank's
capital or on the capital of such owning or controlling corporation as a
consequence of its obligations hereunder (including its Commitment) to a level
below that which such Bank or such owning or controlling corporation could have
achieved but for such introduction, change or compliance (after taking into
account that Bank's policies or the policies of such owning or controlling
corporation, as the case may be, regarding capital adequacy) by an amount
reasonably deemed by such Bank in good faith to be material, then, from time to
time, the Borrower shall pay to such Bank such additional amount or amounts as
will compensate such Bank for such reduction attributable to making, funding and
maintaining its Commitment, Loans and Letters of Credit hereunder.
(C) A certificate of any Bank setting forth such
amount or amounts as shall be necessary to compensate such Bank (or its
participating banks or other entities pursuant to Paragraph 10.8) as specified
in paragraph (A) or (B) above, as the case may be, shall be delivered to the
Agent and the Borrower; provided however, that the Borrower shall be responsible
for compliance herewith and the payment of increased costs only to the extent:
(1) Any change in Laws giving rise to
increased costs occurs after the date of this Agreement;
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(2) Such change in Laws or the
application thereof applies generally to the banking industry and is not the
result of one or more of the Banks in this Agreement having inadequate or
substandard capital as determined by its regulators; and
(3) The affected Bank gives notice of
the change giving rise to increased costs within one hundred eighty (180)
Business Days after such Bank has, or with reasonable diligence should have had,
knowledge of the change, or else such Bank can only collect costs from and after
the date of the notice.
Subject to the foregoing, the Borrower shall pay to the Agent for the account of
the affected Bank the amount shown as due on any such certificate within thirty
(30) days after its receipt of such certificate.
(D) The protection of this Paragraph 2.7 shall
be available to each Bank regardless of any possible contention of invalidity or
inapplicability of the law, regulation or condition that shall have been
imposed; provided, if a court of competent jurisdiction (or a final
administrative proceeding which is not judicially challenged) finally determines
that such law or regulation is invalid or unapplicable, then the protection of
this Paragraph shall not be available.
2.8 Change in Legality
(A) Notwithstanding anything to the contrary
herein contained, if any change in any law or regulation or in interpretation
thereof by any governmental authority charged with the administration or
interpretation thereof shall make it unlawful for any Bank to make or maintain
any Eurodollar Loan or to give effect to its obligations as contemplated hereby,
then, by written notice to the Agent and the Borrower, such Bank may:
(1) Declare that Eurodollar Loans
will not thereafter be made by such Bank hereunder, whereupon the Borrower shall
be prohibited from requesting Eurodollar Loans from such Bank hereunder unless
such declaration is subsequently withdrawn; and
(2) Require that all outstanding
Eurodollar Loans made by it be converted to Floating Rate Loans, in which event
(a) all such Eurodollar Loans shall be automatically converted to Floating Rate
Loans as of the effective date of such notice as provided in paragraph (B) below
and (b) all payments and prepayments of principal that would otherwise have been
applied to repay the converted Eurodollar Loans shall instead be applied to
repay the Floating Rate Loans resulting from the conversion of such Eurodollar
Loans.
(B) For purposes of this Paragraph 2.8, a
notice to the Borrower and Agent by any Bank pursuant to (A) above shall be
effective, if lawful, on the last day of the then current Interest Period; in
all other cases, such notice shall be effective on the date of receipt by the
Borrower.
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2.9 Optional Prepayment - Premiums in Certain Events
(A) The Borrower may, upon three (3) Business
Days' prior written notice to the Agent, and upon payment of all premiums set
forth in subparagraph (D) hereinbelow, prepay any outstanding Eurodollar Loans
prior to any Interest Payment Date for such Eurodollar Loans, in whole or in
part.
(B) The Borrower may at any time prepay any
outstanding Floating Rate Loans in whole or in part without premium or penalty.
(C) Each notice of prepayment of any Eurodollar
Loan shall specify the date and amount of such prepayment and shall be
irrevocable. The Agent shall promptly notify the Banks of its receipt of a
notice of prepayment. Each partial prepayment of any Eurodollar Loans shall be
in an aggregate principal amount which is the lesser of (1) the then outstanding
principal balance of the one or more Eurodollar Loans to be prepaid, or (2) One
Hundred Thousand Dollars ($100,000.00) or an integral multiple thereof. Interest
on the amount prepaid accrued to the prepayment date shall be paid on such date.
(D) Upon prepayment of any Eurodollar Loan on a
date other than the relevant Interest Payment Date for such borrowing, Borrower
shall pay to Agent for the account of each Bank, in addition to all other
payments then due and owing the Banks, premiums which shall be equal to an
amount, if any, reasonably determined by each Bank to be the difference between
the rate of interest then applicable to the relevant Eurodollar Loan and the
yield each Bank receives upon reinvestment of so much of the relevant Eurodollar
Loans as is prepaid for the remainder of the term of the relevant Eurodollar
Loan or Loans. Anything in this section 2.9(D) to the contrary notwithstanding,
the premiums payable upon any such prepayment shall not exceed the amount, if
any, reasonably determined by each Bank to be the difference between the rate of
interest then applicable to the relevant Eurodollar Loan and the yield that each
Bank could receive upon reinvestment in the "Floor Reinvestment" of so much of
the relevant Eurodollar Loan as is prepaid for the remainder of the term of the
relevant Eurodollar Loan. For purposes hereof, "Floor Reinvestment" shall mean
an investment for the time period from the date of such prepayment to the end of
the relevant Interest Period applicable to such Eurodollar Loan at an interest
rate per annum equal to the Federal Fund Rate "offered" as published in the Wall
Street Journal on the date of such prepayment. All determinations, estimates,
assumptions, allocations and the like required for the determination of such
premiums shall be made by each Bank in good faith and shall be presumed correct
absent demonstrable error.
2.10 Payment to the Agent
(A) The Agent shall send the Borrower statements
of all amounts due hereunder (or the Banks may in the case of Section 2.7
above), which statements shall be considered correct and conclusively binding on
the Borrower unless the Borrower notifies the Agent to the contrary within one
hundred eighty (180) days of its receipt of any statement to which it objects.
All sums payable to the Banks hereunder shall be paid directly to the Agent
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for the account of each Bank in immediately available funds prior to 12:00
noon, Nashville time, on the date when such sums are due and payable. Any
amounts received by the Agent after 12:00 noon Nashville time on any Business
Day shall be deemed to have been received on the next Business Day.
(B) Each payment made to the Agent on the
Notes or for other sums or fees due hereunder for the account of the Banks shall
in like funds be properly remitted by the Agent to each Bank, no later than 2:00
p.m. Nashville time on the date on which Agent receives such payment.
SECTION III. CONDITIONS PRECEDENT
---------------------------------
The obligation of the Banks to fund and/or continue funding
the Loans hereunder is subject to the following conditions precedent:
3.1 Documents Required for the Closing. The Borrower
shall have delivered to the Agent prior to the initial disbursement of the Loans
the following:
(A) Evidence satisfactory to the Agent and the
Banks that the Horizon Acquisition has been closed pursuant to the terms of the
Stock Purchase Agreement and that the Borrower is the lawful owner and holder of
all of the shares of Horizon;
(B) This Agreement, duly executed by the
Borrower, the Guarantors, the Agent and the Banks;
(C) The Notes;
(D) Stock Pledge Agreements (collectively, the
"Stock Pledge Agreements") in the form attached hereto as Exhibit E, including
Schedule I thereto, duly executed by the Borrower and Southern Health Systems,
Inc., respectively, together with certificates representing the shares pledged
thereby, duly endorsed in blank, and stock powers duly endorsed in blank;
(E) Duly executed Guaranty and Suretyship
Agreements (collectively the "Guaranty and Suretyship Agreements") of the
Guarantors, in the form attached hereto as Exhibit F;
(F) The Financing Statements required by Section
IV;
(G) A copy of resolutions of Borrower's board of
directors, certified by the corporate secretary or assistant secretary of
Borrower as of the date of Closing, authorizing the execution, delivery and
performance of this Agreement, the Notes, the Collateral Documents, and each
other document to be delivered pursuant hereto;
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(H) A copy of resolutions of each Guarantor's
board of directors, certified as of the date of Closing by the secretary of each
of such corporations, authorizing the execution, delivery and performance of any
documents to be delivered by such corporation pursuant to this Agreement,
including without limitation any of the Collateral Documents.
(I) A copy, certified as of the most recent
date practicable, by the applicable Secretaries of State of Borrower's and each
Guarantor's Charter, together with a certificate dated the date of the Closing
of each corporate secretary to the effect that such certificates of
incorporation have not been amended since the date of the aforesaid Secretary of
State certifications;
(J) A copy of Borrower's by-laws certified by
Borrower's secretary as of the date of the Closing;
(K) A copy of the by-laws of each Guarantor
certified by each Guarantor's secretary as of the date of Closing;
(L) A certificate dated the date of the Closing
of Borrower's corporate secretary as to the incumbency and signatures of the
officers of Borrower executing this Agreement, the Notes, the Collateral
Documents, and each other document to be delivered pursuant hereto;
(M) A certificate dated the date of the Closing
of each Guarantor's corporate secretary as to the incumbency and signatures of
the officers of each of such corporation executing any document to be delivered
pursuant hereto, including without limitation any of the Collateral Documents.
(N) Certificates, as of the most recent dates
practicable, of the Delaware Secretary of State and the Secretary of State of
each state in which a Borrower is qualified as a foreign corporation as to the
good standing of such Borrower;
(O) Certificates, as of the most recent date
practicable, of the Secretaries of State in each state where each Guarantor is
organized as to the good standing of each such Subsidiary;
(P) A written opinion of Messrs. Armstrong,
Allen, Prewitt, Gentry, Johnston & Holmes, PLLC, the Borrower's counsel, dated
the date of the Closing and addressed individually to each Bank, in the form
attached hereto as Exhibit G and otherwise satisfactory to the Banks.
(Q) A certificate, dated the date of the
Closing, signed by the president, vice president, chief financial officer, or
corporate controller of the Borrower and to the effect that:
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(1) The representations and warranties
set forth within Section V are true as of the date of the Closing;
(2) No Event of Default or Unmatured
Default has occurred as of such date;
(3) All of the Collateral Documents are
and shall remain in full force and effect.
(R) Copies of all Material Supplier Agreements,
said agreements to be in form and substance satisfactory to Banks and containing
such inventory buy-back arrangements as may be acceptable to the Banks.
(S) Copies of all documents evidencing the
terms and conditions of any debt specified as Subordinated Indebtedness on
Exhibit D in form and substance satisfactory to Banks;
(T) A fully executed Intercreditor Agreement
between the Banks, the Agent and the holders of the existing Subordinated
Indebtedness in such form as may be required by the Banks.
(U) A fully executed Subordination Agreement
between Genzyme Corporation and the Agent on behalf of the Banks subordinating
the lien of Genzyme Corporation against the accounts of Nova Factor, Inc. to
those liens on such accounts granted hereunder by Nova Factor, Inc. in favor of
the Agent for the benefit of the Banks to secure the Obligations.
(V) A Federal Reserve Form (or Forms) U-1,
duly completed and executed by the Borrower and each Pledgor.
3.2 Requirements for all Subsequent Advances. At the
Closing, and as an express condition precedent after Closing to each
disbursement of any Loan (whether for an Acquisition Advance or otherwise) or
the issuance of any Letter of Credit, each of the following shall be true and
correct:
(A) As of the date thereof, no Event of Default
has occurred and is continuing, and no Unmatured Default is in existence;
(B) The extension of credit will be used only as
permitted in Paragraph 2.1;
(C) No Material Adverse Change has occurred
since the date of the Financial Statements or the date of the Closing, as
applicable; and
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(D) All of the Collateral Documents remain in full
force and effect, and with respect to any Acquisition Advance the Borrower has
satisfied all of the conditions of Paragraph 7.15 including without limitation
providing or causing to be provided such additional Collateral Documents as
required by Paragraph 7.15.
If any of the foregoing statements is not true and correct, then the Banks shall
have no obligation to make the requested advance. In addition, on each requested
disbursement of a Revolving Loan, the Borrower shall deliver to the Agent a true
and accurate certificate together with (or included within) any Borrowing
Notice, dated the date on which a Revolving Loan disbursement is to be made,
signed by the president, vice president, chief financial officer, or corporate
controller of the Borrower and certifying to the foregoing.
3.3 Legal Matters. At the time of the Closing and
thereafter, all legal matters incidental to the Loans shall be satisfactory
to Agent and its counsel.
SECTION IV. COLLATERAL SECURITY
-------------------------------
4.1 Composition of the Collateral. The property in
which a security interest is granted pursuant to the provisions of Paragraphs
4.2 and 4.3 is herein collectively called the "Collateral." The Collateral,
together with all of the Borrower's and any Guarantor's other property of any
kind, both real and personal, held by, assigned to, mortgaged to or conveyed
in favor of the Banks, shall stand as one general, continuing collateral
security for all Obligations and the security interest may be retained by the
Agent and/or Banks until all Obligations have been satisfied in full.
4.2 Rights in Property Held by the Banks. As security
for the prompt satisfaction of all Obligations and all Guaranties of the
Obligations, the Borrower and each Guarantor hereby assign, transfer and set
over to the Banks all of their right, title and interest in and to, and grant
each of the Banks and the Agent on behalf of the Banks a lien on and a
security interest in, all amounts that may be owing from time to time by the
Banks to the Borrower or such Guarantor in any capacity, including, but
without limitation, any balance or share belonging to the Borrower or such
Guarantor of any deposit or other account with the Banks, which lien and
security interest shall be independent of any right of set-off which the
Banks and/or Agent may have.
4.3 Rights in Property of the Borrower and Guarantors.
As further security for the prompt satisfaction of all Obligations and all
Guaranties of the Obligations, the Borrower and each Guarantor hereby
collaterally assign to the Agent for the benefit of the Banks all of their
respective right, title and interest in and to, and grant the Banks a lien
upon and security interest in, all of the following, wherever located,
whether now owned or hereafter acquired, together with all substitutions,
replacements, improvements, accessions or appurtenances thereto, and proceeds
(including without limitation insurance proceeds) thereof:
(A) Accounts;
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(B) Chattel Paper;
(C) Documents;
(D) Equipment;
(E) Fixtures;
(F) General Intangibles;
(G) Instruments;
(H) Inventory;
(I) The Pledged Stock; and
(J) All Records pertaining thereto or to any
other Collateral.
4.4 Priority of Liens. The foregoing liens shall be
first and prior liens except for any Permitted Liens on assets which have
priority or would have priority by the operation of Laws.
4.5 Financing Statements
(A) The Borrower and each Guarantor will:
(1) Join with the Agent in executing
such additional Financing Statements (including amendments thereto and
continuation statements thereof) in form satisfactory to the Banks as the Banks
may specify;
(2) Pay or reimburse the Agent and/or
the Banks for all costs and taxes of filing or recording the same in such public
offices as the Agent may designate, and reimburse the Agent for performing
subsequent verification searches following Closing in Tennessee, Alabama and
Oklahoma; and
(3) Take such other steps as the Agent
may direct, including the noting of the Banks' lien on the Collateral and on any
certificates of title therefor all to perfect the Banks' security interest in
the Collateral.
(B) A carbon, photographic, or other
reproduction of this Agreement shall be sufficient as a financing statement and
may be filed in any appropriate office in lieu thereof.
(C) To the extent lawful, the Borrower and each
Guarantor hereby appoint the Agent as their attorney-in-fact (without requiring
the Agent to act as such) to execute any Financing Statement in the name of the
Borrower or such Guarantor, and to perform all other acts that the Agent deems
appropriate to perfect and continue the Banks' security interest in, and to
protect and preserve, the Collateral.
4.6 Collection of Receivables. Following the
occurrence of any Event of Default and for so long as such Event of Default
remains uncured, upon demand of the Majority Banks, Borrower and each
Guarantor shall deposit or cause to be deposited, all checks, drafts, cash,
and other remittances received in payment of services rendered or inventory
sold or in
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payment or on account of its accounts, immediately upon receipt thereof with
Agent in a special "lockboxed" bank account maintained with Agent, over which
the Agent alone shall have power of withdrawal. The funds in said special
bank account shall be held by the Agent on behalf of the Banks as security
for all loans made hereunder and all other Obligations of Borrower or any
Guarantor to the Banks secured hereby. Said proceeds shall be deposited in
precisely the form received, except for the endorsement of Borrower and each
Guarantor where necessary to permit collection, which endorsement Borrower
and each Guarantor agree to make and which Agent also hereby is irrevocably
authorized to make on their behalf. Pending such deposit, Borrower and each
Guarantor agree that they will not commingle any such checks, drafts, cash,
and other remittances with any of their funds or property, but will hold them
separate and apart therefrom and upon an express trust for the Banks until
deposit thereof is made in the said special bank account. At least twice
weekly, Agent will apply the whole or any part, as the Majority Banks deem
appropriate, of the collected funds on deposit in the said special bank
account against the principal and/or interest of any loans made hereunder
and/or on Borrower's other Obligations secured hereby, the order and method
of such application to be in the discretion of the Majority Banks. Any
portion of said funds on deposit in the special bank account that the
Majority Banks elect not to apply will be paid over by Agent to Borrower.
SECTION V. REPRESENTATIONS AND WARRANTIES
-----------------------------------------
To induce the Banks to enter into this Agreement, the Borrower
and each Guarantor jointly and severally represent and warrant to each Bank as
follows:
5.1 Due Organization and Qualification. Borrower is a
corporation duly organized, validly existing and in good standing under the
Laws of the State of Delaware and is qualified to transact business in
Tennessee; each Subsidiary is duly organized, validly existing and in good
standing under the Laws of its state of formation or incorporation, all as
set forth in Exhibit H, and Borrower has no other Subsidiaries except as
therein listed; the Borrower and each Subsidiary have the lawful power to own
their properties and to engage in the business they conduct, and each is duly
qualified and in good standing as a foreign corporation in the jurisdictions
wherein the nature of the business transacted by it or property owned by it
is both material and makes such qualification necessary; the states in which
the Borrower and each Subsidiary are qualified to do business are set forth
in Exhibit H; the percentage of the Borrower's ownership of the outstanding
stock or ownership interests of each Subsidiary is as listed in Exhibit H;
and the addresses of all places of business of the Borrower and each
Subsidiary are as set forth in Exhibit I, together with a separate listing of
each office or place of business where the value of the Inventory held equals
or exceeds $50,000.00 in amount;
5.2 No Conflicting Agreement. Neither the Borrower nor
any Subsidiary is in default with respect to any existing Indebtedness where
the Indebtedness exceeds $50,000.00 in amount, and the making and performance
of this Agreement, the Notes and the Collateral Documents will not
(immediately, or with the passage of time or the giving of notice, or both):
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(1) Violate the charter or bylaw
provisions of the Borrower or any Guarantor, or violate any Laws, or result in a
default under any material contract, agreement, or instrument to which the
Borrower or any Subsidiary is a party or by which the Borrower or any Guarantor
or its property is bound; or
(2) Result in the creation or imposition
of any security interest in, or lien or encumbrance upon, any of the assets of
the Borrower or any Guarantor, except in favor of the Agent for the benefit of
the Banks;
5.3 Capacity. The Borrower and each Guarantor have the
power and authority to enter into and perform this Agreement, the Notes and
the Collateral Documents, as applicable, and to incur the Obligations herein
and therein provided for, and have taken all corporate action necessary to
authorize the execution, delivery, and performance of this Agreement, the
Notes and the Collateral Documents;
5.4 Binding Obligations. This Agreement and the
Collateral Documents are, and the Notes when delivered will be, valid,
binding, and enforceable in accordance with their respective terms subject to
the general principles of equity (regardless of whether such question is
considered in a proceeding in equity or at law) and to applicable bankruptcy,
insolvency, moratorium, fraudulent or preferential conveyance and other
similar laws affecting generally the enforcement of creditors' rights;
5.5 Pledged Stock. The Borrower owns the Pledged
Stock; the Pledged Stock constitutes one hundred percent (100%) of the issued
and outstanding capital stock of the respective issuers thereof; and the
Pledged Stock has been duly issued, is fully paid and non-assessable, and is
free of all claims, security interests, liens, charges and encumbrances;
5.6 Litigation. Except as disclosed in Exhibit J
hereto, there is no pending or threatened order, notice, claim, litigation,
proceeding or investigation against or affecting the Borrower or any
Subsidiary, whether or not covered by insurance, that would involve the
payment of One Hundred Thousand Dollars ($100,000.00) or more if adversely
determined;
5.7 Title. The Borrower and its Subsidiaries have good
and marketable title to all of their respective material assets, including
without limitation the Collateral, subject to no security interest,
encumbrance or lien, or the claims of any other Person except for Permitted
Liens;
5.8 Financial Statements. The Financial Statements,
including any schedules and notes pertaining thereto, have been prepared in
accordance with generally accepted accounting principles consistently
applied, and fully and fairly present the financial condition of the Borrower
and its Subsidiaries (including without limitation Horizon) at the dates
thereof and the results of operations for the periods covered thereby, and
there has been no Material Adverse Change in the financial condition or
business of the Borrower and its Subsidiaries (including without limitation
Horizon) as last audited to the date hereof;
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5.9 No Additional Indebtedness. As of the date hereof,
the Borrower and its Subsidiaries (including without limitation Horizon) had
no Indebtedness of any nature, including, but without limitation, liabilities
for taxes and any interest or penalties relating thereto, except for trade
payables and other Indebtedness incurred in the ordinary course of business
or to the extent reflected (in a footnote or otherwise) and reserved against
in the March 31, 1997 Financial Statements or as disclosed in or permitted by
this Agreement; the Borrower does not know, and has no knowledge of any basis
for the assertion against it or any Subsidiary (including without limitation
Horizon) as of the date hereof, of any material Indebtedness of any nature
not fully reflected and reserved against in the March 31, 1997 Financial
Statements;
5.10 Taxes. Except as otherwise permitted herein, the
Borrower and its Subsidiaries (including without limitation Horizon) have
filed all federal, state and local tax returns and other reports they are
required by Laws to file prior to the date hereof and which are material to
the conduct of their respective businesses, have paid or caused to be paid
all taxes, assessments and other governmental charges that are due and
payable prior to the delinquency hereof, and have made adequate provision for
the payment of such taxes, assessments or other charges accruing but not yet
payable; the Borrower has no knowledge of any deficiency or additional
assessment in connection with any taxes, assessments or charges not provided
for on its books;
5.11 Licenses; Compliance with Laws. All material
certificates of authority, licenses, permits, accreditations and approvals
required by all laws and/or governmental authorities necessary in order for
Borrower and each of its Subsidiaries to conduct their respective businesses
have been obtained and are in full force and effect. Except as otherwise
disclosed in Exhibit K hereto, or except to the extent that the failure to
comply would not materially interfere with the conduct of the business of the
Borrower or any Subsidiary or have a Material Adverse Effect, the Borrower
and its Subsidiaries have complied with all applicable Laws with respect to:
(1) any licenses, restrictions, specifications, or other requirement
pertaining to services that the Borrower or any Subsidiary performs; (2) the
conduct of their respective businesses; (3) the use, maintenance, and
operation of the real and personal properties owned or leased by them in the
conduct of their respective businesses; and (4) health, safety, worker's
compensation, and equal employment opportunity;
5.12 Environmental Compliance. The Borrower and its
Subsidiaries and their respective assets and operations are in compliance in
all material respects with all Environmental Laws. All warehouses, facilities
and properties of the Borrower and its Subsidiaries are and will be on the
date of Closing in a clean and healthful condition, free of friable asbestos
and of all contamination by Hazardous Materials and, to the best of
Borrower's actual knowledge, there is no illegal contamination of the air,
soil, groundwater or surface waters associated with or adjacent to such
plants, facilities and properties; to the best of Borrower's actual
knowledge, all storage tanks (whether above or below ground) located in or on
such plants, facilities and properties are in sound condition, free or
corrosion or leaks that could allow or threaten the release of any Hazardous
Material; to the best of Borrower's actual knowledge, no Hazardous Materials
have been used, stored, treated or disposed of in violation of applicable
Laws and regulations. Neither the Borrower nor any Subsidiary is a defendant
in any administrative or
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judicial action alleging liability under the Comprehensive Environmental
Response, Compensation and Liability Act, as amended ("CERCLA"), nor has the
Borrower or any Subsidiary received a notice that it is a potentially
responsible party under CERCLA or similar state Laws. The foregoing
representations and exceptions thereto shall in no way diminish or abrogate
the covenants made in Paragraph 6.14;
5.13 Full Disclosure. No representation or warranty by
the Borrower or any Subsidiary contained herein or in any certificate or
other document furnished by the Borrower or any Subsidiary pursuant to this
Agreement contains any untrue statement of material fact or omits to state a
material fact necessary to make such representation or warranty not
misleading in light of the circumstances under which it was made;
5.14 Consents. Each consent, approval or authorization
of, or filing, registration or qualification with, any Person required to be
obtained or effected by the Borrower or any Subsidiary in connection with the
execution and delivery of the Loan Documents or the undertaking or
performance of any obligation thereunder has been duly obtained or effected;
5.15 Existing Borrowings. All existing Indebtedness:
(1) for money borrowed; or (2) under any security agreement or mortgage from
the Borrower or any Subsidiary is described in Exhibit C, unless the same are
less than $10,000.00 in amount;
5.16 Material Contracts. Except as described on Exhibit L
hereto, the Borrower and its Subsidiaries have no material lease, contract or
commitment of any kind (such as employment agreements; collective bargaining
agreements; distribution arrangements; patent license agreements; contracts
for future purchase or delivery of goods or rendering of services; bonus or
stock option plans; all parties (including the Borrower and Subsidiaries) to
all such material leases, contracts and other commitments to which the
Borrower or any Subsidiary is a party have to the best of Borrower's actual
knowledge complied with the provisions of such leases, contracts and other
commitments; no party is in default under any provision thereof; and no event
has occurred which, but for the giving of notice or the passage of time, or
both, would constitute a default;
5.17 No Commissions. Neither the Borrower nor any
Subsidiary has made any agreement or has taken any action which may cause
anyone to become entitled to a commission or finder's fee as a result of the
making of the Loans;
5.18 ERISA. Borrower and its Subsidiaries have no
Defined Benefit Pension Plans, as defined in the Employee Retirement Income
Security Act of 1974, as amended ("ERISA");
5.19 Survival. All of the representations and
warranties set forth in Section V shall survive until all Obligations are
satisfied in full.
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SECTION VI. AFFIRMATIVE COVENANTS
The Borrower does hereby covenant and agree with each Bank
that, so long as any of the Obligations remain unsatisfied, it will comply, and
it will cause its Subsidiaries to comply, with the following covenants:
6.1 Use of Proceeds. The Borrower will use the proceeds of
each of the respective Loans and Letters of Credit only for the purposes
permitted in Paragraph 2.1, and will furnish the Agent such evidence as it
may reasonably require with respect to such use.
6.2 Financial Statements and Reports. The Borrower will
furnish each of the Banks:
(A) Within thirty (30) days after the close of each
calendar month in each fiscal year of Borrower and its Subsidiaries: (a)
consolidated and consolidating income statements of the Borrower and its
Subsidiaries for such monthly period; and (b) consolidated balance sheets of the
Borrower and its Subsidiaries as of the end of such monthly period--all in
reasonable detail, subject to year-end audit adjustments and certificated by the
Borrower's president or principal financial officer to have been prepared in
accordance with generally accepted accounting principles consistently applied by
the Borrower and its Subsidiaries, except for any inconsistencies explained in
such certificate;
(B) Within thirty (30) days after the close of each
quarter-annual accounting period in each fiscal year of the Borrower and its
Subsidiaries: (a) a consolidated statement of cash flows of the Borrower and its
Subsidiaries for such quarter-annual period; (b) consolidated and consolidating
income statements of the Borrower and its Subsidiaries for such quarter-annual
period; (c) consolidated and consolidating balance sheets of the Borrower and
its Subsidiaries as of the end of such quarter-annual period -- all in
reasonable detail, subject to year-end audit adjustments and certified by the
Borrower's president or principal financial officer to have been prepared in
accordance with generally accepted accounting principles consistently applied by
the Borrower and its Subsidiaries, except for any inconsistencies explained in
such certificate; and (d) a product line income statement showing for each
significant drug and product line the cumulative 12 month income attributable
for each such product line;
(C) Within ninety (90) days after the close of each
fiscal year of Borrower and its Subsidiaries: (a) consolidated and consolidating
statements of cash flows of the Borrower and its Subsidiaries for such fiscal
year; (b) consolidated and consolidating income statements of the Borrower and
its Subsidiaries for such fiscal year; and (c) consolidated and consolidating
balance sheets of the Borrower and its Subsidiaries as of the end of such fiscal
year--all in reasonable detail, including all supporting schedules, notes and
comments; the consolidated statements and balance sheets shall be audited by
Ernst & Young or another independent certified public accountant selected by the
Borrower and acceptable to the Banks, and certified by such accountants to have
been prepared in accordance with generally accepted accounting principles
consistently applied by the Borrower and its Subsidiaries, except for any
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inconsistencies explained in such certificate. In addition, the Borrower will
obtain from such independent certified public accountants and deliver to the
Bank, within ninety (90) days after the close of such fiscal year, their written
statement that in making the examination necessary to their certification they
have obtained no knowledge of any Event of Default by the Borrower, or
disclosing all Events of Default of which they have obtained knowledge;
provided, however, that in making their examination such accountants shall not
be required to go beyond the bounds of generally accepted auditing procedures
for the purpose of certifying financial statements. Each Bank shall have the
right, from time to time, to discuss the Borrower's affairs directly with the
Borrower's independent certified public accountants after notice to the Borrower
and opportunity of the Borrower to be present at any such discussions;
(D) Contemporaneously with each monthly and fiscal
year-end financial report required by the foregoing paragraphs (A) and (C), a
Borrowing Base Calculation Certificate in the form of Exhibit M hereto as
well as an aging of all Accounts due and owing to the Borrower and its
Subsidiaries at the end of such period and an aging of all accounts payable
due from the Borrower and its Subsidiaries, each in form and substance
satisfactory to the Agent, together with an aging in the year-end report of
amounts due for advances made pursuant to Paragraph 7.13;
(E) Contemporaneously with each quarter-annual and
fiscal year-end financial report required by the foregoing paragraphs (B) and
(C), a Compliance Certificate in the form of Exhibit N hereto signed by the
president or chief financial officer of the Borrower stating that: (i) such
officer has individually reviewed the provisions of this Agreement; (ii) a
review of the activities of the Borrower and its Subsidiaries during such
year or quarterly period, as the case may be, has been made by such officer
or under such officer's supervision, with a view to determining whether the
Borrower has fulfilled all its obligations under this Agreement; and (iii) to
the best of such officers' knowledge, the Borrower has observed and performed
each undertaking contained in this Agreement and is not in default in the
observance or performance of any of the provisions hereof or, if the Borrower
shall be so in default, specifying all such defaults and events of which such
officer may have knowledge. Such certificate shall further set forth the
calculations of the financial ratios and covenants set forth in Paragraph
6.17 including without limitation any antecedent calculations and the source
of any information that was used in such calculations;
(F) On or before September 1 of each year, a proforma
budget (including projected Capital Expenditures) for the ensuing fiscal
year, in form reasonably satisfactory to the Agent;
(G) Immediately upon receipt of the same by Borrower or
any Subsidiary, copies of all management letters and any other reports which
are submitted to the Borrower or any of its Subsidiaries by its independent
accountants in connection with any annual or interim audit of the Records of
the Borrower or its Subsidiaries by such accountants; and
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(H) Promptly after the sending or making available or
filing of the same, copies of all registration statements, proxy statements,
financial statements and report that the Borrower files with the Securities
and Exchange Commission or any successor Person.
6.3 Good Condition. The Borrower and its Subsidiaries will
maintain their assets and their respective Inventory, Equipment and other
properties in good condition and repair (normal wear and tear excepted), and
will pay and discharge or cause to be paid and discharged when due, the cost
of repairs to or maintenance of the same, and will pay or cause to be paid
all rental or mortgage payments due on such Equipment or real property. The
Borrower hereby agrees that, in the event it or any Subsidiary fails to pay
or cause to be paid any such payment, the Agent may do so on behalf of the
Banks after notice to the Borrower and be reimbursed by the Borrower therefor.
6.4 Insurance. The Borrower and its Subsidiaries will
maintain, or cause to be maintained, public liability insurance (including
product liability) and fire and extended coverage insurance on all assets
owned by them, as well as malpractice and professional liability insurance,
all in such form and amounts as are consistent with industry practices and
with such insurers as may be satisfactory to the Agent. Such policies shall
name the Agent on behalf of the Banks as loss payee under a standard
mortgagee loss payee clause and as an additional insured, as their interests
may appear, and shall contain a provision whereby they cannot be canceled
except after thirty (30) days' written notice to the Agent. The Borrower will
furnish to the Agent such evidence of insurance as the Agent may require. The
Borrower hereby agrees that, in the event it or any Subsidiary fails to pay
or cause to be paid the premium on any such insurance, the Agent or any Bank
may do so and be reimbursed by the Borrower therefor. The Agent is hereby
appointed the Borrower's attorney-in-fact (without requiring the Agent to act
as such) to endorse any check which may be payable to the Borrower to collect
such returned or unearned premiums or the proceeds of such insurance, and any
amounts so collected shall be returned to the Borrower unless there is an
Event of Default, in which case such amounts may be applied by the Agent
toward satisfaction of any of the Obligations.
6.5 Taxes; Copies of Returns. The Borrower and its
Subsidiaries will pay or cause to be paid prior to delinquency, all taxes,
assessments and charges or levies imposed upon them or on any of their
property or which any of them is required to withhold or pay over, except
where contested in good faith by appropriate proceedings with adequate
security therefor having been set aside in a manner satisfactory to Banks.
The Borrower and each Subsidiary shall pay or cause to be paid all such
taxes, assessments, charges or levies forthwith whenever foreclosure on any
lien that attaches (or security therefor) appears imminent. Within ten (10)
days of any Bank's request therefor, the Borrower will furnish the Banks with
copies of federal income tax returns filed by the Borrower.
6.6 Records and Inspection. The Borrower and its
Subsidiaries will, when requested so to do and upon two (2) Business Days
notice, make available at their offices during regular business hours any of
their Records (excluding confidential patient records) for inspection by duly
authorized representatives of the Banks, and will furnish the Banks any
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information regarding their business affairs and financial condition within a
reasonable time after written request therefor.
6.7 Maintenance of Existence and Business; Licenses. The
Borrower and its Subsidiaries will take all necessary steps to renew, keep in
full force and effect, and preserve their corporate existence, good standing,
and franchises, and will comply in all respects with all present and future
Laws applicable to them in the operation of their specialized pharmacy
services and drug distribution business except to the extent that a failure
to do so would not have or cause to occur a Material Adverse Effect. The
Borrower and its Subsidiaries will preserve, renew and keep in full force and
effect all material licenses, contracts, governmental permits,
authorizations, consents and approvals, rights, privileges and franchises
necessary or desirable in the normal course of their providing specialized
pharmacy services and distribution.
6.8 Reimbursement Eligibility. The Borrower and its
Subsidiaries will each maintain at all times eligibility for reimbursement
from Medicaid, Medicare, CHAMPUS, and any successors thereto as necessary for
the operation of their respective business.
6.9 Ordinary Course; Pledge of Notes. The Borrower and its
Subsidiaries will keep accurate and complete Records of their Accounts and
Equipment, consistent with sound business practices. The Borrower and its
Subsidiaries will collect their Accounts only in the ordinary course of
business. If any Accounts in excess of $100,000 should be evidenced by
promissory notes, then the holder shall immediately deliver the same to
Agent, appropriately endorsed to Agent's order. The Borrower and each
Subsidiary hereby waives presentment, demand, notice of dishonor, protest,
notice of protest, and all other notices with respect thereto.
6.10 Payment of Indebtedness. The Borrower and its
Subsidiaries will pay when due (or within applicable grace periods) all
Indebtedness for borrowed money (whether direct or indirect, including
Guarantee Obligations) due any Person, except when the amount thereof is
being contested in good faith by appropriate proceedings and with adequate
security therefor being set aside in a manner reasonably satisfactory to the
Banks. If default is made by the Borrower or any Subsidiary in the payment of
any principal (or installment thereof) of, or interest on, any such
Indebtedness, the Banks shall have the right, in their discretion, to pay
such interest or principal for the account of the Borrower or such Subsidiary
and be reimbursed by the Borrower therefor.
6.11 Notice of Litigation or Loss of Licenses. The Borrower
and its Subsidiaries will give immediate notice to the Agent and provide
copies to the Agent of: (1) any litigation or proceeding in which any of them
is a party if an adverse decision therein would require them to pay over more
than Five Hundred Thousand Dollars ($500,000.00) or deliver assets the value
of which exceeds such sum (if such claim is not considered to be covered by
insurance) or pay over more than One Million Dollars ($1,000,000.00) (if such
claim is considered to be covered by insurance); (2) the institution of any
other suit or proceeding involving any of them, or the overt threat thereof,
that might materially and adversely affect their operations, financial
condition, property, business, or the Collateral; (3) all notices of loss of
participation under any material reimbursement program or loss of applicable
pharmaceutical
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or health care licenses; and (4) all other material deficiency notices,
compliance orders or adverse reports issued by any governmental authority or
licensing commission having jurisdiction over licensing, accreditation or
operation of the Borrower or any Subsidiary or by any governmental authority
or private insurance company pursuant to a provider agreement, which, if not
promptly complied with or cured, could result in the suspension or forfeiture
of any license, certification, or accreditation necessary for the Borrower or
any Subsidiary to carry on its business as then conducted or the termination
of any material insurance or reimbursement program available to the Borrower
or any Subsidiary.
6.12 Notice to Banks of Default. The Borrower and its
Subsidiaries will notify each Bank immediately if any of them becomes aware
of the occurrence of any Event of Default or of any fact, condition or event
that only with the giving of notice or passage of time or both, could become
an Event of Default, or of the failure of the Borrower or any Subsidiary to
observe any of their respective undertakings hereunder.
6.13 Notice of Name Change or Location. The Borrower and
its Subsidiaries will notify each Bank thirty (30) days in advance of any
change in (i) the name of the Borrower or any Subsidiary, (ii) the location
of any Collateral, (iii) the location of any of their places of business or
(iv) of the establishment of any new, or the discontinuance of any existing,
place of business.
6.14 Environmental Compliance.
(A) Borrower and its Subsidiary will (1) employ, and
cause each of its Subsidiaries to employ, in connection with its use, if any,
of all real property, appropriate technology and compliance procedures and
will maintain compliance with any applicable Environmental Laws, (2) obtain
and maintain, and cause each of its Subsidiaries to obtain and maintain, any
and all material permits required by applicable Environmental Laws in
connection with its or its Subsidiaries' operations and (3) dispose of, and
cause each of its Subsidiaries to dispose of, any and all Hazardous Materials
only at facilities and with carriers reasonably believed to possess valid
permits under RCRA, if applicable, and any applicable state and local
Environmental Laws. The Borrower shall use its best efforts, and cause each
of its Subsidiaries to use its best efforts, to obtain all certificates
required by law to be obtained by the Borrower and its Subsidiaries from all
contractors employed by the Borrower or any of its Subsidiaries in connection
with the transport or disposal of any Hazardous Materials.
(B) In the event that the Banks have reason to believe
that any Borrower or Subsidiary has failed to comply with any material
Environmental Laws, or there exists a threat of material harm to the
environment or Persons, the Banks or their agents shall have the right, but
no obligation, at any time during business hours and upon reasonable written
notice, to enter upon any property operated by a Borrower or Subsidiary and
conduct or cause to be conducted an Environmental Phase I audit (or an update
of any audit completed in connection with the execution of this Agreement) at
Borrower's sole expense and if such Phase I audit (or update) recommends
further testing, then the Banks or their agents may require, but shall not be
obligated to require, upon reasonable written notice, such further testing at
Borrower's sole
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expense. The Banks or their agents shall use their best
efforts to invoke and maintain all applicable privileges over all audit
information generated pursuant to this provision.
6.15 Notice of Environmental Action. If the Borrower or any
of its Subsidiaries shall:
(A) receive written notice that any material violation
of any Environmental Laws may have been committed or is about to be committed
by the Borrower or any of its Subsidiaries;
(B) receive written notice that any administrative or
judicial complaint or order has been filed or is about to be filed against
the Borrower or any of its Subsidiaries alleging any material violation of
any Environmental Laws or requiring the Borrower or any of its Subsidiaries
to take any action in connection with the release or threatened release of
Hazardous Substances or solid waste into the environment; or
(C) receive written notice from a federal, state,
foreign or local governmental agency or private party alleging that the
Borrower or any of its Subsidiaries is liable or responsible for costs
associated with the response to cleanup, stabilization or neutralization of
any environmental activity;
then it shall provide the Agent and each Bank with a copy of such notice
within ten (10) Business Days of the Borrower's or such Subsidiary's receipt
thereof. Subject to the right of the Borrower or any Subsidiary to contest in
good faith any such actions or proceedings, the Borrower and/or any
Subsidiary shall as promptly as possible resolve, cure and/or have dismissed
with prejudice any such actions or proceedings, to the reasonable
satisfaction of the Banks.
6.16 ERISA Compliance. The Borrower and its Subsidiaries
will: (1) fund all their Defined Benefit Pension Plans in accordance with no
less than the minimum funding standards of Section 302 of ERISA and Section
412 of the Internal Revenue Code; (2) furnish the Agent upon request with
copies of all reports or other statements filed with the United States
Department of Labor or the Internal Revenue Service with respect to all such
Plans; and (3) promptly advise the Agent of the occurrence of any Reportable
Event or Prohibited Transaction with respect to any such Plan.
6.17 Financial Ratios. Unless the Banks otherwise agree in
writing, the Borrower and its Subsidiaries will maintain the following
financial ratios and covenants:
(A) Funded Debt to Consolidated Capital. A ratio of
Funded Debt to Consolidated Capital of not more than 0.50 to 1.00 at all
times.
(B) Debt Service Coverage. Giving Pro-Forma Effect to
any Permitted Acquisition made or to be made or Indebtedness incurred or to
be incurred as of the date of
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determination, at the end of each fiscal quarter a Debt Service Coverage
Ratio computed for the four (4) quarters just ended of not less than 1.20 to
1.00.
(C) Funded Debt to Cash Flow. Giving Pro-Forma Effect
to any Permitted Acquisition made or to be made or Indebtedness incurred or
to be incurred as of the date of determination, at the end of each fiscal
quarter, a ratio of Funded Debt to Cash Flow for the four (4) quarters just
ended of not greater than 3.50 to 1.0.
(D) Maximum Account Days Outstanding. At all times,
the number of days obtained by multiplying 365 days by the quotient obtained
by dividing Consolidated Accounts derived from patients (less the
Consolidated Allowance for Doubtful Accounts) by Consolidated Revenues for
the prior 12 month period shall be no more than 90 days.
SECTION VII. NEGATIVE COVENANTS
Without first obtaining the prior written consent of the
Majority Banks:
7.1 Merger or Reorganization. No Borrower or Subsidiary
will enter into any merger, consolidation, reorganization or
recapitalization; provided, any Subsidiary may merge into the Borrower or any
other Subsidiary provided the Banks are given not less than thirty (30) days
prior written notice thereof and provided the surviving entity is a Borrower
or a Subsidiary which is a party to this Agreement.
7.2 Sale of Assets. No Borrower or Subsidiary will sell,
transfer, lease or otherwise dispose of all or any material part of its
assets; provided, however, Borrower and its Subsidiaries may in the ordinary
course of business sell its Inventory and may sell other assets to the extent
that the sales of such other assets do not exceed a combined fair market
value of up to One Hundred Thousand Dollars ($100,000.00) per fiscal year, or
may replace damaged or worn Equipment with Equipment of similar value and use.
7.3 Encumbrances. No Borrower or Subsidiary will: (1)
mortgage, pledge, grant or permit to exist a security interest in or lien
upon any of its assets of any kind, now owned or hereafter acquired, except
for Permitted Liens, or (2) covenant or agree with any other Person (other
than the Banks) not to mortgage, pledge, or grant a security interest in or a
lien upon their assets.
7.4 Debts and Other Obligations. No Borrower or Subsidiary
will incur, create, assume, or permit to exist any Indebtedness except: (1)
the Loans; (2) the Indebtedness described in Exhibit C; (3) trade
Indebtedness incurred in the ordinary course of business, including that
payable to Genzyme, Inc.; (4) contingent Indebtedness permitted by Paragraph
7.8; (5) Indebtedness, including Permitted Acquisition Indebtedness, secured
by Permitted Liens; (6) Indebtedness for borrowed money owed by any Guarantor
(exclusive of the Non-Corporate Subsidiaries) to the Borrower, or by the
Borrower to any Subsidiary of the Borrower, provided that if any such
Indebtedness is evidenced by a document or instrument, the same is pledged to
the Agent for the benefit of the Banks pursuant to an appropriate pledge
agreement; (7)
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Indebtedness owed by the Non-Corporate Subsidiaries to the Borrower or any
Guarantor arising in the ordinary course of business from selling Inventory
and supplying management services to the Non-Corporate Subsidiaries, provided
the aggregate amount of such Indebtedness does not exceed One Million Dollars
($1,000,000.00) at any time outstanding; (8) operating leases incurred in the
ordinary course of business; and (9) Permitted Acquisition Indebtedness.
7.5 Untrue Certificate. No Borrower or Subsidiary will
furnish the Agent or any Bank any certificate or other document that will
contain any untrue statement of material fact or that will omit to state a
material fact necessary to make it not misleading in light of the
circumstances under which it was furnished.
7.6 Margin Stock. No Borrower or Subsidiary will directly
or indirectly apply any part of the proceeds of the Loans to the purchasing
or carrying of any "margin stock" within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System, or any regulations,
interpretations or rulings thereunder.
7.7 Sale-Leaseback. No Borrower or Subsidiary will enter
into any sale-leaseback transaction.
7.8 Guarantee Obligation. No Borrower or Subsidiary will
create, incur, suffer to exist a Guarantee Obligation or otherwise become
liable for any obligation of any other Person or any Subsidiary, except: (1)
the endorsement of commercial paper for deposit or collection in the ordinary
course of business, and (2) leases by the Borrower or a Subsidiary incurred
in the ordinary course of business.
7.9 Dividends and Distributions. The Borrower will not
declare or pay any cash dividends, or make any other cash payment or other
distribution of an asset on account of its capital stock (although dividends
may accrue on the preferred stock). The Borrower will not permit any
Subsidiary to become subject to any restriction on the ability of such
Subsidiary to pay dividends or make distributions.
7.10 Redemptions and Capital Stock. Except for the
redemption of up to 100,000 shares of common stock from Kyle Callahan, the
Borrower will not redeem, purchase or retire any of its capital stock and no
Subsidiary will issue, redeem, purchase or retire any of its capital stock or
other ownership interests or grant or issue any warrant, right or option
pertaining thereto or other security convertible into any of the foregoing.
7.11 Prepayments. No Borrower or Subsidiary will prepay any
Subordinated Indebtedness, or Indebtedness for borrowed money other than the
Obligations, or enter into or modify any agreement as a result of which the
terms of payment of any of the foregoing Indebtedness are modified to
accelerate or increase payments.
7.12 Subsidiary. No Borrower or Subsidiary will form any
Subsidiary, make any investment in or make any loan in the nature of any
investment to any Person, except for: (1) any Permitted Investments, (2) the
formation of a Subsidiary in connection with making a
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Permitted Acquisition which qualifies as such under Paragraph 7.15 below, (3)
advances by the Borrower to any Guarantor(s), (4) the formation of additional
Non-Corporate Subsidiaries provided the amounts of the investments and loans
made or reasonably anticipated to be made by the Borrower or any Guarantor to
such Non-Corporate Subsidiary do not exceed in the aggregate Two Hundred
Fifty Thousand Dollars ($250,000.00), and (5) advances by any Subsidiaries of
the Borrower to the Borrower.
7.13 Loans and Advances. No Borrower or Subsidiary will
make any loan or advance to any officer, shareholder, director or employee of
a Borrower or any Subsidiary, except for temporary advances in the ordinary
course of business not to exceed Five Hundred Thousand Dollars ($500,000.00)
in the aggregate.
7.14 Investments. No Borrower or Subsidiary will purchase
or otherwise invest in or hold securities, non-operating real estate outside
the normal course of business, or other non-operating assets, except: (1)
Permitted Investments; (2) the present investment in any such assets,
including existing Subsidiaries; and (3) operating assets that hereafter
become non-operating assets.
7.15 Acquisitions. No Borrower or Subsidiary will make an
Acquisition of any Person without the prior written consent of the Banks;
provided however, the Borrower may acquire either all of the stock or assets
of a Person or any Guarantor may acquire the assets of or merge with such
Person (provided the Guarantor is the surviving entity) (hereinafter
collectively a "Permitted Acquisition") if either all Banks consent in
writing in advance thereto or, without the necessity of obtaining the Banks'
prior written approval if:
(A) not less than ten (10) Business Days prior to
entering into a binding agreement to make any Permitted Acquisition, Borrower
shall submit to each of the Banks the following information: (1) a copy of
the signed letter of intent and a current draft of the acquisition agreement
with any prepared exhibits; (2) a written description of the Person to be
acquired, including location and type of operations, key management, and real
estate assets (including legal descriptions of any owned real estate), if
any; (3) audited or reviewed historical financial statements of the Permitted
Acquisition for the prior two years and the most recent interim statement;
(4) consolidated financial statements and projections for both the Borrower
and its Subsidiaries as well as the Person being acquired giving Pro Forma
Effect to the Indebtedness associated with the Acquisition Advance and the
Acquisition Cash Flow associated with the Person to be acquired, and
indicating: (i) compliance on a joint, consolidated basis with the financial
covenant set forth in Paragraphs 6.17(B) and (C) for the twelve (12) months
prior to the anticipated closing of the Acquisition, (ii) compliance on a
joint, consolidated basis with the financial covenants set forth in
Paragraphs 6.17(A), (B), and (C) as of the closing of the Acquisition, and
(iii) projected compliance for the ensuing twelve (12) months after the
closing of the Acquisition with each financial covenant in Paragraph 6.17;
and (5) a copy of the acquisition analysis done by Borrower preparatory to
making the Permitted Acquisition;
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(B) the Permitted Acquisition Price does not exceed
Five Million Dollars ($5,000,000.00) and does not exceed the product of six
(6) times the Acquisition Cash Flow of such Person;
(C) the business of the Permitted Acquisition is in
the provision of specialized pharmacy services and is located in the United
States;
(D) environmental Phase I audits of any real
properties owned by the Permitted Acquisition company conducted within six
(6) months prior to the closing of the Acquisition (or material substantially
similar thereto in the opinion of the Banks) indicate environmental risks
and/or exposures for which the estimated costs to fully remedy and clean-up
are less than One Hundred Thousand Dollars ($100,000.00), and copies of such
are provided to the Banks with a reliance letter;
(E) no Event of Default or Unmatured Default has
occurred hereunder and not been cured, or would otherwise occur as a result
of or in connection with the Permitted Acquisition, whether immediately or on
a projected basis;
(F) whether or not the Banks have been requested to
disburse funds, the Borrower must pledge or cause to be pledged to the Agent
for the benefit of the Banks a first priority lien on the outstanding stock
or ownership interests, if any, acquired in the Permitted Acquisition and
first priority liens (subject only to Permitted Liens) on all real estate
owned or leased by such Person and on all Inventory, Accounts, Chattel Paper,
Documents, Equipment, Fixtures, Instruments, and General Intangibles acquired
in the Permitted Acquisition in form and substance satisfactory to the Banks;
(G) if a new Subsidiary is formed for the purpose of
making the Permitted Acquisition or the Permitted Acquisition is a stock
purchase Acquisition, the new Subsidiary and/or the entity acquired must
become a party to this Agreement and execute a Guaranty and Suretyship with
respect to the Obligations in form and substance satisfactory to the Banks.
7.16 Capital Expenditures. Other than in connection with
funding Permitted Acquisitions, neither the Borrower nor any Subsidiary will
make or incur Capital Expenditures without the prior approval of Majority
Banks if such Capital Expenditures exceed, in the aggregate, one hundred
fifty percent (150%) of the Capital Expenditure amount set forth in the
applicable budget for such year submitted by Borrower to the Banks pursuant
to Subparagraph 6.2(F) above.
7.17 Accounts Payable. The Borrower and its Subsidiaries
will not permit their consolidated accounts payable portion of their
Consolidated Current Liabilities to exceed the sum of the maximum
contractually permissible payables under their Material Supplier Agreements
and other pharmaceutical supply agreements, if any.
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7.18 Inventory Locations. No Borrower or Guarantor will
store Inventory having a value on a cost basis in excess of $100,000 in any
state other than the States of Tennessee, Alabama and Oklahoma unless such
Borrower or Subsidiary shall have first notified the Agent thereof in writing
of the location in said state and executed such Financing Statement(s) as
shall be necessary to perfect the security interests granted herein in the
Inventory located at such location or locations.
7.19 Affiliate Transactions. Except as described on Exhibit
L hereto, Borrower will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into or permit to exist any transaction
(including without limitation the purchase, sale, lease or exchange of any
property or the rendering of any service) with any Affiliate (other than any
Subsidiary which is wholly owned by Borrower) on terms that are less
favorable to the Borrower or its Subsidiaries than those that would be
obtainable at the time from any Person who is not an Affiliate.
Notwithstanding the foregoing, Borrower will not, and will not permit any of
its Subsidiaries to: (1) pay or incur any obligation to pay any management
fee, consulting fee, service fee or similar fee or charge to any Affiliate
other than a Guarantor or the Borrower or (2) enter into any transaction with
an Affiliate other than a Guarantor or the Borrower where the amount to be
paid, whether immediately or over time, exceeds Two Hundred Thousand Dollars
($200,000.00) in the aggregate other than the Subordinated Indebtedness owed
to Welsh, Carson, Anderson & Stowe VII, L.P. and WCAS Healthcare Partners,
L.P. and their partners and affiliates or pharmacy dispensing contracts
entered into in the ordinary course of business.
SECTION VIII. DEFAULT
8.1 Events of Default. The occurrence of any one or more
of the following events shall constitute an "Event of Default" hereunder:
(A) The Borrower shall fail to pay within five (5) days
of the date when due any installment of principal or interest payable
hereunder or under a Letter of Credit Document or shall fail to pay within
ten (10) days of written notice any fee payable hereunder or under the Fee
Letter.
(B) The Borrower and its Subsidiaries shall fail to
achieve any of the financial covenants contained in Paragraph 6.17.
(C) The Borrower, any Subsidiary, or Pledgor shall fail
to observe or perform any obligation or covenant to be observed or performed
by any of them, jointly or severally, under any of the Loan Documents;
provided, however, if such failure is not related to the payment of money
under Subparagraph 8.1(A), the breach of a financial covenant contained in
Paragraph 6.17, or the breach of any negative covenant in Section VII,
Borrower shall have fifteen (15) days to cure such failure before the
Majority Banks and/or Agent exercise the rights and remedies hereunder, with
such fifteen (15) day period commencing after notice of such failure from the
Agent or Banks.
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(D) The filing of any tax lien whatsoever with respect
to any of the Collateral except for a tax lien that is being contested in
good faith and for which the Borrower has provided additional security
satisfactory in all respects to the Banks.
(E) The Borrower and its Subsidiaries taken as a whole
shall suffer a Material Adverse Effect from any breach of or event of default
arising under any agreement binding the Borrower or any Subsidiary.
(F) Any financial statement, representation, warranty
or certificate made or furnished by any Borrower or Subsidiary to the Agent
or any Bank in connection with this Agreement or the Loans, or as inducement
to the Banks to enter into this Agreement, or in any separate statement or
document to be delivered hereunder to the Agent or any Bank, shall be
materially false, incorrect, or incomplete when made.
(G) Any Borrower or Subsidiary shall admit its
inability to pay its debts as they mature, or shall make an assignment for
the benefit of its or any of its creditors.
(H) Proceedings in bankruptcy, or for reorganization of
any Borrower or Subsidiary, or for the readjustment of any of their
respective debts, under the United States Bankruptcy Code, as amended, or any
part thereof, or under any other Laws, whether state or federal, for the
relief of debtors, now or hereafter existing, shall be commenced by the
Borrower or any Subsidiary, or shall be commenced against the Borrower or any
Subsidiary.
(I) A receiver or trustee shall be appointed for the
Borrower or any Subsidiary or for any substantial part of their respective
assets, or any proceedings shall be instituted for the dissolution or the
full or partial liquidation of the Borrower any Subsidiary, or the Borrower
any Subsidiary shall discontinue business or materially change the nature of
its business.
(J) The Borrower or any Subsidiary shall suffer final
judgments for payment of money aggregating in excess of One Hundred Thousand
Dollars ($100,000.00) and shall not discharge the same within a period of
thirty (30) days unless, pending further proceedings, execution has been
effectively stayed.
(K) A judgment creditor of any Borrower or Subsidiary
shall obtain possession of any Collateral or other assets by any lawful
means, including, but without limitation, levy, distraint, replevin or
self-help.
(L) Any obligee of Subordinated Indebtedness shall fail
to comply with the subordination provisions of the instruments evidencing
such Subordinated Indebtedness.
(M) The termination of one (1) or more of the Material
Supplier Agreements at any time from and after the date of this Agreement.
(N) The occurrence of a Change of Control.
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8.2 Acceleration. Upon the occurrence of any of such Events
of Default, the Majority Banks may, at their option, immediately terminate
the obligation to make any further advances or issue Letters of Credit under
the respective Commitments and/or declare the principal and interest accrued
on the Notes and all other Obligations to be immediately due and payable,
whereupon the same shall become forthwith due and payable, without
presentment, demand, protest, or any notice of any kind except as set forth
above; provided, that in the case of the Events of Default specified in
clause (G), (H) or (I) above with respect to Borrower, without any notice to
Borrower or any act by Agent or the Banks, the Commitments shall thereupon
terminate and the Notes and all other Obligations shall become immediately
due and payable without presentment, demand, protest or other notice of any
kind, all of which are waived by the Borrower. In addition, and regardless of
whether the Notes have been accelerated, the Majority Banks may upon the
occurrence of any Event of Default elect to charge interest at the Default
Rate set forth in the Notes.
8.3 Remedies. After any acceleration, as provided for in
Paragraph 8.2, the Agent and/or Banks shall have, in addition to the rights
and remedies given it by the Loan Documents, all those allowed by all
applicable Laws, including, but without limitation, the UCC as enacted in any
jurisdiction in which any Collateral may be located. Without limiting the
generality of the foregoing, the Agent may immediately, without demand of
performance and without other notice (except as specifically required by the
Loan Documents) or demand whatsoever to the Borrower, all of which are hereby
expressly waived, and without advertisement, sell at public or private sale,
in any manner and at any location authorized by Laws, or otherwise realize
upon, the whole or, from time to time, any part of the Collateral, or any
interest which the Borrower may have therein. After deducting from the
proceeds of sale or other disposition of the Collateral all expenses
(including all reasonable expenses for legal services), the Agent shall apply
such proceeds toward the satisfaction of the Obligations. Any remainder of
the proceeds after satisfaction in full of the Obligations shall be
distributed as required by applicable Laws. Notice of any sale or other
disposition shall be given to the Borrower at least ten (10) days before the
time of any intended public sale or of the time after which any intended
private sale or other disposition of the Collateral is to be made, which the
Borrower hereby agrees shall be reasonable notice of such sale or other
disposition. The Borrower agrees to assemble, or to cause to be assembled, at
its own expense, the Collateral at such place or places as the Banks shall
designate. At any such sale or other disposition, the Banks may, to the
extent permissible under applicable Laws, purchase the whole or any part of
the Collateral, free from any right of redemption on the part of the
Borrower, which right is hereby expressly waived and released.
Without limiting the generality of any of the rights
and remedies conferred upon the Agent and/or Banks under this Paragraph 8.3,
the Agent and/or Banks may, to the full extent permitted by applicable Laws:
(A) Engage independent appraisers and field examiners
to conduct appraisals and field examinations of the real properties,
leasehold interest, fixtures, machinery, equipment, inventory and accounts
receivable owned by Borrower and/or any of its Subsidiaries, with all of the
reasonable costs of such appraisals and field examinations to be paid by
Borrower
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or, if paid by the Banks, reimbursed to the Banks by Borrower upon
demand of the Banks. All such field examinations and appraisals shall be
conducted in accordance with Agent's guidelines for such appraisals and field
examinations at the time, and Borrower and each Subsidiary hereby agree that
such guidelines are reasonable;
(B) The Issuing Bank and Agent may treat each then
outstanding Letter of Credit as if a draft in the full amount available to be
drawn thereunder had been properly drawn thereunder and paid by the Issuing
Bank and the Borrower had failed to reimburse the Agent, for the account of
the Issuing Bank, for the amount so paid;
(C) Upon demand of the Agent (except no demand shall
be required if there shall have occurred an Event of Default under clause
(G), (H) or (I) of Paragraph 8.1), the Borrower shall deposit in cash with
the Agent an amount equal to the amount of all Letter of Credit Liabilities
then outstanding as collateral security for the repayment thereof;
(D) Enter upon the premises of the Borrower, exclude
therefrom the Borrower, any Subsidiary or any Affiliate thereof, and take
immediate possession of the Collateral, either personally or by means of a
receiver appointed by a court of competent jurisdiction, using all necessary
and lawful self-help to do so;
(E) At the Banks' option, use, operate, manage and
control the Collateral in any lawful manner, including lockboxing accounts
receivable pursuant to Paragraph 4.6 above;
(F) Collect and receive all receivables, rents,
income, revenue, earnings, issues and profits therefrom; and
(G) Maintain, repair, renovate, alter or remove the
Collateral as the Banks may determine in their discretion.
SECTION IX. THE AGENT
This Section IX is between and among the Agent and the Banks
only. Neither the Borrower nor any other creditor of the Borrower shall have any
rights under this section, whether as a third party beneficiary or otherwise,
and this section may be amended by the Agent and the Banks acting alone.
9.1 Authorization. Each Bank authorizes the Agent to act on
behalf of such Bank or holder to the extent provided herein or in any
document or instrument delivered hereunder or in connection herewith and
signed by such Bank, and to take such other action as may be reasonably
incidental thereto. The Agent shall be considered as acting solely in an
administrative and ministerial capacity, not as trustee or other fiduciary of
the Banks. The Agent shall not be construed as having any agency or fiduciary
relationship with the Borrower. The Agent shall not have any duties or
obligations to the Banks other than those expressly
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provided for herein. The Agent shall not be required to exercise any
discretion or take any action, but shall be fully protected in so acting or
in refraining from acting, upon the instructions of the Majority Banks
(except as otherwise provided in Paragraph 10.3, for matters which require
the consent of all Banks), and such instructions shall be binding upon all
Banks and holders of the Notes, and the Agent shall not be liable to any
party hereto for any consequence of any such action or refraining from
action. Notwithstanding any instructions of the Majority Banks, the Agent
shall not be required to take any action that exposes the Agent to personal
liability or that is contrary to any loan document or applicable law.
9.2 Standard of Care. Neither the Agent nor any of its
officers, directors, agents, employees or representatives shall be liable for
any action taken or omitted to be taken by it or any of them under or in
connection with this Agreement, except for its or their own gross negligence
or willful misconduct. Without limitation of the generality of the foregoing,
the Agent: (a) may treat the payee of any Notes as the holder thereof and as
a Bank hereunder until the Agent receives written notice of the assignment or
transfer thereof signed by such payee and in form satisfactory to the Agent
(which notice shall be binding on all parties hereto); (b) may consult with
legal counsel, independent public accountants and other experts and advisors
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants, experts or other advisors; (c) makes no warranty or
representation to any Bank and shall not be responsible to any Bank for any
statements, warranties or representations made in or in connection with this
Agreement or for any failure or delay in performance by the Borrower or any
Bank under this Agreement; (d) shall not have any duty to ascertain or to
inquire as to the performance or observance of any of the terms, covenants or
conditions of this Agreement; (e) shall not be responsible to any Bank for
the due execution, legality, validity, enforceability, perfection,
collectability, genuineness, sufficiency or value of this Agreement, the
Notes, or any other instrument or document furnished pursuant thereto or for
the accuracy or completeness of any credit or other information provided to
the Banks; (f) shall incur no liability under or in respect of this Agreement
by acting upon any notice, consent, certificate or other instrument or
writing (which may be by telecopier, telegram, cable or telex) believed by it
to be genuine and signed or sent by the proper party or parties; and (g)
shall incur no liability for relying upon any matters of fact that might
reasonably be expected to be within the knowledge of the Borrower, upon a
certificate or other writing signed by Borrower, or upon telephone
communications with Borrower which are reasonably believed to be true and
valid.
9.3 No Waiver of Rights. With respect to the Notes, the
Agent in its capacity as a Bank shall have the same rights and powers
hereunder as any other Bank and may exercise the same as though it were not
the Agent, and the Agent may accept deposits from, and generally engage in
any kind of business with, the Borrower.
9.4 Payments. The Agent shall use its best efforts to
deliver to each Bank on the same day as received by Agent in immediately
available funds such Bank's pro rata share of all payments received by the
Agent for the benefit of the Banks, but in the event Agent is unable to
deliver such payments to any Bank on the same day of receipt, Agent agrees to
pay such Bank interest on the payment for each day the Agent is unable to
deliver the payments after
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the date of its receipt based on the overnight Federal Funds Rate of
interest. Any payment due for any reason under this Agreement that is
required to be made on a date on which the Agent is not open for business
shall be extended until the next day on which the Agent is open for the
transaction of business. The Agent shall make available to any Bank for
inspection upon reasonable request the Agent's records with respect to all
sums received or disbursed by the Agent in connection with the Loans and the
Loan Documents. The Agent shall provide to any Bank upon request information
as to the amount of the then outstanding Loans, Letter of Credit Liabilities
and Reimbursement Obligations.
9.5 Indemnification. The Agent shall not be required to do
any act hereunder or under any other document or instrument delivered
hereunder or in connection herewith or take any action toward the execution
or enforcement of the agency hereby created, or to prosecute or defend any
suit in respect of this Agreement or the Notes or to advance funds hereunder
upon the failure by any Bank to fund its pro rata share of the Commitment
hereunder, unless ratably indemnified to its satisfaction (to the extent not
reimbursed by Borrower) by the holders of the Notes against loss, cost,
liability and expense (including reasonable fees and out-of-pocket expenses
of counsel), claim, demand, action, loss or liability (except such as result
from Agent's gross negligence or willful misconduct) that Agent may suffer or
incur in connection with this Agreement or any action taken or omitted by
Agent hereunder. If any indemnity furnished to the Agent for or against any
loss, cost, liability, and expense or for any purpose shall, in the opinion
of the Agent, be insufficient or become impaired, the Agent may call for
additional indemnity and not commence or cease to do the acts indemnified
against until such additional indemnity is furnished. Each Bank agrees to
reimburse the Agent promptly upon demand for such Bank's pro rata share of
any expenses referred to in Paragraph 10.4 incurred by the Agent to the
extent that the Agent is not reimbursed for such expenses by the Borrower.
9.6 Exculpation. Neither Agent nor any of its directors,
officers, employees or agents shall be liable for any action taken or not
taken by it in connection herewith (a) with the consent or at the request of
the Banks or Majority Banks, as appropriate, or (b) in the absence of its own
gross negligence or willful misconduct. Neither Agent nor any of its
directors, officers, employees or agents shall (i) be responsible for any
recitals, representations or warranties contained in, or for the execution,
validity, genuineness, effectiveness or enforceability of this Agreement, any
Note or any other instrument or document delivered hereunder or in connection
herewith, or (ii) be under any duty to inquire into or pass upon any of the
foregoing matters, or to make any inquiry concerning the performance by
Borrower or any other obligor of its obligations.
9.7 Credit Investigation. Each Bank acknowledges that it
has made such inquiries and taken such care on its own behalf as would have
been the case had the Commitment been granted and the Loan made directly by
such Bank to the Borrower. Each Bank agrees and acknowledges that the Agent
makes no representations or warranties about the creditworthiness of the
Borrower or any other party to this Agreement or with respect to the
legality, validity, sufficiency or enforceability of this Agreement, the
Notes or the value of any security therefor and that each Bank has not
entered into this Agreement in reliance upon any action, statement,
representation, or warranty of any other Bank or Agent. Each Bank agrees
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that it will, independently and without reliance upon the Agent or any other
Bank and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not
taking action under this Agreement. Neither the Agent nor any other Bank
shall have any obligation whatsoever to make any such credit analysis or
decisions for a Bank or to provide any credit or other information with
respect to the Borrower now or in the future in the possession of the Agent
or such other Bank, except that the Agent shall promptly forward to the Banks
a copy of any notice received by the Agent from the Borrower of the
occurrence of an Event of Default hereunder and copies of all material
documents delivered to it by the Borrower pursuant to the terms hereof.
9.8 Resignation. The Agent may resign at any time as the
Agent under this Agreement by giving written notice thereof to the Banks and
the Borrower, which resignation shall be effective upon a successor Agent's
acceptance of its appointment. Upon any such resignation, the Majority Banks
shall have the right to appoint a successor Agent hereunder, subject to the
Borrower's consent not to be unreasonably withheld. If no such successor
Agent shall have been so appointed by the Majority Banks, or Borrower shall
have reasonably rejected such appointment, within thirty (30) days after the
retiring Agent's giving of notice of resignation, then the retiring Agent
may, on behalf of the Banks, appoint a successor Agent, which shall be a
commercial bank organized under the laws of the United States of America or
of any State thereof having assets of at least One Billion and No/100 Dollars
($1,000,000,000.00) and which shall be reasonably acceptable to the Borrower.
Upon the acceptance of any appointment as Agent hereunder by a successor
Agent, such successor Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations hereunder.
After any retiring Agent's resignation as an Agent hereunder, the provisions
of this Section IX shall inure to its benefit as to any actions taken or
omitted to be taken by it while it was an Agent under the Loan Documents.
9.9 Proration of Payments. Except as may be provided in
other sections of this Agreement, all funds received by Banks, or any of
them, shall be allocated pro rata among all Banks in proportion to their
respective share of outstanding Loan balances and Reimbursement Obligations,
if any; provided, following the occurrence of an Event of Default hereunder
and the acceleration of the Obligations, all funds received by the Banks
thereafter shall, unless the Banks otherwise agree, be allocated in
proportion to their respective outstanding Loan balances and the Letter of
Credit Liabilities. If any Bank or other holder of any Notes shall obtain any
payment or other recovery (whether voluntary, involuntary, by application of
offset or otherwise) on account of principal of or interest on the Note then
held by it in excess of its pro rata share of payments and other recoveries
obtained by all Banks or other holders on account of principal of and
interest on the Notes then held by them, such Bank or other holder shall
purchase from the other Banks or holders such participation in the Notes held
by them as shall be necessary to cause such purchasing Bank or other holder
to share the excess payment or other recovery ratably with each of them;
provided, however, if all or any portion of the excess payment or other
recovery is thereafter recovered from such purchasing holder, the purchase
shall be rescinded and the purchase price restored to the extent of such
recovery, but without interest. Notwithstanding the foregoing, no Bank shall
have any obligation to account
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for or share any amount, property or profit of any kind received by it for
its own account arising out of a banking or other relationship with the
Borrower apart from the obligations under the Loan Documents.
9.10 No Liability For Errors. The Agent shall not be liable
for any error in computing the amounts payable to any Bank in respect of any
amounts due to the Banks hereunder or in making payment of such amounts. In
the event of an error in computing any amount payable to any Bank or in the
making of a payment, the Agent, the Borrower and such Bank shall, forthwith
upon discovery of such error, make such adjustment as shall be required to
correct such error, including the payment of interest on any amounts that
were incorrectly paid or not paid from the date paid or of the date due to
the date returned or paid, all as the case may be, at the average daily rate
for the overnight sale of Federal Funds by the Agent in effect for such
period.
9.11 Offset. In addition to and not in limitation of all
rights of offset that any Bank or other holder of any Note may have under
applicable Laws, each Bank or other holder of a Note shall, upon the
occurrence of any Event of Default described in this Agreement or in the Note
in question, have the right to appropriate and apply to the payment of such
Notes any and all balances, credits, deposits, accounts or moneys of the
Borrower then or thereafter with such Bank or other holder; provided,
however, all funds received as a result of such offsets shall be applied pro
rata among the Banks in proportion to the Letter of Credit Liabilities and
the respective outstanding Loan amounts. Each Bank agrees to notify the
Borrower and other Banks immediately after the exercise by it of this right
of offset.
SECTION X. MISCELLANEOUS
10.1 Construction. The provisions of this Agreement shall
be in addition to those of any guaranty, pledge or security agreement, note
or other evidence of liability held by the Banks, all of which shall be
construed as complementary to each other; provided, in the event of any
inconsistency, the provisions of this Agreement shall control. Nothing herein
contained shall prevent the Banks from enforcing any or all other notes,
guaranties, pledge or security agreements in accordance with their respective
terms.
10.2 Further Assurance. From time to time, the Borrower and
its Guarantors will execute and deliver to the Banks such additional
documents and will provide such additional information as the Banks may
reasonably require to carry out the terms of this Agreement and be informed
of the Borrower's operations, business and condition.
10.3 Enforcement and Waiver by the Banks. The Majority
Banks shall have the sole and exclusive right to administer, amend, or modify
the Loan Documents, and are hereby empowered to act for the Banks with regard
to the aggregate Commitments and the documentation thereof as if said
Majority Banks were the sole lenders or extenders of credit under the Loan
Documents; provided, however, that it shall take an affirmative vote of all
Banks to: (i) increase any of the several Commitments; (ii) decrease any of
the interest rates or fees
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on the Loans; (iii) extend the Loan Termination Date; (iv) reduce or postpone
the principal payments due on any Loans; (v) postpone any payments of
interest or interest payment dates; (vi) release Collateral having a value
greater than fifteen percent (15%) of the total book value of the Collateral,
either in a single transaction or in a series of related transactions
consummated over a six (6) month period; amend the definition of Majority
Banks; and (vii) amend this Paragraph 10.3. The Banks shall have the right at
all times to enforce the provisions of the Loan Documents in strict
accordance with the terms thereof, notwithstanding any conduct or custom on
the part of the Banks and/or Agent in refraining from so doing at any time or
times. The failure of the Banks at any time or times to enforce their rights
under such provisions, strictly in accordance with the same, shall not be
construed as having created a custom in any way or manner contrary to
specific provisions of the Loan Documents or as having in any way or manner
modified or waived the same. All rights and remedies of the Banks are
cumulative and concurrent and the exercise of one right or remedy shall not
be deemed a waiver or release of any other right or remedy.
10.4 Expenses of the Banks. The Borrower will, on demand,
reimburse the Agent and the Banks for all out-of-pocket expenses, including
the reasonable fees and expenses of legal counsel for the Agent and the
Banks, incurred by the Agent and the Banks in connection with the
preparation, administration, amendment, modification, or enforcement of the
Loan Documents and the collection or attempted collection of the Notes.
10.5 Notices. Any notices or consents required or permitted
by this Agreement shall be in writing and shall be deemed delivered when
delivered in person, when sent by overnight courier service or by facsimile
to the address and/or telecopy number as follows, or three (3) days after
mailing by certified mail, return receipt requested, unless such address or
number is changed by written notice hereunder:
(A) If to the Borrower:
Nova Holdings, Inc.
1620 Century Center Parkway, Suite 109
Memphis, Tennessee 38134
Attention: Joel R. Kimbrough, CFO
Telecopy: 1-800-827-8987
With a copy to:
Armstrong, Allen, Prewitt, Gentry,
Johnston & Holmes, PLLC
Brinkley Plaza
80 Monroe Street, Suite 700
Memphis, Tennessee 38103-2467
Attention: Thomas W. Bell, Jr.
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(B) If to the Agent:
NationsBank of Tennessee, N.A., Agent
One NationsBank Plaza
Nashville, Tennessee 37239
Attention: Healthcare Group;
Dave Dupuy, Vice President
Telecopy: 749-4951 (615)
(C) If to the Banks:
NationsBank of Tennessee, N.A.
One NationsBank Plaza
Nashville, Tennessee 37239
Attention: Healthcare Group;
Dave Dupuy, Vice President
Telecopy: 749-4951 (615)
First Tennessee Bank National Association
165 Madison Avenue
Memphis, Tennessee 38103
Attention: Metropolitan Department;
Derrick Williams, Vice President
Telecopy: 523-4235 (901)
10.6 Waiver and Release. To the maximum extent permitted by
applicable Laws, the Borrower and each Subsidiary:
(A) Waive: (1) protest of all commercial paper at any
time held by the Banks on which the Borrower or any Subsidiary is in any way
liable; and (2) notice and opportunity to be heard, after acceleration in the
manner provided in Paragraph 8.2, before exercise by the Banks of the
remedies of self-help, set-off, or of other summary procedures permitted by
any applicable Laws or by any agreement with the Borrower or any Subsidiary,
and, except where required hereby or by any applicable Laws, notice of any
other action taken by the Banks; and
(B) Release the Agent, the Banks, and their officers,
directors, attorneys, employees, and agents from all claims for loss or
damage caused by any act or omission on the part of any of them except for
gross negligence, recklessness or willful misconduct.
10.7 Indemnification. Borrower and each Subsidiary hereby
indemnify and hold the Agent, the Banks, and their officers, directors,
attorneys, employees and agents free and harmless from and against any and
all actions, causes of action, suits, losses, liabilities and
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damages, and expenses in connection therewith, including without limitation
reasonable counsel fees and other disbursements, incurred by the Agent, the
Banks or any of them as a result of, or arising out of, or relating to the
execution, delivery, performance or enforcement of the Loan Documents or any
instrument contemplated therein by Borrower or any Subsidiary except for the
Agent's or any Bank's gross negligence or willful misconduct. If and to the
extent that the foregoing undertaking may be unenforceable for any reason,
Borrower and each Subsidiary hereby agree to make the maximum contribution to
the payment and satisfaction of such liabilities and costs permitted under
applicable Laws.
10.8 Participations and Assignments. Participations and
Assignments
(A) This Agreement and the other Loan Documents shall
be binding upon and inure to the benefit of Borrower, Banks, and Agent and
their respective successors and assigns; provided, however, that Borrower may
not assign, transfer or delegate any of its rights, duties or obligations
under this Agreement or the other Loan Documents without the prior written
consent of Agent and Banks. Banks may assign, sell and transfer their
interests, rights and obligations under this Agreement and the other Loan
Documents only in accordance with this Paragraph 10.8.
(B) With the prior written consent of the Agent and
the Borrower, not to be unreasonably withheld, any Bank may assign to one or
more Eligible Assignees all, or a proportionate part of all, of its
interests, rights and obligations under this Agreement and the other Loan
Documents; provided, however, that (i) each such assignment shall be of a
constant, and not a varying, percentage of all of the assigning Bank's
interests, rights and obligations under this Agreement, (ii) the amount of
each such assignment (determined as of the date the Assignment and Acceptance
with respect to such assignment) shall not be less than the lesser of (A) the
entire amount of such Bank's Loans or (B) the principal amount of $3,000,000
or an integral multiple of $1,000,000 in excess thereof, and (iii) the
parties to each such assignment shall execute and/or deliver to Agent, for
its acceptance and recording in the Register, an Assignment and Acceptance,
together with the Notes subject to such assignment, and a processing and
recordation fee of $3,500 payable to Agent. Upon such execution, delivery,
acceptance and recording, from and after the "Effective Date" specified in
the Assignment and Acceptance, which "Effective Date," unless Agent otherwise
agrees, shall be not earlier than five Business Days after the date of
acceptance and recording by Agent (provided, however, that, as between the
assigning Bank and the assignee thereunder only, the effective date shall be
the effective date of execution and delivery as between such Persons as
specified in the Assignment and Acceptance), (A) the assignee thereunder
shall be a Bank under this Agreement and, to the extent provided in such
Assignment and Acceptance, have the interests, rights and obligations of a
Bank hereunder and (B) the assigning Bank thereunder shall, to the extent
provided in such Assignment and Acceptance, be released from its contractual
obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of the assigning Bank's
interests, rights and obligations under this Agreement, such assigning Bank
shall cease to be a Bank under this Agreement). Each Bank shall, in a
reasonably prompt fashion after it has engaged in any material discussions
with an Eligible Assignee that may lead to an assignment referred to in this
Paragraph 10.8, notify Agent and
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<PAGE>
Borrower of the identity of such Eligible
Assignee so that they will have sufficient time to determine if they are
willing to consent.
(C) By executing and delivering an Assignment and
Acceptance, the assigning Bank thereunder and the Eligible Assignee
thereunder shall be deemed to confirm to and agree with each other and the
other parties hereto as follows: (i) such assignee is an Eligible Assignee;
(ii) other than as provided in the Assignment and Acceptance, such assigning
Bank makes no representation or warranty and assumes no responsibility with
respect to any representations, warranties or other statements made in or in
connection with this Agreement or any other Loan Document or the execution,
legality, validity, enforceability, genuineness, sufficiency or value of this
Agreement or any other Loan Document or any Collateral; (iii) such assigning
Bank makes no representation or warranty and assumes no responsibility with
respect to the financial condition of Borrower or any Subsidiary or the
performance or observance by Borrower or any Subsidiary of any of its
obligations under this Agreement or any other Loan Document; (iv) such
assignee confirms that it has received a copy of this Agreement, together
with copies of the most recent Financial Statements and such other
agreements, documents, instruments, certificates and information as it has
deemed appropriate to make its own credit analysis and decision to enter into
such Assignment and Acceptance; (v) such assignee will independently and
without reliance upon Agent, such assigning Bank or any other Bank and based
on such agreements, documents, instruments, certificates and information as
it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under this Agreement and the other
Loan Documents; (vi) such assignee appoints and authorizes Agent to take such
action as agent on its behalf and to exercise such powers under this
Agreement and the other Loan Documents as are delegated to the Agent by the
terms hereof, together with such powers as are reasonably incidental thereto;
(vii) such assignee agrees that it will perform in accordance with their
terms all the obligations which by the terms of this Agreement and the other
Loan Documents are required to be performed by it as a Bank; and (viii) such
assignee makes loans in the ordinary course of its business.
(D) Upon its receipt of an Assignment and Acceptance
executed by an assigning Bank and an Eligible Assignee and the required
processing and recordation fee, Agent shall, if such Assignment and
Acceptance is duly completed and is in the required form, (i) accept such
Assignment and Acceptance, (ii) record the information contained therein in
the Register and (iii) give prompt notice thereof to Banks and Borrower.
Within five Business Days after its receipt of any such notice from Agent,
Borrower, at its own expense, shall execute and deliver to Agent, in exchange
for the surrendered Note or Notes, a new Note or Notes payable to the order
of such assignee in the appropriate principal amount(s) evidencing such
assignee's assigned Loans and Commitments, and, if the assignor Bank has
retained a portion of its Loans and Commitments, a new Note or Notes payable
to the order of such assignor in the appropriate principal amount(s)
evidencing such assignor's Loans and Commitments retained by it. Such new
Note(s) shall be dated the date of the surrendered Note(s) which they replace
and shall otherwise be in substantially the form of the surrendered Notes, as
appropriate.
(E) Each Bank may, without the consent of Borrower,
any Subsidiary or Agent, sell participations to one or more banks in all or a
portion of its interests, rights and
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<PAGE>
obligations under this Agreement (including all or a portion of its Loans or
Commitments) held by it; provided, however, that (i) such Bank shall remain a
Bank for all purposes of this Agreement and the transferee of such
participation shall not constitute a Bank under this Agreement, (ii) such
Bank's obligations under this Agreement shall remain unchanged, (iii) such
Bank shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iv) the participating banks or other
entities shall be entitled to the benefit of the provisions contained in
Paragraphs 2.9 and 2.10 to the same extent as if they were Banks, except that
no such participant shall be entitled to receive any greater benefit pursuant
to Paragraph 2.9 than its assignor Bank would have been entitled to receive
with respect to the rights participated, and (v) Borrower, Subsidiaries,
Agent and the other Banks shall continue to deal solely and directly with
such Bank in connection with such Bank's interests, rights and obligations
under this Agreement, and such Bank-shall retain the sole right to enforce
the obligations of Borrower and its Subsidiaries relating to the Loans and to
approve any amendment, modification or waiver of any provision of this
Agreement, provided that such participation agreement may provide that such
Bank will not agree to any amendment, modification or waiver of this
Agreement or the other Loan Documents, without the consent of such
participant, that would (A) reduce the principal or the rate of interest
payable by Borrower on any Loan or reduce any fees payable by Borrower, (B)
postpone any date fixed for the payment of principal of or interest on the
Loans or any fees payable by Borrower, (C) increase any Commitment of any
Bank or subject any Bank to any obligation to make Loans, or (D) amend
Paragraph 10.3 or any other provision of this Agreement requiring the consent
or other action of all Banks.
(F) Any Bank may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this
Paragraph 10.8, disclose to the assignee or participant or proposed assignee
or participant any information relating to Borrower or any Subsidiary, the
Collateral or the Loan Documents furnished to such Bank by or on behalf of
the Borrower or any Subsidiary; provided, however, that, prior to any such
disclosure, each such assignee or participant or proposed assignee or
participant shall execute an agreement whereby such assignee or participant
shall agree (subject to customary exceptions) to preserve the confidentiality
of any non-public information received from such Bank.
(G) If (i) any Bank has demanded compensation under
Paragraph 2.9 in an aggregate amount exceeding $5,000 during any calendar
year, (ii) it becomes unlawful, impossible or impractical for any Bank to
make or continue to maintain Eurodollar Loans pursuant to Paragraph 2.10 and
such circumstance is not applicable to NationsBank, or (iii) any Bank is or
becomes insolvent or a receiver, conservator or similar authority is
appointed for any Bank, then Agent and/or Borrower shall have the right, but
not the obligation, upon notice to such Bank and Borrower or Agent, as
applicable, to designate, with the consent of such assignee, an assignee for
any such Bank, which assignee shall be an Eligible Assignee mutually
satisfactory to Agent and Borrower, to purchase such Bank's Loans and
Commitments and assume such Bank's obligations; provided, however, that
Borrower shall have the right to designate any assignee for NationsBank.
Within ten Business Days after any such notice to such Bank and Borrower or
Agent, as applicable, such Bank shall be obligated to sell its Loans and
Commitments, and such assignee shall be obligated to purchase such Loans and
assume such Bank's obligations, pursuant to an Assignment and Acceptance. The
purchase price therefor
65
<PAGE>
shall be an amount equal to the sum of (A) the outstanding principal amount
of the Loans payable to such Bank, plus (B) all accrued and unpaid interest
on such Loans, plus (C) Letter of Credit Interest, plus (D) all accrued and
unpaid fees and other amounts due to such Bank pursuant to this Agreement.
(H) Notwithstanding anything to the contrary contained
in this Paragraph 10.6, any Bank may at any time or from time to time assign
as collateral all or any portion of its rights under this Agreement with
respect to its Loans, Commitments and Notes to a Federal Reserve Bank. No
such assignment shall release the assigning Bank from its obligations under
this Agreement.
10.9 Applicable Laws. The Laws of the State of Tennessee,
other than its conflicts of laws rules, shall govern the construction and
interpretation of this Agreement and the validity and enforceability of this
Agreement, and of its provisions and the transactions pursuant to this
Agreement, except for those transactions for which the parties have chosen
other laws to govern or for which other mandatory choice of law rules apply.
10.10 Binding Effect. Assignment and Entire Agreement. This
Agreement shall inure to the benefit of, and shall be binding upon, the
respective successors and permitted assigns of the parties hereto. The
Borrower has no right to assign any of its rights or obligations hereunder
without the prior written consent of the Banks. This Agreement and the
documents executed and delivered pursuant hereto constitute the entire
agreement between the parties, and supersede all prior agreements and
understandings among the parties hereto. This Agreement may be amended only
by a writing signed on behalf of each party.
10.11 Severability. If any provision of this Agreement
shall be held invalid under any applicable Laws, such invalidity shall not
affect any other provision of this Agreement that can be given effect without
the invalid provision, and, to this end, the provisions hereof are severable.
10.12 Counterparts. This Agreement may be executed by the
parties independently in any number of counterparts, all of which together
shall constitute but one and the same instrument which is valid and effective
as if all parties had executed the same counterpart.
10.13 Venue. It is agreed that venue for any action arising
in connection with this Agreement or the Obligations secured hereby shall lie
exclusively with courts sitting in Davidson County in the state of Tennessee,
unless the Banks and Agent otherwise agree in writing.
10.14 Waiver of Jury Trial. EACH PARTY HERETO, INCLUDING
THE BORROWER, EACH SUBSIDIARY, THE BANKS, AND THE AGENT, HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE (TO THE EXTENT PERMITTED BY APPLICABLE
LAWS) ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING
UNDER, RELATING TO, OR CONNECTED WITH THIS AGREEMENT, THE COLLATERAL OR ANY
OTHER AGREEMENT, INSTRUMENT OR DOCUMENT CONTEMPLATED HEREBY OR DELIVERED IN
CONNECTION HEREWITH AND AGREE THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A
66
<PAGE>
JUDGE SITTING WITHOUT A JURY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE
BANKS' AND THE AGENT ENTERING INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement as of the day and year first above written.
AGENT BORROWER
- ----- --------
NATIONSBANK OF TENNESSEE, N.A., NOVA HOLDINGS, INC.
as Agent
BY: [Illegible] BY: [Illegible]
-------------------------------- --------------------------
TITLE: VP TITLE: CEO
----------------------------- -----------------------
BANKS GUARANTORS AND SUBSIDIARIES
- ----- ---------------------------
NATIONSBANK OF TENNESSEE, N.A. SOUTHERN HEALTH SYSTEMS, INC.
BY: [Illegible] BY: [Illegible]
-------------------------------- --------------------------
TITLE: VP TITLE: CEO
----------------------------- -----------------------
FIRST TENNESSEE BANK NATIONAL NOVA FACTOR, INC.
ASSOCIATION
BY: [Illegible] BY: [Illegible]
-------------------------------- --------------------------
TITLE: VP TITLE: CEO
----------------------------- -----------------------
HORIZON HEALTH SYSTEMS, INC.
BY: [Illegible]
--------------------------
TITLE: Chairman of the Board
-----------------------
67
<PAGE>
EXHIBIT A
Form of Notes
<PAGE>
REVOLVING NOTE
$25,000,000.00 Nashville, Tennessee
June 5, 1997
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
NationsBank of Tennessee, N.A. (the "Bank") the sum of Twenty Five Million
Dollars ($25,000,000.00) with interest thereon as set forth in Section 2.2 of
the Loan and Security Agreement dated of even date herewith (as the same may
be amended, modified or restated from time to time, the "Loan Agreement"),
or, if a lesser amount is outstanding, the Bank's pro rata share of the
aggregate unpaid principal amount of all advances made pursuant to Paragraph
2.1 of the Loan Agreement, at such times as are specified therein and in
accordance with the provisions thereof. Interest shall likewise be payable
hereunder at the rates and on the times specified in the Loan Agreement.
Both principal and interest due on this Revolving Note are payable
in Nashville, Tennessee, at par in lawful money of the United States of
America, in the Main Office of the Agent or at such other place as the Agent
may designate in writing from time to time.
This Revolving Note is one of the Notes referred to in and is
entitled to the benefits of the Loan Agreement and the Collateral referenced
therein. All terms which are capitalized and used herein (which are not
otherwise specifically defined herein) and which are defined in the Loan
Agreement shall be used in this Note as defined in the Loan Agreement.
Time is of the essence of this Note. It is hereby expressly agreed
that in the event that any default be made in the payment of any part of
interest or principal for a period of five (5) days from the date when due,
or upon failure of the undersigned to keep and perform all the covenants,
promises, agreements, conditions and provisions of this Revolving Note, the
Loan Agreement, any Loan Document, or in any other instrument or document now
or hereafter evidencing, securing or otherwise relating to the indebtedness
evidenced hereby, subject to any applicable grace, notice or cure periods
contained therein; then, in any such case, the entire unpaid principal sum
evidenced by this Note, together with all accrued interest, shall, at the
option of any holder, without notice, become due and payable forthwith,
regardless of the stipulated Loan Termination Date. Upon the occurrence of
any default as set forth herein, at the option of holder and without notice
to obligor, all accrued and unpaid interest and fees, if any, shall be added
to the outstanding principal balance hereof, and the entire outstanding
principal balance, as so adjusted, shall bear interest thereafter until paid
at an annual rate (the "Default Rate") equal to the lesser of (i) the rate
that is two percentage points (2%) in excess of the rate(s) set forth in the
Loan Agreement, or (ii) the maximum rate permitted to be charged by
applicable law from time to time in effect (the "Maximum Rate"), regardless
of whether or not there has been an acceleration of the payment of principal
as set forth herein. All such interest shall be paid at the time of and as a
condition precedent to the curing of any such default. Failure of the holder
to exercise this right of accelerating the maturity of the debt, or
PAGE 1 OF A 3 PAGE NOTE
<PAGE>
indulgence granted from time to time, shall in no event be considered as a
waiver of said right of acceleration or stop the holder from exercising said
right.
To the extent permitted by applicable law, obligor shall pay to the holder
hereof a late charge equal to four percent (4%) of any interest payment
which is past due for a period of ten (10) or more days, in order to cover
the additional expenses incident to the handling and processing of delinquent
payments.
All persons or corporations now or at any time liable, whether primarily
or secondarily, for the payment of the indebtedness hereby evidenced, for
themselves, their heirs, legal representatives and assigns, waive demand,
presentment for payment, notice of dishonor, protest, notice of protest, and
diligence in collection and all other notices or demands whatsoever with
respect to this Note or the enforcement hereof, and consent that the time of
said payments or any part thereof may be extended by the holder hereof and
assent to any substitution, exchange, or release of collateral permitted by
the holder hereof, all without in any wise modifying, altering, releasing,
affecting or limiting their respective liability. This Note may not be
changed orally, but only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification or discharge is
sought.
The term obligor, as used in this Note, shall mean all parties, and each
of them, directly or indirectly obligated for the indebtedness that this Note
evidences, whether as principal, maker, endorser, surety, guarantor or
otherwise.
In addition to and not in limitation of the foregoing and the provisions
of the Loan Agreement, it is expressly understood and agreed by all parties
hereto, including obligors, that if it is necessary to enforce payment of
this Note through an attorney or by suit, undersigned or any obligors shall
pay reasonable attorney's fees, court costs and all costs of collection.
THIS REVOLVING NOTE HAS BEEN DELIVERED AT NASHVILLE, TENNESSEE, AND SHALL
BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF TENNESSEE, WITHOUT REGARD TO CONFLICTS OF LAW
PRINCIPLES. WHENEVER POSSIBLE EACH PROVISION OF THIS REVOLVING NOTE SHALL BE
INTERPRETED IN SUCH MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW,
BUT IF ANY PROVISION OF THIS REVOLVING NOTE SHALL BE PROHIBITED BY OR INVALID
UNDER APPLICABLE LAW, SUCH PROVISION SHALL BE INEFFECTIVE TO THE EXTENT OF
SUCH PROHIBITION OR INVALIDITY, WITHOUT INVALIDATING THE REMAINDER OF SUCH
PROVISION OR THE REMAINING PROVISIONS OF THIS REVOLVING NOTE. WHENEVER IN THIS
REVOLVING NOTE REFERENCE IS MADE TO THE AGENT, THE BANK OR THE UNDERSIGNED
BORROWER, SUCH REFERENCE SHALL BE DEEMED TO INCLUDE, AS APPLICABLE, A
REFERENCE TO THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. THE PROVISIONS OF THIS
REVOLVING
PAGE 2 OF A 3 PAGE NOTE
<PAGE>
NOTE SHALL BE BINDING UPON AND SHALL INURE TO THE BENEFIT OF SUCH SUCCESSORS
AND ASSIGNS.
This obligation is made and intended as a Tennessee contract and is to be
so construed.
IN WITNESS WHEREOF, this Note has been duly executed by the undersigned the
day and year first above written.
NOVA HOLDINGS, INC.,
a Delaware corporation
BY:
---------------------------------
ITS:
---------------------------------
PAGE 3 OF A 3 PAGE NOTE
<PAGE>
REVOLVING NOTE
$15,000,000.00 Nashville, Tennessee
June 5, 1997
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
First Tennessee Bank National Association (the "Bank") the sum of Fifteen
Million Dollars ($15,000,000.00) with interest thereon as set forth in
Section 2.2 of the Loan and Security Agreement dated of even date herewith
(as the same may be amended, modified or restated from time to time, the
"Loan Agreement"), or, if a lesser amount is outstanding, the Bank's pro rata
share of the aggregate unpaid principal amount of all advances made pursuant
to Paragraph 2.1 of the Loan Agreement, at such times as are specified
therein and in accordance with the provisions thereof. Interest shall
likewise be payable hereunder at the rates and on the times specified in the
Loan Agreement.
Both principal and interest due on this Revolving Note are payable
in Nashville, Tennessee, at par in lawful money of the United States of
America, in the Main Office of the Agent or at such other place as the Agent
may designate in writing from time to time.
This Revolving Note is one of the Notes referred to in and is
entitled to the benefits of the Loan Agreement and the Collateral referenced
therein. All terms which are capitalized and used herein (which are not
otherwise specifically defined herein) and which are defined in the Loan
Agreement shall be used in this Note as defined in the Loan Agreement.
Time is of the essence of this Note. It is hereby expressly agreed
that in the event that any default be made in the payment of any part of
interest or principal for a period of five (5) days from the date when due,
or upon failure of the undersigned to keep and perform all the covenants,
promises, agreements, conditions and provisions of this Revolving Note, the
Loan Agreement, any Loan Document, or in any other instrument or document now
or hereafter evidencing, securing or otherwise relating to the indebtedness
evidenced hereby, subject to any applicable grace, notice or cure periods
contained therein; then, in any such case, the entire unpaid principal sum
evidenced by this Note, together with all accrued interest, shall, at the
option of any holder, without notice, become due and payable forthwith,
regardless of the stipulated Loan Termination Date. Upon the occurrence of
any default as set forth herein, at the option of holder and without notice
to obligor, all accrued and unpaid interest and fees, if any, shall be added
to the outstanding principal balance hereof, and the entire outstanding
principal balance, as so adjusted, shall bear interest thereafter until paid
at an annual rate (the "Default Rate") equal to the lesser of (i) the rate
that is two percentage points (2%) in excess of the rate(s) set forth in the
Loan Agreement, or (ii) the maximum rate permitted to be charged by
applicable law from time to time in effect (the "Maximum Rate"), regardless
of whether or not there has been an acceleration of the payment of principal
as set forth herein. All such interest shall be paid at the time of and as a
condition precedent to the curing of any such default. Failure of the holder
to exercise this right of accelerating the maturity of the debt, or
PAGE 1 OF A 3 PAGE NOTE
<PAGE>
indulgence granted from time to time, shall in no event be considered as a
waiver of said right of acceleration or stop the holder from exercising said
right.
To the extent permitted by applicable law, obligor shall pay to the
holder hereof a late charge equal to four percent (4%) of any interest
payment which is past due for a period of ten (10) or more days, or order to
cover the additional expenses incident to the handling and processing of
delinquent payments.
All persons or corporations now or at any time liable, whether
primarily or secondarily, for the payment of the indebtedness hereby
evidenced, for themselves, their heirs, legal representatives and assigns,
waive demand, presentment for payment, notice of dishonor, protest, notice of
protest, and diligence in collection and all other notices or demands
whatsoever with respect to this Note or the enforcement hereof, and consent
that the time of said payments or any part thereof may be extended by the
holder hereof and assent to any substitution, exchange, or release of
collateral permitted by the holder hereof, all without in any wise modifying,
altering, releasing, affecting or limiting their respective liability. This
Note May not be changed orally, but only by an agreement in writing signed by
the party against whom enforcement of any waiver, change, modification or
discharge is sought.
The term obligor, as used in this Note, shall mean all parties, and
each of them, directly or indirectly obligated for the indebtedness that
this Note evidences, whether as principal, maker, endorser, surety, guarantor
or otherwise.
In addition to and not in limitation of the foregoing and the
provisions of the Loan Agreement, it is expressly understood and agreed by
all parties hereto, including obligors, that if it is necessary to enforce
payment of this Note through an attorney or by suit, undersigned or any
obligors shall pay reasonable attorney's fees, court costs and all costs of
collection.
THIS REVOLVING NOTE HAS BEEN DELIVERED AT NASHVILLE, TENNESSEE, AND
SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE INTERNAL LAWS OF THE STATE OF TENNESSEE, WITHOUT REGARD TO CONFLICTS OF
LAW PRINCIPLES, WHENEVER POSSIBLE EACH PROVISION OF THIS REVOLVING NOTE
SHALL BE INTERPRETED IN SUCH MANNER AS TO BE EFFECTIVE AND VALID UNDER
APPLICABLE LAW, BUT IF ANY PROVISION OF THIS REVOLVING NOTE SHALL BE
PROHIBITED BY OR INVALID UNDER APPLICABLE LAW, SUCH PROVISION SHALL BE
INEFFECTIVE TO THE EXTENT OF SUCH PROHIBITION OR INVALIDITY, WITHOUT
INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF
THIS REVOLVING NOTE. wHENEVER IN THIS REVOLVING NOTE REFERENCE IS MADE TO THE
AGENT, THE BANK OR THE UNDERSIGNED BORROWER, SUCH REFERENCE SHALL BE DEEMED
TO INCLUDE, AS APPLICABLE, A REFERENCE TO THEIR RESPECTIVE SUCCESSORS AND
ASSIGNS. THE PROVISIONS OF THIS REVOLVING
PAGE 2 OF A 3 PAGE NOTE
<PAGE>
NOTE SHALL BE BINDING UPON AND
SHALL INURE TO THE BENEFIT OF SUCH SUCCESSORS AND ASSIGNS.
This obligation is made and intended as a Tennessee contract and is
to be so construed.
IN WITNESS WHEREOF, this Note has been duly executed by the
undersigned the day and year first above written.
NOVA HOLDINGS, INC.,
a Delaware corporation
BY:
-------------------------------------
ITS:
------------------------------------
PAGE 3 OF A 3 PAGE NOTE
<PAGE>
EXHIBIT B
BORROWING/CONVERSION NOTICE
AGENT: NationsBank of Tennessee, N.A. Date: ___________199_
BORROWER: Nova Holdings, Inc.
This notice is delivered under the Loan and Security Agreement (as
renewed, extended and amended, the "Loan Agreement") dated as of June 5,
1997, between Borrower its Subsidiaries, the Agent, and the Banks named therein.
Terms defined in the Loan Agreement have the same meanings when used --
unless otherwise defined -- in this request.
Borrower requests a Revolving Loan under the Loan Agreement as
follows:
Borrowing Date(1) _______________, 199_
Amount of Borrowing $_____________________
Type of Borrowing(2) _____________________
For Eurodollar Loans, the Interest Period(3) ______________ months
Proceeds of the requested Revolving Loan shall be deposited to
Borrower's account as provided by the Loan Agreement unless one of the
following options is indicated:
____ The proceeds of the requested Revolving Loan shall be applied
to the payment of an existing Floating Rate Loan, this new Revolving Loan
being a conversion of a Floating Rate Loan to a Eurodollar Loan
____ The proceeds of the requested Revolving Loan shall be applied
to the payment of the following Eurodollar Loan, this new Revolving Loan
being a conversion of a Eurodollar Loan to a different Eurodollar Loan:
Date:___________________________
Amount:_________________________
Interest Period:________________
Borrower certifies that on the date hereof and on the date of the
above Borrowing Date -- after giving effect to the requested Revolving Loan
- -- (a) all of the representations and warranties in the Loan Documents will
be true and correct in all material respects -- unless they speak to a
specific date or the facts on which they are based have been changed by
transactions contemplated or permitted by the Loan Agreement, (b) no Event of
Default or Unmatured Default exists, and no Material Adverse Change has
occurred, and (c) all conditions to Borrower's right to receive the requested
Revolving Loan under the Loan Agreement have been satisfied, including those
in Paragraph 3.2.
NOVA HOLDINGS, INC., as Borrower
By:__________________________________________
(Name)_______________________________________
(Title)______________________________________
- ----------------------
(1)Next Business Day for Floating Rate Loans; 3 Business Days for Eurodollar
Loans.
(2)Eurodollar or Floating Rate Loan.
(3)1,2,3 or 6 months.
<PAGE>
Exhibit 10.39
SWINGLINE LOAN NOTE
$2,000,000.00 Nashville, Tennessee
December 1, 1997
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
NationsBank of Tennessee, N.A. ("Bank") the sum of Two Million Dollars
($2,000,000.00) with interest at the rate of the NationsBank Prime Rate
charged by NationsBank of Tennessee, N.A. minus one-half of one percent
(0.50%) per annum, said interest rate to be adjusted whenever there is a
change in said rate, but in no event shall the interest rate charged herein
exceed the maximum rate of interest permitted to be charged under the laws in
effect from time to time (the "Maximum Rate"). NationsBank Prime Rate is the
fluctuating rate of interest established by the Bank from time to time as its
"Prime Rate", whether or not such rate shall be otherwise published. Such
Prime Rate is established by Bank as an index or base rate and may or may not
at any time be the best or lowest rate charged by Bank on any loan. If at any
time or from time to time the Prime Rate increases or decreases, then the
rate of interest hereunder shall be correspondingly increased or decreased
effective on the day on which any such increase or decrease of the Prime Rate
changes, unless otherwise herein provided. In the event that the Bank, during
the term hereof, shall abolish or abandon the practice of establishing a
Prime Rate, or should the same become unascertainable, the Bank shall
designate a comparable reference rate which shall be deemed to be the Prime
Rate for purposes hereof.
Interest shall be computed for the actual number of days elapsed on
the basis of a year consisting of 360 days. Said interest shall be due and
payable monthly on the then outstanding principal balance on the first (1st)
day of each consecutive month, the first such payment being due January 1,
1998. On the Maturity Date, December 1, 1998, the entire outstanding
principal balance, together with all accrued and unpaid interest, shall be
immediately due and payable in full.
Interest shall continue to accrue when payments are submitted by
instruments representing funds not immediately available and until such funds
are, in fact, collected. Both principal and interest due on this Note are
payable in Nashville, Tennessee, at par in lawful money of the United States
of America, in the Main Office of NationsBank of Tennessee, N.A. or at such
other place as NationsBank of Tennessee, N.A. may designate in writing from
time to time.
So long as no default has occurred hereunder or under that certain
Loan and Security Agreement dated as of June 5, 1997 (as amended, modified or
restated from time to time, the "Loan and Security Agreement") and subject to
the limitations and other covenants contained in an Autoborrow Service
Agreement of even date herewith between the undersigned and Bank, the
undersigned may borrow either the full amount of this loan or any portion
thereof, repay without penalty or premium, and reborrow, from the date hereof
until the Maturity Date.
PAGE 1 OF A 4 PAGE NOTE
<PAGE>
Time is of the essence of this Note. It is hereby expressly agreed
that in the event that any default be made in the payment of any part of
interest or principal for a period of five (5) days from the date when due,
or upon failure of the undersigned to keep and perform all the covenants,
promises, agreements, conditions and provisions of this Note, the Autoborrow
Service Agreement, the Loan and Security Agreement, or in any other
instrument or document now or hereafter evidencing, securing or otherwise
relating to the indebtedness evidenced hereby subject to any applicable
grace, notice or cure periods contained therein; then, in any such case, the
entire unpaid principal sum evidenced by this Note, together with all accrued
interest, shall, at the option of any holder, without notice, become due and
payable forthwith, regardless of the stipulated Maturity Date. Upon the
occurrence of any default as set forth herein, at the option of holder and
without notice to obligor, all accrued and unpaid interest, if any, shall be
added to the outstanding principal balance hereof, and the entire outstanding
principal balance, as so adjusted, shall bear interest thereafter until paid
at an annual rate (the "Default Rate") equal to the lesser of (i) the rate
that is two percentage points (2%) in excess of the above-specified interest
rate, as it varies from time to time, or (ii) the Maximum Rate, regardless of
whether or not there has been an acceleration of the payment of principal as
set forth herein. All such interest shall be paid at the time of and as a
condition precedent to the curing of any such default. Failure of the holder
to exercise this right of accelerating the maturity of the debt, or
indulgence granted from time to time, shall in no event be considered as a
waiver of said right of acceleration or stop the holder from exercising said
right.
To the extent permitted by applicable law, obligor shall pay to
NationsBank of Tennessee, N.A. a late charge equal to four percent (4%) of
any interest payment which is past due for a period of ten (10) or more days,
in order to cover the additional expenses incident to the handling and
processing of delinquent payments.
All persons or corporations now or at any time liable, whether
primarily or secondarily, for the payment of the indebtedness hereby
evidenced, for themselves, their heirs, legal representatives and assigns,
waive demand, presentment for payment, notice of dishonor, protest, notice of
protest, and diligence in collection and all other notices or demands
whatsoever with respect to this Note or the enforcement hereof, and consent
that the time of said payments or any part thereof may be extended by the
holder hereof and assent to any substitution, exchange, or release of
collateral permitted by the holder hereof, all without in any wise modifying,
altering, releasing, affecting or limiting their respective liability. This
Note may not be changed orally, but only by an agreement in writing signed by
the party against whom enforcement of any waiver, change, modification or
discharge is sought.
The term obligor, as used in this Note, shall mean all parties, and
each of them, directly or indirectly obligated for the indebtedness that this
Note evidences, whether as principal, maker, endorser, surety, guarantor or
otherwise.
It is expressly understood and agreed by all parties hereto,
including obligors, that if it is necessary to enforce payment of this Note
through an attorney or by suit, undersigned or any obligors shall pay
reasonable attorney's fees, court costs and all costs of collection.
PAGE 2 OF A 4 PAGE NOTE
<PAGE>
This obligation is made and intended as a Tennessee contract and is
to be so construed.
Any controversy or claim between or among the parties hereto
including but not limited to those arising out of or relating to this Note or
any related instruments, agreements or documents, including any claim based
on or arising from an alleged tort, shall be determined by binding
arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the Rules of Practice and Procedure
for the Arbitration of Commercial Disputes of J.A.M.S./Endispute or any
successor thereof ("J.A.M.S."), and the "Special Rules" set forth below. In
the event of any inconsistency, the Special Rules shall control. Judgment
upon any arbitration award may be entered in any court having jurisdiction.
Any party to this Note may bring an action, including a summary or expedited
proceeding, to compel arbitration of any controversy or claim to which this
Note applies in any court having jurisdiction over such action.
(a) Special Rules. The arbitration shall be conducted in the
city of the undersigned's domicile at time of the execution of this instrument,
agreement or document and administered by J.A.M.S who will appoint an
arbitrator; if J.A.M.S. is unable or legally precluded from administering the
arbitration, then the American Arbitration Association will serve. All
arbitration hearings will be commenced within 90 days of the demand for
arbitration; further, the arbitrator shall only, upon a showing of cause, be
permitted to extend the commencement of such hearing for up to an additional
60 days.
(b) Reservation of Rights. Nothing in this arbitration provision
shall be deemed to (i) limit the applicability of any otherwise applicable
statutes of limitation or repose and any waivers contained in this
arbitration provision; or (ii) be a waiver by the Agent or any Lender of the
protection afforded to it by 12 U.S.C. Sec. 91 or any substantially
equivalent state law; or (iii) limit the right of the Agent or any Lender
hereto (a) to exercise self help remedies such as (but not limited to)
setoff, or (b) to foreclose against any real or personal property collateral,
or (c) to obtain from a court provisional or ancillary remedies such as (but
not limited to) injunctive relief, writ of possession or the appointment of a
receiver. The Agent or any Lender may exercise such self help rights,
foreclose upon such property, or obtain such provisional or ancillary
remedies before, during or after the pendency of any arbitration proceeding
brought pursuant to this instrument, agreement or document. Neither this
exercise of self help remedies nor the institution or maintenance of an
action for foreclosure or provisional or ancillary remedies shall constitute
a waiver of the right of any party, including the claimant in such action, to
arbitrate the merits of the controversy or claim occasioning resort to such
remedies.
PAGE 3 OF A 4 PAGE NOTE
<PAGE>
IN WITNESS WHEREOF, this Note has been duly executed by the
undersigned the day and year first above written.
NOVA HOLDINGS, INC.
By: /s/Joel R. ???????????
------------------------------------
Joel R. ???????????
Title: Sec. Treas.
-----------------------------
PAGE 4 OF A 4 PAGE NOTE
<PAGE>
EXHIBIT 10.56
AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
This Amendment No. 1 dated as of August 28, 1998, under and to that
certain Loan and Security Agreement dated as of June 5, 1997, among Nova
Holdings, Inc., a Delaware corporation (the "Borrower"), the Subsidiaries and
Guarantors, jointly and severally; each of the undersigned Banks (in such
capacity the "Banks") and NationsBank of Tennessee, N.A. as agent for the
Banks (in such capacity the "Agent").
W I T N E S S E T H:
-------------------
WHEREAS, Borrower, the Banks and the Agent are parties to the Agreement;
and
WHEREAS, the parties hereto desire to extend the maturity date of the
Revolving Loan Notes to October 31, 2000 on the same terms and conditions as
are presently therein set forth;
NOW, THEREFORE, the Borrower, the Banks and the Agent agree to amend the
Loan Agreement as follows:
1. DEFINITIONS. All capitalized terms used in this Amendment No. 1
which are not otherwise defined herein shall have the respective meanings
ascribed thereto in the Agreement.
2. AMENDMENTS TO AGREEMENT. The definition of Loan Termination Date in
Section I of the Agreement, DEFINITIONS, is hereby amended as follows:
"LOAN TERMINATION DATE" is hereby amended to replace
"October 31, 1999" with "October 31, 2000."
3. COUNTERPARTS. This Amendment No. 1 may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same instrument.
4. AGREEMENT TO REMAIN IN EFFECT. Except as expressly provided herein,
the Agreement and each other Collateral Document shall be and shall continue
in full force and effect in accordance with its respective terms.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1
to be executed by their respective officers thereunto duly authorized, as of
the date first above written.
AGENT BORROWER
- ----- --------
NATIONSBANK OF TENNESSEE, N.A., NOVA HOLDINGS, INC.
as Agent
BY: /s/ Elizabeth L. Knox BY: /s/ Joel Kimbrough
------------------------------ ------------------------------
TITLE: S.V.P. TITLE: CFO
--------------------------- ---------------------------
BANKS GUARANTORS AND SUBSIDIARIES
- ----- ---------------------------
NATIONSBANK OF TENNESSEE, N.A. SOUTHERN HEALTH SYSTEMS, INC.
BY: /s/ Elizabeth L. Knox BY: /s/ Joel Kimbrough
------------------------------ ------------------------------
TITLE: S.V.P. TITLE: CFO
--------------------------- ---------------------------
FIRST TENNESSEE BANK NATIONAL NOVA FACTOR, INC.
ASSOCIATION
BY: /s/ Derrick Williams BY: /s/ Joel Kimbrough
------------------------------ ------------------------------
TITLE: V.P. TITLE: CFO
--------------------------- ---------------------------
HORIZON HEALTH SYSTEMS, INC.
BY: /s/ Joel Kimbrough
------------------------------
TITLE: CFO
---------------------------
<PAGE>
Exhibit 10.57
Date: November 24, 1998
LOAN AGREEMENT
This Loan Agreement (the "Agreement") dated as of November 24, 1998, by
and between NationsBank, N.A., a national banking association ("Bank") and the
Borrower described below:
In consideration of the Loan or Loans described below and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, Bank and Borrower agree as follows:
1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms
defined herein, the following terms shall have the meaning set forth with
respect thereto:
A. BORROWER. Childrens Hemophilia Services, a California
general partnership composed of Childrens Home Care, a California not-for-profit
public benefit corporation, and Horizon Health Systems, Inc., a Tennessee
corporation (d/b/a Hemophilia Health Services).
B. BORROWER'S ADDRESS: 6820 Charlotte Pike Suite 100
Nashville, TN 37209
C. HAZARDOUS MATERIALS. Hazardous Materials include all
materials defined as hazardous wastes or substances under any local, state or
federal environmental laws, rules or regulations, and petroleum, petroleum
products, oil and asbestos.
D. LOAN(S). Loan(s) means collectively any and all loans
heretofore or hereafter made by Bank to the Borrower.
E. LOAN DOCUMENTS. Loan Documents means this Loan Agreement
and any and all promissory notes executed by Borrower in favor of Bank and all
other documents, instruments, guarantees, certificates and agreements executed
and/or delivered by Borrower, any guarantor or third party in connection with
any Loan, including without limitation the Guaranties of Accredo Health,
Incorporated and Childrens Home Care, a California not-for-profit public benefit
corporation.
F. ACCOUNTING TERMS. All accounting terms not specifically
defined or specified herein shall have the meanings generally attributed to such
terms under generally accepted accounting principles ("GAAP"), as in effect from
time to time, consistently applied, with respect to the financial statements
referenced in Section 3.H. hereof.
2. LOANS.
A. LOAN. Bank hereby agrees to make (or has made) a loan or
loans to Borrower in the aggregate principal amount of $1,500,000. The
obligation to repay the loan is evidenced by a promissory note of even date
herewith (the promissory note together with any other promissory notes
heretofore or hereafter executed by Borrower in favor of Bank and any and all
renewals, extensions or rearrangements thereof being hereafter collectively
referred to as the "Note") having a maturity date, repayment terms and interest
rate as set forth in the Note.
B. REVOLVING CREDIT FEATURE. The Loan provides for a revolving
line of credit (the "Line") under which Borrower may from time to time, borrow,
repay and re-borrow funds.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Bank as follows:
<PAGE>
A. GOOD STANDING. Borrower is a general partnership, duly
organized, validly existing and in good standing under the laws of California
and has the power and authority to own its property and to carry on its business
in each jurisdiction in which Borrower does business.
B. AUTHORITY AND COMPLIANCE. Borrower has full power and
authority to execute and deliver the Loan Documents and to incur and perform the
obligations provided for therein, all of which have been duly authorized by all
proper and necessary action of the appropriate governing body of Borrower. No
consent or approval of any public authority or other third party is required as
a condition to the validity of any Loan Document, and Borrower is in compliance
with all laws and regulatory requirements to which it is subject.
C. BINDING AGREEMENT. This Agreement and the other Loan
Documents executed by Borrower constitute valid and legally binding obligations
of Borrower, enforceable in accordance with their terms except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally or by general principles
of equity.
D. LITIGATION. There is no proceeding involving Borrower
pending or, to the knowledge of Borrower, threatened before any court or
governmental authority, agency or arbitration authority, except as disclosed to
Bank in writing and acknowledged by Bank prior to the date of this Agreement.
E. NO CONFLICTING AGREEMENTS. There is no charter, bylaw,
stock provision, partnership agreement or other document pertaining to the
organization, power or authority of Borrower and no provision of any existing
agreement, mortgage, indenture or contract binding on Borrower or affecting its
property, which would conflict with or in any way prevent the execution,
delivery or carrying out of the terms of this Agreement and the other Loan
Documents.
F. OWNERSHIP OF ASSETS. Borrower has good title to its assets,
and its assets are free and clear of liens, except those granted to Bank and as
disclosed to Bank in writing prior to the date of this Agreement.
G. TAXES. All taxes and assessments due and payable by
Borrower have been paid or are being contested in good faith by appropriate
proceedings and the Borrower has filed all tax returns which it is required to
file.
H. FINANCIAL PROJECTIONS. To the best of Borrower's knowledge,
all financial information and projections furnished by Borrower to Bank in
connection with this Agreement and the other Loan Documents is and will be
accurate and complete on the date as of which such information is delivered to
Bank and is not and will not be incomplete by the omission of any material fact
necessary to make such information not misleading.
I. PLACE OF BUSINESS. Borrower's chief executive office is
located at 6820 Charlotte Pike Suite 100 Nashville, TN 37209
J. ENVIRONMENTAL MATTERS. The conduct of Borrower's business
operations do not and will not violate any federal laws, rules or ordinances for
environmental protection, regulations of the Environmental Protection Agency and
any applicable local or state law, rule, regulation or rule of common law and
any judicial interpretation thereof relating primarily to the environment or
Hazardous Materials and Borrower will not use or permit any other party to use
any Hazardous Materials at any of Borrower's places of business or at any other
property owned by Borrower except such materials as are incidental to Borrower's
normal course of business, maintenance and repairs and which are handled in
compliance with all applicable environmental laws. Borrower agrees to permit
Bank, its agents, contractors and employees to enter and inspect any of
Borrower's places of business or any other property of Borrower at any
reasonable times upon three (3) days prior notice for the purposes of conducting
an environmental investigation and audit (including taking physical samples) to
insure that Borrower is complying with this covenant
-2-
<PAGE>
and Borrower shall reimburse Bank on demand for the reasonable costs of any such
environmental investigation and audit. Borrower shall provide Bank, its agents,
contractors, employees and representatives with access to and copies of any and
all data and documents relating to or dealing with any Hazardous Materials used,
generated, manufactured, stored or disposed of by Borrower's business operations
within five (5) days of the request therefore.
K. CONTINUATION OF REPRESENTATION AND WARRANTIES. All
representations and warranties made under this Agreement shall be deemed to be
made at and as of the date hereof and at and as of the date of any future
advance under any Loan.
4. AFFIRMATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will, unless Bank
consents otherwise in writing (and without limiting any requirement of any other
Loan Document):
A. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain a
system of accounting satisfactory to Bank and in accordance with GAAP applied on
a consistent basis throughout the period involved, permit Bank's officers or
authorized representatives upon prior notice to visit and inspect Borrower's
books of account and other records at such reasonable times and during normal
business hours as often as Bank may desire, and pay the reasonable fees and
disbursements of any accountants or other agents of Bank selected by Bank for
the foregoing purposes. Unless written notice of another location is given to
Bank, Borrower's books and records will be located at Borrower's chief executive
office set forth above. All financial statements called for below shall be
prepared in form and content acceptable to Bank and by independent certified
public accountants acceptable to Bank.
B. In addition, Borrower will:
i. Furnish to Bank annual financial statements of
Borrower for each fiscal year of Borrower, within 90 days after the close of
each such fiscal year.
ii. Furnish to Bank monthly financial statements
(including a balance sheet and profit and loss statement) of Borrower for each
month of each fiscal year of Borrower, within 30 days after the close of each
such period.
iii. Furnish to Bank annual audited and consolidating
financial statements of Accredo Health, Incorporated for each fiscal year of
Accredo Health, Incorporated, within 100 days after the close of each such
fiscal year.
iv. Furnish to Bank annual financial statements of
Childrens Home Care for each fiscal year of Childrens Home Care, within 100 days
after the close of each such fiscal year.
v. Furnish to Bank promptly such additional
information, reports and statements respecting the business operations and
financial condition of Borrower and each Guarantor, respectively, from time to
time, as Bank may reasonably request.
C. INSURANCE. Maintain or cause to be maintained by its
general partners insurance with responsible insurance companies on such of its
properties, in such amounts and against such risks as is customarily maintained
by similar businesses operating in the same vicinity, specifically to include
fire and extended coverage insurance covering all assets, business interruption
insurance, workers compensation insurance and liability insurance, all to be
with such companies and in such amounts as are satisfactory to Bank and with
respect to insurance on the Collateral, to contain a mortgagee clause naming
Bank as a loss payee or an additional insured (as applicable) as its interest
may appear and providing for at least 30 days prior notice to Bank of any
cancellation thereof. Satisfactory evidence of such insurance will be supplied
to Bank prior to funding under the Loan(s) and 30 days prior to each policy
renewal.
D. EXISTENCE AND COMPLIANCE. Maintain its existence, good
standing and qualification to do business, where required and comply with all
laws, regulations and
-3-
<PAGE>
governmental requirements including, without limitation, environmental laws
applicable to it or to any of its property, business operations and
transactions.
E. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in
writing of (i) any condition, event or act which comes to its attention that
would or in all likelihood could materially adversely affect Borrower's
financial condition or operations, or Bank's rights under the Loan Documents,
(ii) any litigation filed by or against Borrower where the amount of the claim
exceeds one hundred thousand dollars ($100,000.00), and (iii) any event that has
occurred that would constitute an event of default under any Loan Documents.
F. TAXES AND OTHER OBLIGATIONS. Pay all of its taxes,
assessments and other obligations, including, but not limited to taxes, costs or
other expenses arising out of this transaction, as the same become due and
payable, except to the extent the same are being contested in good faith by
appropriate proceedings in a diligent manner.
G. MAINTENANCE. Maintain all of its tangible property in good
condition and repair and make all necessary replacements thereof, and preserve
and maintain all licenses, trademarks, privileges, permits, franchises,
certificates and the like necessary for the operation of its business.
H. NOTIFICATION OF ENVIRONMENTAL CLAIMS. Borrower shall
immediately advise Bank in writing of (i) any and all enforcement, cleanup,
remedial, removal, or other governmental or regulatory actions instituted,
completed or threatened pursuant to any applicable federal, state, or local
laws, ordinances or regulations relating to any Hazardous Materials affecting
Borrower's business operations; and (ii) all claims made or threatened by any
third party against Borrower relating to damages, contribution, cost recovery,
compensation, loss or injury resulting from any Hazardous Materials. Borrower
shall immediately notify Bank of any remedial action taken by Borrower with
respect to Borrower's business operations.
5. NEGATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will not, without the
prior written consent of Bank (and without limiting any requirement of any other
Loan Documents):
A. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign or
otherwise dispose of or transfer any assets, except in the normal course of its
business, or enter into any merger or consolidation, or transfer control or
ownership of the Borrower or form or acquire any subsidiary.
B. LIENS. Grant, suffer or permit any contractual or
noncontractual lien on or security interest in its assets, except in favor of
Bank, or fail to promptly pay when due (including grace periods) all lawful
claims, whether for labor, materials or otherwise.
C. EXTENSIONS OF CREDIT. Make any loan or advance to any
individual, partnership, corporation or other entity.
D. BORROWINGS. Create, incur, assume or become liable in any
manner for any indebtedness (for borrowed money, deferred payment for the
purchase of assets, lease payments, as surety or guarantor for the debt for
another, or otherwise) other than to Bank, except for normal trade debts
incurred in the ordinary course of Borrower's business, and except for existing
indebtedness disclosed to Bank in writing and acknowledged by Bank prior to the
date of this Agreement.
E. CHARACTER OF BUSINESS. Change the general character of
business as conducted at the date hereof, or engage in any type of business not
reasonably related to its business as presently conducted.
6. DEFAULT. Borrower shall be in default under this Agreement and under
each of the other Loan Documents if it shall default in the payment of any
amounts due and owing under the Loans (including any grace periods) or should it
fail to timely and properly observe, keep or perform any term, covenant,
agreement or condition in any Loan Document or in any other loan
-4-
<PAGE>
agreement, promissory note, security agreement, deed of trust, mortgage,
assignment or other contract securing or evidencing payment of any indebtedness
of Borrower to Bank or any affiliate or subsidiary of NationsBank Corporation.
7. REMEDIES UPON DEFAULT. If an event of default shall occur Bank shall
have all rights, powers and remedies available under each of the Loan Documents
as well as all rights and remedies available at law or in equity.
8. NOTICES. All notices, requests or demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to the other party at the following
address:
Borrower:
6820 Charlotte Pike
Suite 100
Nashville, TN 37209
Attn: Kyle Callahan
Fax. No. (615) 853-3814
copy to:
Accredo Health, Incorporated
1640 Century Center Parkway
Suite 101
Memphis, Tennessee 38134
Attn: Tom Bell
Fax. No. (901) 385-3689
Bank: NationsBank, N.A.
1 NationsBank Plaza
Nashville, Tennessee 37239
Attn: Elizabeth Knox
Fax. No. (615) 749-4951
or to such other address as any party may designate by written notice to the
other party. Each such notice, request and demand shall be deemed given or made
as follows:
A. If sent by hand delivery, upon delivery;
B. If sent by mail, upon the earlier of the date of receipt or
five (5) days after deposit in the U.S. Mail, first class postage prepaid.
9. COSTS, EXPENSES AND ATTORNEY'S FEES. Borrower shall pay to Bank
immediately upon demand the full amount of all costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of Bank's in-house counsel), incurred by Bank in connection with (a)
negotiation and preparation of this Agreement and each of the Loan Documents,
and (b) Bank's continued administration thereof.
10. MISCELLANEOUS. Borrower and Bank further covenant and agree as
follows, without limiting any requirement of any other Loan Document:
A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right
granted to Bank under any Loan Document, or allowed it by law or equity shall be
cumulative of each other and may be exercised in addition to any and all other
rights of Bank, and no delay in exercising any right shall operate as a waiver
thereof, nor shall any single or partial exercise by Bank of any right preclude
any other or future exercise thereof or the exercise of any other right.
Borrower expressly waives any presentment, demand, protest or other notice of
any kind, including but not limited to notice of intent to accelerate and notice
of acceleration. No notice to or demand on Borrower in any case shall, of
itself, entitle Borrower to any other or future notice or demand in similar or
other circumstances.
-5-
<PAGE>
B. APPLICABLE LAW. This Loan Agreement and the rights and
obligations of the parties hereunder shall be governed by and interpreted in
accordance with the laws of the State of Tennessee and applicable United States
federal law.
C. AMENDMENT. No modification, consent, amendment or waiver of
any provision of this Loan Agreement, nor consent to any departure by Borrower
therefrom, shall be effective unless the same shall be in writing and signed by
an officer of Bank, and then shall be effective only in the specified instance
and for the purpose for which given. This Loan Agreement is binding upon
Borrower, its successors and assigns, and inures to the benefit of Bank, its
successors and assigns; however, no assignment or other transfer of Borrower's
rights or obligations hereunder shall be made or be effective without Bank's
prior written consent, nor shall it relieve Borrower of any obligations
hereunder. There is no third party beneficiary of this Loan Agreement.
D. DOCUMENTS. All documents, certificates and other items
required under this Loan Agreement to be executed and/or delivered to Bank shall
be in form and content satisfactory to Bank and its counsel.
E. PARTIAL INVALIDITY. The unenforceability or invalidity of
any provision of this Loan Agreement shall not affect the enforceability or
validity of any other provision herein and the invalidity or unenforceability of
any provision of any Loan Document to any person or circumstance shall not
affect the enforceability or validity of such provision as it may apply to other
persons or circumstances.
F. INDEMNIFICATION. Borrower shall indemnify, defend and hold
Bank and its successors and assigns harmless from and against any and all
claims, demands, suits, losses, damages, assessments, fines, penalties, costs or
other expenses (including reasonable attorneys' fees and court costs) arising
from or in any way related to any of the transactions contemplated hereby
(excluding only those claims arising from Bank's own negligence or
recklessness), including but not limited to actual or threatened damage to the
environment, agency costs of investigation, personal injury or death, or
property damage, due to a release or alleged release of Hazardous Materials,
arising from Borrower's business operations, any other property owned by
Borrower or in the surface or ground water arising from Borrower's business
operations, or gaseous emissions arising from Borrower's business operations or
any other condition existing or arising from Borrower's business operations
resulting from the use or existence of Hazardous Materials, whether such claim
proves to be true or false. Borrower further agrees that its indemnity
obligations shall include, but are not limited to, liability for damages
resulting from the personal injury or death of an employee of the Borrower,
regardless of whether the Borrower has paid the employee under the workmen' s
compensation laws of any state or other similar federal or state legislation for
the protection of employees. The term "property damage" as used in this
paragraph includes, but is not limited to, damage to any real or personal
property of the Borrower, the Bank, and of any third parties. The Borrower's
obligations under this paragraph shall survive the repayment of the Loan.
G. SURVIVABILITY. All covenants, agreements, representations
and warranties made herein or in the other Loan Documents shall survive the
making of the Loan and shall continue in full force and effect so long as the
Loan is outstanding or the obligation of the Bank to make any advances under the
Line shall not have expired.
11. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY,
-6-
<PAGE>
THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE
ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT,
AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS
AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE
COUNTY OF ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS
INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT
AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE
ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR
ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION
PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE
APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS
INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION
AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW;
OR (III) LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH
AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL
PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY
REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR
THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS,
FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES
BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT
PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF
SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR
FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF
THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE
THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
12. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized representatives as of the date first
above written.
BORROWER: Childrens Hemophilia BANK: NationsBank, N.A.
Services, a California general partnership
By: By:
-------------------------------------- ---------------------------
Kyle Callahan, Manager
Title:
------------------------
-7-
<PAGE>
Exhibit 10.58
Date November 24, 1998
LIMITED GUARANTY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BANK: GUARANTOR:
<S> <C>
NationsBank, N.A. Accredo Health, Incorporated
Banking Center: 1620 Century Center Parkway, Suite 109
1 NationsBank Plaza Memphis, Tennessee 38134
Nashville, Tennessee 37239
Davidson County Shelby County
(Street address including county) (Name and street address, including county)
- --------------------------------------------------------------------------------
</TABLE>
"BORROWER":
CHILDRENS HEMOPHILIA SERVICES, A CALIFORNIA GENERAL PARTNERSHIP
(Borrower's Name)
1. GUARANTY. FOR VALUE RECEIVED, and to induce NationsBank, N.A. (Attn:
Elizabeth Knox) ("Bank") to make loans or advances or to extend credit or other
financial accommodations or benefits, with or without security, to or for the
account of Borrower, the undersigned "Guarantor," hereby becomes surety for and
irrevocably and unconditionally guarantees to Bank prompt payment in an amount
as provided herein, when due, whether by acceleration or otherwise, of any
Liabilities of Borrower to Bank. This Guaranty is cumulative to and does not
supersede any other guaranties.
NOTWITHSTANDING THE FOREGOING OR ANYTHING HEREIN TO THE CONTRARY, this Guaranty
is limited to the amount of $1,500,000 principal plus interest incurred by
Borrower pursuant to that certain promissory note or other Loan Documents from
Borrower to Bank, dated November 24, 1998 in the principal amount of
$1,500,000.00, including, without limitation, all principal plus interest owing
at any time thereunder whether arising by renewal or advance of additional
principal which may accrue or be incurred with respect to said promissory note
or other Loan Documents, plus attorney's fees, cost of expenses of collection
incurred and/or the cost of the enforcement of rights in enforcing this Guaranty
(including, without limitation, any liability arising from failure to comply
with any state or federal laws, rules and regulations concerning the control of
hazardous waste or substances at or with respect to any real estate securing any
loan guaranteed hereby), plus interest on such attorney's fees and cost of
collection.
Except to the extent limited above, Guarantor unconditionally guarantees the
faithful, prompt and complete compliance by Borrower with all Obligations (as
hereinafter defined). The undertakings of Guarantor hereunder are independent of
the Liabilities and Obligations of Borrower and a separate action or actions for
payment, damages or performance may be brought or prosecuted against Guarantor,
whether or not an action is brought against Borrower or to realize upon the
security for the Liabilities and/or Obligations, whether or not Borrower is
joined in any such action or actions, and whether or not notice is given or
demand is made upon Borrower.
Bank shall not be required to proceed first against Borrower, or any other
person or entity, whether primarily or secondarily liable, or against any
collateral held by it, before resorting to Guarantor for payment, and Guarantor
shall not be entitled to assert as a defense to the enforceability of the
Guaranty any defense of Borrower with respect to any Liabilities or Obligations.
2. PARAGRAPH HEADINGS, GOVERNING LAW AND BINDING EFFECT. Guarantor agrees
that the
<PAGE>
paragraph headings in this Guaranty are for convenience only and that they will
not limit any of the provisions of this Guaranty. Guarantor further agrees that
this Guaranty shall be governed by and construed in accordance with the laws of
the State of Tennessee and applicable United States federal law. Guarantor
further agrees that this Guaranty shall be deemed to have been made in the State
of Tennessee at Bank's address indicated above, and shall be governed by, and
construed in accordance with, the laws of the State of Tennessee, or the United
States courts located within the State of Tennessee, and is performable in the
State of Tennessee. This Guaranty is binding upon Guarantor, his, their or its
executors, administrators, successors or assigns, and shall inure to the benefit
of Bank, its successors, indorsees or assigns. Anyone executing this Guaranty
shall be bound by the terms hereof without regard to execution by anyone else.
3. DEFINITIONS.
A. "Guarantor" shall mean Guarantor.
B. "Liability" or "Liabilities" shall mean without limitation, all
liabilities, overdrafts, indebtedness, and obligations of Borrower to Bank,
whether direct or indirect, absolute or contingent, joint or several, secured or
unsecured, due or not due, contractual or tortious, liquidated or unliquidated,
arising by operation of law or otherwise, now or hereafter existing, or held or
to be held by Bank for its own account or as agent for another or others,
whether created directly, indirectly, or acquired by assignment or otherwise,
including but not limited to all extensions or renewals thereof, and all sums
payable under or by virtue thereof, including without limitation, all amounts of
principal and interest, all expenses (including reasonable attorney's fees and
cost of collection) incurred in the collection thereof or the enforcement of
rights thereunder (including without limitation, any liability arising from
failure to comply with state or federal laws, rules and regulations concerning
the control of hazardous waste or substances at or with respect to any real
estate securing any loan guaranteed hereby), whether arising in the ordinary
course of business or otherwise. If Borrower is a partnership, corporation or
other entity the term "Liability" or "Liabilities" as used herein shall include
all Liabilities to Bank of any successor entity or entities.
C. "Loan Documents" shall mean all deeds to secure debt, deeds of
trust, mortgages, security agreements and other documents securing payment of
the Liabilities and all notes and other agreements, documents, and instruments
evidencing or relating to the Liabilities and Obligations.
D. "Obligation" or "Obligations" shall mean all terms, conditions,
covenants, agreements and undertakings of Borrower under all notes and other
documents evidencing the Liabilities, and under all deeds to secure debt, deeds
of trust, mortgages, security agreements and other agreements, documents and
instruments executed in connection with the Liabilities or related thereto.
4. WAIVERS BY GUARANTOR. Guarantor waives notice of acceptance of this
Guaranty, notice of any Liabilities or Obligations to which it may apply,
presentment, demand for payment, protest, notice of dishonor or nonpayment of
any Liabilities, notice of intent to accelerate, notice of acceleration, and
notice of any suit or the taking of other action by Bank against Borrower, or
any other guarantor, any applicable statute of limitations and any other notice
to any party liable on any Loan Document (including Guarantor).
Guarantor also hereby waives any claim, right or remedy which such Guarantor may
now have or hereafter acquire against Borrower that arises hereunder and/or from
the performance by any other guarantor including, without limitation, any claim,
remedy or right of subrogation, reimbursement, exoneration, contribution,
indemnification, or participation in any claim, right or remedy of Bank against
Borrower or against any security which Bank now has or hereafter acquires,
whether or not such claim, right or remedy arises in equity, under contract, by
statute, under common law or otherwise.
Guarantor also waives the benefits of any provision of law requiring that Bank
exhaust any right or remedy, or take any action, against Borrower, any
Guarantor, any other person and/or property
-2-
<PAGE>
including but not limited to the provisions of the Tenn. Code Ann. '47-12-101,
as amended, or otherwise.
Bank may at any time and from time to time (whether before or after revocation
or termination of this Guaranty) without notice to Guarantor (except as required
by law), without incurring responsibility to Guarantor, without impairing,
releasing or otherwise affecting the Obligations of Guarantor, in whole or in
part, and without the indorsement or execution by Guarantor of any additional
consent, waiver or guaranty: (a) change the manner, place or terms of payment,
or change or extend the time of or renew, or change any interest rate or alter
any Liability or Obligation or installment thereof, or any security therefor;
(b) loan additional monies or extend additional credit to Borrower, with or
without security, thereby creating new Liabilities or Obligations the payment or
performance of which shall be guaranteed hereunder, and the Guaranty herein made
shall apply to the Liabilities and Obligations as so changed, extended,
surrendered, realized upon or otherwise altered; (c) sell, exchange, release,
surrender, realize upon or otherwise deal with in any manner and in any order
any property at any time pledged or mortgaged to secure the Liabilities or
Obligations and any offset there against; (d) exercise or refrain from
exercising any rights against Borrower or others (including Guarantor) or act or
refrain from acting in any other manner; (e) settle or compromise any Liability
or Obligation or any security therefor and subordinate the payment of all or any
part thereof to the payment of any Liability or Obligation of any other parties
primarily or secondarily liable on any of the Liabilities or Obligations; (f)
release or compromise any Liability of Guarantor hereunder or any Liability or
Obligation of any other parties primarily or secondarily liable on any of the
Liabilities or Obligations; or (g) apply any sums from any sources to any
Liability without regard to any Liabilities remaining unpaid.
5. SUBORDINATION. Guarantor agrees that it will not demand, take or
receive from Borrower, by set-off or in any other manner, payment of any moneys
loaned to Borrower in excess of an aggregate of One Hundred Thousand and No/100
Dollars ($100,000.00), now and at any time or times hereafter owing by Borrower
to Guarantor unless and until all the Liabilities and Obligations shall have
been fully paid and performed, and any security interest, liens or encumbrances
which Guarantor now has and from time to time hereafter may have upon any of the
assets of Borrower shall be made subordinate, junior and inferior and postponed
in priority, operation and effect to any security interest of Bank in such
assets. The foregoing shall not apply to management fees and trade payables due
in the ordinary course of business.
6. WAIVERS BY BANK. No delay on the part of Bank in exercising any of its
options, powers or rights, and no partial or single exercise thereof, shall
constitute a waiver thereof. No waiver of any of its rights hereunder, and no
modification or amendment of this Guaranty, shall be deemed to be made by Bank
unless the same shall be in writing, duly signed on behalf of Bank; and each
such waiver, if any, shall apply only with respect to the specific instance
involved, and shall in no way impair the rights of Bank or the obligations of
Guarantor to Bank in any other respect at any other time.
7. TERMINATION. This Guaranty shall be binding on Guarantor until written notice
of revocation signed by such Guarantor shall have been received by Bank,
notwithstanding change in name, location, composition or structure of, or the
dissolution, termination or increase, decrease or change in personnel, owners or
partners of Borrower, or any one or more of Guarantors. No notice of revocation
or termination hereof shall affect in any manner rights arising under this
Guaranty with respect to Liabilities or Obligations that shall have been
committed, created, contracted, assumed or incurred prior to receipt of such
written notice pursuant to any agreement entered into by Bank prior to receipt
of such notice. The sole effect of such notice of revocation or termination
hereof shall be to exclude from this Guaranty, Liabilities or Obligations
thereafter arising that are unconnected with Liabilities or Obligations
theretofore arising or transactions entered into theretofore.
8. PARTIAL INVALIDITY AND/OR ENFORCEABILITY OF GUARANTY. The
unenforceability or invalidity of any provision of this Guaranty shall not
affect the enforceability or validity of any other provision herein and the
invalidity or unenforceability of any provision of any Loan Document as it may
apply to any person or circumstance shall not affect the enforceability or
validity of such
-3-
<PAGE>
provision as it may apply to other persons or circumstances.
In the event Bank is required to relinquish or return the payments, the
collateral or the proceeds thereof, in whole or in part, which had been
previously applied to or retained for application against any Liability, by
reason of a proceeding arising under the Bankruptcy Code, or for any other
reason, this Guaranty shall automatically continue to be effective
notwithstanding any previous cancellation or release effected by Bank.
9. CHANGE OF STATUS. Guarantor will not become a party to a merger or
consolidation with any other company, except where Guarantor is the surviving
corporation or entity, and all covenants under this Guaranty are assumed by the
surviving entity. Further, Guarantor may not change its legal structure, without
the written consent of Bank and all covenants under this Guaranty are assumed by
the new or surviving entity. Guarantor further agrees that this Guaranty shall
be binding, legal and enforceable against Guarantor in the event Borrower
changes its name, status or type of entity.
10. FINANCIAL AND OTHER INFORMATION. Guarantor agrees to furnish to Bank
within ninety (90) days after the end of its fiscal year annual financial
statements (audited, if available) for such year including balance sheet, income
statement and changes in financial condition. Guarantor further agrees to
furnish to Bank any and all financial information and any other information
regarding Guarantor and/or collateral reasonably requested in writing by Bank
within ten (10) days of the date of the request. Guarantor has made an
independent investigation of the financial condition and affairs of Borrower
prior to entering into this Guaranty, and Guarantor will continue to make such
investigation; and in entering into this Guaranty Guarantor has not relied upon
any representation of Bank as to the financial condition, operation or
creditworthiness of Borrower. Guarantor further agrees that Bank shall have no
duty or responsibility now or hereafter to make any investigation or appraisal
of Borrower on behalf of Guarantor or to provide Guarantor with any credit or
other information which may come to its attention now or hereafter.
11. NOTICES. Notice shall be deemed reasonable if mailed postage prepaid at
least five (5) days before the related action to the address of Guarantor or
Bank, at their respective addresses indicated at the beginning of this Guaranty,
or to such other address as any party may designate by written notice to the
other party. Each notice, request and demand shall be deemed given or made, if
sent by mail, upon the earlier of the date of receipt or five (5) days after
deposit in the U.S. Mail, first class postage prepaid, or if sent by any other
means, upon delivery.
12. GUARANTOR DUTIES. Subject to Paragraph 1 above, Guarantor shall upon
notice or demand by Bank promptly and with due diligence pay all amounts
guaranteed hereby for the benefit of Bank in the event of (a) the occurrence of
any default under any Loan Documents; (b) the failure of any Borrower or Accredo
Health, Incorporated to perform any obligation or pay any liability or
indebtedness of any Borrower or Accredo Health, Incorporated to Bank, or to any
affiliate of Bank, whether under any Note, Guaranty, or any other agreement, now
or hereafter existing, as and when due (whether upon demand, at maturity or by
acceleration, subject to any grace provisions contained therein); (c) the
failure of any Borrower or Accredo Health, Incorporated to pay or perform any
other liability, obligation or indebtedness of any Borrower or Accredo Health,
Incorporated in excess of Two Hundred Fifty and No/100 Dollars ($250,000.00) to
any other party; (d) the resignation or withdrawal of any partner or a material
owner of Borrower, as determined by Bank in its sole discretion; (e) the
commencement of a proceeding against Borrower or any Guarantor for dissolution
or liquidation, the voluntary or involuntary termination or dissolution of
Borrower or any Guarantor or the merger or consolidation of Borrower or any
Guarantor with or into another entity; (f) the insolvency, or the business
failure of, or the appointment of a custodian, trustee, liquidator or receiver
for or of any of the property of, or the assignment for the benefit of creditors
by, or the filing of a petition under bankruptcy, insolvency or debtor's relief
law or the filing of a petition for any adjustment of indebtedness, composition
or extension by or against Borrower or any Guarantor; (g) the sole determination
by Bank that any representation or warranty to Bank in any Loan Document or
otherwise to Bank was untrue or materially misleading when made; (h) the failure
of Guarantor or Borrower to timely deliver such financial statements including
tax returns and all schedules, or other statements of condition or other
information, as Bank shall reasonably request from time to time; (i) the entry
of a judgment
-4-
<PAGE>
against Borrower or Guarantor which Bank deems to be of a material nature in the
sole discretion of Bank; (j) the seizure or forfeiture of any of Borrower or
Guarantor's property, or the issuance of any writ of possession, garnishment or
attachment, or any turnover order; (k) the reasonable determination by Bank in
good faith that Accredo Health, Incorporated or Borrower has suffered a material
adverse change in its financial condition; or (l) the failure of Borrower's
business to comply with any material law or regulation controlling the operation
of Borrower's business.
13. REMEDIES. Upon the failure of Guarantor to fulfill its duty to pay all
Liabilities and perform and satisfy all Obligations as required hereunder, Bank
shall have all of the remedies of a creditor and, to the extent applicable, of a
secured party, under all applicable law, and without limiting the generality of
the foregoing, Bank may, at its option and without notice or demand: (a) declare
any Liability due and payable at once; (b) take possession of any collateral
pledged by Borrower or Guarantor wherever located, and sell, resell, assign,
transfer and deliver all or any part of said collateral of Borrower or Guarantor
at any public or private sale or otherwise dispose of any or all of the
collateral in its then condition, for cash or on credit or for future delivery,
and in connection therewith Bank may impose reasonable conditions upon any such
sale, and Bank, unless prohibited by law the provisions of which cannot be
waived, may purchase all or any part of said collateral to be sold, free from
and discharged of all trusts, claims, rights or redemption and equities of
Borrower or Guarantor whatsoever; Guarantor acknowledges and agrees that the
sale of any collateral through any nationally recognized broker-dealer,
investment banker or any other method common in the securities industry shall be
deemed a commercially reasonable sale under the Uniform Commercial Code or any
other equivalent statute or federal law, and expressly waives notice thereof
except as provided herein; and (c) set-off against any or all liabilities of
Guarantor all money owed by Bank or any of its agents or affiliates in any
capacity to Guarantor whether or not due, and also set-off against all other
Liabilities of Guarantor to Bank all money owed by Bank in any capacity to
Guarantor, and if exercised by Bank, Bank shall be deemed to have exercised such
right of set-off and to have made a charge against any such money immediately
upon the occurrence of such default although made or entered on the books
subsequent thereto; PROVIDED, Bank shall after the fact notify the Guarantor of
any such setoff within a reasonable time.
Bank shall have a properly perfected security interest in all of Guarantor's
funds on deposit with Bank to secure the balance of any Liabilities and/or
Obligations that Guarantor may now or in the future owe Bank. Bank is granted a
contractual right of set-off and will not be liable for dishonoring checks or
withdrawals where the exercise of Bank's contractual right of set-off or
security interest results in insufficient funds in Guarantor's account. As
authorized by law, Guarantor grants to Bank this contractual right of set-off
and security interest in all property of Guarantor now or at anytime hereafter
in the possession of Bank, including but not limited to any joint account,
special account, account by the entireties, tenancy in common, and all dividends
and distributions now or hereafter in the possession or control of Bank.
14. ATTORNEY FEES, COST AND EXPENSES. Guarantor shall pay all costs of
collection and reasonable attorney's fees, including reasonable attorney's fees
in connection with any suit, mediation or arbitration proceeding, out of Court
payment agreement, trial, appeal, bankruptcy proceedings or otherwise, incurred
or paid by Bank in enforcing the payment of any Liability or defending this
agreement.
15. INTENTIONALLY OMITTED.
16. PRESERVATION OF PROPERTY. Bank shall not be bound to take any steps
necessary to preserve any rights in any property pledged as collateral to Bank
to secure Borrower and/or Guarantor's Liabilities and Obligations as against
prior parties who may be liable in connection therewith, and Borrower and
Guarantor hereby agree to take any such steps. Bank, nevertheless, at any time,
may (a) take any action it deems appropriate for the care or preservation of
such property or of any rights of Borrower and/or Guarantor or Bank therein; (b)
following a default hereunder, demand, sue for, collect or receive any money or
property at any time due, payable or receivable on account of or in exchange for
any property pledged as collateral to Bank to secure Borrower and/or Guarantor's
Liabilities to Bank; (c) compromise and settle with any person liable on such
property; or (d) extend the time of payment or otherwise change the terms of the
Loan
-5-
<PAGE>
Documents as to any party liable on the Loan Documents, all without notice to,
without incurring responsibility to, and without affecting any of the
Obligations or Liabilities of Guarantor.
17. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY
TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A
SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR
CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH
ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF
ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT,
AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN
ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE
ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR
ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL
BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF
LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR
DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12
U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE
RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED
TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY
COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH
AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT
OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH
PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR
AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES
NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL
OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY,
INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE
CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
18. CONTROLLING DOCUMENT. To the extent that this Limited Guaranty
conflicts with or is in any way incompatible with any other Loan Document
concerning this Obligation, any promissory note shall control over any other
document, and if such promissory note does not address an issue, then each other
document shall control to the extent that it deals most specifically with an
issue.
-6-
<PAGE>
19. NOTICE OF FINAL AGREEMENT. THIS WRITTEN LIMITED GUARANTY REPRESENTS THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be executed as
of the 24th day of November, 1998.
WITNESSED BY: GUARANTOR:
Accredo Health, Incorporated, a Delaware
corporation
By:
----------------------------------------
Print Name and Title Kyle Callahan, Vice President
State of )
------------------
)
County of )
-----------------
This instrument was acknowledged before me on ___________, 1998, by Kyle
Callahan, of Accredo Health, Incorporated, a Delaware corporation, on behalf of
said corporation.
-------------------------------------------
Notary Public
in and for the State of
--------------------
-------------------------------------------
My Commission Expires Print Name of Notary
-7-
<PAGE>
Exhibit 10.59
PROMISSORY NOTE
Date November 24, 1998 Amount $1,500,000 Maturity Date: November 24, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Bank: Borrower:
<S> <C>
NationsBank, N.A. Childrens Hemophilia Services, a
Banking Center: California general partnership
1 NationsBank Plaza 6820 Charlotte Pike
Nashville, Tennessee 37239 Suite 100
Nashville, Tennessee 37209
Davidson County Davidson County
(Street address including county) (Name and street address, including county)
- --------------------------------------------------------------------------------
</TABLE>
FOR VALUE RECEIVED, the undersigned Borrower unconditionally (and jointly and
severally, if more than one) promises to pay to the order of Bank, its
successors and assigns, without setoff, at its offices indicated at the
beginning of this Note, or at such other place as may be designated by Bank, the
principal amount of One Million Five Hundred Thousand and No/100 Dollars
($1,500,000), or so much thereof as may be advanced from time to time in
immediately available funds, together with interest computed daily on the
outstanding principal balance hereunder, at an annual interest rate, and in
accordance with the payment schedule, indicated below.
1. PRIME RATE. The Rate shall be the Prime Rate, minus six-tenths of one
percent (0.60%), per annum. The "Prime Rate" is the fluctuating rate of interest
established by Bank from time to time, at its discretion, whether or not such
rate shall be otherwise published. The Prime Rate is established by Bank as an
index and may or may not at any time be the best or lowest rate charged by Bank
on any loan.
Notwithstanding any provision of this Note, Bank does not intend to charge and
Borrower shall not be required to pay any amount of interest or other charges in
excess of the maximum permitted by the applicable law of the State of Tennessee;
if any higher rate ceiling is lawful, then that higher rate ceiling shall apply.
Any payment in excess of such maximum shall be refunded to Borrower or credited
against principal, at the option of Bank.
2. ACCRUAL METHOD. Unless otherwise indicated, interest at the Rate set
forth above will be calculated by the 365/360 day method (a daily amount of
interest is computed for a hypothetical year of 360 days; that amount is
multiplied by the actual number of days for which any principal is outstanding
hereunder).
3. RATE CHANGE DATE. Any Rate based on a fluctuating index or base rate
will change, unless otherwise provided, each time and as of the date that the
index or base rate changes.
4. PAYMENT SCHEDULE. Accrued interest hereon shall be due and payable
monthly commencing on January 1, 1999, and continuing on the first day of each
successive month, with a final payment of all unpaid interest due at the stated
maturity of this Note. Principal hereon shall be due and payable as follows: all
outstanding principal amounts in excess of $1,000,000 shall be due and payable
on January 1, 2000; all outstanding principal amounts in excess of $500,000
shall be due and payable on July 1, 2000; and all remaining principal shall be
due in full in a single payment on November 24, 2000. All payments received
hereunder shall be applied first to the payment of any expense or charges
payable hereunder or under any other loan documents executed in connection with
this Note, then to interest due and payable, with the balance applied to
principal, or in such other order as Bank shall determine at its option.
5. REVOLVING FEATURE. Borrower may borrow, repay and reborrow hereunder at
any time, up to a maximum aggregate amount outstanding at any one time equal to
the principal amount of this Note, PROVIDED that the committed amount available
to be borrowed hereunder shall be reduced to $1,000,000 from and after January
1, 2000, and shall be further reduced to $500,000 from and after July 1, 2000;
and PROVIDED FURTHER, that Borrower is not in default under any provision of
this Note, any other documents executed in connection with this Note, or any
other note or other loan documents now or hereafter executed in connection with
any other obligation of Borrower to Bank. Any amounts outstanding over and above
the foregoing commitment amount shall be due and payable on demand. Bank shall
incur no liability for its refusal to advance funds based upon its determination
that any conditions of such further advances have not been met. Bank records of
the
<PAGE>
amounts borrowed from time to time shall be conclusive proof thereof.
6. AUTOMATIC PAYMENT. Borrower has elected to authorize Bank to effect
payment of sums due under this Note by means of debiting Borrower's account
number ________________________________. This authorization shall not affect the
obligation of Borrower to pay such sums when due, without notice, if there are
insufficient funds in such account to make such payment in full on the due date
thereof, or if Bank fails to debit the account.
7. WAIVERS, CONSENTS AND COVENANTS. Borrower, any indorser or guarantor
hereof, or any other party hereto (individually an "Obligor" and collectively
"Obligors") and each of them jointly and severally: (a) waive presentment,
demand, protest, notice of demand, notice of intent to accelerate, notice of
acceleration of maturity, notice of protest, notice of nonpayment, notice of
dishonor, and any other notice required to be given under the law to any Obligor
in connection with the delivery, acceptance, performance, default or enforcement
of this Note, any indorsement or guaranty of this Note, or any other documents
executed in connection with this Note or any other note or other loan documents
now or hereafter executed in connection with any obligation of Borrower to Bank
(the "Loan Documents"); (b) consent to all delays, extensions, renewals or other
modifications of this Note or the Loan Documents, or waivers of any term hereof
or of the Loan Documents, or release or discharge by Bank of any of Obligors, or
release, substitution or exchange of any security for the payment hereof, or the
failure to act on the part of Bank, or any indulgence shown by Bank (without
notice to or further assent from any of Obligors), and agree that no such
action, failure to act or failure to exercise any right or remedy by Bank shall
in any way affect or impair the obligations of any Obligors or be construed as a
waiver by Bank of, or otherwise affect, any of Bank's rights under this Note,
under any indorsement or guaranty of this Note or under any of the Loan
Documents; and (c) agree to pay, on demand, all reasonable costs and expenses of
collection or defense of this Note or of any indorsement or guaranty hereof
and/or the enforcement or defense of Bank's rights with respect to, or the
administration, supervision, preservation, or protection of, or realization
upon, any property securing payment hereof, including, without limitation,
reasonable attorney's fees, including fees related to any suit, mediation or
arbitration proceeding, out of court payment agreement, trial, appeal,
bankruptcy proceedings or other proceeding, in such amount as may be determined
reasonable by any arbitrator or court, whichever is applicable.
8. PREPAYMENTS. Prepayments may be made in whole or in part at any time on
any loan for which the Rate is based on the Prime Rate. All prepayments of
principal shall be applied in the inverse order of maturity, or in such other
order as Bank shall determine in its sole discretion. No prepayment of any other
loan shall be permitted without the prior written consent of Bank.
Notwithstanding such prohibition, if there is a prepayment of any such loan,
whether by consent of Bank, or because of acceleration or otherwise, Borrower
shall, within 15 days of any request by Bank, pay to Bank any loss or expense
which Bank may incur or sustain as a result of such prepayment. For the purposes
of calculating the amounts owed only, it shall be assumed that Bank actually
funded or committed to fund the loan through the purchase of an underlying
deposit in an amount and for a term comparable to the loan, and such
determination by Bank shall be conclusive, absent a manifest error in
computation.
9. DELINQUENCY CHARGE. To the extent permitted by law, a delinquency
charge may be imposed in an amount not to exceed two percent (2%) of any payment
that is more than fifteen days late.
10. EVENTS OF DEFAULT. The following are events of default hereunder: (a)
the failure to pay or perform any obligation, liability or indebtedness of
Borrower or Accredo Health, Incorporated to Bank, or to any affiliate or
subsidiary of NationsBank Corporation, whether under this Note or any Loan
Documents, within 3 days of the date when due (whether upon demand, at maturity
or by acceleration); (b) the failure to pay or perform any other obligation,
liability or indebtedness of Borrower or Accredo Health, Incorporated in excess
of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) to any other
party; (c) the resignation or withdrawal of any partner or a material owner of
Borrower, as determined by Bank in its sole discretion; (d) the commencement of
a proceeding against any Obligor for dissolution or liquidation, the voluntary
or involuntary termination or dissolution of any Obligor or the merger or
consolidation of any Obligor with or into another entity; (e) the insolvency of,
the business failure of, the appointment of a custodian, trustee, liquidator or
receiver for or for any of the property of, the assignment for the benefit of
creditors by, or the filing of a petition under bankruptcy, insolvency or
debtor's relief law or the filing of a petition for any adjustment of
indebtedness, composition or extension by or against any Obligor; (f) the
determination by Bank that any representation or warranty made to Bank by any
Obligor in any Loan Documents or otherwise is or was, when it was made, untrue
or materially misleading; (g) the failure of any Obligor to timely deliver such
financial statements, including tax returns, other statements of condition or
other information, as Bank shall reasonably request from time to time; (h) the
entry of a judgment against any Obligor which Bank deems to be of a material
nature, in Bank's sole discretion; (i) the seizure or forfeiture of, or the
issuance of any writ of possession, garnishment or attachment, or any turnover
order for any property of any Obligor; (j) the reasonable determination by Bank
in good faith that a material adverse change has occurred in the financial
condition of Borrower or Accredo Health, Incorporated; or (k) the failure of
Borrower's business to comply with any material law or regulation controlling
its operation.
11. REMEDIES UPON DEFAULT. Whenever there is a default under this Note (a)
the entire balance outstanding hereunder
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shall, at the option of Bank, become immediately due and payable and any
obligation of Bank to permit further borrowing under this Note shall immediately
cease and terminate, and/or (b) to the extent permitted by law, the Rate of
interest on the unpaid principal shall be increased at Bank's discretion up to
the maximum rate allowed by law, or if none, 12% per annum (the "Default Rate").
The provisions herein for a Default Rate shall not be deemed to extend the time
for any payment hereunder or to constitute a "grace period" giving Obligors a
right to cure any default. At Bank's option, any accrued and unpaid interest,
fees or charges may, for purposes of computing and accruing interest on a daily
basis after the due date of the Note or any installment thereof, be deemed to be
a part of the principal balance, and interest shall accrue on a daily compounded
basis after such date at the Default Rate provided in this Note until the entire
outstanding balance of principal and interest is paid in full. Upon a default
under this Note, Bank is hereby authorized at any time, at its option and
without notice or demand, to set off and charge against any deposit accounts of
any Obligor, (as well as any money, instruments, securities, documents, chattel
paper, credits, claims, demands, income and any other property, rights and
interests of any Obligor), which at any time shall come into the possession or
custody or under the control of Bank or any of its agents, affiliates or
correspondents, any and all obligations due hereunder; PROVIDED, Bank shall
after the fact notify the Borrower of any such setoff within a reasonable time.
Additionally, Bank shall have all rights and remedies available under each of
the Loan Documents, as well as all rights and remedies available at law or in
equity.
12. NON-WAIVER. The failure at any time of Bank to exercise any of its
options or any other rights hereunder shall not constitute a waiver thereof, nor
shall it be a bar to the exercise of any of its options or rights at a later
date. All rights and remedies of Bank shall be cumulative and may be pursued
singly, successively or together, at the option of Bank. The acceptance by Bank
of any partial payment shall not constitute a waiver of any default or of any of
Bank's rights under this Note. No waiver of any of its rights hereunder, and no
modification or amendment of this Note, shall be deemed to be made by Bank
unless the same shall be in writing, duly signed on behalf of Bank; each such
waiver shall apply only with respect to the specific instance involved, and
shall in no way impair the rights of Bank or the obligations of Obligors to Bank
in any other respect at any other time.
13. APPLICABLE LAW, VENUE AND JURISDICTION. This Note and the rights and
obligations of Borrower and Bank shall be governed by and interpreted in
accordance with the law of the State of Tennessee. In any litigation in
connection with or to enforce this Note or any indorsement or guaranty of this
Note or any Loan Documents, Obligors, and each of them, irrevocably consent to
and confer personal jurisdiction on the courts of the State of Tennessee or the
United States located within the State of Tennessee and expressly waive any
objections as to venue in any such courts. Nothing contained herein shall,
however, prevent Bank from bringing any action or exercising any rights within
any other state or jurisdiction or from obtaining personal jurisdiction by any
other means available under applicable law.
14. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision
of this Note shall not affect the enforceability or validity of any other
provision herein and the invalidity or unenforceability of any provision of this
Note or of the Loan Documents to any person or circumstance shall not affect the
enforceability or validity of such provision as it may apply to other persons or
circumstances.
15. BINDING EFFECT. This Note shall be binding upon and inure to the
benefit of Borrower, Obligors and Bank and their respective successors, assigns,
heirs and personal representatives, provided, however, that no obligations of
Borrower or Obligors hereunder can be assigned without prior written consent of
Bank.
16. CONTROLLING DOCUMENT. To the extent that this Note conflicts with or is
in any way incompatible with any other document related specifically to the loan
evidenced by this Note, this Note shall control over any other such document,
and if this Note does not address an issue, then each other such document shall
control to the extent that it deals most specifically with an issue.
17. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY
TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A
SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR
CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH
ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF
ANY
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<PAGE>
BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT
OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF
J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN
THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL
BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE
COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL
BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF
LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR
DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12
U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE
RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED
TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY
COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH
AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT
OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH
PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR
AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES
NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL
OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY,
INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE
CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
BORROWER REPRESENTS TO BANK THAT THE PROCEEDS OF THIS LOAN ARE TO BE USED
PRIMARILY FOR BUSINESS, COMMERCIAL OR AGRICULTURAL PURPOSES. BORROWER
ACKNOWLEDGES HAVING READ AND UNDERSTOOD, AND AGREES TO BE BOUND BY, ALL TERMS
AND CONDITIONS OF THIS NOTE.
NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
CHILDRENS HEMOPHILIA SERVICES, A CALIFORNIA GENERAL
PARTNERSHIP
By: /s/ Kyle Callahan
------------------------------------------------------
Kyle Callahan
Title: MANAGER
---------------------------------------------------
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<PAGE>
Exhibit 10.60
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AMENDED AND RESTATED
GENERAL PARTNERSHIP AGREEMENT
OF
CHILDREN'S HOME SERVICES
DATED AND EXECUTED AS OF
NOVEMBER 10, 1998
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<PAGE>
AMENDED AND RESTATED
GENERAL PARTNERSHIP AGREEMENT
OF
CHILDREN'S HOME SERVICES
<PAGE>
AMENDED AND RESTATED
GENERAL PARTNERSHIP AGREEMENT
OF
CHILDREN'S HOME SERVICES
THIS AMENDED AND RESTATED GENERAL PARTNERSHIP AGREEMENT of CHILDREN'S
HOME SERVICES (the "AGREEMENT" or "PARTNERSHIP AGREEMENT") is made and entered
into effective as of NOVEMBER 10, 1998, by and between CHILDREN'S HOME CARE, a
California nonprofit public benefit corporation ("CHC"), and NOVA FACTOR, INC.,
a Tennessee corporation ("NOVA"), as Partners of this Partnership (as those
terms are defined herein).
STATEMENTS OF FACT:
A. Children's Home Services was formed as a general partnership
pursuant to the Act (as defined below) by CHC and Thomas J. McNulty, PharmD., an
individual, as the "Initial Partner" by their execution of the General
Partnership Agreement of CHC dated and adopted as of October 1, 1998 (the
"ORIGINAL PARTNERSHIP AGREEMENT").
B. CHC and NOVA, as Partners of the Partnership, desire to amend and
restate the Original Partnership Agreement in its entirety, and to enter into
and adopt this Amended and Restated General Partnership Agreement of Children's
Home Services effective as of the date hereof.
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL TERMS, CONDITIONS,
COVENANTS AND AGREEMENTS SET FORTH HEREIN, AND WITH THE INTENTION OF BEING
LEGALLY BOUND HEREBY, THE PARTIES DO HEREBY AGREE AS FOLLOWS:
ARTICLE 1
FORMATION AND INTRODUCTORY MATTERS
1.1 FORMATION. A general partnership was formed on October 1, 1998,
between CHC and Thomas J. McNulty, PharmD., an individual, as the "Initial
Partner," pursuant to the Uniform Partnership Act of California of 1994, Section
1600, ET SEQ., of the California Corporations Code (the "ACT"). This Amended and
Restated General Partnership Agreement is hereby adopted as of November 10,
1998, as the General Partnership Agreement of the Partnership and shall control
the organization and business affairs of the Partnership and the relationship,
rights and obligations of its Partners.
1.2 NAME. The name of the Partnership shall be "CHILDREN'S HOME
SERVICES," or such other trade name or similar name as the Management Committee
shall from time to time determine to be in compliance with the Act and
applicable law.
1.3. PRINCIPAL PLACE OF BUSINESS. The principal place of business of
the Partnership shall be located at 65 NORTH RAYMOND AVENUE, SUITE 305,
PASADENA, CALIFORNIA 91103, or at such other place or places as shall be
determined by the Partners within the County of Los Angeles, California.
1.4. BUSINESS AND PURPOSE. The general business and purpose of the
Partnership shall be to distribute pharmaceutical drugs, products and supplies
and to provide related services with a particular emphasis on the pediatric
population within a service area encompassed by a 100-mile
<PAGE>
radius of the City and County of Los Angeles, California, and within the city
limits of the City Los Angeles, California (the "SERVICE AREA") to meet the
growth hormone needs of patients of health care providers within the Service
Area (the "BUSINESS"). The Partnership may conduct any other lawful activity
which the Partnership deems is necessary, incidental to or desirable in
connection with the Business of the Partnership and in maximizing the economic
benefit of the Partnership, including, without limitation, engaging in any and
all lawful business activities related or incidental thereto which are not
otherwise specifically prohibited by this Agreement. In accomplishing its
purposes and carrying on its Business, the Partnership may employ such personnel
and obtain such other services and advice that the Partnership may deem
advisable.
1.5. TERM; TERMINATION. The term of the Partnership shall commence on
OCTOBER 1, 1998, and shall continue thereafter until the occurrence of any of
the events set forth in Article 11 hereof, at which time the Partnership shall
be terminated and dissolved in accordance with said Article 11.
1.6 STATUTORY FILINGS.
1.6.1 FICTITIOUS BUSINESS NAME STATEMENT. Promptly after the
commencement of the term of the Partnership, and upon any subsequent change in
its Partners, CHC shall sign and cause to be filed and published in Los Angeles
County, California, a Fictitious Business Name Statement pursuant to the
provisions of Section 17000, ET SEQ., of the California Business and Professions
Code, registering the Partnership to conduct the Business under the fictitious
business name of "CHILDRENS HOME SERVICES" in said county, or under any other
trade names or such other similar names as the Management Committee shall
determine.
1.6.2 STATEMENT OF PARTNERSHIP AUTHORITY. Pursuant to Section
16303 of the Act, promptly after commencement of the term of the Partnership,
the Partners shall each sign and cause a Form GP-1, Statement of Partnership
Authority, to be filed in the office of the Secretary of State of California
and, if the Partners deem it necessary or appropriate, to cause the same to be
recorded in the Official Records of Los Angeles County, California, pursuant to
Section 16303 of the Act (the "STATEMENT OF AUTHORITY").
1.6.3 NECESSARY ACTS. The Partners shall execute, deliver,
record, file and publish, as appropriate, such other documents and instruments
as may be necessary or appropriate under the laws of any jurisdiction in which
the Partnership conducts its Business.
1.7 NO INDIVIDUAL AUTHORITY. Except as expressly set forth
herein, no Partner, acting alone or acting with any other non-Partner, shall
have the authority to act for, or to undertake or assume, any obligation, debt,
duty or responsibility on behalf of the Partnership.
1.8 TITLE TO PARTNERSHIP PROPERTY IN THE NAME OF THE
PARTNERSHIP. All Partnership Property owned, leased, consigned to or purchased
by the Partnership shall be held and owned, and conveyance made, in the name of
the Partnership. Partners have no ownership rights in specific Partnership
Property and may not transfer any interest in Partnership Property, either
voluntarily or involuntarily.
1.9 RECORD KEEPING DUTIES. Proper books and records shall be kept
regarding all Partnership transactions. The Management Committee may keep, or
cause to be kept, at the Partnership's principal office or such other place as
the Management Committee may direct, a record of all meetings, proceedings and
actions of the Management Committee and of committees
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<PAGE>
appointed by the Management Committee (if any). Such records may include the
time and place that the meeting was held or the action was taken, whether the
meeting was regular or special, and, if special, how authorized, the notice
given, the names of those present at committee meetings (if any), the Percentage
Interests of the Partners represented at any meetings of the Partners and the
proceedings thereof.
ARTICLE 2
DEFINITIONS
Except as separately defined elsewhere in this Agreement, following are
the terms and their meanings as used in this Agreement:
2.1 "ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any
Partner, the deficit balance, if any, in such Partner's Capital Account as of
the end of the relevant Fiscal Year, after giving effect to the following
adjustments:
2.1.1 Increase such Capital Account by any amounts which such
Partner is obligated to contribute to the Partnership (pursuant to the terms of
this Agreement or otherwise) or is deemed to be obligated to contribute to the
Partnership pursuant to Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5);
and
2.1.2 Reduce such Capital Account by the amount of the items
described in Regulations Sections 1.704-1(b) (2) (ii) (d) (4), (5) and (6).
The foregoing definition of Adjusted Capital Account Deficit is
intended to comply with the provisions Regulations Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith.
2.2 "AFFILIATE" means any Person (defined below) which is controlling,
controlled by or under common control with a Partner, either directly or
indirectly, through one or more intermediaries. The term "CONTROL" (and any
derivation thereof) means, with respect to a corporation, the right to exercise,
directly or indirectly, more than FIFTY PERCENT (50%) of the voting rights
attributable to the controlled corporation and, with respect to any other Person
(other than a corporation), the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of the controlled
entity. For purposes of this Agreement, Children's Hospital Los Angeles and
University Children's Medical Group Inc., a tax-exempt California professional
corporation, shall each be deemed an affiliate of CHC.
2.3 "AGREEMENT" OR "PARTNERSHIP AGREEMENT" means this Amended and
Restated General Partnership Agreement of the Partnership dated and adopted as
of November 10, 1998, as originally executed and as may be amended or restated
from time to time hereafter. Words such as "herein," "hereinafter," "hereto,"
"hereby" and "hereunder," when used with reference to this Agreement, refer to
this Agreement as a whole unless the context otherwise requires.
2.4 "BOOK DEPRECIATION" means for each Fiscal Year or other period, an
amount equal to the Depreciation, except that if the Gross Asset Value of any
asset differs from its adjusted basis for federal income tax purposes at the
beginning of such year or other period, "book depreciation" with respect to such
asset shall be an amount which bears the same ratio to such beginning Gross
Asset Value as the Depreciation with respect to such asset for such year or
other period bears to such beginning adjusted tax basis. However, if the federal
income tax Depreciation with respect to such asset for such year is "zero," book
depreciation shall be determined with reference to such beginning Gross Asset
Value using any reasonable method selected by the Partnership.
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<PAGE>
2.5 "BUSINESS" OR "BUSINESS OF THE PARTNERSHIP" means the business of
the Partnership as defined in Section 1.4 hereof.
2.6 "CAPITAL ACCOUNT" means an account maintained by the Partnership
for each Partner, which shall be determined in accordance with Section 3.6
hereof.
2.7 "CAPITAL CONTRIBUTION" means the total contribution, in cash or
property, which a Partner has made or is obligated to make to the Partnership,
as set forth in Section 3.2 below, or as may be supplemented and identified on
EXHIBIT A attached hereto and made a part of this Agreement, which exhibit may
be amended or modified from time to time. All contributions of property shall be
valued at their initial Gross Asset Value.
2.8 "CODE" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision or provisions of any succeeding law.
2.9 "COMMITTEE MEMBER(S)"means one of four (4) Persons appointed by the
Partners to serve on the Management Committee (as defined below) pursuant to
Section 6.1 of this Agreement.
2.10 "DEPRECIATION" means, for each Fiscal Year or other period, an
amount equal to the depreciation, amortization or other cost recovery reduction
allowable with respect to an asset for such Fiscal Year or other period.
2.11 "DISTRIBUTABLE CASH" means the portion of the cash in hand or in
bank accounts of the Partnership as the Management Committee deems, in its sole
discretion, is available for distribution to the Partners after reasonable
provision has been made for the current liabilities of the Partnership and a
reasonable allowance for Reserves.
2.12 "FISCAL YEAR" means the fiscal year of the Partnership for all tax
and accounting purposes, which shall be the year commencing on JULY 1 and ending
on JUNE 30 of each year.
2.13 "GROSS ASSET VALUE" means, with respect to any asset of the
Partnership, the asset's adjusted basis for federal income tax purposes, except
as follows:
2.13.1 The initial Gross Asset Value of any asset contributed
by a Partner to the Partnership shall be the gross fair market value of such
asset, as mutually agreed between the Partnership and the contributing Partner.
2.13.2 The Gross Asset Value of all Partnership assets shall
be adjusted to equal their respective gross fair market values, as mutually
agreed between the Partnership and the affected Partner(s) upon the occurrence
of the following events:
2.13.2.1 The acquisition of an additional Interest in the
Partnership by any new or existing Partner in exchange for a Capital
Contribution;
2.13.2.2 The distribution by the Partnership to a Partner of
cash or property as consideration for the acquisition of all or a portion of
such Partner's Interest in the Partnership if the Partnership reasonably
determines that such adjustment is necessary or appropriate to reflect the
relative economic interests of the Partners in the Partnership; and
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<PAGE>
2.13.2.3 The liquidation of the Partnership within the meaning
of Regulations Section 1.704-1(b)(2)(ii)(g).
2.13.3 The Gross Asset Value of any Partnership asset
distributed to any Partner shall be the gross fair market value of such asset as
mutually agreed by the Partnership and the affected Partner(s) on the date of
distribution.
2.13.4 The Gross Asset Value of the Partnership assets shall
be increased (or decreased) to reflect any adjustments to the adjusted basis of
such assets pursuant to Code section 734(b) or Code section 743(b), but only to
the extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section 4.9
hereof; provided, however, that Gross Asset Value shall not be adjusted pursuant
to this Section 2.13.4 to the extent the Partnership determines that an
adjustment pursuant to Section 2.13.2 above is necessary or appropriate in
connection with the transaction that would otherwise result in an adjustment
under this Section 2.13.4.
If the Gross Asset Value of an asset has been determined or
adjusted pursuant to Sections 2.13.1, 2.13.2 or 2.13.4 above, such Gross Asset
Value shall thereafter be adjusted by the Book Depreciation taken into account
with respect to such asset for purposes of computing profits and losses.
2.13.5 If the Partnership and any affected Partner pursuant to
Sections 2.13.1, 2.13.2 or 2.13.3 above are unable to agree on the Gross Asset
Value of any asset for purposes of this Agreement, a mutually acceptable
appraiser shall be selected by them for this purpose, and the value established
by such appraisal shall be binding on the Partnership and the affected Partner.
2.14 "MAJORITY IN INTEREST OF THE PARTNERS" means more than FIFTY
PERCENT (50%) of the Percentage Interests of the Partners.
2.15 "MANAGEMENT COMMITTEE" means, collectively, the four (4) Committee
Members appointed by the Partners to manage the Partnership pursuant to Section
6.1 of this Agreement acting together to manage the Partnership in accordance
with the terms and conditions of this Agreement. The Management Committee shall
be charged with those powers, duties and responsibilities as set forth in
Article 6 and elsewhere in this Agreement.
2.16 "NET PROFIT(S)" AND "NET LOSS(ES)" mean, for each Fiscal Year or
other period, an amount equal to the Partnership's taxable income or loss for
such year or period, determined in accordance with Code section 703(a) (for this
purpose, all items of income, gain, loss or deduction required to be stated
separately pursuant to Code section 703(a) (1) shall be included in taxable
income or loss), with the following adjustments:
2.16.1 Any income of the Partnership that is exempt from federal income
tax and not otherwise taken into account in computing Net Profits or Net Losses
shall be added to such taxable income or loss;
2.16.2 Any expenditures of the Partnership described in Code
section 705(b)(2)(B) or treated as Code section 705(b)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken
into account in computing Net Profits or Net Losses shall be subtracted from
such taxable income or loss;
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2.16.3 Gain or loss resulting from any disposition of
Partnership Property with respect to which gain or loss is recognized for
federal income tax purposes shall be computed by reference to the fair market
value of such property disposed of, notwithstanding that the adjusted tax basis
of such property differs from its fair market value; and
2.16.4 Notwithstanding any other provision of this subsection,
any items of income, gain, loss or deduction which are specifically allocated
shall not be taken into account in computing Net Profits or Net Losses.
2.17 "PARTNER" means a Person who has:
2.17.1 Been admitted to the Partnership as a Partner in
accordance with this Agreement, or is an assignee or transferee of an Interest
and who has become a Partner of the Partnership pursuant to Section 8.4 hereof;
2.17.2 Not dissociated or been expelled as a Partner or, if
other than an individual, been dissolved; and
2.17.3 Paid his or her Capital Contribution to the Partnership
in exchange for an Interest in the Partnership, or, in the case of a transferee
Partner, has succeeded to the Capital Account of the transferor Partner, and who
has executed and submitted to the Management Committee a counterpart signature
page to this Agreement.
Reference to a "PARTNER" shall be to any Partner of the Partnership
identified in Section 3.1 below or as otherwise supplemented and identified on
EXHIBIT A attached to and made a part of this Agreement, which exhibit may be
amended or modified from time to time.
2.18 "PARTNER NONRECOURSE DEBT" has the meaning set forth in
Regulations Section 1.704-2(b)(4).
2.19 "PARTNER NONRECOURSE DEBT MINIMUM GAIN" means an amount, with
respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain
that would result if such Partner Nonrecourse Debt were treated as a nonrecourse
liability of the Partnership, determined in accordance with Regulations Sections
1.704-2(i) (2) and (3) .
2.20 "PARTNER NONRECOURSE DEDUCTIONS" has the meaning set forth in
Regulations Section 1.704-2(i)(2). The amount of Partner Nonrecourse Deductions
with respect to a Partner Nonrecourse Debt for a Fiscal Year of the Partnership
equals the excess (if any) of the net increase (if any) in the amount of Partner
Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt
during that Fiscal Year over the aggregate amount of any distributions during
that Fiscal Year to the Partner that bears (or is deemed to bear) the economic
loss for such Partner Nonrecourse Debt to the extent such distributions are from
the proceeds of such Partner Nonrecourse Debt and are allocable to an increase
in Partner Nonrecourse Debt Minimum Gain attributable to such Partner
Nonrecourse Debt, determined in accordance with Regulations Section 1. 704-2 (i)
(2) .
2.21 "PARTNERSHIP" means CHILDREN'S HOME SERVICES, the California
general partnership formed pursuant to the Act and the terms and conditions of
this Agreement.
2.22 "PARTNERSHIP INTEREST" or "INTEREST" means all of a Partner's
interest in the Partnership, including the Partner's transferable interest and
all management and other rights.
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2.23 "PARTNERSHIP LOAN(S)" shall refer to any loans or advances made by
any Partner or its Affiliate to the Partnership which are approved by the
Management Committee. Such Partnership Loans shall accrue interest at the rate
agreed upon between the loaning Partner and the Management Committee.
2.24 "PARTNERSHIP MINIMUM GAIN" means the amount determined by
computing with respect to each nonrecourse liability of the Partnership, the
amount of gain (of whatever character), if any, that would be realized by the
Partnership if it disposed (in a taxable transaction) of Partnership Property
subject to such liability in full satisfaction thereof, and by then aggregating
the amounts so computed as set forth in Regulations Section 1.704-2 (d).
2.25 "PARTNERSHIP PROPERTY" means any or all assets of the
Partnership, both tangible and intangible, or any portion thereof.
2.26 "PERCENTAGE INTEREST(S)" means a fraction, expressed as a
percentage, the numerator of which is the Capital Account owned by a Partner and
the denominator of which is the aggregate Capital Accounts of all of the
Partners. The Percentage Interests of the Partners shall be set forth on EXHIBIT
A attached hereto and made a part of this Agreement, which exhibit may be
amended from time to time by the Management Committee to reflect any change in
the Percentage Interest owned by a Partner or any change in the aggregate
Percentage Interests of all the Partners.
2.27 "PERSON" means an individual, corporation, business trust, estate,
trust, partnership, limited partnership, limited liability partnership, limited
liability company, association, joint venture, government, governmental
subdivision, agency, or instrumentality, or any other legal or commercial
entity.
2.28 "PRINCIPAL" means the natural Person which is in ultimate control
of a Partner.
2.29 "REGULATIONS" or "TREASURY REGULATIONS" means the federal income
tax regulations promulgated by the Treasury Department under the Code, as such
regulations may be amended from time to time. All references herein to a
specific section of the Regulations shall be deemed also to refer to any
corresponding provisions of succeeding Regulations.
2.30 "RESERVES" means funds set aside from Capital Contributions or
operating revenues as reserves. Such Reserves shall be maintained in amounts
reasonably deemed sufficient by the Management Committee for working capital and
the payment of taxes, insurance, debt service, repairs, replacements renewals,
or other costs or expenses incident to the Business of the Partnership, or in
the alternative, the Dissolution of the Partnership.
2.31 "RISK OF LOSS" reflects the meaning set forth in Treasury
Regulations Section 1.752-1(d)(3).
2.32 "SECRETARY OF STATE" means the Secretary of State of the State
of California.
2.33 "VOTE" means, except where superseded by another section of this
Agreement, or required by the terms of the Act, the Code or applicable
Regulations thereunder, votes of the Partners, wherein each Partner shall have
and cast a number of votes equal to that Partner's Percentage Interest. For this
purpose, each one percent (1%) of the Partner's Percentage Interest shall be
equal to one vote.
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ARTICLE 3
PARTNERS, CAPITAL AND FINANCING
3.1 NAMES AND ADDRESSES OF THE PARTNERS. The Partners of the
Partnership are CHC and NOVA, unless and until additional Partners or transferee
Partners, as the case may be, are admitted to the Partnership in accordance with
this Agreement. The full names and current addresses of the Partners of the
Partnership are set forth on EXHIBIT A attached hereto and made a part of this
Agreement, which exhibit may be amended or modified from time to time.
3.2 PARTNER CAPITAL CONTRIBUTIONS. All Capital Contributions of the
Partners shall be set forth on EXHIBIT A attached hereto and made a part of this
Agreement, which exhibit may be amended or modified from time to time. The
Partners shall be required to make their Capital Contributions to the
Partnership immediately following the execution of this Agreement.
3.3 ADDITIONAL CAPITAL CONTRIBUTIONS AND LOANS. Except as shall be
expressly set forth herein, no Partner shall be required or permitted to make
any additional Capital Contributions to the Partnership or to make any loan or
cause to be loaned any money or other assets to the Partnership. Notwithstanding
the foregoing, a Partner shall be permitted to make an additional Capital
Contribution to the Partnership in order to maintain the relative proportions of
their respective Capital Accounts.
3.4 RIGHTS WITH RESPECT TO CAPITAL.
3.4.1 PARTNERSHIP CAPITAL. No Partner shall have the right to
withdraw or to receive any return of its Capital Contribution, and no Capital
Contribution may be returned in the form of property other than cash, except as
specifically provided for herein.
3.4.2 NO INTEREST ON CAPITAL CONTRIBUTIONS. No Capital
Contribution of any Partner shall bear any interest or otherwise entitle the
contributing Partner to any compensation for use of the contributed capital.
3.4.3 ESTABLISHMENT OF CAPITAL ACCOUNTS. A separate Capital
Account shall be established and maintained for each Partner. Sections 3.5 and
3.6 below describe the appropriate accounting treatment for tax purposes of the
Capital Accounts.
3.4.4 NO PAYMENT OF SALARIES OR DRAWS. No Partner shall receive or be
entitled to receive any payment of salaries or draws with respect to its Capital
Contribution or the balance in its Capital Account or for services rendered on
behalf of the Partnership or otherwise in its capacity as a Partner, except as
expressly provided for in this Agreement or any other written agreement between
the Partnership and a Partner.
3.5 GENERAL RULES FOR DETERMINING CAPITAL ACCOUNTS. The Capital
Account of each Partner shall be determined as follows:
3.5.1 INCREASES. The Capital Account of a Partner shall be
increased by:
3.5.1.1 Such Partner's cash contributions;
3.5.1.2 The Gross Asset Value of property
contributed by such Partner (net of liabilities secured by such contributed
property that the Partnership is considered to assume or take subject to under
Code section 752);
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3.5.1.3 All Net Profits of the Partnership allocated
to such Partner pursuant to Article 4 or other provisions of this Agreement; and
3.5.2 DECREASES. The Capital Account of a Partner shall be
decreased by:
3.5.2.1 The amount of cash distributed to such
Partner;
3.5.2.2 The Gross Asset Value of all actual and
deemed distributions of property made to such Partner pursuant to this Agreement
(net of liabilities secured by such distributed property that the Partner is
considered to assume or take subject to under Code section 752);
3.5.2.3 All Net Losses of the Partnership allocated
to such Partner pursuant to Article 4 or other provisions of this Agreement.
3.6 SPECIAL RULES WITH RESPECT TO CAPITAL ACCOUNTS.
3.6.1 TIME OF ADJUSTMENT FOR CAPITAL CONTRIBUTIONS. For
purposes of computing the balance in a Partner's Capital Account, no credit
shall be given for any Capital Contribution which such Partner is to make until
such contribution is actually made. "CAPITAL CONTRIBUTION" refers to the total
amount of cash and the Gross Asset Value (net of liabilities) of any property
contributed to the Partnership by that Partner and any subsequent contributions
of cash and the Gross Asset Value (net of liabilities) of any other property
subsequently contributed to the Partnership by that Partner.
3.6.2 INTENT TO COMPLY WITH TREASURY REGULATIONS. The
foregoing provisions of Sections 3.5 and 3.6 and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Regulations Section 1.704-1(b), and shall be interpreted and applied in a
manner consistent with such Regulations section. To the extent such provisions
are inconsistent with such Regulations section or are incomplete with respect
thereto, Capital Accounts shall be maintained in accordance with such
Regulations section.
3.7 TRANSFEREE'S CAPITAL ACCOUNT. In the event a Partner, transfers an
Interest in accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred Interest.
ARTICLE 4
ALLOCATION OF NET PROFITS AND NET LOSSES
4.1 ALLOCATION OF NET PROFITS AND NET LOSSES. Except as otherwise
provided in this Article 4, Net Profits and Net Losses of the Partnership in
each Fiscal Year shall be allocated among the Partners in accordance with their
respective Percentage Interests in the Partnership.
4.2 RESIDUAL ALLOCATIONS. Except as otherwise provided in this
Agreement, all items of Partnership income, gain, loss, deduction, and any other
allocations not otherwise provided for shall be divided among the Partners in
the same proportions as they share Net Profits or Net Losses, as the case may
be, for the Fiscal Year.
4.3 QUALIFIED INCOME OFFSET. If any Partner unexpectedly receives any
adjustments, allocation or distributions described in clauses (4), (5) or (6) of
Regulations Section 1.704-1(b)(2)
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(ii)(d), items of Partnership income shall be specially allocated to such
Partner in an amount and manner sufficient to eliminate the Adjusted Capital
Account Deficit created by such adjustments allocations or distributions as
quickly as possible. This Section 4.3 is intended to constitute a "QUALIFIED
INCOME OFFSET" within the meaning of Regulations Section
1.704-l(b)(2)(ii)(d)(3).
4.4 MINIMUM GAIN CHARGEBACK. If there is a net decrease in Partnership
Minimum Gain during a Fiscal Year, each Partner will be allocated, before any
other allocation under this Article 4, items of income and gain for such Fiscal
Year (and if necessary, subsequent years) in proportion to and to the extent of
an amount equal to such Partner's share of the net decrease in Partnership
Minimum Gain determined in accordance with Regulations Section 1.704- 2(g)(2).
This Section 4.4 is intended to comply with, and shall be interpreted
consistently with, the "MINIMUM GAIN CHARGEBACK" provisions of Regulations
Section 1.704-2(f).
4.5 PARTNER NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK. Notwithstanding
any other provision of this Article 4, but except Section 4.4, if there is a net
decrease in Partner Nonrecourse Debt Minimum Gain attributable to a Partner
Nonrecourse Debt during any Fiscal Year of the Partnership, each Partner who has
a share of the Partner Nonrecourse Debt Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Treasury Regulations
Section 1.704-2(i) (5), shall be specially allocated items of Partnership income
and gain for such year (and, if necessary, subsequent years) in an amount equal
to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum
Gain attributable to such Partner Nonrecourse Debt, determined in accordance
with Regulations Section 1.704-2 (i) (4). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Partner pursuant thereto. The items to be so allocated shall
be determined in accordance with Regulations Section 1.704-2(i)(4). This Section
4.5 is intended to comply with a minimum gain chargeback requirement of that
Section of the Regulations and shall be interpreted consistently therewith.
4.6 PARTNER NONRECOURSE DEDUCTIONS. Any Partner Nonrecourse Deductions
for any Fiscal Year or other period shall be specially allocated to the Partner
who bears (or is deemed to bear) the economic risk of loss with respect to the
Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are
attributable in accordance with Regulations Section 1.704-2(i)(2).
4.7 SPECIAL ALLOCATIONS. Any special allocations of items of Net
Profits pursuant to Sections 4.4, 4.5 and 4.6 shall be taken into account in
computing subsequent allocations of Net Profits pursuant to Section 4.1, so that
the net amount of any items so allocated and the gain, loss and any other item
allocated to each Partner pursuant to Section 4.1 shall, to the extent possible,
be equal to the net amount that would have been allocated to each such Partner
pursuant to the provisions of this Article 4 if such special allocations had not
occurred.
4.8 FEES TO PARTNERS OR AFFILIATES. Notwithstanding the provisions of
Section 4.1, in the event that any fees, interest, or other amounts paid to any
Partner or any Affiliate thereof pursuant to this Agreement or any other
agreement between the Partnership and any Partner or Affiliate thereof providing
for the payment of such amount, and deducted by the Partnership in reliance on
Code section 707(a) and/or Code section 707(c), are disallowed as deductions to
the Partnership on its federal income tax return and are treated as Partnership
distributions, then:
4.8.1 The Net Profits or Net Losses, as the case may be, for the
Fiscal Year in which such fees, interest, or other amounts were paid shall be
increased or decreased, as the case may be, by the amount of such fees,
interest, or other amounts that are treated as Partnership distributions; and
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4.8.2 There shall be allocated to the Partner to which (or to whose
Affiliate) such fees, interest, or other amounts were paid, prior to the
allocations pursuant to Section 4.1, an amount of gross income for the Fiscal
Year equal to the amount of such fees, interest, or other amounts that are
treated as Partnership distributions.
4.9 SECTION 704(C) ALLOCATION. Any item of income, gain, loss, and
deduction with respect to any property (other than cash) that has been
contributed by a Partner to the capital of the Partnership and which is required
or permitted to be allocated to such Partner for income tax purposes under Code
section 704(c) so as to take into account the variation between the tax basis of
such property and its Gross Asset Value at the time of its contribution shall be
allocated to such Partner solely for income tax purposes in the manner so
required or permitted. In the event the Gross Asset Value of any Partnership
Property is adjusted in accordance with Section 2.13.2, subsequent allocations
of income, gain, loss and deduction with respect to such Partnership Property
shall take into account any variation between the adjusted basis of such
Partnership Property for federal income tax purposes and its Gross Asset Value
in the same manner as under section 704(c) and the Regulations promulgated
thereunder. Any elections or other decisions relating to such allocations shall
be made in any manner that reasonably reflects the purpose and intention of this
Agreement. To the extent permitted by Regulations Section 1.704-1 (b) (4) (i) ,
all items of income, gain, loss and deduction for federal and state tax purposes
shall be allocated in accordance with the corresponding book items.
ARTICLE 5
DISTRIBUTIONS OF DISTRIBUTABLE CASH
5.1 DISTRIBUTIONS OF DISTRIBUTABLE CASH. Distributions from the
Partnership to the Partners shall be made from time to time to the extent
Distributable Cash is available as determined by the Management Committee. Prior
to the determination of the amount of distributions, provisions shall be made
for all known and reasonable obligations and liabilities of the Partnership,
whether or not such obligations and liabilities are due or contingent, except
that provision need not be made for any portion of any Partnership financing,
the amount of which can be reasonably expected to be satisfied from the proceeds
of the sale of the then remaining Property of the Partnership.
5.2 PRIORITY AND MANNER OF DISTRIBUTIONS TO PARTNERS. All distributions
of Distributable Cash shall be made by the Partnership pro rata to the Partners
in accordance with their applicable Percentage Interests as of the time of such
distribution.
5.3 TAX DISTRIBUTIONS. Except as otherwise may be prohibited by any
agreements between the Partnership and its lenders, within ninety (90) days
after the conclusion of each Fiscal Year, the Management Committee shall
determine and provide written notice to the Partners of the amount (the "TAX
LIABILITY SHORTFALL AMOUNT"), if any, by which (a) the aggregate federal and
California state tax liability (if any) incurred by the Partners with respect to
the net income of the Partnership for such preceding Fiscal Year (which tax
liability shall be determined by applying the highest effective corporate tax
rates then in effect for the Fiscal Year in question), EXCEEDS (b) the aggregate
distributions of Distributable Cash made by the Partnership with respect to such
Fiscal Year (including any distributions made to the Partners with respect to
the final fiscal quarter of such Fiscal Year). The Management Committee shall
use all reasonable efforts to cause the Partnership to distribute the Tax
Liability Shortfall Amount to the Partners in the time and manner required
hereunder, including, but not limited to, borrowing on behalf of the Partnership
sufficient funds to enable the Partnership to distribute such Tax Liability
Shortfall Amount. Each such distribution shall be made to the Partners as soon
as practicable after such funds are available. It is the objective of the
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Partners that while the Tax Liability Shortfall Amount will be determined at the
end of each Fiscal Year, to the extent possible and subject to the foregoing,
distributions will be made in respect thereof on a quarterly basis to facilitate
the Partners' ability to make quarterly estimated tax payments with respect to
their net income from the Partnership. At the end of each Fiscal Year as
contemplated above, final adjustments shall be made to reflect the actual
results of such Fiscal Year.
ARTICLE 6
MANAGEMENT OF THE PARTNERSHIP
6.1 MANAGEMENT OF THE PARTNERSHIP. Subject to the provisions of the Act
and to any limitations set forth in this Agreement (as may be amended from time
to time) relating to actions required to be approved by the Partners, the
Business and affairs of the Partnership shall be managed by, and all Partnership
powers shall be vested exclusively in, the Management Committee. The day-to-day
operations of the Partnership shall be implemented by a Partnership Manager
designated or appointed pursuant to Section 6.1.1 below, who shall conduct the
Business in accordance with and subject to the policies, procedures, decisions
and directives of the Management Committee.
6.1.1 DESIGNATION OF THE PARTNERSHIP MANAGER. The Partnership
Manager of the Partnership shall initially be THOMAS J. McNULTY, PharmD., an
individual, or his successor as appointed by the Management Committee pursuant
to Section 6.1.2 below.
6.1.2 ELECTION OF SUCCESSOR PARTNERSHIP MANAGER. Upon resignation
from office or removal from office by the Management Committee, a successor
Partnership Manager shall be appointed by the Management Committee.
6.1.3 MANAGEMENT COMMITTEE; APPOINTMENT OF COMMITTEE MEMBERS;
VOTING. The authorized number of Committee Members of the Partnership shall be
four (4), unless the Partners agree to increase or decrease the size of the
Management Committee proportionately from time to time. Each Partner (the
"APPOINTING PARTNER") shall appoint two (2) Committee Members. The initial
Committee Members shall be appointed by the Partners by a separate written
action of the Partners. Each initial Committee Member shall serve until his or
her successor is appointed by the Appointing Partner in accordance with this
Agreement. Each Partner shall cause its appointed Committee Member to comply
with the terms of this Agreement to be performed by such Committee Member. The
Committee Members shall exercise their authority collectively and exclusively
through the actions of the Management Committee. Each Committee Member shall
have one (1) vote on any decision of the Management Committee. Approval of the
Management Committee shall require a majority of the authorized number of the
Committee Members.
6.1.4 SUCCESSOR OR ALTERNATE COMMITTEE MEMBERS. Successor Committee
Members shall be appointed by the respective Appointing Partner at any time and
from time to time. Each Partner may, at any time, designate an alternate
Committee Member by prior notice to the other Partner, and such alternate
Committee Member will have all of the powers of the regular Committee Member in
the absence or inability of the regular Committee Member to serve.
6.1.5 CHAIRMAN OF THE MANAGEMENT COMMITTEE. The Management
Committee shall have a chairman (the "CHAIRMAN"), who shall: (i) be one of the
Committee Members selected by a majority of the authorized number of the
Committee Members; (ii) preside at Management Committee meetings; and (iii)
exercise such rights or perform such duties as are otherwise provided in this
Agreement or as otherwise may be approved by the Management Committee In the
event a Chairman resigns or is removed, a replacement Chairman shall be chosen
by the Management Committee.
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6.1.6 DELEGATION OF AUTHORITY. The Management Committee may, by
written resolution from time to time, delegate any of its powers to the
Partnership Manager, to officers or employees of a Partner, or to any other
Person. Such delegation of powers may include the authority to execute and
deliver on behalf of the Partnership any note, mortgage, evidence of
indebtedness, contract, certificate, statement, conveyance or other instrument
in writing, and any assignment or endorsement thereof.
6.1.7 DUTIES OF COMMITTEE MEMBERS. Each Committee Member shall
serve on the Management Committee in good faith and in a manner such Committee
Member believes to be in the best interests of the Partnership and its Partners
and with such care, including reasonable inquiry as an ordinary prudent person
in a like position would use under similar circumstances.
6.1.8 OTHER ACTIVITIES OF COMMITTEE MEMBERS. Each Committee Member
need devote to the Business and affairs of the Partnership only such time and
attention as he shall deem necessary and appropriate in the exercise of his
reasonable judgment.
6.1.9 REMOVAL OF COMMITTEE MEMBERS. Any Committee Member may be
removed from office, with or without cause, only by the respective Appointing
Partner of such Committee Member.
6.2 POWERS AND AUTHORITY OF THE MANAGEMENT COMMITTEE. The Management
Committee shall have all of the rights, duties and powers as specified in this
Agreement, including without limitation, the general powers and duties of
management typically vested in the board of directors and the office of a chief
executive officer of a corporation. Matters requiring the approval of the
Management Committee shall include, without limitation, the following:
6.2.1 To select and remove all agents and employees of the
Partnership; prescribe the powers and duties for them as may not be inconsistent
with law, the Statement of Authority, or this Agreement; fix their compensation;
and require from any such agents and employees security for faithful service.
6.2.2 To conduct, manage and control the affairs and Business of
the Partnership and to make such rules not inconsistent with the law, the
Statement of Authority or this Agreement, as they may deem best.
6.2.3 To borrow money and incur indebtedness for the purposes of
the Partnership and to cause to be executed and delivered therefor, in the
Partnership's name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and securities
therefor.
6.2.4 To enter into any and all agreements on behalf of the
Partnership with any other Person for any purpose necessary or appropriate to
the conduct of the Business of the Partnership, including, but not limited, to
agreements for management or other services, and the distribution or resale of
products and supplies. The fact that a Partner is directly or indirectly
affiliated or connected with any such Person shall not prohibit the Management
Committee from dealing with that Person.
6.2.5 To purchase liability and other insurance to protect the
Partnership Property and Business of the Partnership.
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6.2.6 To approve detailed line item budgets for the operation of
the Partnership and its Business.
6.2.7 To invest any funds of the Partnership temporarily (by way of
example, but not limitation) in time deposits, short-term governmental
obligations, commercial paper or other investments.
6.2.8 To engage accountants, legal counsel, managing agents or
other experts to perform services for the Partnership and to compensate them
from Partnership funds.
6.2.9 To pay reimbursement from the Partnership of all expenses of
the Partnership reasonably incurred and paid by the Management Committee on
behalf of the Partnership.
6.2.10 To amend, update or correct from time to time the
information contained in EXHIBIT A to the Agreement or on the Statement of
Authority and cause the same to be filed with the California Secretary of State.
6.2.11 To do and perform all other acts as may be necessary or
appropriate to the conduct of the Business of the Partnership.
6.3 POWERS, DUTIES AND RESPONSIBILITIES OF THE PARTNERSHIP MANAGER. The
Partnership Manager shall be charged with the rights, duties, powers and
responsibilities as specified in this Agreement, subject to the limitations set
forth in this Article 6 and elsewhere in this Agreement. The Partnership Manager
shall have the responsibility for conducting the day-to-day operations of the
Business of the Partnership and for implementing the decisions and directives of
the Management Committee in connection therewith, subject to the supervision,
direction and control of the Management Committee. The Partnership Manager shall
have the general powers and duties of management typically vested in the office
of a chief operating officer of a corporation.
6.4 RESTRICTIONS ON AUTHORITY; APPROVAL BY THE PARTNERS. The individual
Partners, the Committee Members, acting alone or collectively as the Management
Committee, and the Partnership Manager shall have no authority with respect to
the Partnership or its Business to do any of the following without the prior
unanimous Vote or written consent of the Partners:
6.4.1 Do any act in contravention of this Agreement;
6.4.2 Do any act that would make it impossible to carry out the
Partnership Business;
6.4.3 Possess Partnership Property or assign the right of the
Partnership or its Partners in specific Partnership Property for anything other
than a Partnership purpose;
6.4.4 Make, execute or deliver any general assignments for the
benefit of creditors or any bond, guaranty, indemnity bond or surety bond;
6.4.5 Assign, transfer, pledge, compromise or release any
Partnership claim;
6.4.6 Confess a judgment;
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6.4.7 Except for the power of the Management Committee to amend or
correct from time to time any information contained in EXHIBIT A to this
Agreement or in the Statement of Authority, to make any material amendment or
change to the Statement of Authority or to this Agreement, including, but not
limited to, any change in the authorized number of Committee Members or any
modification or enlargement of the rights or obligations of the Partners as set
forth herein;
6.4.8 Pursuant to Article 8 hereof, approve the sale, transfer,
assignment, hypothecation or encumbrance of any Partnership Interest by a
Partner, the admission of any new or transferee Partner to the Partnership, the
determination of the amount of any Capital Contribution to be made by any new
Partner, and the approval of a Partner's sale of all of its Interest in
accordance with Section 8.5 hereof;
6.4.9 The sale, exchange or other disposition of all or
substantially all of the Partnership Property, occurring as part of single
transaction or a series of related transactions as part of plan;
6.4.10 The merger of the Partnership with any other partnership or
business entity;
6.4.11 The termination or dissolution of the Partnership;
6.4.12 A change in the character of the Business of the
Partnership;
6.4.13 Any acquisitions of any rights or interests in another
entity;
6.4.14 All distributions to the Partners, which shall not be
deemed valid unless so approved in advance by the Partners;
6.4.15 Any contracts or agreements between the Partnership and any
third party including Affiliates in excess of Fifty Thousand Dollars
($50,000.00) and the approval of any material changes or amendments thereto or
renewals thereof;
6.4.16 Any transactions with an Affiliate;
6.4.17 Any amendment, modification, supplement, renewal or
termination for any reason of that certain Growth Hormone Business Management,
Service and Sales Agreement dated as of November 10, 1998, by and between NOVA
and the Partnership (the "GROWTH HORMONE MANAGEMENT AGREEMENT"), or
6.4.18 Any amendment, modification, supplement, renewal or
termination for any reason of that certain Growth Hormone Services Agreement
dated as of November 10, 1998, by and among the Partnership, NOVA and CHC (the
"GROWTH HORMONE SERVICES AGREEMENT").
6.5 MEETINGS OF THE MANAGEMENT COMMITTEE.
6.5.1 REGULAR AND ANNUAL MEETINGS. Regular meetings of the
Management Committee shall be held at such time and day as may be designated by
the Management Committee. The regular annual meeting of the Management Committee
shall be held, without call or notice, immediately following each annual meeting
of the Partners of the Partnership as set forth in Article 7 hereof.
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6.5.2 SPECIAL MEETINGS. Special meetings of the Management
Committee may be called by any Partner. Notice of any special meeting of the
Management Committee shall be given to each Committee Member by first-class
mail, postage prepaid, at least ten (10) days in advance of the meeting or
delivered in person or by telephone or facsimile transmission at least seven (7)
days in advance of the meeting. No notice need be given to any Committee Member
who signs a waiver of notice, whether before or after the meeting, or who
attends the meeting without protesting the lack of notice prior to attending the
meeting or at its commencement.
6.5.3 PLACE OF MEETINGS. All meetings of the Management
Committee shall be held at the Partnership's principal executive office or any
other place within or without this state as may be designated for that purpose
from time to time by the Management Committee. Any meeting is valid wherever
held if held by the written consent of all Persons entitled to vote thereat,
given either before or after the meeting.
6.5.4 QUORUM. A majority of the authorized number of Committee
Members constitutes a quorum of the Management Committee for the transaction of
business, except to adjourn as provided in Section 6.5.8 hereof.
6.5.5 TRANSACTIONS AT MEETINGS OF THE MANAGEMENT COMMITTEE.
Except as otherwise provided in this Agreement or by law, every act or decision
done or made by a majority of the authorized number of Committee Members is the
act of the Management Committee; PROVIDED, HOWEVER, that any meeting at which a
quorum was initially present may continue to transact business notwithstanding
the withdrawal of Committee Members if any action taken is approved by at least
a majority of the required quorum for such meeting.
6.5.6 TELEPHONIC PARTICIPATION. Committee Members may
participate in meetings through the use of a conference telephone or similar
communications equipment, as long as all Committee Members participating in the
meeting can hear one another.
Participation in a meeting in this manner constitutes presence in person at the
meeting.
6.5.7 ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the Management Committee may be taken without a meeting
if all Committee Members shall unanimously consent in writing to that action.
Such action by written consent shall have the same force and effect as a
unanimous vote by the Management Committee. Such written consents shall be filed
with the minutes of the proceedings of the Management Committee.
6.5.8 ADJOURNMENT. A majority of the Committee Members present
at any meeting, whether or not a quorum is present, may adjourn the meeting to
another time and place. If the meeting is adjourned for more than twenty-four
(24) hours, notice of the adjournment to another time and place must be given
prior to the time of the adjourned meeting to the Committee Members who were not
present at the time of the adjournment.
6.6 COMPENSATION AND REIMBURSEMENT. Committee Members shall receive
such compensation for their services and reimbursement for their expenses as
shall be determined from time to time by resolution of the Management Committee
and approval by a Majority in Interest of the Partners of this Partnership. In
addition, the Partnership will reimburse the Committee Members for any direct
costs incurred by the Committee Members which are directly attributable to the
Partnership or to its Business, including, but not limited, to travel expenses
incurred to attend any regular or special meetings of the Management Committee
all in accordance with such reimbursement policies as may be adopted from time
to time by the Management Committee.
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6.7 RIGHTS OF INSPECTION. Every Committee Member shall have the
absolute right at any reasonable time to inspect and copy all books, records and
documents of every kind, and to inspect the physical properties of the
Partnership. Such inspection by a Committee Member may be made in person or by
agent or attorney and includes the right to copy and obtain abstracts.
ARTICLE 7
PARTNERS' MEETINGS; PARTNERS' RIGHTS
7.1 MEETINGS OF THE PARTNERS. Meetings of the Partners may be called by
the Management Committee or, for any purpose set forth in Section 7.2 below, by
any Partner or Partners holding TEN PERCENT (10%) or more of the Percentage
Interests of the Partnership.
7.2 PURPOSE OF MEETINGS; VOTING RIGHTS. Any Partner or Partners
representing more than TEN PERCENT (10%) of the Percentage Interests of the
Partners may call a meeting of the Partners to Vote on any of the following:
7.2.1 The approval of any matter set forth in Section 6.4 of this
Agreement requiring the Vote of the Partners.
7.2.2 Any other matter set forth in this Agreement which
requires the Vote or written consent of a Majority in Interest or more of the
Partners.
7.2.3 Any other legitimate purpose or business matter properly
brought before the meeting of the Partners.
Without limiting the generality of the foregoing, the Management
Committee may require the Partners to Vote on additional matters as provided
elsewhere herein. The Partners shall not have the right to Vote on whether to
enter into any transaction in which the Management Committee has an actual or
potential conflict of interest with the Partners or the Partnership, unless the
transaction falls within the scope of the voting rights granted in this Section
7.2 or the limitations on the Management Committee listed in Article 6 of this
Agreement.
7.3 PLACE OF MEETINGS. Meetings of the Partners shall be held at the
principal executive office of the Partnership, unless some other appropriate and
convenient location, either within or without the State of California, shall be
designated for that purpose from time to time by the Management Committee.
7.4 NOTICE OF MEETINGS. Notice of meetings shall be given by the
Management Committee to the Partners in writing not less than ten (10) nor more
than sixty (60) days before the date of the meeting. Notice of any meeting of
Partners shall be delivered in accordance with Article 15 hereof and shall
specify the place, the day and the hour of the meeting, and (i) the general
nature of the business to be transacted, or (ii) those matters which the
Management Committee, at the date of mailing, intends to present for action by
the Partners.
7.5 VALIDATION OF PARTNERS' MEETINGS. The transactions of a meeting of
Partners which was not called or noticed pursuant to the provisions of this
Article 7 shall be valid as though transacted at a meeting duly held after
regular call and notice, if Partners holding in the aggregate a Majority in
Interest of the Partners are present, and if, either before or after the
meeting, each of the Partners entitled to Vote but not present (whether in
person or by proxy, as that term is used in the Act) at the meeting signs either
a written waiver of notice, a consent to the holding of such meeting or an
approval of the minutes thereof. All such waivers, consents or approvals shall
be filed with the
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records of the Partnership. Attendance shall constitute a waiver of notice,
unless objection shall be made.
7.6 ACTIONS WITHOUT A MEETING.
7.6.1 Any action which may be taken at any meeting of Partners may
be taken without a meeting and without prior notice if a consent in writing,
setting forth the action so taken, shall be unanimously agreed upon and signed
by all the Partners. Any Partner giving a written consent may revoke the consent
by a writing received by the Partnership prior to the time that written consents
of all the remaining Partners authorizing the proposed action have been filed
with the Partnership. Such revocation is effective upon its receipt by the
Partnership.
7.6.2 Unless the consents of all Partners have been given in
writing to any proposed action, any such action shall then require approval by
the Partners at a meeting duly called and held for such purpose.
7.7 QUORUM AND EFFECT OF VOTE. Each Partner shall have a number of
Votes equal to the Percentage Interest held by such Partner, provided that if,
pursuant to the Act or the terms of this Agreement, a Partner is not entitled to
Vote on a specific matter, then such Partner's number of Votes and Percentage
Interest shall not be considered for purposes of determining whether a quorum is
present, or whether approval by a Vote of the Partners has been obtained in
respect of such specific matter. Partners holding an aggregate of a Majority in
Interest of the Partners or more shall constitute a quorum at all meetings of
the Partners for the transaction of business, and the Vote of a Majority in
Interest of the Partners at any such meeting where a quorum is present shall be
required to approve any action, unless a greater Vote is required or a lesser
Vote is provided for by this Agreement or by the Act.
7.8 VOTE REQUIRED. The affirmative Vote of a Majority in Interest of
the Partners shall be required for any matter on which the Partners are entitled
to Vote.
ARTICLE 8
RESTRICTIONS ON TRANSFER OF INTERESTS;
RIGHT OF FIRST REFUSAL;
ADMISSION OF NEW PARTNERS AND TRANSFEREES
8.1 RESTRICTIONS ON TRANSFER OF PARTNERSHIP INTERESTS. Except as
provided in Section 8.5 below and Article 10 hereof, no Partnership Interest may
be transferred, conveyed, sold, hypothecated, encumbered or assigned without the
prior unanimous Vote or written consent of the Partners pursuant to Section
6.4.8 hereof.
8.2 TRANSFERS OF INTERESTS DURING FISCAL YEAR. If all or any portion of
an Interest is transferred during any Fiscal Year of the Partnership upon the
death of a Partner or by operation of law or in any other manner, all items of
income, gain, loss, cost, expense, deduction and credit with respect to the
Interest so transferred shall be prorated between the transferor and the
transferee in accordance with the number of days during the year each held the
Interest (or any permissible method under Code section 706 and the Regulations
promulgated thereunder). Notwithstanding the foregoing, distributions of
Distributable Cash allocated pursuant to Article 5 hereof shall be made to the
Person who was a Partner on the record date established pursuant thereto.
8.3 VOID TRANSFERS. Any transfer of a Partnership Interest which does
not satisfy the requirements of Section 8.1 above shall be null and void.
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8.4 ADMISSION OF NEW PARTNERS AND TRANSFEREES. A Person or transferee
of a Partnership Interest may be admitted into the Partnership as a new Partner
only upon the prior unanimous Vote or written consent of the Partners pursuant
to Section 6.4.8 hereof and upon satisfaction of the following conditions:
8.4.1 The amount of Capital Contribution which must be paid by a
new Partner shall be determined by the unanimous Vote or written consent of the
Partners. In the case of a consented transfer of a Partnership Interest, the
Capital Account balance of the transferor shall succeed to the transferee.
8.4.2 A new Partner or transferee of a Partnership Interest shall
not be deemed admitted into the Partnership until (i) the Capital Contribution
required of such new Partner shall have been paid or the Capital Account has
been transferred between the transferor and transferee, and (ii) such new
Partner or transferee has become a party to this Agreement by his or her
execution and submission to the Management Committee of a counterpart signature
page to this Agreement.
8.5 RIGHT OF FIRST REFUSAL. This section sets forth the procedure by
which a Partner may sell all of its Interest in the Partnership, but does not
authorize a Partner to sell less than all of its Interest in the Partnership
without the unanimous Vote or written consent of the Partners. In the event a
Partner desires to sell all (but not less than all) of its Interest in the
Partnership, it shall first notify and fully inform the other Partners in
writing of the identity of the proposed buyer (the "BUYER") and the proposed
terms and conditions of such proposed sale (the "NOTICE OF PROPOSED SALE"). The
selling Partner shall afford the non-selling Partners the opportunity, within
thirty (30) days after receiving the Notice of Proposed Sale, to elect to
purchase such selling Partner's Interest on the same terms and conditions as set
forth in the Notice of Proposed Sale by delivery of its written notice to this
effect to the selling Partner. If more than one non-selling Partner desires to
purchase the selling Partner's Interest, each non-selling Partner shall purchase
that portion determined by multiplying the Interest being sold by a fraction,
the numerator of which is the existing Percentage Interest of the Partner
electing to purchase, and the denominator of which is the total of the
Percentage Interests of the Partners EXCLUDING the Interest being sold. If one
of the non-selling Partners does not elect to purchase its share of the selling
Partner's Interest, the entire Interest shall be sold to the other non-selling
Partners.
In the event that one or more of the non-selling Partners shall so
elect to purchase the Interest of the selling Partner on such terms and
conditions, the closing of the purchase will take place according to the
proposed terms and conditions of the sale or, if not specified, within a
reasonable period (but not more than ninety (90) days) after such election to
purchase is made. In the event that none of the non-selling Partners elect to
purchase the Interest of the selling Partner within the 30-day period, the
selling Partner shall, upon obtaining the unanimous Vote or written consent of
the non-selling Partners, then be free to sell to the proposed Buyer all (but
not less than all) of such Interest on terms and conditions no less favorable
than offered to the non-selling Partners in the Notice of Proposed Sale within a
period of one hundred twenty (120) days after the end of such 30-day period. In
the event the sale does not take place to the proposed Buyer in compliance with
this section within such 120-day period, the selling Partner shall give written
notice to this effect to the non-selling Partners. Any subsequent proposed sale
by that Partner of its Interest in the Partnership will again require compliance
with the provisions of this Section 8.5.
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ARTICLE 9
ADMINISTRATION AND ACCOUNTING MATTERS
9.1 MAINTENANCE OF BOOKS AND RECORDS. The Partnership shall cause the
books and records of the Partnership to be maintained in accordance with
generally accepted accounting principles and shall give reports to the Partners
in accordance with prudent business practices and the Act.
9.2 ANNUAL ACCOUNTING. Within one hundred twenty (120) days after the
close of each Fiscal Year of the Partnership, the Management Committee shall (i)
cause to be prepared and submitted to each Partner a balance sheet and income
statement for the preceding Fiscal Year of the Partnership (or portion thereof)
in substantial conformity with generally accepted accounting principles, and
(ii) provide to the Partners all information necessary for them to complete
federal and state tax returns.
The determination of the Management Committee as to adjustments to the
financial reports, books, records and returns of the Partnership before any such
inspection or copying, in the absence of fraud or gross negligence, shall be
final and binding upon the Partnership and all of the Partners if there is no
exception thereto within ninety (90) days after distribution of such financial
reports, books, records and returns of the Partnership to the Partners.
9.3 INSPECTION RIGHTS. Each Partner or his or her agent or attorney
shall have access to the Partnership's books and records. Former Partners and
their agents or attorneys shall have access to such books and records pertaining
to the period which they were Partners of the Partnership. This right of access
is intended to provide the opportunity to inspect and copy books and records
upon reasonable request and during normal business hours. The Partnership may
impose a reasonable charge, covering the costs of labor and material, for copies
of documents so furnished.
9.4 RIGHTS OF PARTNERS. Each Partner and the Partnership shall furnish
to a Partner and to the legal representative of a deceased Partner or Partner
under legal disability, both of the following:
9.4.1 Without demand, any information concerning the Partnership's
Business and affairs reasonably required for the proper exercise of the
Partner's rights and duties under this Agreement or under the Act; and
9.4.2 On demand, any other information concerning the Partnership's
Business and affairs, except to the extent the demand or the information
demanded is unreasonable or otherwise improper under the circumstance.
9.5 TAX MATTERS HANDLED BY MANAGEMENT COMMITTEE. The Management
Committee shall designate an individual to act as the "TAX MATTERS PARTNER" (as
defined in Code section 6231) to represent the Partnership (at the Partnership's
expense) in connection with all examinations of the Partnership's affairs by tax
authorities, including resulting judicial and administrative proceedings, and to
expend Partnership funds for professional services and costs associated
therewith. In its capacity as Tax Matters Partner, the designated Committee
Member shall oversee the Partnership's tax affairs in the overall best interests
of the Partnership.
9.6 FEDERAL INCOME TAX ELECTIONS MADE BY MANAGEMENT COMMITTEE. The
Management Committee on behalf of the Partnership may make all elections for
federal income tax purposes, including but not limited to, the following:
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9.6.1 USE OF ACCELERATED DEPRECIATION METHODS. To the extent
permitted by applicable law and regulations, the Partnership may elect to use an
accelerated depreciation method on any depreciable unit of the assets of the
Partnership.
9.6.2 ACCOUNTING METHOD. For financial reporting purposes, the
books and records of the Partnership shall be kept on the applicable method of
accounting as required by law applied in a consistent manner and shall reflect
all transactions of the Partnership and be appropriate and adequate for the
purposes of the Partnership.
9.6.3 OBLIGATIONS OF PARTNERS TO REPORT ALLOCATIONS. The Partners
are aware of the income tax consequences of the allocations made by this
Agreement and hereby agree to be bound by the provisions of this Section 9.6 in
reporting their shares of the Partnership income and loss for income tax
purposes.
9.6.4 TAX YEAR. The Management Committee will cause the Partnership
to elect the Fiscal Year as its taxable year.
9.6.5 OTHER ELECTIONS. The Management Committee shall have the
right in its sole discretion at any time to make or not to make such other
elections as are authorized or permitted by any law or regulation for income tax
purposes (including, but not limited to, any election under sections 734, 743
and 754 of the Code to adjust the basis of the Property of the Partnership in
the event of a Transfer of all or part of the Interest of any Partner).
Notwithstanding the above, no Partner, nor the Partnership, shall make an
election to be excluded from the application of Subchapter K of the Code or any
similar provisions of state law.
9.7 BANK ACCOUNTS; BANKING. The Management Committee shall establish
one or more depository accounts for the funds of the Partnership and designate
Persons authorized to deposit and draw against such accounts on behalf of the
Partnership. Cash balances on hand may be invested by the Management Committee
on behalf of the Partnership as provided for in this Agreement. Partnership
funds will not be commingled with the funds of any Committee Member, Partner or
any other party or used as compensating balances for any other obligations of
any Partner, Committee Member or any other party.
ARTICLE 10
PARTNER DISSOCIATION
10.1 COVENANT NOT TO DISSOCIATE OR DISSOLVE. Notwithstanding any
provision of the Act, each Partner hereby covenants and agrees that the Partners
have entered into this Agreement based on their mutual expectation that all
Partners will continue as Partners and will carry out the duties and obligations
undertaken by them hereunder and that, except as otherwise expressly required or
permitted hereby, no Partner shall dissociate from the Partnership, be entitled
to demand or receive a return of such Partner's contributions or profits (or a
bond or other security for the return of such contributions or profits), or
exercise any power under the Act to dissolve the Partnership without the consent
of the other Partners. Notwithstanding any of the foregoing, this Section 10.1
shall not apply to any termination of the Partnership pursuant to Article 11
hereof.
10.2 DISSOCIATION OF A PARTNER; LIABILITY. A dissociation from the
Partnership by any Partner shall be a breach of this Agreement. Any Partner who
wrongfully dissociates is liable to the Partnership and to the other Partners
for damages and liabilities caused by the dissociation in addition to any other
obligations of the Partner to the Partnership or to the other Partners.
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10.3 VOLUNTARY DISSOCIATION. Should a Partner exercise its power to
dissociate from the Partnership in contravention of this Agreement pursuant to
Section 16602 (a) of the Act, it shall give all other Partners ninety (90) days
advance written notice of its intention to do so.
10.4 OPTION TO PURCHASE DISSOCIATED PARTNER'S INTEREST. On the
voluntary dissociation of a Partner pursuant to Section 10.3 above, the
remaining Partners shall have the option to purchase the Interest of the
dissociated Partner in the Partnership. The manner in which such option may be
exercised, the determination of the purchase price to be paid for the
dissociated Partner's Interest, and the method of payment therefor shall be in
accordance with Section 8.5 of this Agreement.
10.5 ASSUMPTION OF PARTNERSHIP OBLIGATIONS. On any purchase and sale of
a Partnership Interest under this Article 10, the remaining Partners shall
assume all Partnership obligations and shall protect, defend, and indemnify the
dissociated Partner and its officers, directors, employees and agents and the
property of any dissociated Partner from liability for any such obligations.
10.6 PUBLICATION OF NOTICE. On any purchase and sale of a Partnership
Interest under this Article 10, the remaining Partners shall, at their own cost
and expense, as soon as reasonably practicable after exercise of their option to
purchase the dissociating Partner's Interest, prepare, publish, file and serve
all notices as may be required by law to protect the dissociated Partner from
liability for future obligations of the Partnership Business.
ARTICLE 11
TERMINATION AND DISSOLUTION
11.1 TERMINATION AND DISSOLUTION. The Partnership shall be dissolved
upon the occurrence of any of the following events:
11.1.1 The affirmative Vote or written consent of all of the
Partners to terminate and dissolve the Partnership.
11.1.2 The affirmative Vote or written consent of all of the
Partners to sell, exchange or otherwise dispose of all or substantially all of
the Partnership Property occurring as part of single transaction or a series of
related transactions as part of plan.
11.1.3 The termination for any reason of the Growth Hormone
Management Agreement.
11.1.4 The termination for any reason of the Growth Hormone
Services Agreement.
11.1.5 After the initial forty-eight (48) months of Partnership
operations, either Partner may terminate the Partnership upon twelve (12) months
prior written notice to the other Partner (s) .
11.1.6 An event that makes it unlawful for all or substantially
all of the Business of the Partnership to be continued, but a cure of illegality
within ninety (90) days after notice to the Partnership of the event is
effective retroactively to the date of the event for purposes of California
Corporations Code Section 16801.
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11.1.7 On application by a Partner, the entry of a judicial
determination that any of the following apply:
(a) The economic purpose of the Partnership is likely to
be unreasonably frustrated;
(b) Another Partner has engaged in conduct relating to the
Partnership Business that makes it not reasonably practicable to carry on the
Business in partnership with that Partner; or
(c) It is not otherwise reasonably practicable to carry on the
Partnership Business in conformity with the Partnership Agreement.
11.2 STATEMENT OF DISSOLUTION. As soon as possible after the
occurrence of any of the events specified in Section 11.1 above, the Partnership
shall execute a Statement of Dissolution (Form GP-4) in such form as prescribed
by the Secretary of State, and cause the same to be filed in the office of the
Secretary of State pursuant to Section 16805 of the California Corporations
Code.
11.3 CONDUCT OF BUSINESS. Upon the filing of the Statement of
Dissolution with the Secretary of State, the Partnership shall cease to carry on
its Business, except insofar as may be necessary for the winding up of its
Business, but the Partnership's separate existence shall continue until the
Statement of Dissolution has been filed with the Secretary of State or until a
judicial determination dissolving the Partnership has been entered by a court of
competent jurisdiction.
11.4 DISTRIBUTION OF NET PROCEEDS UPON LIQUIDATION. The Partners
shall continue to divide Net Profits and Net Losses and Distributable Cash
during the winding up period in the same manner and the same priorities as
provided for in Articles 4 and 5 hereof. The proceeds from the liquidation of
Partnership Property shall be applied in the following order:
11.4.1 First, to the payment of creditors, in the order of
priority as provided by law, except to Partners on account of their Capital
Contributions.
11.4.2 Second, to the payment of loans or advances that may
have been made by any of the Partners for working capital or other requirements
of the Partnership.
11.4.3 Thereafter, to the Partners in accordance with their
positive Capital Account balances.
Where the distribution pursuant to this Section 11.4 consists
both of cash (or cash equivalents) and non-cash assets, the cash (or cash
equivalents) shall first be distributed, in a descending order, to fully satisfy
each category starting with the most preferred category above. In the case of
noncash assets, the distribution values are to be based on the fair market value
thereof as determined in good faith by the Management Committee, and the
shortest maturity portion of such non-cash assets (e.g., notes or other
indebtedness) shall, to the extent such non-cash assets are readily divisible,
be distributed, in a descending order, to fully satisfy each category above,
starting with the most preferred category.
ARTICLE 12
INDEMNIFICATION
12.1 INDEMNIFICATION OF THE PARTNERS AND THEIR PRINCIPALS. The
Partnership shall indemnify and hold harmless each of the Partners, the
Partnership Manager, the Committee
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Members, their Affiliates and each of their respective partners, officers,
directors, managers, trustees, employees, agents and Principals (individually,
an "INDEMNITEE") from and against any and all losses, claims, demands, costs,
damages, liabilities, joint and several, expenses of any nature (including
reasonable attorneys' fees and disbursements), judgments, fines, settlements and
other amounts arising from any and all claims, demands, actions, suits or
proceedings, whether civil, criminal, administrative or investigative, in which
the Indemnitee is involved as a party arising out of the Business of the
Partnership, excluding liabilities to any Partner, regardless of whether the
Indemnitee continues to be a Partner, or a partner, officer, director, manager,
trustee, employee, agent or Principal of the Partner at the time any such
liability or expense is paid or incurred, to the fullest extent permitted by the
Act and all other applicable laws, PROVIDED that the Partner or such Person
acted in good faith, within what is reasonably believed to be the scope of its
authority and for a purpose which it reasonably believed to be in the best
interests of the Partnership and the Partners or otherwise in compliance with
the provisions of this Agreement; provided, however (i) that the Partnership
shall not be required to indemnify any Indemnitee, and any such Indemnitee shall
be liable, for any loss, expense or damage which the Partnership may suffer as a
result of (A) such Indemnitee's willful misconduct, gross negligence or bad
faith in failing to perform its duties hereunder, (B) actions taken by such
Indemnitee in violation of this Agreement, (C) the receipt by such Indemnitee of
any financial benefits to which it is not entitled pursuant to this Agreement,
or (D) the vote by such Indemnitee for a distribution of funds of the
Partnership in violation of this Agreement or the Act; (ii) the Partnership
shall not be required to indemnify any Indemnitee for any breach of the
provisions of this Agreement, or for any loss, expense or damage which it may
suffer as a result of the breach of this Agreement by the Partner to which the
Indemnitee is related; and (iii) any liability hereunder shall be limited solely
to the assets and properties of the Partnership, and no Partner (or any
Affiliate of any Partner) shall have any liability or obligation hereunder.
12.2 EXPENSES. Expenses incurred by an Indemnitee in defending any
claim, demand, action, suit or proceeding subject to Section 12.1 above may,
from time to time, be advanced by the Partnership prior to the final disposition
of such claim, demand, action, suit or proceeding upon receipt by the
Partnership of an undertaking by or on behalf of the Indemnitee to repay such
amount if it shall be determined that such Person is not entitled to be
indemnified as authorized in Section 12.1.
12.3 INDEMNIFICATION RIGHTS NON-EXCLUSIVE. The indemnification provided
by Section 12.1 shall be in addition to any other rights to which those
indemnified may be entitled under any agreement, vote of the Partners, as a
matter of law or equity or otherwise, both as to action in the Indemnitee's
capacity as a Partner, as an Affiliate or as an officer, director, employee,
agent or Principal of a Partner and as to any action in another capacity, and
shall continue as to an Indemnitee who has ceased to serve in such capacity and
shall inure to the benefit of the heirs, successors, assigns and administrators
of the Indemnitee.
12.4 ERRORS AND OMISSIONS INSURANCE. The Partnership may purchase and
maintain insurance, at the Partnership's expense, on behalf of the Partners and
such other Persons as the Partners shall determine, against any liability that
may be asserted against, or any expense that may be incurred by, such Person in
connection with the activities of the Partnership and/or the Partners' acts or
omissions as the Partners of the Partnership regardless of whether the
Partnership would have the power to indemnify such Person against such liability
under the provisions of this Agreement.
12.5 ASSETS OF THE PARTNERSHIP. Any indemnification under Section 12.1
shall be satisfied solely out of the assets of the Partnership. No Partner shall
be subject to personal liability or required to fund or to cause to be funded
any obligation by reason of these indemnification provisions.
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ARTICLE 13
INDEPENDENT ACTIVITIES; AGREEMENT NOT TO COMPETE
13.1 INDEPENDENT ACTIVITIES. Subject to Section 13.2 below, each of the
Partners and its Affiliates may engage in business and activities which are
competitive with the Business and activities of the Partnership, and neither
such Partner nor any of such Affiliates shall be under any obligation or duty to
account for or offer the benefit of any such business and activities to the
other Partners or the Partnership.
13.2 AGREEMENT NOT TO COMPETE. Each Partner and its Affiliates agree
that, during the term of this Agreement, it shall not compete with the
Partnership by providing any therapies, services, supplies or goods which are
being provided by the Partnership and encompassed within the definition of the
"Business" of the Partnership as contained in this Agreement to any patient who
has his or her principal residence in the Service Area, or any patient being
treated by a physician or hospital which has it principal place of business
within the Service Area. Notwithstanding the foregoing, neither the resale by
CHC of drugs acquired in wholesale transactions with the Partnership or NOVA,
nor CHC's and NOVA's execution, delivery and performance under that certain
Product Supply and Service Agreement for Human Growth Hormone dated November 10,
1998, by and between CHC and NOVA shall constitute a breach of this agreement
not to compete.
No Partner shall be in violation of this Section 13.2 if it has
made reasonable inquiry of the patient and the patient has denied having a
principal residence which would cause the patient to be covered by these
restrictions. However, if the correct information is subsequently discovered
such that the patient should not have been provided therapies, services,
supplies or goods by the Partner, then the Partner shall so advise the patient
and shall use all reasonable efforts to encourage the patient to have such
therapies, services, supplies or goods, as the case may be, be provided by the
Partnership, consistent with the right of the patient to select his or her own
health care provider.
ARTICLE 14
AMENDMENTS
14.1 AMENDMENTS. Except for EXHIBIT A to this Agreement which may be
modified and supplemented from time to time by the Management Committee without
the necessity of a formal amendment to this Agreement, the terms and provisions
of this Agreement shall not be modified or amended in any respect except by a
written instrument executed by the number of Partners bearing the Vote required
under Section 14.2 below.
14.2 VOTE REQUIRE. Proposed amendments to this Agreement shall be
adopted if consented to by the unanimous Vote of the Partners, unless a lesser
Vote is required by law or by this Agreement. Notwithstanding the foregoing, no
amendment to this Agreement may enlarge the obligations of any Partner hereunder
without the consent of such Partner, even if the requisite number of Partners
have consented thereto.
14.3 MANAGEMENT COMMITTEE'S RIGHT TO REQUIRE WRITTEN RESPONSES. For the
purpose of obtaining a written Vote to approve or disapprove a proposed
amendment, the Management Committee may require written responses within a
specified time period (not less than 10 nor more than 60 days from the date of
any notice of a proposed amendment) and provide that the failure to respond
shall constitute a favorable or unfavorable Vote (as designated) for the
proposed amendment.
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<PAGE>
14.4 COPY OF AMENDMENT. The Management Committee shall promptly furnish
a copy of any amendment to this Agreement to each Partner on whose behalf the
Management Committee executed the amendment as attorney-in-fact and to any
Partner who did not Vote.
14.5 FILINGS. The Management Committee shall, within a reasonable time
after the effective date of any amendment to this Agreement, make any official
filings or publications required or desirable to reflect such amendment,
including a Statement of Amendment (Form GP-7).
ARTICLE 15
NOTICES
Any notice, demand or other communication required or permitted
hereunder shall be in writing and may be either (i) personally delivered, which
shall be deemed received at the time of actual receipt thereof; or (ii) sent by
registered or certified mail, with postage and charges prepaid, which shall be
deemed delivered three (3) business days after deposit in the United States
mail; or (iii) sent by overnight courier service, such as FedEx, with charges
prepaid, which shall be deemed delivered upon such courier service's record
delivery date of the same; or (iv) delivered by facsimile transmission, which
shall be deemed received at the time and date of transmission, provided an
original mechanical signed copy of such communication is also immediately
deposited in the United States mail with first-class postage and charges
prepaid, and IN EACH CASE, addressed or delivered to a party at such party's
address as set forth below, or at such other address as that party may specify
by written notice given to the other in accordance with this Article:
IF TO THE PARTNERSHIP, THEN TO EACH OF THE FOLLOWING PARTIES:
CHILDREN'S HOME SERVICES
Attn: Thomas J. McNulty, PharmD.,
Partnership Manager
65 North Raymond Avenue, Suite 305
Pasadena, California 91103
Facsimile: (626) 577-1411
AND TO:
JOHN R. GROW
6820 Charlotte Pike, Suite 100
Nashville, Tennessee 37209
Facsimile: (615) 352-2588
AND TO:
Each of the Committee Members, addressed and delivered
separately to each Committee Member at such address as they
shall provide the Partnership from time to time,
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<PAGE>
WITH COURTESY COPIES TO EACH OF:
FRYE & HSIEH, LLP
Attn: Douglas J. Frye, Esq.
24955 Pacific Coast Highway, Suite A201
Malibu, California 90265-4747
Facsimile: (310) 456-0808
Thomas W. Bell, Jr., Esq.
1640 Century Center Parkway, Suite 101
Memphis, Tennessee 38134
Facsimile: (901) 385-3689
IF TO CHC AS A PARTNER:
CHILDREN'S HOME CARE
Attn: Thomas J. McNulty, PharmD., President
c/o 65 North Raymond Avenue, Suite 305 Pasadena,
California 91103
Facsimile: (626) 577-1411
WITH A COURTESY COPY TO:
FRYE & HSIEH, LLP
Attn: Douglas J. Frye, Esq.
24955 Pacific Coast Highway, Suite A201
Malibu, California 90265-4747
Facsimile: (310) 456-0808
IF TO NOVA, AS A PARTNER:
NOVA FACTOR, INC.
Attn: John R. Grow, President
6820 Charlotte Pike, Suite 100
Nashville, Tennessee 37209
Facsimile: (615) 352-2588
WITH A COURTESY COPY TO:
Thomas W. Bell, Jr., Esq.
1640 Century Center Parkway, Suite 101
Memphis, Tennessee 38134
Facsimile: (901) 385-3689
Where courtesy copies are requested to be given, such copies shall not
constitute valid notice to the party where a copy is requested to be given. If
the United States Postal Service returns to the Partnership or the Management
Committee any notice as undeliverable, all future notices to that Partner shall
be deemed duly given if kept available for that Partner at the Partnership's
principal executive office for one (1) year.
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<PAGE>
ARTICLE 16
GENERAL PROVISIONS
16.1 CONSTRUCTION. Every covenant, term and provision of this Agreement
shall be construed simply according to its fair meaning and not strictly for or
against any Partner.
16.2 HEADINGS. The headings contained in this Agreement are inserted
for convenience and identification only and are in no way intended to describe,
interpret, define or limit the scope, extent or intent of this Agreement or any
provision hereof.
16.3 VARIATION OF PRONOUNS; GENDER. All pronouns and any variations
thereof shall be deemed to refer to masculine, feminine, or neuter, singular or
plural, as the identity of the Person or Persons may require.
16.4 SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity of the
remainder of the within Agreement.
16.5 ENTIRE AGREEMENT; MODIFICATION. This Agreement, together with all
Exhibits, schedules and other appendices attached hereto and referred to herein,
constitutes the entire understanding of the parties hereto with respect to the
subject matter hereof, and no amendment, modification or alteration of the terms
hereof shall be binding unless the same be in writing, dated subsequent to the
date hereof and duly adopted in accordance with the provisions of this
Agreement.
16.6 FURTHER ACTION. Each Partner, upon request, agrees to perform all
further acts and execute, acknowledge and deliver any documents or instruments
which may be reasonably necessary, appropriate or desirable to carry out the
provisions of this Agreement.
16.7 NO WAIVER TO SEEK REDRESS. The failure of any Partner to seek
redress for violation of or to insist upon the strict performance of any
covenant or condition of this Agreement shall not prevent a subsequent act,
which would have originally constituted a violation, from having the effect of
an original violation.
16.8 WAIVER OF ACT FOR PARTITION. No Partner shall, either directly or
indirectly, take any action to require partition or appraisement of the
Partnership or any of its assets or properties or cause the sale of any
Partnership property, and notwithstanding any provision of applicable law to the
contrary, each Partner (and his legal representatives, successors, or assigns)
hereby irrevocably waives any and all rights to maintain any action for
partition or to compel any sale with respect to his Partnership Interest, or
with respect to any asset or properties of the Partnership, except as expressly
provided in this Agreement.
16.9 CUMULATIVE REMEDIES. The rights and remedies provided by this
Agreement are cumulative and the use of any one right or remedy by a party
hereto shall not preclude or waive its right to use any or all other remedies.
Said rights and remedies are given in addition to any other rights the parties
may have by law, statute, ordinance or otherwise.
16.10 BENEFIT AND BURDEN. Except as otherwise expressly permitted,
restricted or provided for in this Agreement, each and all of the covenants,
terms, provisions and agreements contained herein shall be binding upon and
inure to the benefit of the Partners and their respective heirs, legatees,
personal and legal representatives, successors, transferees and assigns.
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<PAGE>
16.11 NO THIRD PARTY BENEFICIARIES. Except for the foregoing, no rights
or benefits under this Agreement are conferred upon, directly or indirectly, or
shall in any way inure to the benefit of, any third party who is not a signatory
to this Agreement.
16.12 LENDER'S RELIANCE. Any lender may rely upon the written statement
of the Partnership as to the intended use of the proceeds of any borrowings of
the Partnership, and such statements shall be conclusively binding upon all
parties hereto irrespective of the actual disposition or use of such proceeds.
16.13 BINDING ARBITRATION OF DISPUTES. UNLESS OTHERWISE WAIVED BY THE
PARTNERS, AND EXCEPT FOR ANY DEADLOCK OF THE MANAGEMENT COMMITTEE, ANY DISPUTE,
CONTROVERSY OR CLAIM BETWEEN THE PARTNERS ARISING OUT OF OR RELATING TO THIS
AGREEMENT EITHER DURING OR AFTER THE TERM HEREOF (INCLUDING THE QUESTION AS TO
WHETHER ANY PARTICULAR MATTER IS ARBITRABLE) SHALL BE SOLELY AND FINALLY SETTLED
BY ARBITRATION CONDUCTED IN LOS ANGELES COUNTY, CALIFORNIA, IN ACCORDANCE WITH
THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION THEN IN
FORCE (THE "RULES"). THE PARTNER REQUESTING ARBITRATION SHALL SERVE UPON THE
OTHER PARTNERS TO THE CONTROVERSY, DISPUTE OR CLAIM A WRITTEN DEMAND FOR
ARBITRATION STATING THE SUBSTANCE OF THE CONTROVERSY, DISPUTE OR CLAIM, THE
CONTENTION OF THE PARTNER REQUESTING ARBITRATION, AND THE NAME AND ADDRESS OF
THE ARBITRATOR APPOINTED BY IT. THE RECIPIENTS OF SUCH DEMAND SHALL WITHIN
TWENTY (20) DAYS AFTER SUCH RECEIPT APPOINT AN ARBITRATOR AND NOTIFY THE PARTNER
REQUESTING ARBITRATION OF THE IDENTITY OF THE ARBITRATOR SO SELECTED, AND THE
TWO ARBITRATORS SHALL APPOINT A THIRD, AND THE DECISION OR AWARD OF ANY TWO
ARBITRATORS SHALL BE FINAL AND BINDING UPON THE PARTIES. IN THE EVENT THAT THE
TWO ARBITRATORS FAIL TO APPOINT A THIRD ARBITRATOR WITHIN TWENTY (20) DAYS OF
THE APPOINTMENT OF THE SECOND ARBITRATOR, EITHER ARBITRATOR, OR ANY PARTY TO THE
ARBITRATION, MAY APPLY TO A JUDGE OF THE UNITED STATES DISTRICT COURT IN AND FOR
THE CENTRAL DISTRICT OF THE STATE OF CALIFORNIA FOR THE APPOINTMENT OF THE THIRD
ARBITRATOR, AND THE APPOINTMENT OF SUCH ARBITRATOR BY SUCH JUDGE ON SUCH
APPLICATION SHALL HAVE PRECISELY THE SAME FORCE AND EFFECT AS IF SUCH ARBITRATOR
HAD BEEN APPOINTED BY THE TWO ARBITRATORS. IF FOR ANY REASON THE THIRD
ARBITRATOR CANNOT BE APPOINTED IN THE MANNER PRESCRIBED BY THE PRECEDING
SENTENCE, EITHER REGULARLY APPOINTED ARBITRATOR OR EITHER PARTY TO THE
ARBITRATION, MAY APPLY TO THE AMERICAN ARBITRATION ASSOCIATION FOR APPOINTMENT
OF THE THIRD ARBITRATOR IN ACCORDANCE WITH THE RULES.
SHOULD THE PARTIES UPON WHOM THE DEMAND FOR ARBITRATION HAS BEEN
SERVED FAIL OR REFUSE TO APPOINT AN ARBITRATOR WITHIN 20 DAYS, THE SINGLE
ARBITRATOR SHALL HAVE THE RIGHT TO DECIDE ALONE.
THE ARBITRATORS SHALL HAVE THE POWER TO GRANT ALL LEGAL AND
EQUITABLE REMEDIES AND AWARD COMPENSATORY DAMAGES PROVIDED BY CALIFORNIA LAW,
BUT SPECIFICALLY SHALL NOT HAVE THE POWER TO AWARD PUNITIVE DAMAGES. THE PARTIES
TO THE ARBITRATION SHALL BE ENTITLED TO CONDUCT DISCOVERY, AS MAY BE REASONABLY
LIMITED BY THE ARBITRATORS,
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<PAGE>
UNDER THE CALIFORNIA CODE OF CIVIL PROCEDURE. THE ARBITRATORS SHALL APPLY
CALIFORNIA SUBSTANTIVE LAW AND THE CALIFORNIA EVIDENCE CODE TO THE PROCEEDING.
THE ARBITRATORS SHALL PREPARE IN WRITING AND PROVIDE TO THE PARTIES AN AWARD
INCLUDING FACTUAL FINDINGS AND THE REASONS ON WHICH THE DECISION IS BASED THE
ARBITRATOR'S DECISION OR AWARD SHALL BE FINAL AND BINDING UPON THE PARTIES. THE
PARTNERS SHALL ABIDE BY ALL AWARDS RENDERED IN ARBITRATION PROCEEDINGS, AND ALL
SUCH AWARDS MAY BE ENFORCED AND EXECUTED UPON IN ANY COURT HAVING COMPETENT
JURISDICTION OVER THE PARTY AGAINST WHOM ENFORCEMENT OF SUCH AWARD IS SOUGHT.
THE PARTNER OR PARTNERS LOSING THE DISPUTE WHICH WAS SUBMITTED TO ARBITRATION
SHALL PAY THE ADMINISTRATIVE CHARGES, ARBITRATORS' FEES, AND RELATED EXPENSES OF
ARBITRATION, AND EACH PARTNER'S LEGAL FEES INCURRED IN CONNECTION WITH ANY SUCH
ARBITRATION. THIS AGREEMENT TO ARBITRATE SHALL BE SPECIFICALLY ENFORCEABLE UNDER
THE PREVAILING ARBITRATION LAW.
16.14 WAIVER OF JURY TRIAL. WITH RESPECT TO ANY DISPUTE ARISING UNDER
OR IN CONNECTION WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, AS TO WHICH NO
PARTNER INVOKES THE RIGHT TO ARBITRATION HEREIN PROVIDED, OR AS TO WHICH LEGAL
ACTION NEVERTHELESS OCCURS, EACH PARTNER HEREBY IRREVOCABLY WAIVES ALL RIGHTS IT
MAY HAVE TO DEMAND A JURY TRIAL. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND
VOLUNTARILY MADE BY THE PARTNERS, AND EACH PARTNER ACKNOWLEDGES THAT NONE OF THE
OTHER PARTNERS, MANAGERS, NOR ANY PERSON ACTING ON BEHALF OF THE OTHER PARTIES
HAS MADE ANY REPRESENTATION OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN
ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THE PARTNERS EACH FURTHER ACKNOWLEDGE
THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN
THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT
LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE
OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. EACH OF THE PARTNERS FURTHER
ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF
THIS WAIVER PROVISION.
16.15 ATTORNEYS' FEES. In the event of any arbitration, litigation or
other dispute or proceeding arising as a result of or by reason of this
Agreement, the prevailing party in any such arbitration, litigation or other
dispute or proceeding shall be entitled to, in addition to any other damages
assessed, its reasonable attorneys' fees and all other out-of-pocket costs and
expenses incurred in connection with settling or resolving such dispute. The
reasonable attorneys' fees which the prevailing party is entitled to recover
shall include fees for prosecuting or defending any appeal and shall be awarded
for any supplemental proceedings until the final judgment is satisfied in full.
In addition to the foregoing award of attorneys' fees to the prevailing party,
the prevailing party in any lawsuit or arbitration procedure relating to this
Agreement shall be entitled to its reasonable attorneys' fees and costs incurred
in any post judgment proceedings to collect or enforce the judgment. THIS
ATTORNEYS' FEES PROVISION IS SEPARATE AND SEVERAL AND SHALL SURVIVE THE MERGER
OF THIS AGREEMENT INTO ANY JUDGMENT.
16.16 TIME IS OF THE ESSENCE. TIME IS EXPRESSLY DECLARED TO BE OF THE
ESSENCE with respect to the parties hereto and in connection with all acts or
things to be done or performed in connection herewith and of every provision
hereof in which time is an element.
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<PAGE>
16.17 COUNTERPARTS; FACSIMILE EXECUTION. This Agreement may be executed
in multiple counterparts each of which shall be deemed an original Agreement,
and all of which shall constitute one Agreement to be effective as of the date
of execution of this Agreement. The execution of this Agreement, and any notices
or documents required to be delivered hereunder, may be accomplished by
facsimile transmission, provided the original of such Agreement, notice or
document containing an original signature is delivered to the other party within
five (5) business days after such execution or facsimile transmission thereof.
(Continued and Signed on the Following Page)
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<PAGE>
16.18 GOVERNING LAW. This Agreement and any amendments or exhibits
hereto, and the rights and obligations of the parties hereunder, is executed
under and in conformity with the laws of the State of California relating to
general partnerships and is to be construed, enforced and governed in accordance
therewith without giving effect to any conflict of law provision.
SIGNATURES AND ACKNOWLEDGMENT
OF THE PARTNERS
IN WITNESS WHEREOF, the parties hereto have caused this AMENDED AND
RESTATED GENERAL PARTNERSHIP AGREEMENT of CHILDREN'S HOME SERVICES to be duly
and validly executed and delivered by a duly authorized representative as of the
day and year first above written.
FURTHER, WE, THE UNDERSIGNED, AS PARTNERS OF THE PARTNERSHIP,
ACKNOWLEDGE WE HAVE READ AND UNDERSTAND THE TERMS AND CONDITIONS OF THE
FOREGOING AMENDED AND RESTATED GENERAL PARTNERSHIP AGREEMENT OF CHILDREN'S HOME
SERVICES, INCLUDING SPECIFICALLY, BUT NOT LIMITED TO, SECTION 10.1, "COVENANT
NOT TO DISSOCIATE OR DISSOLVE," AND SECTIONS 16.13 AND 16.14, "BINDING
ARBITRATION OF DISPUTES," AND "WAIVER OF JURY TRIAL," RESPECTIVELY, AND, AS
EVIDENCED BY OUR SIGNATURES BELOW, THE UNDERSIGNED HEREBY ACCEPT, AND AGREE TO
BE BOUND BY, THE TERMS AND PROVISIONS CONTAINED HEREIN.
CHILDREN'S HOME SERVICES
A California General Partnership
By Its Partners
"CHC"
CHILDREN'S HOME CARE
A California Nonprofit Public
Benefit Corporation
By: /s/ Thomas J. McNulty
--------------------------------------
THOMAS J. McNULTY, PharmD.,
Its President
"NOVA"
NOVA FACTOR, INC.
A Tennessee Corporation
By: /s/ John R. Grow
--------------------------------------
JOHN R. GROW
Its President
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<PAGE>
ACCEPTANCE BY PARTNERSHIP MANAGER
The undersigned hereby accepts his appointment as the Partnership
Manager of the Partnership, and hereby agrees to undertake the performance of
his duties, responsibilities and obligations in accordance with terms of this
Amended and Restated General Partnership Agreement and the applicable provisions
of the Act and California law, as any and all may be amended from time to time.
-----------------------------------
THOMAS J. McNULTY, PharmD.
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<PAGE>
EXHIBIT A
AMENDED AND RESTATED GENERAL PARTNERSHIP AGREEMENT
OF
CHILDREN'S HOME SERVICES
NAMES AND ADDRESSES OF THE PARTNERS,
THEIR CAPITAL CONTRIBUTIONS AND PERCENTAGE INTERESTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAMES AND ADDRESSES
OF THE PARTNERS OF CAPITAL PERCENTAGE
CHILDREN'S HOME SERVICES CONTRIBUTION INTEREST
<S> <C> <C>
- --------------------------------------------------------------------------------
CHILDREN'S HOME CARE TO BE 50.0%
6430 Sunset Boulevard, Suite 400 DETERMINED
Los Angeles, California 90028
Facsimile: (626) 577-1411
Attn: Thomas J. McNulty, President
- --------------------------------------------------------------------------------
NOVA FACTOR, INC. TO BE 50.0%
6820 Charlotte Pike, Suite 100 DETERMINED
Nashville, Tennessee 37209
Facsimile: (615) 352-2588
Attn: John R. Grow, President
- --------------------------------------------------------------------------------
TOTAL: $ 100.0%
---------------------------------
---------------------------------
</TABLE>
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<PAGE>
Exhibit 10.61
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
GENERAL PARTNERSHIP AGREEMENT
OF
CHILDRENS HEMOPHILIA SERVICES
DATED AND EXECUTED AS OF
NOVEMBER 10, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THIS AMENDED AND RESTATED GENERAL PARTNERSHIP AGREEMENT of CHILDRENS
HEMOPHILIA SERVICES (the "AGREEMENT" or "PARTNERSHIP AGREEMENT") is made and
entered into effective as of NOVEMBER 10, 1998, by and between CHILDRENS HOME
CARE, a California nonprofit public benefit corporation ("CHC"), AND HORIZON
HEALTH SYSTEMS, INC., a Tennessee corporation ("HHS"), as Partners of this
Partnership (as those terms are defined herein).
STATEMENTS OF FACT:
A. Childrens Hemophilia Services was formed as a general partnership
pursuant to the Act (as defined below) by CHC and Thomas J. McNulty, PharmD., an
individual, as the "Initial Partner" by their execution of the General
Partnership Agreement of CHC dated and adopted as of October 1, 1998 (the
"ORIGINAL PARTNERSHIP AGREEMENT").
B. CHC and HHS, as Partners of the Partnership, desire to amend and restate
the Original Partnership Agreement in its entirety, and to enter into and adopt
this Amended and Restated General Partnership Agreement of Childrens Hemophilia
Services effective as of the date hereof.
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL TERMS, CONDITIONS, COVENANTS
AND AGREEMENTS SET FORTH HEREIN, AND WITH THE INTENTION OF BEING LEGALLY BOUND
HEREBY, THE PARTIES DO HEREBY AGREE AS FOLLOWS:
ARTICLE 1
FORMATION AND INTRODUCTORY MATTERS
1.1 FORMATION. A general partnership was formed on October 1, 1998, between
CHC and Thomas J. McNulty, PharmD., an individual, as the "Initial Partner,"
pursuant to the Uniform Partnership Act of California of 1994, Section 1600, EQ.
SEQ., of the California Corporations Code (the "ACT"). This Amended and Restated
General Partnership Agreement is hereby adopted as of November 10, 1998, as the
General Partnership Agreement of the Partnership and shall control the
organization and business affairs of the Partnership and the relationship,
rights and obligations of its Partners.
1.2 NAME. The name of the Partnership shall be "CHILDRENS HEMOPHILIA
SERVICES," or such other trade name or similar name as the Management Committee
shall from time to time determine to be in compliance with the Act and
applicable law.
1.3 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the
Partnership shall be located at 65 NORTH RAYMOND AVENUE, SUITE 305, PASADENA,
CALIFORNIA 91103, or at such other place or places as shall be determined by the
Partners within the County of Los Angeles, California.
1.4 BUSINESS AND PURPOSE. The general business and purpose of the
Partnership shall be to distribute pharmaceutical drugs, products and supplies
and to provide related services with a particular emphasis on the pediatric
population within a service area encompassed by a 100-mile radius of the City
and County of Los Angeles, California, and within the city limits of the City
Los Angeles, California (the "SERVICE AREA") to meet the blood factor infusion
therapy needs of patients of health care providers within the Service Area (the
"BUSINESS"). The Partnership may conduct any other lawful activity which the
Partnership deems is necessary,
<PAGE>
incidental to or desirable in connection with the Business of the Partnership
and in maximizing the economic benefit of the Partnership, including, without
limitation, engaging in any and all lawful business activities related or
incidental thereto which are not otherwise specifically prohibited by this
Agreement. In accomplishing its purposes and carrying on its Business, the
Partnership may employ such personnel and obtain such other services and advice
that the Partnership may deem advisable.
1.5 TERM; TERMINATION. The term of the Partnership shall commence on
OCTOBER 1, 1998, and shall continue thereafter until the occurrence of any of
the events set forth in Article 11 hereof, at which time the Partnership shall
be terminated and dissolved in accordance with said Article 11.
1.6 STATUTORY FILINGS.
1.6.1 FICTITIOUS BUSINESS NAME STATEMENT. Promptly after the
commencement of the term of the Partnership, and upon any subsequent change in
its Partners, CHC shall sign and cause to be filed and published in Los Angeles
County, California, a Fictitious Business Name Statement pursuant to the
provisions of Section 17000, ET. SEQ., of the California Business and
Professions Code, registering the Partnership to conduct the Business under the
fictitious business name of "CHILDRENS HEMOPHILIA SERVICES" in said county, or
under any other trade names or such other similar names as the Management
Committee shall determine.
1.6.2 STATEMENT OF PARTNERSHIP AUTHORITY. Pursuant to Section 16303
of the Act, promptly after commencement of the term of the Partnership, the
Partners shall each sign and cause a Form GP-1, Statement of Partnership
Authority, to be filed in the office of the Secretary of State of California
and, if the Partners deem it necessary or appropriate, to cause the same to be
recorded in the Official Records of Los Angeles County, California, pursuant to
Section 16303 of the Act (the "STATEMENT OF Authority").
1.6.3 NECESSARY ACTS. The Partners shall execute, deliver, record,
file and publish, as appropriate, such other documents and instruments as may be
necessary or appropriate under the laws of any jurisdiction in which the
Partnership conducts its Business.
1.7 NO INDIVIDUAL AUTHORITY. Except as expressly set forth herein, no
Partner, acting alone or acting with any other non-Partner, shall have the
authority to act for, or to undertake or assume, any obligation, debt, duty or
responsibility on behalf of the Partnership.
1.8 TITLE TO PARTNERSHIP PROPERTY IN THE NAME OF THE PARTNERSHIP. All
Partnership Property owned, leased, consigned to or purchased by the Partnership
shall be held and owned, and conveyance made, in the name of the Partnership.
Partners have no ownership rights in specific Partnership Property and may not
transfer any interest in Partnership Property, either voluntarily or
involuntarily.
1.9 RECORD KEEPING DUTIES. Proper books and records shall be kept
regarding all Partnership transactions. The Management Committee may keep, or
cause to be kept, at the Partnership's principal office or such other place as
the Management Committee may direct, a record of all meetings, proceedings and
actions of the Management Committee and of committees appointed by the
Management Committee (if any). Such records may include the time and place that
the meeting was held or the action was taken, whether the meeting was regular or
special, and, if special, how authorized, the notice given, the names of those
present at committee
-2-
<PAGE>
meetings (if any), the Percentage Interests of the Partners represented at any
meetings of the Partners and the proceedings thereof.
ARTICLE 2
DEFINITIONS
Except as separately defined elsewhere in this Agreement, following are
the terms and their meanings as used in this Agreement:
2.1 "ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any
Partner, the deficit balance, if any, in such Partner's Capital Account as of
the end of the relevant Fiscal Year, after giving effect to the following
adjustments:
2.1.1 Increase such Capital Account by any amounts which such
Partner is obligated to contribute to the Partnership (pursuant to the terms of
this Agreement or otherwise) or is deemed to be obligated to contribute to the
Partnership pursuant to Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5);
and
2.1.2 Reduce such Capital Account by the amount of the items
described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
The foregoing definition of Adjusted Capital Account Deficit is
intended to comply with the provisions Regulations Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith.
2.2 "AFFILIATE" means any Person (defined below) which is controlling,
controlled by or under common control with a Partner, either directly or
indirectly, through one or more intermediaries. The term "CONTROL" (and any
derivation thereof) means, with respect to a corporation, the right to exercise,
directly or indirectly, more than FIFTY PERCENT (50%) of the voting rights
attributable to the controlled corporation and, with respect to any other Person
(other than a corporation), the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of the controlled
entity. For purposes of this Agreement, Childrens Hospital Los Angeles and
University Childrens Medical Group Inc., a tax-exempt California professional
corporation, shall each be deemed an affiliate of CHC.
2.3 "AGREEMENT" or "PARTNERSHIP AGREEMENT" means this Amended and
Restated General Partnership Agreement of the Partnership dated and adopted as
of November 10, 1998, as originally executed and as may be amended or restated
from time to time hereafter. Words such as "herein," "hereinafter," "hereto,"
"hereby" and "hereunder," when used with reference to this Agreement, refer to
this Agreement as a whole unless the context otherwise requires.
2.4 "BOOK DEPRECIATION" means for each Fiscal Year or other period, an
amount equal to the Depreciation, except that if the Gross Asset Value of any
asset differs from its adjusted basis for federal income tax purposes at the
beginning of such year or other period, "book depreciation" with respect to such
asset shall be an amount which bears the same ratio to such beginning Gross
Asset Value as the Depreciation with respect to such asset for such year or
other period bears to such beginning adjusted tax basis. However, if the federal
income tax Depreciation with respect to such asset for such year is "zero," book
depreciation shall be determined with reference to such beginning Gross Asset
Value using any reasonable method selected by the Partnership.
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2.5 "BUSINESS" or "BUSINESS OF THE PARTNERSHIP" means the business of
the Partnership as defined in Section 1.4 hereof.
2.6 "CAPITAL ACCOUNT" means an account maintained by the Partnership
for each Partner, which shall be determined in accordance with Section 3.6
hereof.
2.7 "CAPITAL CONTRIBUTION" means the total contribution, in cash or
property, which a Partner has made or is obligated to make to the Partnership,
as set forth in Section 3.2 below, or as may be supplemented and identified on
EXHIBIT A attached hereto and made a part of this Agreement, which exhibit may
be amended or modified from time to time. All contributions of property shall be
valued at their initial Gross Asset Value.
2.8 "CODE" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision or provisions of any succeeding law.
2.9 "COMMITTEE MEMBER(S)" means one of four (4) Persons appointed by
the Partners to serve on the Management Committee (as defined below) pursuant to
Section 6.1 of this Agreement.
2.10 "DEPRECIATION" means, for each Fiscal Year or other period, an
amount equal to the depreciation, amortization or other cost recovery reduction
allowable with respect to an asset for such Fiscal Year or other period.
2.11 "DISTRIBUTABLE CASH" means the portion of the cash in hand or in
bank accounts of the Partnership as the Management Committee deems, in its sole
discretion, is available for distribution to the Partners after reasonable
provision has been made for the current liabilities of the Partnership and a
reasonable allowance for Reserves.
2.12 "FISCAL YEAR" means the fiscal year of the Partnership for all tax
and accounting purposes, which shall be the year commencing on JULY 1 and ending
on JUNE 30 of each year.
2.13 "GROSS ASSET VALUE" means, with respect to any asset of the
Partnership, the asset's adjusted basis for federal income tax purposes, except
as follows:
2.13.1 The initial Gross Asset Value of any asset contributed
by a Partner to the Partnership shall be the gross fair market value of such
asset, as mutually agreed between the Partnership and the contributing Partner.
2.13.2 The Gross Asset Value of all Partnership assets shall
be adjusted to equal their respective gross fair market values, as mutually
agreed between the Partnership and the affected Partner(s) upon the occurrence
of the following events:
2.13.2.1 The acquisition of an additional Interest in the
Partnership by any new or existing Partner in exchange for a Capital
Contribution;
2.13.2.2 The distribution by the Partnership to a Partner
of cash or property as consideration for the acquisition of all or a portion of
such Partner's Interest in the Partnership if the Partnership reasonably
determines that such adjustment is necessary or appropriate to reflect the
relative economic interests of the Partners in the Partnership; and
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2.13.2.3 The liquidation of the Partnership within the
meaning of Regulations Section 1.704-1(b)(2)(ii)(g).
2.13.3 The Gross Asset Value of any Partnership asset distributed
to any Partner shall be the gross fair market value of such asset as mutually
agreed by the Partnership and the affected Partner(s) on the date of
distribution.
2.13.4 The Gross Asset Value of the Partnership assets shall be
increased (or decreased) to reflect any adjustments to the adjusted basis of
such assets pursuant to Code section 734(b) or Code section 743(b), but only to
the extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section 4.9
hereof; provided, however, that Gross Asset Value shall not be adjusted pursuant
to this Section 2.13.4 to the extent the Partnership determines that an
adjustment pursuant to Section 2.13.2 above is necessary or appropriate in
connection with the transaction that would otherwise result in an adjustment
under this Section 2.13.4.
If the Gross Asset Value of an asset has been determined or
adjusted pursuant to Sections 2.13.1, 2.13.2 or 2.13.4 above, such Gross Asset
Value shall thereafter be adjusted by the Book Depreciation taken into account
with respect to such asset for purposes of computing profits and losses.
2.13.5 If the Partnership and any affected Partner pursuant to
Sections 2.13.1, 2.13.2 or 2.13.3 above are unable to agree on the Gross Asset
Value of any asset for purposes of this Agreement, a mutually acceptable
appraiser shall be selected by them for this purpose, and the value established
by such appraisal shall be binding on the Partnership and the affected Partner.
2.14 "MAJORITY IN INTEREST OF THE PARTNERS" means more than FIFTY
PERCENT (50%) of the Percentage Interests of the Partners.
2.15 "MANAGEMENT COMMITTEE" means, collectively, the four (4) Committee
Members appointed by the Partners to manage the Partnership pursuant to Section
6.1 of this Agreement acting together to manage the Partnership in accordance
with the terms and conditions of this Agreement. The Management Committee shall
be charged with those powers, duties and responsibilities as set forth in
Article 6 and elsewhere in this Agreement.
2.16 "NET PROFIT(S)" and "NET LOSSES(ES)" mean, for each Fiscal Year or
other period, an amount equal to the Partnership's taxable income or loss for
such year or period, determined in accordance with Code section 703(a) (for this
purpose, all items of income, gain, loss or deduction required to be stated
separately pursuant to Code section 703(a)(1) shall be included in taxable
income or loss), with the following adjustments:
2.16.1 Any income of the Partnership that is exempt from federal
income tax and not otherwise taken into account in computing Net Profits or Net
Losses shall be added to such taxable income or loss;
2.16.2 Any expenditures of the Partnership described in Code
section 705(b)(2)(B) or treated as Code section 705(b)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken
into account in computing Net Profits or Net Losses shall be subtracted from
such taxable income or loss;
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2.16.3 Gain or loss resulting from any disposition of Partnership
Property with respect to which gain or loss is recognized for federal income tax
purposes shall be computed by reference to the fair market value of such
property disposed of, notwithstanding that the adjusted tax basis of such
property differs from its fair market value; and
2.16.4 Notwithstanding any other provision of this subsection, any
items of income, gain, loss or deduction which are specifically allocated shall
not be taken into account in computing Net Profits or Net Losses.
2.17 "PARTNER" means a Person who has:
2.17.1 Been admitted to the Partnership as a Partner in accordance
with this Agreement, or is an assignee or transferee of an Interest and who has
become a Partner of the Partnership pursuant to Section 8.4 hereof;
2.17.2 Not dissociated or been expelled as a Partner or, if other
than an individual, been dissolved; and
2.17.3 Paid his or her Capital Contribution to the Partnership in
exchange for an Interest in the Partnership, or, in the case of a transferee
Partner, has succeeded to the Capital Account of the transferor Partner, and who
has executed and submitted to the Management Committee a counterpart signature
page to this Agreement.
Reference to a "PARTNER" shall be to any Partner of the Partnership
identified in Section 3.1 below or as otherwise supplemented and identified on
EXHIBIT A attached to and made a part of this Agreement, which exhibit may be
amended or modified from time to time.
2.18 "PARTNER NONRECOURSE DEBT" has the meaning set forth in
Regulations Section 1.704-2(b)(4).
2.19 "PARTNER NONRECOURSE DEBT MINIMUM GAIN" means an amount, with
respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain
that would result if such Partner Nonrecourse Debt were treated as a nonrecourse
liability of the Partnership, determined in accordance with Regulations Sections
1.704-2(i)(2) and (3).
2.20 "PARTNER NONRECOURSE DEDUCTIONS" has the meaning set forth in
Regulations Section 1.704-2(i)(2). The amount of Partner Nonrecourse Deductions
with respect to a Partner Nonrecourse Debt for a Fiscal Year of the Partnership
equals the excess (if any) of the net increase (if any) in the amount of Partner
Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt
during that Fiscal Year over the aggregate amount of any distributions during
that Fiscal Year to the Partner that bears (or is deemed to bear) the economic
loss for such Partner Nonrecourse Debt to the extent such distributions are from
the proceeds of such Partner Nonrecourse Debt and are allocable to an increase
in Partner Nonrecourse Debt Minimum Gain attributable to such Partner
Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(2).
2.21 "PARTNERSHIP" means CHILDRENS HEMOPHILIA SERVICES, the California
general partnership formed pursuant to the Act and the terms and conditions of
this Agreement.
2.22 "PARTNERSHIP INTEREST" or "INTEREST" means all of a Partner's
interest in the Partnership, including the Partner's transferable interest and
all management and other rights.
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2.23 "PARTNERSHIP LOAN(S)" shall refer to any loans or advances made by
any Partner or its Affiliate to the Partnership which are approved by the
Management Committee. Such Partnership Loans shall accrue interest at the rate
agreed upon between the loaning Partner and the Management Committee.
2.24 "PARTNERSHIP MINIMUM GAIN" means the amount determined by
computing with respect to each nonrecourse liability of the Partnership, the
amount of gain (of whatever character), if any, that would be realized by the
Partnership if it disposed (in a taxable transaction) of Partnership Property
subject to such liability in full satisfaction thereof, and by then aggregating
the amounts so computed as set forth in Regulations Section 1.704-2(d).
2.25 "PARTNERSHIP PROPERTY" means any or all assets of the Partnership,
both tangible and intangible, or any portion thereof.
2.26 "PERCENTAGE INTEREST(S)" means a fraction, expressed as a
percentage, the numerator of which is the Capital Account owned by a Partner and
the denominator of which is the aggregate Capital Accounts of all of the
Partners. The Percentage Interests of the Partners shall be set forth on EXHIBIT
A attached hereto and made a part of this Agreement, which exhibit may be
amended from time to time by the Management Committee to reflect any change in
the Percentage Interest owned by a Partner or any change in the aggregate
Percentage Interests of all the Partners.
2.27 "PERSON" means an individual, corporation, business trust, estate,
trust, partnership, limited partnership, limited liability partnership, limited
liability company, association, joint venture, government, governmental
subdivision, agency, or instrumentality, or any other legal or commercial
entity.
2.28 "PRINCIPAL" means the natural Person which is in ultimate control
of a Partner.
2.29 "REGULATIONS" or "TREASURY REGULATIONS" means the federal income
tax regulations promulgated by the Treasury Department under the Code, as such
regulations may be amended from time to time. All references herein to a
specific section of the Regulations shall be deemed also to refer to any
corresponding provisions of succeeding Regulations.
2.30 "RESERVES" means funds set aside from Capital Contributions or
operating revenues as reserves. Such Reserves shall be maintained in amounts
reasonably deemed sufficient by the Management Committee for working capital and
the payment of taxes, insurance, debt service, repairs, replacements renewals,
or other costs or expenses incident to the Business of the Partnership, or in
the alternative, the Dissolution of the Partnership.
2.31 "RISK OF LOSS" reflects the meaning set forth in Treasury
Regulations Section 1.752-1(d)(3).
2.32 "SECRETARY OF STATE" means the Secretary of State of the State of
California.
2.33 "VOTE" means, except where superseded by another section of this
Agreement, or required by the terms of the Act, the Code or applicable
Regulations thereunder, votes of the Partners, wherein each Partner shall have
and cast a number of votes equal to that Partner's Percentage Interest. For this
purpose, each one percent (1%) of the Partner's Percentage Interest shall be
equal to one vote.
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ARTICLE 3
PARTNERS. CAPITAL AND FINANCING
3.1 NAMES AND ADDRESSES OF THE PARTNERS. The Partners of the
Partnership are CHC and HHS, unless and until additional Partners or transferee
Partners, as the case may be, are admitted to the Partnership in accordance with
this Agreement. The full names and current addresses of the Partners of the
Partnership are set forth on EXHIBIT A attached hereto and made a part of this
Agreement, which exhibit may be amended or modified from time to time.
3.2 PARTNER CAPITAL CONTRIBUTIONS. All Capital Contributions of the
Partners shall be set forth on EXHIBIT A attached hereto and made a part of this
Agreement, which exhibit may be amended or modified from time to time. The
Partners shall be required to make their Capital Contributions to the
Partnership immediately following the execution of this Agreement.
3.3 ADDITIONAL CAPITAL CONTRIBUTIONS AND LOANS. Except as shall be
expressly set forth herein, no Partner shall be required or permitted to make
any additional Capital Contributions to the Partnership or to make any loan or
cause to be loaned any money or other assets to the Partnership. Notwithstanding
the foregoing, a Partner shall be permitted to make an additional Capital
Contribution to the Partnership in order to maintain the relative proportions of
their respective Capital Accounts.
3.4 RIGHTS WITH RESPECT TO CAPITAL.
3.4.1 PARTNERSHIP CAPITAL. No Partner shall have the right to
withdraw or to receive any return of its Capital Contribution, and no Capital
Contribution may be returned in the form of property other than cash, except as
specifically provided for herein. 3.4.2 NO INTEREST ON CAPITAL CONTRIBUTIONS. No
Capital Contribution of any Partner shall bear any interest or otherwise entitle
the contributing Partner to any compensation for use of the contributed capital.
3.4.3 ESTABLISHMENT OF CAPITAL ACCOUNTS. A separate Capital Account
shall be established and maintained for each Partner. Sections 3.5 and 3.6 below
describe the appropriate accounting treatment for tax purposes of the Capital
Accounts.
3.4.4 NO PAYMENT OF SALARIES OR DRAWS. No Partner shall receive or be
entitled to receive any payment of salaries or draws with respect to its Capital
Contribution or the balance in its Capital Account or for services rendered on
behalf of the Partnership or otherwise in its capacity as a Partner, except as
expressly provided for in this Agreement or any other written agreement between
the Partnership and a Partner.
3.5 GENERAL RULES FOR DETERMINING CAPITAL ACCOUNTS. The Capital Account
of each Partner shall be determined as follows:
3.5.1 INCREASES. The Capital Account of a Partner shall be
increased by:
3.5.1.1 Such Partner's cash contributions;
3.5.1.2 The Gross Asset Value of property contributed by such
Partner (net of liabilities secured by such contributed property that the
Partnership is considered to assume or take subject to under Code section 752);
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3.5.1.3 All Net Profits of the Partnership allocated to
such Partner pursuant to Article 4 or other provisions of this Agreement; and
3.5.2 DECREASES. The Capital Account of a Partner shall be decreased
by:
3.5.2.1 The amount of cash distributed to such Partner;
3.5.2.2 The Gross Asset Value of all actual and deemed
distributions of property made to such Partner pursuant to this Agreement (net
of liabilities secured by such distributed property that the Partner is
considered to assume or take subject to under Code section 752);
3.5.2.3 All Net Losses of the Partnership allocated to such
Partner pursuant to Article 4 or other provisions of this Agreement.
3.6 SPECIAL RULES WITH RESPECT TO CAPITAL ACCOUNTS.
3.6.1 TIME OF ADJUSTMENT FOR CAPITAL CONTRIBUTIONS. For
purposes of computing the balance in a Partner's Capital Account, no credit
shall be given for any Capital Contribution which such Partner is to make until
such contribution is actually made. "CAPITAL CONTRIBUTION" refers to the total
amount of cash and the Gross Asset Value (net of liabilities) of any property
contributed to the Partnership by that Partner and any subsequent contributions
of cash and the Gross Asset Value (net of liabilities) of any other property
subsequently contributed to the Partnership by that Partner.
3.6.2 INTENT TO COMPLY WITH TREASURY REGULATIONS. The
foregoing provisions of Sections 3.5 and 3.6 and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Regulations Section 1.704-1(b), and shall be interpreted and applied in a
manner consistent with such Regulations section. To the extent such provisions
are inconsistent with such Regulations section or are incomplete with respect
thereto, Capital Accounts shall be maintained in accordance with such
Regulations section.
3.7 TRANSFEREE'S CAPITAL ACCOUNT. In the event a Partner, transfers an
Interest in accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred Interest.
ARTICLE 4
ALLOCATION OF NET PROFITS AND NET LOSSES
4.1 ALLOCATION OF NET PROFITS AND NET LOSSES. Except as otherwise
provided in this Article 4, Net Profits and Net Losses of the Partnership in
each Fiscal Year shall be allocated among the Partners in accordance with their
respective Percentage Interests in the Partnership.
4.2 RESIDUAL ALLOCATIONS. Except as otherwise provided in this
Agreement, all items of Partnership income, gain, loss, deduction, and any other
allocations not otherwise provided for shall be divided among the Partners in
the same proportions as they share Net Profits or Net Losses, as the case may
be, for the Fiscal Year.
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4.3 QUALIFIED INCOME OFFSET. If any Partner unexpectedly receives any
adjustments, allocation or distributions described in clauses (4), (5) or (6) of
Regulations Section 1.704-1(b)(2)(ii)(d), items of Partnership income shall be
specially allocated to such Partner in an amount and manner sufficient to
eliminate the Adjusted Capital Account Deficit created by such adjustments,
allocations or distributions as quickly as possible. This Section 4.3 is
intended to constitute a "QUALIFIED INCOME OFFSET" within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(d)(3).
4.4 MINIMUM GAIN CHARGEBACK. If there is a net decrease in Partnership
Minimum Gain during a Fiscal Year, each Partner will be allocated, before any
other allocation under this Article 4, items of income and gain for such Fiscal
Year (and if necessary, subsequent years) in proportion to and to the extent of
an amount equal to such Partner's share of the net decrease in Partnership
Minimum Gain determined in accordance with Regulations Section 1.704-2(g)(2).
This Section 4.4 is intended to comply with, and shall be interpreted
consistently with, the "MINIMUM GAIN CHARGEBACK" provisions of Regulations
Section 1.704-2(f).
4.5 PARTNER NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK. Notwithstanding
any other provision of this Article 4, but except Section 4.4, if there is a net
decrease in Partner Nonrecourse Debt Minimum Gain attributable to a Partner
Nonrecourse Debt during any Fiscal Year of the Partnership, each Partner who has
a share of the Partner Nonrecourse Debt Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Treasury Regulations
Section 1.704-2(i)(5), shall be specially allocated items of Partnership income
and gain for such year (and, if necessary, subsequent years) in an amount equal
to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum
Gain attributable to such Partner Nonrecourse Debt, determined in accordance
with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Partner pursuant thereto. The items to be so allocated shall
be determined in accordance with Regulations Section 1.704-2(i)(4). This Section
4.5 is intended to comply with a minimum gain chargeback requirement of that
Section of the Regulations and shall be interpreted consistently therewith.
4.6 PARTNER NONRECOURSE DEDUCTIONS. Any Partner Nonrecourse Deductions
for any Fiscal Year or other period shall be specially allocated to the Partner
who bears (or is deemed to bear) the economic risk of loss with respect to the
Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are
attributable in accordance with Regulations Section 1.704-2(i)(2).
4.7 SPECIAL ALLOCATIONS. Any special allocations of items of Net
Profits pursuant to Sections 4.4, 4.5 and 4.6 shall be taken into account in
computing subsequent allocations of Net Profits pursuant to Section 4.1, so that
the net amount of any items so allocated and the gain, loss and any other item
allocated to each Partner pursuant to Section 4.1 shall, to the extent possible,
be equal to the net amount that would have been allocated to each such Partner
pursuant to the provisions of this Article 4 if such special allocations had not
occurred.
4.8 FEES TO PARTNERS OR AFFILIATES. Notwithstanding the provisions of
Section 4.1, in the event that any fees, interest, or other amounts paid to any
Partner or any Affiliate thereof pursuant to this Agreement or any other
agreement between the Partnership and any Partner or Affiliate thereof providing
for the payment of such amount, and deducted by the Partnership in reliance on
Code section 707(a) and/or Code section 707(c) , are disallowed as deductions to
the Partnership on its federal income tax return and are treated as Partnership
distributions, then:
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4.8.1 The Net Profits or Net Losses, as the case may be, for the
Fiscal Year in which such fees, interest, or other amounts were paid shall be
increased or decreased, as the case may be, by the amount of such fees,
interest, or other amounts that are treated as Partnership distributions; and
4.8.2 There shall be allocated to the Partner to which (or to whose
Affiliate) such fees, interest, or other amounts were paid, prior to the
allocations pursuant to Section 4.1, an amount of gross income for the Fiscal
Year equal to the amount of such fees, interest, or other amounts that are
treated as Partnership distributions.
4.9 SECTION 704(C) ALLOCATION. Any item of income, gain, loss, and
deduction with respect to any property (other than cash) that has been
contributed by a Partner to the capital of the Partnership and which is required
or permitted to be allocated to such Partner for income tax purposes under Code
section 704(c) so as to take into account the variation between the tax basis of
such property and its Gross Asset Value at the time of its contribution shall be
allocated to such Partner solely for income tax purposes in the manner so
required or permitted. In the event the Gross Asset Value of any Partnership
Property is adjusted in accordance with Section 2.13.2, subsequent allocations
of income, gain, loss and deduction with respect to such Partnership Property
shall take into account any variation between the adjusted basis of such
Partnership Property for federal income tax purposes and its Gross Asset Value
in the same manner as under section 704(c) and the Regulations promulgated
thereunder. Any elections or other decisions relating to such allocations shall
be made in any manner that reasonably reflects the purpose and intention of this
Agreement. To the extent permitted by Regulations Section 1.7041(b)(4)(i) , all
items of income, gain, loss and deduction for federal and state tax purposes
shall be allocated in accordance with the corresponding book items.
ARTICLE 5
DISTRIBUTIONS OF DISTRIBUTABLE CASH
5.1 DISTRIBUTIONS OF DISTRIBUTABLE CASH. Distributions from the
Partnership to the Partners shall be made from time to time to the extent
Distributable Cash is available as determined by the Management Committee. Prior
to the determination of the amount of distributions, provisions shall be made
for all known and reasonable obligations and liabilities of the Partnership,
whether or not such obligations and liabilities are due or contingent, except
that provision need not be made for any portion of any Partnership financing,
the amount of which can be reasonably expected to be satisfied from the proceeds
of the sale of the then remaining Property of the Partnership.
5.2 PRIORITY AND MANNER OF DISTRIBUTIONS TO PARTNERS. All distributions
of Distributable Cash shall be made by the Partnership pro rata to the Partners
in accordance with their applicable Percentage Interests as of the time of such
distribution.
5.3 TAX DISTRIBUTIONS. Except as otherwise may be prohibited by any
agreements between the Partnership and its lenders, within ninety (90) days
after the conclusion of each Fiscal Year, the Management Committee shall
determine and provide written notice to the Partners of the amount (the "TAX
LIABILITY SHORTFALL AMOUNT"), if any, by which (a) the aggregate federal and
California state tax liability (if any) incurred by the Partners with respect to
the net income of the Partnership for such preceding Fiscal Year (which tax
liability shall be determined by applying the highest effective corporate tax
rates then in effect for the Fiscal Year in question), EXCEEDS (b) the aggregate
distributions of Distributable Cash made by the Partnership with respect to such
Fiscal Year (including any distributions made to the Partners
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with respect to the final fiscal quarter of such Fiscal Year). The Management
Committee shall use all reasonable efforts to cause the Partnership to
distribute the Tax Liability Shortfall Amount to the Partners in the time and
manner required hereunder, including, but not limited to, borrowing on behalf of
the Partnership sufficient funds to enable the Partnership to distribute such
Tax Liability Shortfall Amount. Each such distribution shall be made to the
Partners as soon as practicable after such funds are available. It is the
objective of the Partners that while the Tax Liability Shortfall Amount will be
determined at the end of each Fiscal Year, to the extent possible and subject to
the foregoing, distributions will be made in respect thereof on a quarterly
basis to facilitate the Partners' ability to make quarterly estimated tax
payments with respect to their net income from the Partnership. At the end of
each Fiscal Year as contemplated above, final adjustments shall be made to
reflect the actual results of such Fiscal Year.
ARTICLE 6
MANAGEMENT OF THE PARTNERSHIP
6.1 MANAGEMENT OF THE PARTNERSHIP. Subject to the provisions of the Act
and to any limitations set forth in this Agreement (as may be amended from time
to time) relating to actions required to be approved by the Partners, the
Business and affairs of the Partnership shall be managed by, and all Partnership
powers shall be vested exclusively in, the Management Committee. The day-to-day
operations of the Partnership shall be implemented by a Partnership Manager
designated or appointed pursuant to Section 6.1.1 below, who shall conduct the
Business in accordance with and subject to the policies, procedures, decisions
and directives of the Management Committee.
6.1.1 DESIGNATION OF THE PARTNERSHIP MANAGER. The Partnership
Manager of the Partnership shall initially be THOMAS J. McNULTY, PharmD., an
individual, or his successor as appointed by the Management Committee pursuant
to Section 6.1.2 below.
6.1.2 ELECTION OF SUCCESSOR PARTNERSHIP MANAGER. Upon resignation
from office or removal from office by the Management Committee, a successor
Partnership Manager shall be appointed by the Management Committee.
6.1.3 MANAGEMENT COMMITTEE; APPOINTMENT OF COMMITTEE MEMBERS;
VOTING. The authorized number of Committee Members of the Partnership shall be
four (4), unless the Partners agree to increase or decrease the size of the
Management Committee proportionately from time to time. Each Partner (the
"APPOINTING PARTNER") shall appoint two (2) Committee Members. The initial
Committee Members shall be appointed by the Partners by a separate written
action of the Partners. Each initial Committee Member shall serve until his or
her successor is appointed by the Appointing Partner in accordance with this
Agreement. Each Partner shall cause its appointed Committee Member to comply
with the terms of this Agreement to be performed by such Committee Member. The
Committee Members shall exercise their authority collectively and exclusively
through the actions of the Management Committee. Each Committee Member shall
have one (1) vote on any decision of the Management Committee. Approval of the
Management Committee shall require a majority of the authorized number of the
Committee Members.
6.1.4 SUCCESSOR OR ALTERNATE COMMITTEE MEMBERS. Successor Committee
Members shall be appointed by the respective Appointing Partner at any time and
from time to time. Each Partner may, at any time, designate an alternate
Committee Member by prior notice to the other Partner, and such alternate
Committee Member will have all of the powers of the regular Committee Member in
the absence or inability of the regular Committee Member to serve.
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6.1.5 CHAIRMAN OF THE MANAGEMENT COMMITTEE. The Management
Committee shall have a chairman (the "CHAIRMAN"), who shall: (i) be one of the
Committee Members selected by a majority of the authorized number of the
Committee Members; (ii) preside at Management Committee meetings; and (iii)
exercise such rights or perform such duties as are otherwise provided in this
Agreement or as otherwise may be approved by the Management Committee. In the
event a Chairman resigns or is removed, a replacement Chairman shall be chosen
by the Management Committee.
6.1.6 DELEGATION OF AUTHORITY. The Management Committee may, by
written resolution from time to time, delegate any of its powers to the
Partnership Manager, to officers or employees of a Partner, or to any other
Person. Such delegation of powers may include the authority to execute and
deliver on behalf of the Partnership any note, mortgage, evidence of
indebtedness, contract, certificate, statement, conveyance or other instrument
in writing, and any assignment or endorsement thereof.
6.1.7 DUTIES OF COMMITTEE MEMBERS. Each Committee Member shall
serve on the Management Committee in good faith and in a manner such Committee
Member believes to be in the best interests of the Partnership and its Partners
and with such care, including reasonable inquiry as an ordinary prudent person
in a like position would use under similar circumstances.
6.1.8 OTHER ACTIVITIES OF COMMITTEE MEMBERS. Each Committee Member
need devote to the Business and affairs of the Partnership only such time and
attention as he shall deem necessary and appropriate in the exercise of his
reasonable judgment.
6.1.9 REMOVAL OF COMMITTEE MEMBERS. Any Committee Member may be
removed from office, with or without cause, only by the respective Appointing
Partner of such Committee Member.
6.2 POWERS AND AUTHORITY OF THE MANAGEMENT COMMITTEE. The Management
Committee shall have all of the rights, duties and powers as specified in this
Agreement, including without limitation, the general powers and duties of
management typically vested in the board of directors and the office of a chief
executive officer of a corporation. Matters requiring the approval of the
Management Committee shall include, without limitation, the following:
6.2.1 To select and remove all agents and employees of the
Partnership; prescribe the powers and duties for them as may not be inconsistent
with law, the Statement of Authority, or this Agreement; fix their compensation;
and require from any such agents and employees security for faithful service.
6.2.2 To conduct, manage and control the affairs and Business of
the Partnership and to make such rules not inconsistent with the law, the
Statement of Authority or this Agreement, as they may deem best.
6.2.3 To borrow money and incur indebtedness for the purposes of
the Partnership and to cause to be executed and delivered therefor, in the
Partnership's name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and securities
therefor.
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6.2.4 To enter into any and all agreements on behalf of the
Partnership with any other Person for any purpose necessary or appropriate to
the conduct of the Business of the Partnership, including, but not limited, to
agreements for management or other services, and the distribution or resale of
products and supplies. The fact that a Partner is directly or indirectly
affiliated or connected with any such Person shall not prohibit the Management
Committee from dealing with that Person.
6.2.5 To purchase liability and other insurance to protect the
Partnership Property and Business of the Partnership.
6.2.6 To approve detailed line-item budgets for the operation of
the Partnership and its Business.
6.2.7 To invest any funds of the Partnership temporarily (by
way of example, but not limitation) in time deposits, short-term governmental
obligations, commercial paper or other investments.
6.2.8 To engage accountants, legal counsel, managing agents or
other experts to perform services for the Partnership and to compensate them
from Partnership funds.
6.2.9 To pay reimbursement from the Partnership of all expenses of
the Partnership reasonably incurred and paid by the Management Committee on
behalf of the Partnership.
6.2.10 To amend, update or correct from time to time the
information contained in EXHIBIT A to the Agreement or on the Statement of
Authority and cause the same to be filed with the California Secretary of State.
6.2.11 To do and perform all other acts as may be necessary or
appropriate to the conduct of the Business of the Partnership.
6.3 POWERS, DUTIES AND RESPONSIBILITIES OF THE PARTNERSHIP MANAGER. The
Partnership Manager shall be charged with the rights, duties, powers and
responsibilities as specified in this Agreement, subject to the limitations set
forth in this Article 6 and elsewhere in this Agreement. The Partnership Manager
shall have the responsibility for conducting the day-to-day operations of the
Business of the Partnership and for implementing the decisions and directives of
the Management Committee in connection therewith, subject to the supervision,
direction and control of the Management Committee. The Partnership Manager shall
have the general powers and duties of management typically vested in the office
of a chief operating officer of a corporation.
6.4 RESTRICTIONS ON AUTHORITY; APPROVAL BY THE PARTNERS. The individual
Partners, the Committee Members, acting alone or collectively as the Management
Committee, and the Partnership Manager shall have no authority with respect to
the Partnership or its Business to do any of the following without the prior
unanimous Vote or written consent of the Partners:
6.4.1 Do any act in contravention of this Agreement;
6.4.2 Do any act that would make it impossible to carry out the
Partnership Business;
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6.4.3 Possess Partnership Property or assign the right of the
Partnership or its Partners in specific Partnership Property for anything other
than a Partnership purpose;
6.4.4 Make, execute or deliver any general assignments for the
benefit of creditors or any bond, guaranty, indemnity bond or surety bond;
6.4.5 Assign, transfer, pledge, compromise or release any
Partnership claim;
6.4.6 Confess a judgment;
6.4.7 Except for the power of the Management Committee to
amend or correct from time to time any information contained in EXHIBIT A to
this Agreement or in the Statement of Authority, to make any material amendment
or change to the Statement of Authority or to this Agreement, including, but not
limited to, any change in the authorized number of Committee Members or any
modification or enlargement of the rights or obligations of the Partners as set
forth herein;
6.4.8 Pursuant to Article 8 hereof, approve the sale, transfer,
assignment, hypothecation or encumbrance of any Partnership Interest by a
Partner, the admission of any new or transferee Partner to the Partnership, the
determination of the amount of any Capital Contribution to be made by any new
Partner, and the approval of a Partner's sale of all of its Interest in
accordance with Section 8.5 hereof;
6.4.9 The sale, exchange or other disposition of all or
substantially all of the Partnership Property, occurring as part of single
transaction or a series of related transactions as part of plan;
6.4.10 The merger of the Partnership with any other partnership or
business entity;
6.4.11 The termination or dissolution of the Partnership;
6.4.12 A change in the character of the Business of the
Partnership;
6.4.13 Any acquisitions of any rights or interests in another
entity;
6.4.14 All distributions to the Partners, which shall not be deemed
valid unless so approved in advance by the Partners;
6.4.15 Any contracts or agreements between the Partnership and any
third party including Affiliates in excess of Fifty Thousand Dollars
($50,000.00) and the approval of any material changes or amendments thereto or
renewals thereof;
6.4.16 Any transactions with an Affiliate;
6.4.17 Any amendment, modification, supplement, renewal or
termination for any reason of that certain Hemophilia Therapy Business
Management, Service and Sales Agreement dated as of November 10, 1998, by and
between HHS and the Partnership (the "HEMOPHILIA THERAPY MANAGEMENT AGREEMENT");
or
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6.4.18 Any amendment, modification, supplement, renewal or
termination for any reason of that certain Hemophilia Factor Services Agreement
dated as of November 10, 1998, by and among the Partnership, HHS and CHC (the
"HEMOPHILIA FACTOR SERVICES AGREEMENT").
6.5 MEETINGS OF THE MANAGEMENT COMMITTEE.
6.5.1 REGU1AR AND ANNUAL MEETINGS. Regular meetings of the
Management Committee shall be held at such time and day as may be designated by
the Management Committee. The regular annual meeting of the Management Committee
shall be held, without call or notice, immediately following each annual meeting
of the Partners of the Partnership as set forth in Article 7 hereof.
6.5.2 SPECIAL MEETINGS. Special meetings of the Management
Committee may be called by any Partner. Notice of any special meeting of the
Management Committee shall be given to each Committee Member by first class
mail, postage prepaid, at least ten (10) days in advance of the meeting or
delivered in person or by telephone or facsimile transmission at least seven (7)
days in advance of the meeting. No notice need be given to any Committee Member
who signs a waiver of notice, whether before or after the meeting, or who
attends the meeting without protesting the lack of notice prior to attending the
meeting or at its commencement.
6.5.3 PLACE OF MEETINGS. All meetings of the Management Committee
shall be held at the Partnership's principal executive office or any other place
within or without this state as may be designated for that purpose from time to
time by the Management Committee. Any meeting is valid wherever held if held by
the written consent of all Persons entitled to vote thereat, given either before
or after the meeting.
6.5.4 QUORUM. A majority of the authorized number of Committee
Members constitutes a quorum of the Management Committee for the transaction of
business, except to adjourn as provided in Section 6.5.8 hereof.
6.5.5 TRANSACTIONS AT MEETINGS OF THE MANAGEMENT COMMITTEE. Except
as otherwise provided in this Agreement or by law, every act or decision done or
made by a majority of the authorized number of Committee Members is the act of
the Management Committee; provided, however, that any meeting at which a quorum
was initially present may continue to transact business notwithstanding the
withdrawal of Committee Members if any action taken is approved by at least a
majority of the required quorum for such meeting.
6.5.6 TELEPHONIC PARTICIPATION. Committee Members may participate
in meetings through the use of a conference telephone or similar
communications equipment, as long as all Committee Members participating in the
meeting can hear one another. Participation in a meeting in this manner
constitutes presence in person at the meeting.
6.5.7 ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the Management Committee may be taken without a meeting if all
Committee Members shall unanimously consent in writing to that action. Such
action by written consent shall have the same force and effect as a unanimous
vote by the Management Committee. Such written consents shall be filed with the
minutes of the proceedings of the Management Committee.
6.5.8 ADJOURMENT. A majority of the Committee Members present at
any meeting, whether or not a quorum is present, may adjourn the meeting to
another time and place. If the meeting is adjourned for more than twenty-four
(24) hours, notice of the adjournment to
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another time and place must be given prior to the time of the adjourned meeting
to the Committee Members who were not present at the time of the adjournment.
6.6 COMPENSATION AND REIMBURSEMENT. Committee Members shall receive
such compensation for their services and reimbursement for their expenses as
shall be determined from time to time by resolution of the Management Committee
and approval by a Majority in Interest of the Partners of this Partnership. In
addition, the Partnership will reimburse the Committee Members for any direct
costs incurred by the Committee Members which are directly attributable to the
Partnership or to its Business, including, but not limited, to travel expenses
incurred to attend any regular or special meetings of the Management Committee
all in accordance with such reimbursement policies as may be adopted from time
to time by the Management Committee.
6.7 RIGHTS OF INSPECTION. Every Committee Member shall have the
absolute right at any reasonable time to inspect and copy all books, records and
documents of every kind, and to inspect the physical properties of the
Partnership. Such inspection by a Committee Member may be made in person or by
agent or attorney and includes the right to copy and obtain abstracts.
ARTICLE 7
PARTNERS' MEETINGS; PARTNERS' RIGHTS
7.1 MEETINGS OF THE PARTNERS. Meetings of the Partners may be called by
the Management Committee or, for any purpose set forth in Section 7.2 below, by
any Partner or Partners holding TEN PERCENT (10%) or more of the Percentage
Interests of the Partnership.
7.2 PURPOSE OF MEETINGS; VOTING RIGHTS. Any Partner or Partners
representing more than TEN PERCENT (10%) of the Percentage Interests of the
Partners may call a meeting of the Partners to Vote on any of the following:
7.2.1 The approval of any matter set forth in Section 6.4 of this
Agreement requiring the Vote of the Partners.
7.2.2 Any other matter set forth in this Agreement which requires
the Vote or written consent of a Majority in Interest or more of the Partners.
7.2.3 Any other legitimate purpose or business matter properly
brought before the meeting of the Partners.
Without limiting the generality of the foregoing, the Management
Committee may require the Partners to Vote on additional matters as provided
elsewhere herein. The Partners shall not have the right to Vote on whether to
enter into any transaction in which the Management Committee has an actual or
potential conflict of interest with the Partners or the Partnership, unless the
transaction falls within the scope of the voting rights granted in this Section
7.2 or the limitations on the Management Committee listed in Article 6 of this
Agreement.
7.3 PLACE OF MEETINGS. Meetings of the Partners shall be held at the
principal executive office of the Partnership, unless some other appropriate and
convenient location, either within or without the State of California, shall be
designated for that purpose from time to time by the Management Committee.
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7.4 NOTICE OF MEETINGS. Notice of meetings shall be given by the
Management Committee to the Partners in writing not less than ten (10) nor more
than sixty (60) days before the date of the meeting. Notice of any meeting of
Partners shall be delivered in accordance with Article 15 hereof and shall
specify the place, the day and the hour of the meeting, and (i) the general
nature of the business to be transacted, or (ii) those matters which the
Management Committee, at the date of mailing, intends to present for action by
the Partners.
7.5 VALIDATION OF PARTNERS' MEETINGS. The transactions of a meeting of
Partners which was not called or noticed pursuant to the provisions of this
Article 7 shall be valid as though transacted at a meeting duly held after
regular call and notice, if Partners holding in the aggregate a Majority in
Interest of the Partners are present, and if, either before or after the
meeting, each of the Partners entitled to Vote but not present (whether in
person or by proxy, as that term is used in the Act) at the meeting signs either
a written waiver of notice, a consent to the holding of such meeting or an
approval of the minutes thereof. All such waivers, consents or approvals shall
be filed with the records of the Partnership. Attendance shall constitute a
waiver of notice, unless objection shall be made.
7.6 ACTIONS WITHOUT A MEETING.
7.6.1 Any action which may be taken at any meeting of Partners may
be taken without a meeting and without prior notice if a consent in writing,
setting forth the action so taken, shall be unanimously agreed upon and signed
by all the Partners. Any Partner giving a written consent may revoke the consent
by a writing received by the Partnership prior to the time that written consents
of all the remaining Partners authorizing the proposed action have been filed
with the Partnership. Such revocation is effective upon its receipt by the
Partnership.
7.6.2 Unless the consents of all Partners have been given in
writing to any proposed action, any such action shall then require approval by
the Partners at a meeting duly called and held for such purpose.
7.7 QUORUM AND EFFECT OF VOTE. Each Partner shall have a number of
Votes equal to the Percentage Interest held by such Partner, provided that if,
pursuant to the Act or the terms of this Agreement, a Partner is not entitled to
Vote on a specific matter, then such Partner's number of Votes and Percentage
Interest shall not be considered for purposes of determining whether a quorum is
present, or whether approval by a Vote of the Partners has been obtained in
respect of such specific matter. Partners holding an aggregate of a Majority in
Interest of the Partners or more shall constitute a quorum at all meetings of
the Partners for the transaction of business, and the Vote of a Majority in
Interest of the Partners at any such meeting where a quorum is present shall be
required to approve any action, unless a greater Vote is required or a lesser
Vote is provided for by this Agreement or by the Act.
7.8 VOTE REQUIRED. The affirmative Vote of a Majority in Interest of
the Partners shall be required for any matter on which the Partners are entitled
to Vote.
ARTICLE 8
RESTRICTIONS ON TRANSFER OF INTERESTS;
RIGHT OF FIRST REFUSAL;
ADMISSION OF NEW PARTNERS AND TRANSFEREES
8.1 RESTRICTIONS ON TRANSFER OF PARTNERSHIP INTERESTS. Except as
provided in Section 8.5 below and Article 10 hereof, no Partnership Interest may
be transferred, conveyed,
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sold, hypothecated, encumbered or assigned without the prior unanimous Vote or
written consent of the Partners pursuant to Section 6.4.8 hereof.
8.2 TRANSFERS OF INTERESTS DURING FISCAL YEAR. If all or any portion of
an Interest is transferred during any Fiscal Year of the Partnership upon the
death of a Partner or by operation of law or in any other manner, all items of
income, gain, loss, cost, expense, deduction and credit with respect to the
Interest so transferred shall be prorated between the transferor and the
transferee in accordance with the number of days during the year each held the
Interest (or any permissible method under Code section 706 and the Regulations
promulgated thereunder). Notwithstanding the foregoing, distributions of
Distributable Cash allocated pursuant to Article 5 hereof shall be made to the
Person who was a Partner on the record date established pursuant thereto.
8.3 VOID TRANSFERS. Any transfer of a Partnership Interest which does
not satisfy the requirements of Section 8.1 above shall be null and void.
8.4 ADMISSION OF NEW PARTNERS AND TRANSFEREES. A Person or transferee
of a Partnership Interest may be admitted into the Partnership as a new Partner
only upon the prior unanimous Vote or written consent of the Partners pursuant
to Section 6.4.8 hereof and upon satisfaction of the following conditions:
8.4.1 The amount of Capital Contribution which must be paid by a
new Partner shall be determined by the unanimous Vote or written consent of the
Partners. In the case of a consented transfer of a Partnership Interest, the
Capital Account balance of the transferor shall succeed to the transferee.
8.4.2 A new Partner or transferee of a Partnership Interest shall
not be deemed admitted into the Partnership until (i) the Capital Contribution
required of such new Partner shall have been paid or the Capital Account has
been transferred between the transferor and transferee, and (ii) such new
Partner or transferee has become a party to this Agreement by his or her
execution and submission to the Management Committee of a counterpart signature
page to this Agreement.
8.5 RIGHT OF FIRST REFUSAL. This section sets forth the procedure by
which a Partner may sell all of its Interest in the Partnership, but does not
authorize a Partner to sell less than all of its Interest in the Partnership
without the unanimous Vote or written consent of the Partners. In the event a
Partner desires to sell all (but not less than all) of its Interest in the
Partnership, it shall first notify and fully inform the other Partners in
writing of the identity of the proposed buyer (the "BUYER") and the proposed
terms and conditions of such proposed sale (the "NOTICE OF PROPOSED SALE"). The
selling Partner shall afford the non-selling Partners the opportunity, within
thirty (30) days after receiving the Notice of Proposed Sale, to elect to
purchase such selling Partner's Interest on the same terms and conditions as set
forth in the Notice of Proposed Sale by delivery of its written notice to this
effect to the selling Partner. If more than one non-selling Partner desires to
purchase the selling Partner's Interest, each non-selling Partner shall purchase
that portion determined by multiplying the Interest being sold by a fraction,
the numerator of which is the existing Percentage Interest of the Partner
electing to purchase, and the denominator of which is the total of the
Percentage Interests of the Partners excluding the Interest being sold. If one
of the non-selling Partners does not elect to purchase its share of the selling
Partner's Interest, the entire Interest shall be sold to the other non-selling
Partners.
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In the event that one or more of the non-selling Partners shall so
elect to purchase the Interest of the selling Partner on such terms and
conditions, the closing of the purchase will take place according to the
proposed terms and conditions of the sale or, if not specified, within a
reasonable period (but not more than ninety (90) days) after such election to
purchase is made. In the event that none of the non-selling Partners elect to
purchase the Interest of the selling Partner within the 30-day period, the
selling Partner shall, upon obtaining the unanimous Vote or written consent of
the non-selling Partners, then be free to sell to the proposed Buyer all (but
not less than all) of such Interest on terms and conditions no less favorable
than offered to the non-selling Partners in the Notice of Proposed Sale within a
period of one hundred twenty (120) days after the end of such 30-day period. In
the event the sale does not take place to the proposed Buyer in compliance with
this section within such 120-day period, the selling Partner shall give written
notice to this effect to the non-selling Partners. Any subsequent proposed sale
by that Partner of its Interest in the Partnership will again require compliance
with the provisions of this Section 8.5.
ARTICLE 9
ADMINISTRATION AND ACCOUNTING MATTERS
9.1 MAINTENANCE OF BOOKS AND RECORDS. The Partnership shall cause the
books and records of the Partnership to be maintained in accordance with
generally accepted accounting principles and shall give reports to the Partners
in accordance with prudent business practices and the Act.
9.2 ANNUAL ACCOUNTING. Within one hundred twenty (120) days after the
close of each Fiscal Year of the Partnership, the Management Committee shall (i)
cause to be prepared and submitted to each Partner a balance sheet and income
statement for the preceding Fiscal Year of the Partnership (or portion thereof)
in substantial conformity with generally accepted accounting principles, and
(ii) provide to the Partners all information necessary for them to complete
federal and state tax returns.
The determination of the Management Committee as to adjustments to
the financial reports, books, records and returns of the Partnership before any
such inspection or copying, in the absence of fraud or gross negligence, shall
be final and binding upon the Partnership and all of the Partners if there is no
exception thereto within ninety (90) days after distribution of such financial
reports, books, records and returns of the Partnership to the Partners.
9.3 INSPECTION RIGHTS. Each Partner or his or her agent or attorney
shall have access to the Partnership's books and records. Former Partners and
their agents or attorneys shall have access to such books and records pertaining
to the period which they were Partners of the Partnership. This right of access
is intended to provide the opportunity to inspect and copy books and records
upon reasonable request and during normal business hours. The Partnership may
impose a reasonable charge, covering the costs of labor and material, for copies
of documents so furnished.
9.4 RIGHTS OF PARTNERS. Each Partner and the Partnership shall furnish
to a Partner and to the legal representative of a deceased Partner or Partner
under legal disability, both of the following:
9.4.1 Without demand, any information concerning the Partnership's
Business and affairs reasonably required for the proper exercise of the
Partner's rights and duties under this Agreement or under the Act; and
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9.4.2 On demand, any other information concerning the Partnership's
Business and affairs, except to the extent the demand or the information
demanded is unreasonable or otherwise improper under the circumstance.
9.5 TAX MATTERS HANDLED BY MANAGEMENT COMMITTEE. The Management
Committee shall designate an individual to act as the "TAX MATTERS PARTNER" (as
defined in Code section 6231) to represent the Partnership (at the Partnership's
expense) in connection with all examinations of the Partnership's affairs by tax
authorities, including resulting judicial and administrative proceedings, and to
expend Partnership funds for professional services and costs associated
therewith. In its capacity as Tax Matters Partner, the designated Committee
Member shall oversee the Partnership's tax affairs in the overall best interests
of the Partnership.
9.6 FEDERAL INCOME TAX ELECTIONS MADE BY MANAGEMENT COMMITTEE. The
Management Committee on behalf of the Partnership may make all elections for
federal income tax purposes, including but not limited to, the following:
9.6.1 USE OF ACCELERATED DEPRECIATION METHODS. To the extent
permitted by applicable law and regulations, the Partnership may elect to use an
accelerated depreciation method on any depreciable unit of the assets of the
Partnership.
9.6.2 ACCOUNTING METHOD . For financial reporting purposes, the
books and records of the Partnership shall be kept on the applicable method of
accounting as required by law applied in a consistent manner and shall reflect
all transactions of the Partnership and be appropriate and adequate for the
purposes of the Partnership.
9.6.3 OBLIGATIONS OF PARTNERS TO REPORT ALLOCATIONS. The Partners
are aware of the income tax consequences of the allocations made by this
Agreement and hereby agree to be bound by the provisions of this Section 9.6 in
reporting their shares of the Partnership income and loss for income tax
purposes.
9.6.4 TAX YEAR. The Management Committee will cause the Partnership
to elect the Fiscal Year as its taxable year.
9.6.5 OTHER ELECTIONS. The Management Committee shall have the
right in its sole discretion at any time to make or not to make such other
elections as are authorized or permitted by any law or regulation for income tax
purposes (including, but not limited to, any election under sections 734, 743
and 754 of the Code to adjust the basis of the Property of the Partnership in
the event of a Transfer of all or part of the Interest of any Partner).
Notwithstanding the above, no Partner, nor the Partnership, shall make an
election to be excluded from the application of Subchapter K of the Code or any
similar provisions of state law.
9.7 BANK ACCOUNTS; BANKING. The Management Committee shall establish
one or more depository accounts for the funds of the Partnership and designate
Persons authorized to deposit and draw against such accounts on behalf of the
Partnership. Cash balances on hand may be invested by the Management Committee
on behalf of the Partnership as provided for in this Agreement. Partnership
funds will not be commingled with the funds of any Committee Member, Partner or
any other party or used as compensating balances for any other obligations of
any Partner, Committee Member or any other party.
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ARTICLE 10
PARTNER DISSOCIATION
10.1 COVENANT NOT TO DISSOCIATE OR DISSOLVE. Notwithstanding any
provision of the Act, each Partner hereby covenants and agrees that the Partners
have entered into this Agreement based on their mutual expectation that all
Partners will continue as Partners and will carry out the duties and obligations
undertaken by them hereunder and that, except as otherwise expressly required or
permitted hereby, no Partner shall dissociate from the Partnership, be entitled
to demand or receive a return of such Partner's contributions or profits (or a
bond or other security for the return of such contributions or profits), or
exercise any power under the Act to dissolve the Partnership without the consent
of the other Partners. Notwithstanding any of the foregoing, this Section 10.1
shall not apply to any termination of the Partnership pursuant to Article 11
hereof.
10.2 DISSOCIATION OF A PARTNER; LIABILITY. A dissociation from the
Partnership by any Partner shall be a breach of this Agreement. Any Partner who
wrongfully dissociates is liable to the Partnership and to the other Partners
for damages and liabilities caused by the dissociation in addition to any other
obligations of the Partner to the Partnership or to the other Partners.
10.3 VOLUNTARY DISSOCIATION. Should a Partner exercise its power to
dissociate from the Partnership in contravention of this Agreement pursuant to
Section 16602(a) of the Act, it shall give all other Partners ninety (90) days
advance written notice of its intention to do so.
10.4 OPTION TO PURCHASE DISSOCIATED PARTNER'S INTEREST. On the
voluntary dissociation of a Partner pursuant to Section 10.3 above, the
remaining Partners shall have the option to purchase the Interest of the
dissociated Partner in the Partnership. The manner in which such option may be
exercised, the determination of the purchase price to be paid for the
dissociated Partner's Interest, and the method of payment therefor shall be in
accordance with Section 8.5 of this Agreement.
10.5 ASSUMPTION OF PARTNERSHIP OBLIGATIONS. On any purchase and sale of
a Partnership Interest under this Article 10, the remaining Partners shall
assume all Partnership obligations and shall protect, defend, and indemnify the
dissociated Partner and its officers, directors, employees and agents and the
property of any dissociated Partner from liability for any such obligations.
10.6 PUBLICATION OF NOTICE. On any purchase and sale of a Partnership
Interest under this Article 10, the remaining Partners shall, at their own cost
and expense, as soon as reasonably practicable after exercise of their option to
purchase the dissociating Partner's Interest, prepare, publish, file and serve
all notices as may be required by law to protect the dissociated Partner from
liability for future obligations of the Partnership Business.
ARTICLE 11
TERMINATION AND DISSOLUTION
11.1 TERMINATION AND DISSOLUTION. The Partnership shall be dissolved
upon the occurrence of any of the following events:
11.1.1 The affirmative Vote or written consent of all of the
Partners to terminate and dissolve the Partnership.
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11.1.2 The affirmative Vote or written consent of all of the
Partners to sell, exchange or otherwise dispose of all or substantially all of
the Partnership Property occurring as part of single transaction or a series of
related transactions as part of plan.
11.1.3 The termination for any reason of the Hemophilia Therapy
Management Agreement.
11.1.4 The termination for any reason of the Hemophilia Factor
Services Agreement.
11.1.5 After the initial forty-eight (48) months of Partnership
operations, either Partner may terminate the Partnership upon twelve (12) months
prior written notice to the other Partner(s).
11.1.6 An event that makes it unlawful for all or substantially
all of the Business of the Partnership to be continued, but a cure of illegality
within ninety (90) days after notice to the Partnership of the event is
effective retroactively to the date of the event for purposes of California
Corporations Code Section 16801.
11.1.7 On application by a Partner, the entry of a judicial
determination that any of the following apply:
(a) The economic purpose of the Partnership is likely to
be unreasonably frustrated;
(b) Another Partner has engaged in conduct relating to
the Partnership Business that makes it not reasonably practicable to carry on
the Business in partnership with that Partner; or
(c) It is not otherwise reasonably practicable to carry
on the Partnership Business in conformity with the Partnership Agreement.
11.2 STATEMENT OF DISSOLUTION. As soon as possible after the occurrence
of any of the events specified in Section 11.1 above, the Partnership shall
execute a Statement of Dissolution (Form GP-4) in such form as prescribed by the
Secretary of State, and cause the same to be filed in the office of the
Secretary of State pursuant to Section 16805 of the California Corporations
Code.
11.3 CONDUCT OF BUSINESS. Upon the filing of the Statement of
Dissolution with the Secretary of State, the Partnership shall cease to carry on
its Business, except insofar as may be necessary for the winding up of its
Business, but the Partnership's separate existence shall continue until the
Statement of Dissolution has been filed with the Secretary of State or until a
judicial determination dissolving the Partnership has been entered by a court of
competent jurisdiction.
11.4 DISTRIBUTION OF NET PROCEEDS UPON LIQUIDATION. The Partners shall
continue to divide Net Profits and Net Losses and Distributable Cash during the
winding-up period in the same manner and the same priorities as provided for in
Articles 4 and 5 hereof. The proceeds from the liquidation of Partnership
Property shall be applied in the following order:
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11.4.1 First, to the payment of creditors, in the order of
priority as provided by law, except to Partners on account of their Capital
Contributions.
11.4.2 Second, to the payment of loans or advances that may have
been made by any of the Partners for working capital or other requirements of
the Partnership.
11.4.3 Thereafter, to the Partners in accordance with their
positive Capital Account balances.
Where the distribution pursuant to this Section 11.4 consists both
of cash (or cash equivalents) and non-cash assets, the cash (or cash
equivalents) shall first be distributed, in a descending order, to fully satisfy
each category starting with the most preferred category above. In the case of
noncash assets, the distribution values are to be based on the fair market value
thereof as determined in good faith by the Management Committee, and the
shortest maturity portion of such non-cash assets (e.g., notes or other
indebtedness) shall, to the extent such non-cash assets are readily divisible,
be distributed, in a descending order, to fully satisfy each category above,
starting with the most preferred category.
ARTICLE 12
INDEMNIFICATION
12.1 INDEMNIFICATION OF THE PARTNERS AND THEIR PRINCIPALS. The
Partnership shall indemnify and hold harmless each of the Partners, the
Partnership Manager, the Committee Members, their Affiliates and each of their
respective partners, officers, directors, managers, trustees, employees, agents
and Principals (individually, an "INDEMNITEE") from and against any and all
losses, claims, demands, costs, damages, liabilities, joint and several,
expenses of any nature (including reasonable attorneys, fees and disbursements),
judgments, fines, settlements and other amounts arising from any and all claims,
demands, actions, suits or proceedings, whether civil, criminal, administrative
or investigative, in which the Indemnitee is involved as a party arising out of
the Business of the Partnership, excluding liabilities to any Partner,
regardless of whether the Indemnitee continues to be a Partner, or a partner,
officer, director, manager, trustee, employee, agent or Principal of the Partner
at the time any such liability or expense is paid or incurred, to the fullest
extent permitted by the Act and all other applicable laws, PROVIDED that the
Partner or such Person acted in good faith, within what is reasonably believed
to be the scope of its authority and for a purpose which it reasonably believed
to be in the best interests of the Partnership and the Partners or otherwise in
compliance with the provisions of this Agreement; provided, however (i) that the
Partnership shall not be required to indemnify any Indemnitee, and any such
Indemnitee shall be liable, for any loss, expense or damage which the
Partnership may suffer as a result of (A) such Indemnitee's willful misconduct,
gross negligence or bad faith in failing to perform its duties hereunder, (B)
actions taken by such Indemnitee in violation of this Agreement, (C) the receipt
by such Indemnitee of any financial benefits to which it is not entitled
pursuant to this Agreement, or (D) the vote by such Indemnitee for a
distribution of funds of the Partnership in violation of this Agreement or the
Act; (ii) the Partnership shall not be required to indemnify any Indemnitee for
any breach of the provisions of this Agreement, or for any loss, expense or
damage which it may suffer as a result of the breach of this Agreement by the
Partner to which the Indemnitee is related; and (iii) any liability hereunder
shall be limited solely to the assets and properties of the Partnership, and no
Partner (or any Affiliate of any Partner) shall have any liability or obligation
hereunder.
12.2 EXPENSES. Expenses incurred by an Indemnitee in defending any
claim, demand, action, suit or proceeding subject to Section 12.1 above may,
from time to time, be advanced by
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the Partnership prior to the final disposition of such claim, demand, action,
suit or proceeding upon receipt by the Partnership of an undertaking by or on
behalf of the Indemnitee to repay such amount if it shall be determined that
such Person is not entitled to be indemnified as authorized in Section 12.1.
12.3 INDEMNIFICATION RIGHTS NON-EXCLUSIVE. The indemnification provided
by Section 12.1 shall be in addition to any other rights to which those
indemnified may be entitled under any agreement, vote of the Partners, as a
matter of law or equity or otherwise, both as to action in the Indemnitee's
capacity as a Partner, as an Affiliate or as an officer, director, employee,
agent or Principal of a Partner and as to any action in another capacity, and
shall continue as to an Indemnitee who has ceased to serve in such capacity and
shall inure to the benefit of the heirs, successors or assigns and
administrators of the Indemnitee.
12.4 ERRORS AND OMISSIONS INSURANCE. The Partnership may purchase and
maintain insurance, at the Partnership's expense, on behalf of the Partners and
such other Persons as the Partners shall determine, against any liability that
may be asserted against, or any expense that may be incurred by, such Person in
connection with the activities of the Partnership and/or the Partners' acts or
omissions as the Partners of the Partnership regardless of whether the
Partnership would have the power to indemnify such Person against such liability
under the provisions of this Agreement.
12.5 ASSETS OF THE PARTNERSHIP. Any indemnification under Section 12.1
shall be satisfied solely out of the assets of the Partnership. No Partner shall
be subject to personal liability or required to fund or to cause to be funded
any obligation by reason of these indemnification provisions.
ARTICLE 13
INDEPENDENT ACTIVITIES; AGREEMENT NOT TO COMPETE
13.1 INDEPENDENT ACTIVITIES. Subject to Section 13.2 below, each of the
Partners and its Affiliates may engage in business and activities which are
competitive with the Business and activities of the Partnership, and neither
such Partner nor any of such Affiliates shall be under any obligation or duty to
account for or offer the benefit of any such business and activities to the
other Partners or the Partnership.
13.2 AGREEMENT NOT TO COMPETE. Each Partner and its Affiliates agree
that, during the term of this Agreement, it shall not compete with the
Partnership by providing any therapies, services, supplies or goods which are
being provided by the Partnership and encompassed within the definition of the
"Business" of the Partnership as contained in this Agreement to any patient who
has his or her principal residence in the Service Area, or any patient being
treated by a physician or hospital which has it principal place of business
within the Service Area. Notwithstanding the foregoing, the resale by CHC of
drugs acquired in wholesale transactions with the Partnership or HHS shall not
constitute a breach of this agreement not to compete.
No Partner shall be in violation of this Section 13.2 if it has
made reasonable inquiry of the patient and the patient has denied having a
principal residence which would cause the patient to be covered by these
restrictions. However, if the correct information is subsequently discovered
such that the patient should not have been provided therapies, services,
supplies or goods by the Partner, then the Partner shall so advise the patient
and shall use all reasonable efforts to encourage the patient to have such
therapies, services, supplies or goods, as
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the case may be, be provided by the Partnership, consistent with the right of
the patient to select his or her own health care provider.
ARTICLE 14
AMENDMENTS
14.1 Amendments. Except for EXHIBIT A to this Agreement which may be
modified and supplemented from time to time by the Management Committee without
the necessity of a formal amendment to this Agreement, the terms and provisions
of this Agreement shall not be modified or amended in any respect except by a
written instrument executed by the number of Partners bearing the Vote required
under Section 14.2 below.
14.2 VOTE REQUIRE. Proposed amendments to this Agreement shall be
adopted if consented to by the unanimous Vote of the Partners, unless a lesser
Vote is required by law or by this Agreement. Notwithstanding the foregoing, no
amendment to this Agreement may enlarge the obligations of any Partner hereunder
without the consent of such Partner, even if the requisite number of Partners
have consented thereto.
14.3 MANAGEMENT COMMITTEE'S RIG-HT TO REQUIRE WRITTEN RESPONSES. For
the purpose of obtaining a written Vote to approve or disapprove a proposed
amendment, the Management Committee may require written responses within a
specified time period (not less than 10 nor more than 60 days from the date of
any notice of a proposed amendment) and provide that the failure to respond
shall constitute a favorable or unfavorable Vote (as designated) for the
proposed amendment.
14.4 COPY OF AMENDMENT. The Management Committee shall promptly furnish
a copy of any amendment to this Agreement to each Partner on whose behalf the
Management Committee executed the amendment as attorney-in-fact and to any
Partner who did not Vote.
14.5 FILINGS. The Management Committee shall, within a reasonable time
after the effective date of any amendment to this Agreement, make any official
filings or publications required or desirable to reflect such amendment,
including a Statement of Amendment (Form GP-7).
ARTICLE 15
NOTICES
Any notice, demand or other communication required or permitted
hereunder shall be in writing and may be either (i) personally delivered, which
shall be deemed received at the time of actual receipt thereof; or (ii) sent by
registered or certified mail, with postage and charges prepaid, which shall be
deemed delivered three (3) business days after deposit in the United States
mail; or (iii) sent by overnight courier service, such as FedEx, with charges
prepaid, which shall be deemed delivered upon such courier service's record
delivery date of the same; or (iv) delivered by facsimile transmission, which
shall be deemed received at the time and date of transmission, provided an
original mechanical signed copy of such communication is also immediately
deposited in the United States mail with first class postage and charges
prepaid, and IN EACH CASE, addressed or delivered to a party at such party's
address as set forth below, or at such other address as that party may specify
by written notice given to the other in accordance with this Article:
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IF TO THE PARTNERSHIP, THEN TO EACH OF THE FOLLOWING PARTIES:
CHILDRENS HEMOPHILIA SERVICES
Attn: Thomas J. McNulty, PharmD., Partnership Manager
65 North Raymond Avenue, Suite 305
Pasadena, California 91103
Facsimile: (626) 577-1411
AND TO:
KYLE CALLAHAN
6820 Charlotte Pike, Suite 100
Nashville, Tennessee 37209
Facsimile: (615) 352-2588
AND TO:
Each of the Committee Members, addressed and delivered
separately to each Committee Member at such address as they
shall provide the Partnership from time to time,
WITH COURTESY COPIES TO EACH OF:
FRYE & HSIEH, LLP
Attn: Douglas J. Frye, Esq.
24955 Pacific Coast Highway, Suite A201
Malibu, California 90265-4747
Facsimile: (310) 456-0808
Thomas W. Bell, Jr., Esq.
1640 Century Center Parkway, Suite 101
Memphis, Tennessee 38134
Facsimile: (901) 385-3689
IF TO CHC, AS A PARTNER:
CHILDRENS HOME CARE
Attn: Thomas J. McNulty, PharmD., President
c/o 65 North Raymond Avenue, Suite 305
Pasadena, California 91103
Facsimile: (626) 577-1411
WITH A COURTESY COPY TO:
FRYE & HSIEH, LLP
Attn: Douglas J. Frye, Esq.
24955 Pacific Coast Highway, Suite A201
Malibu, California 90265-4747
Facsimile: (310) 456-0808
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<PAGE>
IF TO HHS, AS A PARTNER:
HORIZON HEALTH SYSTEMS, INC.
Attn: Kyle Callahan, President
6820 Charlotte Pike, Suite 100
Nashville, Tennessee 37209
Facsimile: (615) 352-2588
WITH A COURTESY COPY TO:
Thomas W. Bell, Jr., Esq.
1640 Century Center Parkway, Suite 101
Memphis, Tennessee 38134
Facsimile: (901) 385-3689
Where courtesy copies are requested to be given, such copies shall not
constitute valid notice to the party where a copy is requested to be given. If
the United States Postal Service returns to the Partnership or the Management
Committee any notice as undeliverable, all future notices to that Partner shall
be deemed duly given if kept available for that Partner at the Partnership's
principal executive office for one (1) year.
ARTICLE 16
GENERAL PROVISIONS
16.1 CONSTRUCTION. Every covenant, term and provision of this Agreement
shall be construed simply according to its fair meaning and not strictly for or
against any Partner.
16.2 HEADINGS. The headings contained in this Agreement are inserted
for convenience and identification only and are in no way intended to describe,
interpret, define or limit the scope, extent or intent of this Agreement or any
provision hereof.
16.3 VARIATION OF PRONOUNS; GENDER. All pronouns and any variations
thereof shall be deemed to refer to masculine, feminine, or neuter, singular or
plural, as the identity of the Person or Persons may require.
16.4 SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity of the
remainder of the within Agreement.
16.5 ENTIRE AGREEMENT; MODIFICATION. This Agreement, together with all
Exhibits, schedules and other appendices attached hereto and referred to herein,
constitutes the entire understanding of the parties hereto with respect to the
subject matter hereof, and no amendment, modification or alteration of the terms
hereof shall be binding unless the same be in writing, dated subsequent to the
date hereof and duly adopted in accordance with the provisions of this
Agreement.
16.6 FURTHER ACTION. Each Partner, upon request, agrees to perform all
further acts and execute, acknowledge and deliver any documents or instruments
which may be reasonably necessary, appropriate or desirable to carry out the
provisions of this Agreement.
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<PAGE>
16.7 NO WAIVER TO SEEK REDRESS. The failure of any Partner to seek
redress for violation of or to insist upon the strict performance of any
covenant or condition of this Agreement shall not prevent a subsequent act,
which would have originally constituted a violation, from having the effect of
an original violation.
16.8 WAIVER OF ACT FOR PARTITION. No Partner shall, either directly or
indirectly, take any action to require partition or appraisement of the
Partnership or any of its assets or properties or cause the sale of any
Partnership property, and notwithstanding any provision of applicable law to the
contrary, each Partner (and his legal representatives, successors, or assigns)
hereby irrevocably waives any and all rights to maintain any action for
partition or to compel any sale with respect to his Partnership Interest, or
with respect to any asset or properties of the Partnership, except as expressly
provided in this Agreement.
16.9 CUMULATIVE REMEDIES. The rights and remedies provided by this
Agreement are cumulative and the use of any one right or remedy by a party
hereto shall not preclude or waive its right to use any or all other remedies.
Said rights and remedies are given in addition to any other rights the parties
may have by law, statute, ordinance or otherwise.
16.10 BENEFIT AND BURDEN. Except as otherwise expressly permitted,
restricted or provided for in this Agreement, each and all. of the covenants,
terms, provisions and agreements contained herein shall be binding upon and
inure to the benefit of the Partners and their respective heirs, legatees,
personal and legal representatives, successors, transferees and assigns.
16.11 NO THIRD PARTY BENEFICIARIES. Except for the foregoing, no rights
or benefits under this Agreement are conferred upon, directly or indirectly, or
shall in any way inure to the benefit of, any third party who is not a signatory
to this Agreement.
16.12 LENDER IS RELIANCE. Any lender may rely upon the written
statement of the Partnership as to the intended use of the proceeds of any
borrowings of the Partnership, and such statements shall be conclusively binding
upon all parties hereto irrespective of the actual disposition or use of such
proceeds.
16.13 BINDING ARBITRATION OF DISPUTES. UNLESS OTHERWISE WAIVED BY THE
PARTNERS, AND EXCEPT FOR ANY DEADLOCK OF THE MANAGEMENT COMMITTEE, ANY DISPUTE,
CONTROVERSY OR CLAIM BETWEEN THE PARTNERS ARISING OUT OF OR RELATING TO THIS
AGREEMENT EITHER DURING OR AFTER THE TERM HEREOF (INCLUDING THE QUESTION AS TO
WHETHER ANY PARTICULAR MATTER IS ARBITRABLE) SHALL BE SOLELY AND FINALLY SETTLED
BY ARBITRATION CONDUCTED IN LOS ANGELES COUNTY, CALIFORNIA, IN ACCORDANCE WITH
THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION THEN IN
FORCE (THE "RULES"). THE PARTNER REQUESTING ARBITRATION SHALL SERVE UPON THE
OTHER PARTNERS TO THE CONTROVERSY, DISPUTE OR CLAIM A WRITTEN DEMAND FOR
ARBITRATION STATING THE SUBSTANCE OF THE CONTROVERSY, DISPUTE OR CLAIM, THE
CONTENTION OF THE PARTNER REQUESTING ARBITRATION, AND THE NAME AND ADDRESS OF
THE ARBITRATOR APPOINTED BY IT. THE RECIPIENTS OF SUCH DEMAND SHALL WITHIN
TWENTY (20) DAYS AFTER SUCH RECEIPT APPOINT AN ARBITRATOR AND NOTIFY THE PARTNER
REQUESTING ARBITRATION OF THE IDENTITY OF THE ARBITRATOR SO SELECTED, AND THE
TWO ARBITRATORS SHALL APPOINT A THIRD, AND THE DECISION OR AWARD OF ANY TWO
ARBITRATORS SHALL BE FINAL AND BINDING UPON THE PARTIES. IN
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<PAGE>
THE EVENT THAT THE TWO ARBITRATORS FAIL TO APPOINT A THIRD ARBITRATOR WITHIN
TWENTY (20) DAYS OF THE APPOINTMENT OF THE SECOND ARBITRATOR, EITHER ARBITRATOR,
OR ANY PARTY TO THE ARBITRATION, MAY APPLY TO A JUDGE OF THE UNITED STATES
DISTRICT COURT IN AND FOR THE CENTRAL DISTRICT OF THE STATE OF CALIFORNIA FOR
THE APPOINTMENT OF THE THIRD ARBITRATOR, AND THE APPOINTMENT OF SUCH ARBITRATOR
BY SUCH JUDGE ON SUCH APPLICATION SHALL HAVE PRECISELY THE SAME FORCE AND EFFECT
AS IF SUCH ARBITRATOR HAD BEEN APPOINTED BY THE TWO ARBITRATORS. IF FOR ANY
REASON THE THIRD ARBITRATOR CANNOT BE APPOINTED IN THE MANNER PRESCRIBED BY THE
PRECEDING SENTENCE, EITHER REGULARLY APPOINTED ARBITRATOR OR EITHER PARTY TO THE
ARBITRATION, MAY APPLY TO THE AMERICAN ARBITRATION ASSOCIATION FOR APPOINTMENT
OF THE THIRD ARBITRATOR IN ACCORDANCE WITH THE RULES. SHOULD THE PARTIES UPON
WHOM THE DEMAND FOR ARBITRATION HAS BEEN SERVED FAIL OR REFUSE TO APPOINT AN
ARBITRATOR WITHIN 20 DAYS, THE SINGLE ARBITRATOR SHALL HAVE THE RIGHT TO DECIDE
ALONE.
THE ARBITRATORS SHALL HAVE THE POWER TO GRANT ALL LEGAL AND
EQUITABLE REMEDIES AND AWARD COMPENSATORY DAMAGES PROVIDED BY CALIFORNIA LAW,
BUT SPECIFICALLY SHALL NOT HAVE THE POWER TO AWARD PUNITIVE DAMAGES. THE PARTIES
TO THE ARBITRATION SHALL BE ENTITLED TO CONDUCT DISCOVERY, AS MAY BE REASONABLY
LIMITED BY THE ARBITRATORS, UNDER THE CALIFORNIA CODE OF CIVIL PROCEDURE. THE
ARBITRATORS SHALL APPLY CALIFORNIA SUBSTANTIVE LAW AND THE CALIFORNIA EVIDENCE
CODE TO THE PROCEEDING. THE ARBITRATORS SHALL PREPARE IN WRITING AND PROVIDE TO
THE PARTIES AN AWARD INCLUDING FACTUAL FINDINGS AND THE REASONS ON WHICH THE
DECISION IS BASED. THE ARBITRATOR'S DECISION OR AWARD SHALL BE FINAL AND BINDING
UPON THE PARTIES. THE PARTNERS SHALL ABIDE BY ALL AWARDS RENDERED IN ARBITRATION
PROCEEDINGS, AND ALL SUCH AWARDS MAY BE ENFORCED AND EXECUTED UPON IN ANY COURT
HAVING COMPETENT JURISDICTION OVER THE PARTY AGAINST WHOM ENFORCE AND OF SUCH
AWARD IS SOUGHT. THE PARTNER OR PARTNERS LOSING THE DISPUTE WHICH WAS SUBMITTED
TO ARBITRATION SHALL PAY THE ADMINISTRATIVE CHARGES, ARBITRATORS' FEES, AND
RELATED EXPENSES OF ARBITRATION, AND EACH PARTNER'S LEGAL FEES INCURRED IN
CONNECTION WITH ANY SUCH ARBITRATION. THIS AGREEMENT TO ARBITRATE SHALL BE
SPECIFICALLY ENFORCEABLE UNDER THE PREVAILING ARBITRATION LAW.
16.14 WAIVER OF JURY TRIAL. WITH RESPECT TO ANY DISPUTE ARISING UNDER
OR IN CONNECTION WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, AS TO WHICH NO
PARTNER INVOKES THE RIGHT TO ARBITRATION HEREIN PROVIDED, OR AS TO WHICH LEGAL
ACTION NEVERTHELESS OCCURS, EACH PARTNER HEREBY IRREVOCABLY WAIVES ALL RIGHTS IT
MAY HAVE TO DEMAND A JURY TRIAL. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND
VOLUNTARILY MADE BY THE PARTNERS, AND EACH PARTNER ACKNOWLEDGES THAT NONE OF THE
OTHER PARTNERS, MANAGERS, NOR ANY PERSON ACTING ON BEHALF OF THE OTHER PARTIES
HAS MADE ANY REPRESENTATION OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN
ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THE PARTNERS EACH FURTHER ACKNOWLEDGE
THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED)
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<PAGE>
IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT
LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE
OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. EACH OF THE PARTNERS FURTHER
ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF
THIS WAIVER PROVISION.
16.15 ATTORNEYS' FEES. In the event of any arbitration, litigation or
other dispute or proceeding arising as a result of or by reason of this
Agreement, the prevailing party in any such arbitration, litigation or other
dispute or proceeding shall be entitled to, in addition to any other damages
assessed, its reasonable attorneys' fees and all other out-of-pocket costs and
expenses incurred in connection with settling or resolving such dispute. The
reasonable attorneys' fees which the prevailing party is entitled to recover
shall include fees for prosecuting or defending any appeal and shall be awarded
for any supplemental proceedings until the final judgment is satisfied in full.
In addition to the foregoing award of attorneys' fees to the prevailing party,
the prevailing party in any lawsuit or arbitration procedure relating to this
Agreement shall be entitled to its reasonable attorneys' fees and costs incurred
in any post judgment proceedings to collect or enforce the judgment. THIS
ATTORNEYS' FEES PROVISION IS SEPARATE AND SEVERAL AND SHALL SURVIVE THE MERGER
OF THIS AGREEMENT INTO ANY JUDGMENT.
16.16 TIME IS OF THE ESSENCE. TIME IS EXPRESSLY DECLARED TO BE OF THE
ESSENCE with respect to the parties hereto and in connection with all acts or
things to be done or performed in connection herewith and of every provision
hereof in which time is an element.
16.17 COUNTERPARTS; FACSIMILE EXECUTION. This Agreement may be executed
in multiple counterparts each of which shall be deemed an original Agreement,
and all of which shall constitute one Agreement to be effective as of the date
of execution of this Agreement. The execution of this Agreement, and any notices
or documents required to be delivered hereunder, may be accomplished by
facsimile transmission, provided the original of such Agreement, notice or
document containing an original signature is delivered to the other party within
five (5) business days after such execution or facsimile transmission thereof.
16.18 GOVERNING LAW. This Agreement and any amendments or exhibits
hereto, and the rights and obligations of the parties hereunder, is executed
under and in conformity with the laws of the State of California relating to
general partnerships and is to be construed, enforced and governed in accordance
therewith without giving effect to any conflict of law provision.
(Continued and Signed on the Following Page)
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<PAGE>
SIGNATURES AND ACKNOWLEDGMENTS
OF THE PARTNERS
IN WITNESS WHEREOF, the parties hereto have caused this AMENDED AND
RESTATED GENERAL PARTNERSHIP AGREEMENT of CHILDRENS HEMOPHILIA SERVICES to be
duly and validly executed and delivered by a duly authorized representative as
of the day and year first above written.
FURTHER, WE, THE UNDERSIGNED, AS PARTNERS OF THE PARTNERSHIP, ACKNOWLEDGE
WE HAVE READ AND UNDERSTAND THE TERMS AND CONDITIONS OF THE FOREGOING AMENDED
AND RESTATED GENERAL PARTNERSHIP AGREEMENT OF CHILDRENS HEMOPHILIA SERVICES,
INCLUDING SPECIFICALLY, BUT NOT LIMITED TO, SECTION 10.1, "COVENANT NOT TO
DISSOCIATE OR DISSOLVE," AND SECTIONS 16.13 AND 16.14, "'BINDING ARBITRATION OF
DISPUTES," AND "WAIVER OF JURY TRIAL, RESPECTIVELY, AND, AS EVIDENCED BY OUR
SIGNATURES BELOW, THE UNDERSIGNED HEREBY ACCEPT, AND AGREE TO HE BOUND BY, THE
TERMS AND PROVISIONS CONTAINED HEREIN.
CHILDRENS HEMOPHILIA SERVICES
A California General Partnership
By Its Partners
"CHC"
CHILDRENS HOME CARE
A California Nonprofit Public Benefit
Corporation
By: /s/ Thomas J. McNulty
---------------------------------------
THOMAS J. McNULTY, PharmD.,
Its President
"HHS"
HORIZON HEALTH SYSTEMS, INC.
A Tennessee Corporation
By: /s/ Kyle Callahan
---------------------------------------
KYLE CALLAHAN
Its President
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ACCEPTANCE BY PARTNERSHIP MANAGER
The undersigned hereby accepts his appointment as the Partnership Manager
of the Partnership, and hereby agrees to undertake the performance of his
duties, responsibilities and obligations in accordance with terms of this
Amended and Restated General Partnership Agreement and the applicable provisions
of the Act and California law, as any and all may be amended from time to time.
------------------------------------------
THOMAS J. McNULTY, PharmD.
<PAGE>
EXHIBIT A
AMENDED AND RESTATED GENERAL PARTNERSHIP AGREEMENT
OF
CHILDRENS HEMOPHILIA SERVICES
NAMES AND ADDRESSES OF THE PARTNERS,
THEIR CAPITAL CONTRIBUTIONS AND PERCENTAGE INTERESTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAMES AND ADDRESSES
OF THE PARTNERS OF CAPITAL PERCENTAGE
CHILDRENS HEMOPHILIA SERVICES CONTRIBUTION INTEREST
- --------------------------------------------------------------------------------
<S> <C> <C>
CHILDRENS HOME CARE TO BE 50.0%
6430 Sunset Boulevard, Suite 400 DETERMINED
Los Angeles, California 90028
Facsimile: (626) 577-1411
Attn: Thomas J. McNulty, President
- --------------------------------------------------------------------------------
HORIZON HEALTH SYSTEMS, INC. TO BE 50.0%
6820 Charlotte Pike, Suite 100 DETERMINED
Nashville, Tennessee 37209
Facsimile: (615) 352-2588
Attn: Kyle Callahan, President
- --------------------------------------------------------------------------------
TOTAL: $ 100.0%
------------------------------
------------------------------
</TABLE>
<PAGE>
Exhibit 10.62
GROWTH HORMONE
DRUG THERAPY BUSINESS
MANAGEMENT, SERVICE AND SALES AGREEMENT
This Business Management, Service and Sales Agreement (hereinafter
referred to as the "Agreement") is made and entered into this 10th day of
November, 1998, by and between Nova Factor, Inc., a Tennessee corporation
(hereinafter referred to as "Supplier") and Childrens Home Services, a
California general partnership (hereinafter referred to as "CHS");
W I T N E S S E T H:
WHEREAS, CHS has been formed for the purpose, among others, of engaging
in the business of providing certain drugs, therapies and services, to patients,
as set out in the Partnership Agreement of CHS (the "Drug Therapy Business");
and
WHEREAS, CHS desires to obtain from Supplier, and Supplier is willing
to provide to CHS, a supply of drug ("Drug") and certain services necessary or
desirable in the conduct of CHS's Drug Therapy Business, all upon the terms and
subject to the conditions hereinafter set forth; and
WHEREAS, CHS has also contracted with Childrens Home Care, a partner in
the CHS ("CHC") to obtain certain services from CHC;
NOW, THEREFORE, for and in consideration of the mutual promises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
<PAGE>
1. Goods and SERVICES TO BE PROVIDED BY SUPPLIER. During the term of
this Agreement, Supplier agrees to provide, or arrange for the provision of, the
following goods and services to CHS:
A. PATIENT SERVICES. Supplier shall provide coordination with CHC of
medication shipments, including advice as to when drug will be shipped, co-pay
amounts and other patient coverage information. However, it is contemplated that
CHC shall be the primary contact with the patient.
B. BILLING, REIMBURSEMENT, COLLECTION AND FINANCIAL COUNSELING
SERVICES.
(a) SERVICES. Supplier shall provide such billing,
reimbursement and collection services as are required by CHS in
conducting its Drug Therapy Business, including the preparation,
transmitting and monitoring of all bills to patients of CHS's Drug
Therapy Business, or third party payors; preparing requests or
otherwise assisting patients of CHS's Drug Therapy Business in seeking
reimbursement from all third party payors for the services provided to
such patients by CHS; and collection of amounts due CHS from patients
or third parties. CHS shall establish patient charges for such Drug
Therapy Goods and related services.
(b) CLEARANCE OF PATIENTS. Except as otherwise provided
herein, CHS agrees that it will not commit to provide Drug Therapy
Goods, or related services, to any patient until such patient is
approved by Supplier as eligible for third party reimbursement. CHS
shall promptly notify Supplier as to any potential patient and CHS
shall obtain such patient data as shall be specified by Supplier.
Supplier agrees to promptly contact the third party payor, investigate
a potential patient's insurance coverage and financial ability to pay,
obtain prior authorization, and notify CHS if the potential patient is
approved to
2
<PAGE>
purchase Drug Therapy Goods, or related services, from CHS. CHS shall
thereafter obtain all documentation necessary to file claims with third
party payors and forward same to Supplier. In the case of any potential
patient who is not approved, Supplier shall notify CHS of the reasons
for such disapproval. Supplier shall have no liability for relying upon
information provided by third party payors concerning coverage in the
event that such information shall subsequently prove to be incorrect.
(c) COLLECTION AND DISBURSEMENT. Supplier shall monitor and
coordinate collection of all monies due to CHS from patients and/or
third party payors for Drug Therapy Goods and related services.
Supplier shall deposit all CHS funds received by it into the bank
account designated by CHS, Supplier shall have authority to disburse
funds from this account as necessary to carry out the accounts payable
functions specified herein. Collections of all accounts are performed
by Supplier on behalf of CHS and Supplier shall not be responsible for
any failure to collect such accounts. Supplier shall use reasonable
efforts to collect said accounts (but not greater than those efforts
used in the collection of its own accounts) but Supplier shall not be
required to institute suit for collection or incur any extraordinary
expenses in attempting to collect these receivables unless such action
is approved by the Management Committee and the costs are paid by CHS.
(d) ACCOUNTS PAYABLE. Supplier shall provide accounts payable
services to CHS, to consist of the writing of checks necessary to pay
the debts and obligations of CHS. Supplier shall only use funds in the
operating account for this purpose and Supplier shall have no
responsibility or liability for paying the debts of CHS from any source
other than the funds in the operating account. Those persons having
authority to sign checks on the operating account shall be designated
by the Management Committee. All checks to Supplier shall require two
signatures by persons designated by the Management Committee.
3
<PAGE>
C. ACCOUNTING AND FINANCIAL REPORTING. Supplier shall provide the
following accounting and financial reporting services required by CHS in the
conduct of its Drug Therapy Business: (a) monthly, quarterly and annual
financial statements consisting of income statements, balance sheets, and a
detailed General Ledger, (b) all sales tax returns and reports, (c) schedules of
accounts receivable, accounts payable and cash applications, (after applying
cash received to appropriate invoices, applying credits to patient accounts and
applying write-offs and adjustments approved by CHS) and (d) reconciliation of
the bank account statements of CHS. Supplier shall not make provision for any
annual audit of the CHS, and such audit if desired by CHS shall be the
responsibility of CHS and shall be conducted by such independent accounting firm
as CHS may select. Supplier agrees to cooperate with the accounting firm in the
conduct of the audit of CHS or any other accounting procedure for which the
accounting firm may be engaged by CHS. CHS shall make available to Supplier such
information and documentation as may be needed to enable Supplier to prepare the
tax returns and financial reports specified herein.
D. MANAGEMENT SERVICES AND MARKETING.
(a) RESPONSIBILITIES. CHS hereby appoints Supplier to
manage and supervise CHS's day-to-day operations of its Tennessee
pharmacy, and for this purpose, CHS delegates to Supplier the
authority to make, subject to the terms hereof, such management
decisions as are necessary for the day-to-day operations of CHS's
pharmacy. Supplier
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<PAGE>
accepts this engagement and agrees to faithfully perform the duties
and responsibilities set out herein. As part of its management
responsibilities, and in accordance with the provisions of this
Agreement, Supplier shall, subject to the direction, input and general
guidance of the Management Committee, specifically carry out all
duties related to the pharmacy and shall provide such procedure
manuals as necessary.
(b) SALES AND MARKETING. Supplier shall, at CHS's cost, also
provide such materials for marketing to managed care organizations as
Supplier and CHS may from time to time mutually agree to be helpful in
the operation of CHS's Drug Therapy Business. Supplier shall also, at
CHS's cost, provide sales support in the form of managed care marketing
efforts as Supplier and CHS may from time to time mutually agree to be
helpful to CHS.
(c) PERSONNEL. Supplier shall designate certain Supplier
personnel to perform the management functions set out hereunder and
such Supplier personnel shall conduct and supervise the operation of
CHS's Tennessee pharmacy. All such employees shall remain employees of
Supplier and Supplier shall retain control and supervision of such
employees.
E. PHARMACY SERVICES. Supplier shall assist CHS in the establishment,
build out and operation of a pharmacy located at Supplier's Tennessee facility.
Supplier shall staff the pharmacy location in accordance with the requirements
of Tennessee pharmacy law and Supplier shall cause the pharmacy to be in
compliance with all applicable pharmacy laws and regulations applicable thereto.
Supplier will secure the prescription from CHC, dispense the Drug, and provide
follow up documentation as required. Supplier shall maintain such pharmacy
records as required by state and local governmental entities. Such records shall
be the property of CHS; however, copies will be made available to Supplier and
CHC to the extent allowed by law. Supplier shall obtain and
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<PAGE>
maintain for CHS, all of the necessary licenses required by local, state or
federal authorities, including, but not limited to pharmacy licenses.
F. SALE OF DRUG.
(a) DRUG. During the term of this Agreement, CHS shall
purchase from Supplier and Supplier shall sell and provide to CHS, or
arrange for the provision of, such units of Drug, which are required by
CHS to meet the needs of its Drug Therapy Business. Said Drug will be
sold and provided to CHS when and as requested by CHS for resale by CHS
to its patients. Supplier shall only be obligated to provide Drug to,
or on behalf of, CHS for resale to patients pursuant to a physician's
prescription. Supplier shall provide such Drug as is prescribed by the
Physician, (or if not specifically described in the prescription, as
determined by CHS), subject to product availability. If Drugs are not
available, Supplier shall promptly notify CHS. In the event of Drug
unavailability, Supplier shall provide Drugs to CHS on a "most favored
nations" basis and CHS shall be free to purchase any shortfall of Drugs
elsewhere. "Most favored Nations" basis shall mean that Supplier shall
provide Drugs to CHS on the same basis that it provides Drugs to any
other entity with which it has a management contract, but shall not
require Supplier to treat CHS the same as Supplier's direct patients.
(b) HANDLING AND LABELING. Supplier agrees that all Drug
provided by Supplier hereunder shall be labeled in accordance with
applicable federal, state and local law and that said Drug shall be
stored, shipped and handled by Supplier in accordance with recognized
professional standards for handling and storage of such products and in
accordance with Supplier policies and procedures to the extent that
same do not contradict the requirements of federal, state and local
law. As part of preparing drug for shipment from Supplier's facility,
Supplier shall pack the goods in cartons or other suitable
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<PAGE>
packaging with such ice, cooling packs, insulation, or other packing
materials as necessary.
(c) DELIVERY. All Drug provided by Supplier pursuant to this
Agreement, other than Consigned Drug described in paragraph 1(d)
hereinbelow, shall be delivered either to (i) CHS's patients on behalf
of CHS, or (ii) CHC for delivery to CHS's patients, or (iii) the
dispensing pharmacy designated by CHS, whichever shall be designated by
CHS. The cost of delivery of all Drugs which are delivered by Supplier
to CHS at its pharmacy in Memphis, Tennessee shall be paid by CHS.
Title to said Drug shall pass to CHS upon delivery of Drug to CHS. Any
Drug shipped to a location other than CHS's pharmacy in Memphis,
Tennessee shall be shipped at CHS's cost with risk of loss in transit
being in CHS. A copy of all shipping confirmations shall be forwarded
to CHC.
(d) CONSIGNED DRUG. The parties recognize that Supplier will
place certain Drug with CHC for use in meeting the needs of certain CHS
patients ("Consigned Drug"), in accordance with the terms of the
Services Agreement entered into among CHS, Supplier and CHC dated the
same date as this Agreement. All sales of Consigned Drug by Supplier to
CHS are made pursuant to this Management, Service and Sales Agreement
and all terms and provisions of this Agreement apply to all sales of
Consigned Drug.
(e) DISCLAIMER OF WARRANTY. Supplier makes no warranty as to
any Drug sold hereunder to CHS, and ALL WARRANTIES, EXPRESSED OR
IMPLIED, INCLUDING BUT NOT BEING LIMITED TO WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY
EXPRESSLY DISCLAIMED BY SUPPLIER. CHS shall, where allowable, be given
and shall obtain all rights under, and directly against, the warranty
of any manufacturer of Drug which is acquired by Supplier and resold to
CHS.
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2. COMPENSATION. In exchange for the services provided by Supplier
under Sections 1A through 1E of this Agreement, CHS agrees to pay Supplier in
accordance with the prices set out on Exhibit A attached hereto which exhibit
may be amended from time to time by mutual agreement of the parties. Said fee
shall be determined on a monthly basis by Supplier and Supplier shall at the end
of each calendar month during the term of this Agreement submit invoices to CHS
setting out the amounts due Supplier for said month. The invoices for Supplier's
services shall be due and payable thirty (30) days from the receipt of same by
CHS.
In addition to the fee for services set out in the previous paragraph,
CHS agrees to pay to Supplier in exchange for the Drug purchased by it from
Supplier, an amount per each unit of Drug sold to CHS equal to Supplier's cost
of acquisition of said unit of Drug. Supplier's cost of acquisition shall mean
the price paid by Supplier to its supplier for the Drug, plus taxes and freight,
and less volume incentive discounts and free goods. CHS may review Supplier's
books and records at such times as shall be mutually convenient with Supplier
and CHS in order to verify Supplier's cost of acquisition of Drug. Supplier
shall submit invoices to CHS on a monthly basis identifying each shipment of
Drug supplied to CHS during that month and such invoices shall be due and
payable to Supplier thirty (30) days from date submitted to CHS. Drug placed on
consignment by Supplier at CHC pursuant to the Services Agreement entered into
among Supplier, CHS and CHC, shall be treated as having been purchased by CHS on
the date the Drug is dispensed to the patient by CHC as pharmacy agent for CHS.
The parties agree that the fees set forth in this Section 2 reflect
fair market value for the products and services provided by Supplier.
3. CHS COSTS. It is agreed and understood that during the term of this
Agreement, Supplier shall be responsible for the costs incurred in providing the
services which it is obligated
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<PAGE>
to provide. Notwithstanding the preceding provision, CHS shall be responsible
for the costs of salaries and fringe benefits for CHS's employees, if any; cost
of goods; outside auditor fees; state taxes; principal and interest on CHS
loans; compensation to CHC for acting as pharmacy agent; depreciation; and
payroll taxes for its employees, if any, and the cost of preparing CHS's Federal
and State Income tax returns. All such expenses shall be contracted for and in
the name of CHS, based solely upon CHS's credit, and Supplier shall not be
liable to third party providers for the costs of such goods and services.
Supplier shall file for, and on behalf of, CHS all sales and use tax returns
necessary in the operation of CHS's Drug Therapy Business, however CHS shall
remit the amount of said taxes, if any, out of its own funds and Supplier shall
not be responsible for paying these taxes.
4. SALES TAX. With respect to the sale of products supplied by Supplier
to CHS or its patients under this Agreement, CHS shall provide Supplier an
appropriate state resale certificate, or CHS shall be responsible for remitting
to Supplier any state sales or use taxes that may be due relating to such sales.
5. DISCOUNT. Supplier and CHS acknowledge that CHS is obligated to
disclose any discount from Supplier's usual and customary charges reflected in
the prices for the products listed on Schedule A and any price reduction made on
account of the warranties set forth in this Agreement under all applicable state
and federal programs that provide cost or charged-based reimbursement to CHS for
the goods and services provided and that this Section and the disclosure
contained on any invoice delivered to CHS are intended to constitute notice from
Supplier to CHS of such obligation.
6. SUBCONTRACTING. The parties to this Agreement recognize that
Supplier may provide to CHS certain of the goods and services which it is
obligated to provide under this Agreement by means of subcontracts with third
parties. Supplier shall notify CHS of all
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<PAGE>
subcontracting arrangements, and shall obtain CHS's approval, which approval
shall not be unreasonably withheld or delayed.
7. INDEMNITY AND INSURANCE. Supplier and CHS hereby agree that:
(i) Supplier shall assume responsibility for and shall indemnify and
hold CHS (and its Partners) harmless, and defend CHS (and its
Partners), from all losses (including claims for injuries to
employees of Supplier or of CHS), expenses, attorneys' fees,
damages, claims and judgments resulting from the negligent acts or
omissions or wrongful acts of Supplier, its agents or employees;
(ii) CHS shall assume responsibility for and shall indemnify and
hold Supplier harmless, and defend Supplier, from all losses
(including claims for injuries to employees of Supplier or of CHS),
expenses, attorneys' fees, damages, claims and judgments resulting
from the negligent acts or omissions or wrongful acts of CHS, its
agents or employees.
The party seeking indemnification pursuant to this Section shall notify
the other party in writing by registered mail of the assertion of any claim, or
the commencement of any suit, action or proceeding by any party in respect of
which indemnity may be sought under this agreement within thirty (30) days of
the party's actual knowledge of such assertion or commencement. Failure to
notify the other party will not result in the waiver of indemnity rights with
respect to such claim, suit, action or proceeding, unless such failure shall
prejudice the rights of the other party. The parties shall cooperate with each
other in the defense and settlement of any such claim, suit, action or
proceeding.
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The indemnities and assumptions of liabilities and obligations herein
provided for shall continue in full force and effect notwithstanding the
termination of this Agreement whether by expiration of time, by operation of law
or otherwise.
During the term of this Agreement, Supplier will at its sole cost and
expense, maintain general public liability, products liability and property
damage insurance with limits of not less than $1,000,000.00 per incident; and
$3,000,000.00 per annum aggregate. All policies insuring against liability for
bodily injury or death or damage to property shall include coverage for
malpractice if such exposure exists and shall insure Supplier against the
matters covered by Supplier's contractual duty to indemnify CHS set out
hereinabove.
Supplier will name CHS as an additional insured on all such general
liability, products liability and property damage insurance policies and provide
CHS with certificates evidencing the insurance required hereunder, and all such
policies shall provide that notice of cancellation or termination thereof shall
be provided in advance to CHS. In the event of cancellation or termination of
the coverage described herein, Supplier shall immediately obtain substitute or
replacement coverage.
8. TERM. This Agreement shall be for a term of FOUR years from the date of
execution ("Initial Term"), unless otherwise terminated in accordance with this
section. This Agreement shall thereafter be automatically renewed for additional
12 month periods ("Renewal Term"), unless otherwise terminated in accordance
with the provisions herein. This Agreement shall terminate (i) at the election
of either party upon CHS or the other party ceasing to exist, the insolvency or
bankruptcy of the other party, the making by the other party of an assignment
for the benefit of creditors, the consent by the other party to the appointment
of a trustee or receiver, or the appointment without its consent of a trustee or
receiver for the other party or for a
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<PAGE>
substantial part of its property or the institution by or against the other
party of bankruptcy, reorganization, arrangement or insolvency proceedings, (ii)
upon the mutual agreement of the parties, or (iii) upon notice by any party
hereto given twelve months prior to the effective date of termination provided
that such notice may not be given during the Initial Term. In addition, if
either party hereto shall breach the terms of this Agreement, the nonbreaching
party may give written notice of the breach to the breaching party, and if said
breach is not cured within 14 business days following the giving of said notice,
this Agreement shall at the option of the nonbreaching party be terminated.
Upon termination of this Agreement, Supplier shall provide CHS with
such records as are reasonably required by CHS to undertake collection and
billing activities which prior to termination were being handled by Supplier.
After termination, Supplier shall have no further obligation to perform any
services for CHS, including but not limited to billing or collection activities.
Notwithstanding the foregoing, at the request of CHS, Supplier shall continue to
provide collection services for a reasonable period of time to enable CHS to
transition to a new collection services provider, and Supplier shall be paid for
these continued services in accordance with Exhibit A.
9. FORCE MAJEURE. The obligations of Supplier hereunder shall be
excused during any period of delay caused by matters such as strikes, acts of
God, shortages of raw materials or power, governmental action or compliance with
governmental requirements, whether voluntary or pursuant to order, or any other
matter which is beyond the reasonable efforts of Supplier to control.
10. INDEPENDENT CONTRACTOR. It is agreed that Supplier shall be an
independent contractor, and not an employee or agent, of CHS. Supplier shall
have sole control and discretion in the manner of performing its obligations
under this Agreement and CHS shall not
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<PAGE>
be responsible for the acts of Supplier while Supplier is performing services
under this Agreement. Supplier is solely responsible for its employees'
salaries, federal and state income withholding, social security tax withholding,
workmen's compensation benefits and fringe benefits.
11. SEVERABILITY. If any one or more of the provisions of this
Agreement shall for any reason be held illegal or invalid, such illegality or
invalidity shall not affect any other provision of this Agreement and this
Agreement shall be enforced as if such illegal or invalid provision had not been
contained herein.
12. CONFIDENTIALITY. Each party has developed or may during the term
hereof develop certain formulae, products, methods of doing business, customer
lists and other proprietary information which that party deems to be
confidential and a trade secret. In the course of fulfilling their respective
obligations hereunder, some of these formulae, products, methods and other
proprietary information will become known to the other party hereto. It is
contemplated that each employee or agent of the parties who will be exposed to
such confidential information will be required to execute a confidentiality
agreement with each party hereto. Each party also agrees that it will not
duplicate, make use of, or disclose, in any manner whatsoever, any information
which is deemed to be confidential by the other party, either during or after
the term of this Agreement, without the express prior written consent of the
other party hereto.
In the event that any information deemed to be confidential by a party
is provided to the other party or its employees or agents in writing, the party
providing same shall mark the writing as "confidential." In the event that such
information is provided in non-written form such as orally, by audiotape,
videotape or computer software or disc, the party claiming such information to
be confidential shall furnish to the other party a written list containing a
brief description of such item and designating such item as confidential. Upon
termination of this Agreement, all copies of any information hereunder deemed,
or designated by a party as, confidential shall be
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<PAGE>
returned to the party who supplied the information, or who designated same as
confidential. Notwithstanding the preceding provision, the following types of
information provided by a party shall always be deemed confidential, whether or
not so designated: patient records; prescription files; costs of goods and
supplies; and financial records of the party.
It is recognized and acknowledged that damages caused by a party's
breach of this Section would be difficult to ascertain and would not adequately
compensate the other party for its losses. Therefore, both parties agree that
the party claiming a breach of this Section shall be entitled to injunctive
relief to restrain the commission or continued commission of said breach by
seeking such relief from a court of competent jurisdiction.
Notwithstanding the preceding paragraphs, this restriction shall not
apply (i) to any information which is not deemed confidential hereunder, or
which has not been designated as confidential in the manner specified herein,
(ii) to any information which was known to a party prior to its disclosure by
the other party, (iii) to any information which is or becomes public knowledge
through no failure of a party bound by this Agreement, (iv) to any information
which is independently developed by a party hereto, (v) to any information
reasonably required by healthcare providers involved in a particular patient's
care, (vi) to the extent that such restrictions conflict with the terms of
Partnership Agreement evidencing CHS, or (vii) to information provided to
voluntary accreditation agencies government agencies or third party payors as
required by law or consented to by the affected party.
This provision shall not negate or in any way affect any other similar
agreement by which any of the parties are bound.
13. PATIENT REFERRALS. No part of this Agreement shall be construed to
induce or encourage the referral of patients. The parties acknowledge that there
is no requirement under
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this Agreement or any other agreement between Supplier and CHS that either party
refer any patients to the other or any affiliate. Patients that receive products
from CHS purchased pursuant to this Agreement are patients of CHS and not
Supplier. No payment made under this Agreement shall be in return for the
referral of patients. CHS is free to refer patients to or purchase healthcare
goods and services from any source it chooses.
14. SERVICE TO OTHER BUSINESSES. CHS acknowledges that Supplier offers
its services to other businesses and CHS agrees that no provision contained
herein shall restrict or prohibit Supplier from providing services to others in
addition to CHS as long as the performance of said services does not interfere
with the performance of Supplier's obligations hereunder.
15. CHANGE IN LAW. No party shall make or receive any payment under
this Agreement if any judicial decision, legislative action, or regulatory or
other administrative interpretation, whether federal or state, would render
illegal the conduct of either party under this Agreement. If performance by
either party of any term of this Agreement should be deemed illegal for any such
reason, the affected party shall have the right to require that the other party
renegotiate the terms of this Agreement, such renegotiated terms to become
effective not later than fifteen (15) days after receipt of written notice of
such request for renegotiations. If the parties fail to reach an agreement
satisfactory to both parties within fifteen (15) days after the receipt of the
request for renegotiations, either party may terminate this Agreement upon
fifteen (15) days' prior written notice to the other party, or sooner if
required by law. Neither party will make payments under this Agreement which
would be prohibited by law.
16. LEGAL COMPLIANCE. It is the intent of the parties to establish a
business relationship which complies with the requirement of the "safe harbor"
regulations regarding price discounts set forth in 42 CFR Section 1001.952(h)
and which also complies with the requirements of the Medicare and
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Medicaid anti-kickback statute (set for the at 42 U.S.C. 1320 a-7b (b)) and the
parties believe that this Agreement satisfies those requirements.
17. RECORDS. To the extent required by Section 1861(b)(1)(I) of the
Social Security Act, Supplier shall, upon proper request, allow the United
States Department of Health and Human Services, the Comptroller General of the
United States and their duly authorized representatives, access to this
Agreement and to all books, documents and records necessary to verify the nature
and extent of the costs of the services provided by Supplier under this
Agreement at any time during the term of this Agreement and for an additional
period of four (4) years following the last date services are furnished under
this Agreement.
18. NONASSIGNABILITY. The rights, duties and responsibilities of the
parties hereto are personal in nature and, except as stated herein, shall not be
assigned without the express written consent of the other party.
19. APPLICABLE LAW. This Agreement shall be construed in accordance
with the laws of the State of Tennessee and the laws of the State of Tennessee
shall govern the rights, duties, liabilities and responsibilities created
hereunder.
20. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but which together shall constitute one
instrument. Facsimile signatures shall have the same effect as originals.
21. EFFECT. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, their successors, administrators, trustees and
assigns.
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22. MODIFICATION. This Agreement may be changed or modified only with
the written consent of both parties.
23. NOTICES. All notices, demands, requests, consents, reports,
approvals, or other communications which may be or are required to be given,
served, or sent pursuant to this Agreement shall be in writing and shall be
mailed by first class, registered or certified mail, return receipt requested,
postage prepaid, or transmitted by telegram, addressed as set out below. Each
party may designate by notice in writing a new address to which any notice,
demand, request, consent, report, approval or communication may thereafter be so
given, served or sent. Each notice, demand, request, consent, report, approval
or communication which shall be mailed in the manner described above, or which
shall be delivered to a telegraph company, shall be deemed sufficiently given,
served, sent or received for all purposes at such time as it is delivered to the
addressee (with the return receipt or the delivery receipt being deemed
conclusive evidence of such delivery) or at such time as delivery is refused by
the addressee upon presentation.
24. WAIVERS. A waiver of the breach of any provision of this Agreement
shall not be deemed a waiver of any other breach of the same or any other
provision hereof.
25. FAIRNESS. The parties hereto recognize that the Supplier is a
Partner of CHS. Each party acknowledges that the terms of this Agreement are
fair and reasonable to both parties and that it is in the best interest of each
party to enter into this Agreement. Each party further acknowledges that the
terms of this Agreement were negotiated, and that CHS's decision to enter into
this Agreement, was made solely by the other partner of CHS.
26. HEADINGS. All headings used herein are for ease of reference only
and shall in no way be construed as interpreting, decreasing or enlarging the
provisions of this Agreement.
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IN WITNESS WHEREOF, the undersigned parties hereto have caused this
Agreement to be executed as of the day and year first above written.
CHILDRENS HOME SERVICES, a general partnership
By: Childrens Home Care, a general partner
By: /s/ Ted McNulty
--------------------------------------
Title: President
-----------------------------------
Address: 65 N Raymond Ave, Suite 305
Pasadena, CA. 91103
---------------------------------
NOVA FACTOR, INC.
By: /s/ David D. Stevens
--------------------------------------
Title: Chairman
-----------------------------------
Address: 1620 Century Center Parkway #109
Memphis, TN 38134
---------------------------------
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Exhibit A
CHILDRENS HOME SERVICES
<TABLE>
<CAPTION>
FUNCTION NFI
- -------- ---
<S> <C>
Sales/Mgmt $ *
Patient Services
Pharmacy Services *
Reimbursement Services *
Accounting Functions *
TOTAL MANAGEMENT FEE PER MONTH $ *
</TABLE>
NOTES:
1. All marketing expenses will be billed to the partnership directly (i.e.
marketing materials, flyers, brochures, invitations, promotional items,
translation, stationary, etc. and to include production costs.)
2. All deliveries made by CHC will be reimbursed at a rate of $ per
delivery. It is anticipated that all patients that have been on service
more than months will receive delivery of their drug via FedEx.
3. Nurse training, if necessary, will be billed to the partnership at a rate
of $ .
4. All management fees will be reviewed after each of the first two six month
periods and adjusted prospectively, if necessary. This review will take
place annually thereafter. If there is a significant change in either
partner's responsibilities during these periods, the management fees will
be reviewed and adjusted accordingly.
5. Sub lease rental cost will be billed separately through a formal sub lease
agreement.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
<PAGE>
Exhibit 10.63
HEMOPHILIA THERAPY BUSINESS
MANAGEMENT, SERVICE AND SALES AGREEMENT
This Business Management, Service and Sales Agreement (hereinafter
referred to as the "Agreement") is made and entered into this 10th day of
November, 1998, by and between Horizon Health Systems, Inc., a Tennessee
corporation (hereinafter referred to as "Supplier") and Childrens Hemophilia
Services, a California general partnership (hereinafter referred to as "CHS");
W I T N E S S E T H:
WHEREAS, CHS has been formed for the purpose, among others, of engaging
in the business of providing certain clotting factors, therapies and services,
commonly referred to as hemophilia therapy, to hemophilia patients, and retail
pharmacies as set out in the Partnership Agreement of CHS (the "Hemophilia
Therapy Business"); and
WHEREAS, CHS desires to obtain from Supplier, and Supplier is willing
to provide to CHS, a supply of blood clotting factors ("Factors") and certain
services necessary or desirable in the conduct of CHS's Hemophilia Therapy
Business, all upon the terms and subject to the conditions hereinafter set
forth; and
WHEREAS, CHS has also contracted with Childrens Home Care, a partner in
the CHS ("CHC") to obtain certain services from CHC;
NOW, THEREFORE, for and in consideration of the mutual promises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
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1. Goods and SERVICES TO BE PROVIDED BY SUPPLIER. During the term of
this Agreement, Supplier agrees to provide, or arrange for the provision of, the
following goods and services to CHS:
A. CASE MANAGEMENT AND COUNSELING SERVICES. Supplier agrees to provide,
or arrange for the provision of, pharmacy counseling required by patients of
CHS's Hemophilia Therapy Business, including prescription consultation,
interpretation of laboratory results, and the provision of routine and emergency
consultation to such patients. Supplier shall also perform an initial patient
assessment to determine the patient's base line health status, dietary standards
and the other JCAHO requirements for the initial assessment. Supplier shall
prepare and provide (i) the patient's care plan and drug profile; (ii)
coordination with CHC of medication shipments to patients homes, including
advice as to when patient will receive drug, co-pay amounts and other patient
coverage information, (iii) 24-hour emergency hot line service and access to
on-call clinical staff, (iv) provision of professional educational materials on
the patient's disease and related topics, and (v) compliance with OBRA '90
Regulations.
B. BILLING, REIMBURSEMENT, COLLECTION AND FINANCIAL COUNSELING
SERVICES.
(a) SERVICES. Supplier shall provide such billing,
reimbursement, collection and financial counseling services as are
required by CHS in conducting its Hemophilia Therapy Business,
including the preparation, transmitting and monitoring of all bills to
patients of CHS's Hemophilia Therapy Business, or third party payors;
preparing requests or otherwise assisting patients of CHS's Hemophilia
Therapy Business in seeking reimbursement from all third party payors
for the services provided to such patients by CHS; collection of
amounts due CHS from patients or third parties; and counseling patients
regarding the options available to them in paying for the Hemophilia
Therapy
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<PAGE>
Goods, and related services, provided to them by CHS. CHS shall
establish patient charges for such Hemophilia Therapy Goods and related
services.
(b) CLEARANCE OF PATIENTS. Except as otherwise provided herein
with respect to emergency situations, CHS agrees that it will not
commit to provide Hemophilia Therapy Goods, or related services, to any
patient until such patient is approved by Supplier as eligible for
third party reimbursement. CHS shall promptly notify Supplier as to any
potential patient and CHS shall obtain such patient data as shall be
specified by Supplier. Supplier agrees to promptly contact the third
party payor, investigate a potential patient's insurance coverage and
financial ability to pay, obtain prior authorization, and notify CHS if
the potential patient is approved to purchase Hemophilia Therapy Goods,
or related services, from CHS. CHS shall thereafter obtain all
documentation necessary to file claims with third party payors and
forward same to Supplier. In the case of any potential patient who is
not approved, Supplier shall advise CHS of the reasons for such
disapproval. Supplier shall have no liability for relying upon
information provided by third party payors concerning coverage in the
event that such information shall subsequently prove to be incorrect.
(c) COLLECTION AND DISBURSEMENT. Supplier shall monitor and
coordinate collection of all monies due to CHS from patients and/or
third party payors for Hemophilia Therapy Goods and related services.
Supplier shall deposit all CHS funds received by it into the bank
account designated by CHS.Supplier shall have authority to disburse
funds from this account as necessary to carry out the accounts payable
functions specified herein. Collections of all accounts are performed
by Supplier on behalf of CHS and Supplier shall not be responsible for
any failure to collect such accounts. Supplier shall use reasonable
efforts to collect said accounts (but not greater than those efforts
used in the collection of its own accounts) but Supplier shall not be
required to institute suit for collection or incur
3
<PAGE>
any extraordinary expenses in attempting to collect these receivables
unless such action is approved by the Management Committee and the
costs are paid by CHS.
(d) ACCOUNTS PAYABLE. Supplier shall provide accounts payable
services to CHS, to consist of the writing of checks necessary to pay
the debts and obligations of CHS. Supplier shall only use funds in the
operating account for this purpose and Supplier shall have no
responsibility or liability for paying the debts of CHS from any source
other than the funds in the operating account. Those persons having
authority to sign checks on the operating account shall be
designated by the Management Committee. All checks to Supplier shall
require two signatures by persons designated by the Management
Committee.
C. ACCOUNTING AND FINANCIAL REPORTING. Supplier shall provide the
following accounting and financial reporting services required by CHS in the
conduct of its Hemophilia Therapy Business: (a) monthly, quarterly and annual
financial statements consisting of income statements, balance sheets, and a
detailed General Ledger, (b) all sales and tax returns and reports, (c)
schedules of accounts receivable, accounts payable and cash applications, (after
applying cash received to appropriate invoices, applying credits to patient
accounts and applying write-offs and adjustments approved by CHS) and (d)
reconciliation of the bank account statements of CHS. Supplier shall not make
provision for any annual audit of CHS, and such audit if desired by CHS shall be
the responsibility of CHS and shall be conducted by such independent accounting
firm as CHS may select. Supplier agrees to cooperate with the accounting firm in
the conduct of the audit of CHS or any other accounting procedure for which the
accounting firm may be engaged by CHS. CHS shall make available to Supplier such
information and documentation as may be needed to enable Supplier to prepare the
tax returns and financial reports specified herein.
4
<PAGE>
D. MANAGEMENT SERVICES AND MARKETING.
(a) RESPONSIBILITIES. CHS hereby appoints Supplier to manage
and supervise CHS's day-to-day operations of its Tennessee pharmacy,
and for this purpose, CHS delegates to Supplier the authority to make,
subject to the terms hereof, such management decisions as are necessary
for the day-to-day operations of CHS's pharmacy. Supplier accepts this
engagement and agrees to faithfully perform the duties and
responsibilities set out herein. As part of its management
responsibilities, and in accordance with the provisions of this
Agreement, Supplier shall, subject to the direction, input and general
guidance of the Management Committee, specifically carry out all duties
related to the pharmacy and shall provide such procedure manuals as
necessary.
(b) SALES AND MARKETING. Supplier shall, at CHS's cost, also
provide such marketing materials (including invitations, brochures,
stationary, flyers and promotional material and items) as Supplier and
CHS may from time to time mutually agree to be helpful in the operation
of CHS's Hemophilia Therapy Business. Supplier shall also, at CHS's
cost, provide sales support in the form of clinic account maintenance,
community activities and managed care marketing efforts as Supplier an
CHS may from time to time mutually agree to be helpful to CHS.
(c) DATA REPORTING. Supplier shall compile data supplied by
CHC and prepare reports needed by CHS to be made to the clinic.
(d) PERSONNEL. Supplier shall designate certain Supplier
personnel to perform the management functions set out hereunder and
such Supplier personnel shall conduct and supervise the operation of
CHS's Tennessee pharmacy. All such employees shall remain employees of
Supplier and Supplier shall retain control and supervision of such
employees.
5
<PAGE>
E. PHARMACY SERVICES. Supplier shall assist CHS in the establishment,
build out and operation of a pharmacy located at Supplier's Tennessee facility.
Supplier shall staff the pharmacy location in accordance with the requirements
of Tennessee pharmacy law and Supplier shall cause the pharmacy to be in
compliance with all applicable pharmacy laws and regulations applicable
thereto. Supplier will secure the prescription, dispense the Factor, and
provide follow up documentation as required. Supplier shall maintain such
pharmacy records as required by state and local governmental entities. Such
records shall be the property of CHS; however, copies will be made available to
Supplier, CHC and retail pharmacies purchasing from CHS to the extent allowed
by law. Supplier shall obtain and maintain for CHS, all of the necessary
licenses required by local, state or federal authorities, including, but not
limited to pharmacy licenses.
F. SALE OF FACTOR.
(a) FACTOR. During the term of this Agreement, CHS shall
purchase from Supplier and Supplier shall sell and provide to CHS, or
arrange for the provision of, such units of Factor, which are required
by CHS to meet the needs of its Hemophilia Therapy Business. Said
Factor will be sold and provided to CHS when and as requested by CHS
for resale by CHS. - Supplier shall only be obligated to provide Factor
to, or on behalf of, CHS pursuant to a physician's prescription.
Supplier shall provide such Factor subject to product availability. If
Factor is not available, Supplier shall promptly notify CHS. In the
event of Factor unavailability, Supplier shall provide CHS Factor on a
"most favored nations" basis and CHS shall be free to purchase any
shortfall of Factor elsewhere. "Most favored Nations" basis shall mean
that Supplier shall provide Drugs to CHS on the same basis that it
provides Drugs to any other entity with which it has a management
contract, but shall not require Supplier to treat CHS the same as
Supplier's direct patients.
6
<PAGE>
(b) HANDLING AND LABELING. Supplier agrees that all Factor
provided by Supplier hereunder shall be labeled in accordance with
applicable federal, state and local law and that said Factor shall be
stored, shipped and handled by Supplier in accordance with recognized
professional standards for handling and storage of such products and in
accordance with Supplier policies and procedures to the extent that
same do not contradict the requirements of federal, state and local
law. As part o preparing Factor for shipment from Supplier's facility,
Supplier shall pack the goods in cartons or other suitable packaging
with such ice, cooling packs, insulation, or other packing materials as
necessary.
(c) DELIVERY. All Factor provided by Supplier pursuant to this
Agreement, other than Consigned Factor described in paragraph 1(d)
hereinbelow, shall be delivered to CHS's patients, or the dispensing
pharmacy designated by CHS, on behalf of CHS from Supplier's facility,
by Federal Express or other acceptable courier, with the cost of said
delivery to be paid by CHS. Title to said Factor shall pass to CHS upon
delivery of Factor to CHS's patient, or the designated dispensing
pharmacy, and risk of loss in transit shall as between Supplier and CHS
remain in Supplier. A copy of the shipping confirmation shall be
forwarded to CHC.
(d) CONSIGNED FACTOR. The parties recognize that Supplier will
place certain Factor with CHC for use in meeting the needs of certain
CHS patients ("Consigned Factor") who require Factor on an emergency
basis. The details of such arrangement are set out in the Hemophilia
Factor Services Agreement entered into between CHS, Supplier and CHC.
All sales of Consigned Factor by Supplier to CHS are made pursuant to
this Management, Service and Sales Agreement and all terms and
provisions of this Agreement apply to all sales of Consigned Factor.
7
<PAGE>
(e) DISCLAIMER OF WARRANTY. Supplier makes no warranty as to
any Factor sold hereunder to CHS, and ALL WARRANTIES, EXPRESSED OR
IMPLIED, INCLUDING BUT NOT BEING LIMITED TO WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY
EXPRESSLY DISCLAIMED BY SUPPLIER. CHS shall, where allowable, be given
and shall obtain all rights under, and directly against, the warranty
of any manufacturer of Factor which is acquired by Supplier and resold
to CHS.
2. COMPENSATION. In exchange for the services provided by Supplier
under Sections 1A through 1E of this Agreement, CHS agrees to pay Supplier in
accordance with the prices set out on Exhibit A attached hereto which exhibit
may be amended from time to time by mutual agreement of the parties. Supplier
shall at the end of each calendar month during the term of this Agreement submit
invoices to CHS setting out the amounts due Supplier for said month. The
invoices for Supplier's services shall be due and payable thirty (30) days from
the receipt of same by CHS.
In addition to the fee for services set out in the previous paragraph,
CHS agrees to pay to Supplier for the Factor purchased by it from Supplier, an
amount per each unit of Factor sold to CHS equal to Supplier's cost of
acquisition of said unit of Factor. Supplier's cost of acquisition shall mean
the price paid by Supplier to its supplier for the Factor, plus taxes and
freight, and less volume incentive discounts and free goods. CHS may review
Supplier's books and records at such times as shall be mutually convenient with
Supplier and CHS in order to verify Supplier's cost of acquisition of Factor.
Supplier shall submit invoices to CHS on a monthly basis identifying each
shipment of Factor supplied to CHS during that month and such invoices shall be
due and payable to Supplier thirty (30) days from date submitted to CHS. Factor
placed on consignment by Supplier at CHC pursuant to the Hemophilia Factor
Services Agreement entered into among
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<PAGE>
Supplier, CHS and CHC, shall be treated as having been purchased by CHS on the
date the Factor is dispensed to the patient.
The parties agree that the fees set forth in this Section 2 reflect
fair market value for the products and services provided by Supplier.
3. CHS COSTS. It is agreed and understood that during the term of this
Agreement, Supplier shall be responsible for the costs incurred in providing the
services which it is obligated to provide. Notwithstanding the preceding
provision, CHS shall be responsible for the costs of salaries and fringe
benefits for CHS's employees, if any; cost of goods; outside auditor fees; state
taxes; principal and interest on CHS loans; compensation to CHC for acting as
pharmacy agent; depreciation; and payroll taxes for its employees, if any, and
the cost of preparing CHS's Federal and State Income tax returns. All such
expenses shall be contracted for and in the name of CHS, based solely upon CHS's
credit, and Supplier shall not be liable to third party providers for the costs
of such goods and services. Supplier shall file for and on behalf of CHS all
sales and use tax returns necessary in the operation of CHS's Hemophilia Therapy
Business, however CHS shall remit the amount of said taxes, if any, out of its
own funds and Supplier shall not be responsible for paying these taxes.
4. SALES TAX. With respect to the sale of products supplied by Supplier
to CHS or its patients under this Agreement, CHS shall provide Supplier an
appropriate state resale certificate, or CHS shall be responsible for remitting
to Supplier any state sales or use taxes that may be due relating to such sales.
5. DISCOUNT. Supplier and CHS acknowledge that CHS is obligated to
disclose any discount from Supplier's usual and customary charges reflected in
the prices for the products listed on Schedule A and any price reduction made on
account of the warranties set forth in this
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<PAGE>
Agreement under all applicable state and federal programs that provide cost or
charged-based reimbursement to CHS for the goods and services provided and that
this Section and the disclosure contained on any invoice delivered to CHS are
intended to constitute notice from Supplier to CHS of such obligation.
6. SUBCONTRACTING. The parties to this Agreement recognize that
Supplier may provide to CHS certain of the goods and services which it is
obligated to provide under this Agreement by means of subcontracts with third
parties. Supplier shall notify CHS of all subcontracting arrangements, and shall
obtain CHS's approval, which approval shall not be unreasonably withheld or
delayed.
7. INDEMNITY AND INSURANCE. Supplier and CHS hereby agree that:
(i) Supplier shall assume responsibility for and shall indemnify and
hold CHS (and its Partners) harmless, and defend CHS (and its Partners), from
all losses (including claims for injuries to employees of Supplier or of CHS),
expenses, attorneys' fees, damages, claims and judgments resulting from the
negligent acts or omissions or wrongful acts of Supplier, its agents or
employees;
(ii) CHS shall assume responsibility for and shall indemnify and hold
Supplier harmless, and defend Supplier, from all losses (including claims for
injuries to employees of Supplier or of CHS), expenses, attorneys' fees,
damages, claims and judgments resulting from the negligent acts or omissions or
wrongful acts of CHS, its agents or employees.
The party seeking indemnification pursuant to this Section shall notify
the other party in writing by registered mail of the assertion of any claim, or
the commencement of any suit, action or proceeding by any party in respect of
which indemnity may be sought under this Agreement
10
<PAGE>
within thirty (30) days of the party's actual knowledge of such assertion or
commencement. Failure to notify the other party will not result in the waiver of
indemnity rights with respect to such claim, suit, action or proceeding unless
such failure shall prejudice the rights of the other party. The parties shall
cooperate with each other in the defense and settlement of any such claim, suit,
action or proceeding.
The indemnities and assumptions of liabilities and obligations herein
provided for shall continue in full force and effect notwithstanding the
termination of this Agreement whether by expiration of time, by operation of law
or otherwise.
During the term of this Agreement, Supplier will at its sole cost and
expense, maintain general public liability, products liability and property
damage insurance with limits of not less than $1,000,000.00 per incident; and
$3,000,000.00 per annum aggregate. All policies insuring against liability for
bodily injury or death or damage to property shall include coverage for
malpractice if such exposure exists and shall insure Supplier against the
matters covered by Supplier's contractual duty to indemnify CHS set out
hereinabove.
Supplier will name CHS as an additional insured on all such general
public liability, products liability, and property damage insurance policies and
provide CHS with certificates evidencing the insurance required hereunder, and
all such policies shall provide that notice of cancellation or termination
thereof shall be provided in advance to CHS. In the event of cancellation or
termination of the coverage described herein, Supplier shall immediately obtain
substitute or replacement coverage.
8. TERM. This Agreement shall be for a term of FOUR years from the date
of execution ("Initial Term"), unless otherwise terminated in accordance with
this section. This Agreement shall thereafter be automatically renewed for
additional 12 month periods ("Renewal Term")
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<PAGE>
unless otherwise terminated in accordance with the provisions herein. This
Agreement shall terminate (i) at the election of either party upon CHS or the
other party ceasing to exist, the insolvency or bankruptcy of the other party,
the making by the other party of an assignment for the benefit of creditors, the
consent by the other party to the appointment of a trustee or receiver, or the
appointment without its consent of a trustee or receiver for the other party or
for a substantial part of its property or the institution by or against the
other party of bankruptcy, reorganization, arrangement or insolvency
proceedings, (ii) upon the mutual agreement of the parties, or (iii) upon notice
by any party hereto given twelve months prio to the effective date of
termination provided that such notice may not be given during the Initial Term.
In addition, if either party hereto shall breach the terms of this Agreement,
the nonbreaching party may give written notice of the breach to the breaching
party, and if said breach is not cured within 14 business days following the
giving of said notice, this Agreement shall at the option of the nonbreaching
party be terminated.
Upon termination of this Agreement, Supplier shall provide CHS with
such records as are reasonably required by CHS to undertake collection and
billing activities which prior to termination were being handled by Supplier.
After termination, Supplier shall have no further obligation to perform any
services for CHS, including but not limited to billing or collection activities.
Notwithstanding the foregoing, at the request of CHS, Supplier shall continue to
provide collection services for a reasonable period of time to enable CHS to
transition to a new collection service provider and Supplier shall be paid for
these continued services in accordance with Exhibit A.
9. FORCE MAJEURE. The obligations of Supplier hereunder shall be
excused during any period of delay caused by matters such as strikes, acts of
God, shortages of raw materials or power, governmental action or compliance with
governmental requirements, whether voluntary or
12
<PAGE>
pursuant to order, or any other matter which is beyond the reasonable efforts of
Supplier to control.
10. INDEPENDENT CONTRACTOR. It is agreed that Supplier shall be an
independent contractor, and not an employee or agent, of CHS. Supplier shall
have sole control and discretion in the manner of performing its obligations
under this Agreement and CHS shall not be responsible for the acts of Supplier
while Supplier is performing services under this Agreement. Supplier is solely
responsible for its employees' salaries, federal and state income withholding,
social security tax withholding, workmen's compensation benefits and fringe
benefits.
11. SEVERABILITY. If any one or more of the provisions of this
Agreement shall for any reason be held illegal or invalid, such illegality or
invalidity shall not affect any other provision of this Agreement and this
Agreement shall be enforced as if such illegal or invalid provision had not been
contained herein.
12. CONFIDENTIALITY. Each party has developed or may during the term
hereof develop certain formulae, products, methods of doing business, customer
lists and other proprietary information which that party deems to be
confidential and a trade secret. In the course of fulfilling their respective
obligations hereunder, some of these formulae, products, methods and other
proprietary information will become known to the other party hereto. It is
contemplated that each employee or agent of the parties who will be exposed to
such confidential information will be required to execute a confidentiality
agreement with each party hereto. Each party also agrees that it will not
duplicate, make use of, or disclose, in any manner whatsoever, any information
which is deemed to be confidential by the other party, either during or after
the term of this Agreement, without the express prior written consent of the
other party hereto.
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In the event that any information deemed to be confidential by a party
is provided to the other party or its employees or agents in writing, the party
providing same shall mark the writing as "confidential." In the event that such
information is provided in non-written form such as orally, by audiotape,
videotape or computer software or disc, the party claiming such information to
be confidential shall furnish to the other party a written list containing a
brief description of such item and designating such item as confidential. Upon
termination of this Agreement, all copies of any information hereunder deemed,
or designated by a party as, confidential shall be returned to the party who
supplied the information, or who designated same as confidential.
Notwithstanding the preceding provision, the following types of information
provided by a party shall always be deemed confidential, whether or not so
designated: patient records; prescription files; costs of goods and supplies;
and financia records of the party.
It is recognized and acknowledged that damages caused by a party's
breach of this Section would be difficult to ascertain and would not adequately
compensate the other party for its losses. Therefore, both parties agree that
the party claiming a breach of this Section shall be entitled to injunctive
relief to restrain the commission or continued commission of said breach by
seeking such relief from a court of competent jurisdiction.
Notwithstanding the preceding paragraphs, this restriction shall not
apply (i) to any information which is not deemed confidential hereunder, or
which has not been designated as confidential in the manner specified herein,
(ii) to any information which was known to a party prior to its disclosure by
the other party, (iii) to any information which is or becomes public knowledge
through no failure of a party bound by this Agreement, (iv) to any information
which is independently developed by a part hereto, (v) to any information
reasonably required by healthcare providers involved in a particular patient's
care, (vi) to the extent that such restrictions conflict with the terms of the
Partnership Agreement evidencing CHS, or (vii) to information
14
<PAGE>
provided to voluntary accreditation agencies government agencies or third party
payors as required by law or consented to by the affected party.
This provision shall not negate or in any way affect any other similar
agreement by which any of the parties are bound.
13. PATIENT REFERRALS. No part of this Agreement shall be construed to
induce or encourage the referral of patients. The parties acknowledge that there
is no requirement under this Agreement or any other agreement between Supplier
and CHS that either party refer any patients to the other or any affiliate.
Patients that receive products from CHS purchased pursuant to this Agreement are
patients of CHS and not Supplier. No payment made under this Agreement shall be
in return for the referral of patients. CHS is free to refer patients to or
purchase healthcare goods and services from any source it chooses.
14. SERVICE TO OTHER BUSINESSES. CHS acknowledges that Supplier offers
its services to other businesses and CHS agrees that no provision contained
herein shall restrict or prohibit Supplier from providing services to others in
addition to CHS as long as the performance of said services does not interfere
with the performance of Supplier's obligations hereunder.
15. CHANGE IN LAW. No party shall make or receive any payment under
this Agreement if any judicial decision, legislative action, or regulatory or
other administrative interpretation, whether federal or state, would render
illegal the conduct of either party under this Agreement. If performance by
either party of any term of this Agreement should be deemed illegal for any such
reason, the affected party shall have the right to require that the other party
renegotiate the terms of this Agreement, such renegotiated terms to become
effective not later than fifteen (15) days after receipt of written notice of
such request for renegotiations. If the parties fail to reach an agreement
satisfactory to both parties within fifteen (15) days after the
15
<PAGE>
receipt of the request for renegotiations, either party may terminate this
Agreement upon fifteen (15) days' prior written notice to the other party, or
sooner if required by law. Neither party will make payments under this Agreement
which would be prohibited by law.
16. LEGAL COMPLIANCE. It is the intent of the parties to establish a
business relationship which complies with the requirement of the "safe harbor"
regulations regarding price discounts set forth in 42 CFR Section.1001.952(h)
and which also complies with the requirements of the Medicare and Medicaid
anti-kickback statute (set for the at 42 U.S.C. 1320 a-7b (b)) and the parties
believe that this Agreement satisfies those requirements.
17. RECORDS. To the extent required by Section 1861(b)(1)(I) of the
Social Security Act, Supplier shall, upon proper request, allow the United
States Department of Health and Human Services, the Comptroller General of the
United States and their duly authorized representatives, access to this
Agreement and to all books, documents and records necessary to verify the nature
and extent of the costs of the services provided by Supplier under this
Agreement at any time during the term of this Agreement and for an additional
period of four (4) years following the last date services are furnished under
this Agreement.
18. NONASSIGNABILITY. The rights, duties and responsibilities of the
parties hereto are personal in nature and, except as stated herein, shall not be
assigned without the express written consent of the other party.
19. APPLICABLE LAW. This Agreement shall be construed in accordance
with the laws of the State of Tennessee and the laws of the State of Tennessee
shall govern the rights, duties, liabilities and responsibilities created
hereunder.
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<PAGE>
20. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but which together shall constitute one
instrument. Facsimile signatures shall have the same effect as originals.
21. EFFECT. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, their successors, administrators, trustees and
assigns.
22. MODIFICATION. This Agreement may be changed or modified only with
the written consent of both parties.
23. NOTICES. All notices, demands, requests, consents, reports,
approvals, or other communications which may be or are required to be given,
served, or sent pursuant to this Agreement shall be in writing and shall be
mailed by first class, registered or certified mail, return receipt requested,
postage prepaid, or transmitted by telegram, addressed as set out below. Each
party may designate by notice in writing a new address to which any notice,
demand, request, consent, report, approval or communication may thereafter be so
given, served or sent. Each notice, demand, request, consent, report, approval
or communication which shall be mailed in the manner described above, or which
shall be delivered to a telegraph company, shall be deemed sufficiently given,
served, sent or received for all purposes at such time as it is delivered to the
addressee (with the return receipt or the delivery receipt being deemed
conclusive evidence of such delivery) or at such time as delivery is refused by
the addressee upon presentation.
24. WAIVERS. A waiver of the breach of any provision of this Agreement
shall not be deemed a waiver of any other breach of the same or any other
provision hereof.
25. FAIRNESS. The parties hereto recognize that the Supplier is a
Partner of CHS. Each party acknowledges that the terms of this Agreement are
fair and reasonable to both parties
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and that it is in the best interest of each party to enter into this Agreement.
Each party further acknowledges that the terms of this Agreement were
negotiated, and that CHS's decision to enter into this Agreement, was made
solely by the other partner of l CHS.
26. HEADINGS. All headings used herein are for ease of reference only
and shall in no way be construed as interpreting, decreasing or enlarging the
provisions of this Agreement.
IN WITNESS WHEREOF, the undersigned parties hereto have caused this
Agreement to be executed as of the day and year first above written.
CHILDRENS HEMOPHILIA SERVICES, ,
a general partnership
By: Childrens Home Care, a
general partner
By: /s/ TJ McNulty
---------------------------------
Title: President
------------------------------
Address: 65 N. Raymond Ave, Suite 305
----------------------------
Pasadena, CA 91103
------------------------------------
HORIZON HEALTH SYSTEMS, INC.
By: /s/ David D. Stevens
---------------------------------
Title: Chairman
------------------------------
Address: 6020 Charlotte Pike #100
----------------------------
Nashville, TN 37209
------------------------------------
18
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Exhibit A
MANAGEMENT FEE SUMMARY
CHILDRENS HEMOPHILIA SERVICES
CHILDRENS HEMOPHILIA SERVICES
<TABLE>
<CAPTION>
FUNCTION HHS
- -------- ---
<S> <C>
Sales/Mgmt $*
Patient Services
Pharmacy Services *
Reimbursement Services *
Accounting Functions *
TOTAL MANAGEMENT FEE PER MONTH $*
</TABLE>
NOTES:
1. All marketing expenses will be billed to the partnership directly (i.e.
marketing materials, flyers, brtochures, invitations, promotional items,
translation, stationary, etc. and to include production costs.)
2. Nurse training, if necessary, will be billed to the partnership at a rate
of [*]/hour.
3. All management fees will be reviewed after each of the first two six
month periods and adjusted prospectively, if necessary. This review will
take place annually thereafter. If there is a significant change in either
partner's responsibilities during these periods, the management fees will
be reviewed and adjusted accordingly.
4. Sub lease rental cost will be billed separately through a formal sub lease
agreement.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
<PAGE>
Exhibit 10.64
PRODUCT SUPPLY AND SERVICE AGREEMENT
This Product Supply and Service Agreement (hereinafter referred to as the
"Agreement") is made and entered into this 10th day of November, 1998,
by and between Nova Factor, Inc., a Tennessee corporation (hereinafter referred
to as "Supplier") and Childrens Home Care, a California non-profit public
benefit corporation (hereinafter referred to as "CHC");
W I T N E S S E T H:
WHEREAS, CHC is engaged in the business of providing certain drugs,
therapies and services, to patients who are insured under MediCal, Medicaid, CCS
and GHPP (the "Drug Therapy Business"); and
WHEREAS, CHC desires to obtain from Supplier, and Supplier is willing to
provide to CHC, a supply of drug listed on Exhibit A ("Drug") and certain
services necessary or desirable in the conduct of CHC's Drug Therapy Business,
all upon the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, for and in consideration of the mutual promises contained
herein and for other good and valuable consideration, the receipt and adequacy
of which is hereby acknowledged, the parties hereto agree as follows:
1. GOODS AND SERVICES TO BE PROVIDED BY SUPPLIER. During the term of this
Agreement, Supplier agrees to provide, or arrange for the provision of, the
following goods and services to CHC:
A. BILLING, REIMBURSEMENT, COLLECTION AND FINANCIAL COUNSELING SERVICES.
<PAGE>
(a) SERVICES. Supplier shall provide such billing,
reimbursement and collection services as are required by CHC in
conducting its Drug Therapy Business, including the preparation,
transmitting and monitoring of all bills to patients of CHC's Drug
Therapy Business, or third party payors; preparing requests or
otherwise assisting patients of CHC's Drug Therapy Business in seeking
reimbursement from all third party payors for the services provided to
such patients by CHC; and collection of amounts due CHC from patients
or third parties. CHC shall establish patient charges for such Drug
Therapy Goods and related services. (These services will also be
provided for Hematrope patients).
(b) CLEARANCE OF PATIENTS. Except as otherwise provided
herein, CHC agrees that it will not commit to provide Drug Therapy
Goods, or related services, to any patient until such patient is
approved by Supplier as eligible for third party reimbursement. CHC
shall promptly notify Supplier as to any potential patient and CHC
shall obtain such patient data as shall be specified by Supplier.
Supplier agrees to promptly contact the third party payor, investigate
a potential patient's insurance coverage and financial ability to pay,
obtain prior authorization, and notify CHC if the potential patient is
approved to purchase Drug Therapy Goods, or related services, from CHC.
CHC shall thereafter obtain all documentation necessary to file claims
with third party payors and forward same to Supplier. In the case of
any potential patient who is not approved, Supplier shall notify CHC of
the reasons for such disapproval. Supplier shall have no liability for
relying upon information provided by third party payors concerning
coverage in the event that such information shall subsequently prove to
be incorrect.
(c) COLLECTION AND DISBURSEMENT. Supplier shall monitor and
coordinate collection of all monies due to CHC from patients and/or
third party payors for Drug Therapy Goods and related services.
Supplier shall deposit all CHS funds received by it into the bank
2
<PAGE>
account designated by CHS. Collections of all accounts are performed by
Supplier on behalf of CHC and Supplier shall not be responsible for any
failure to collect such accounts. Supplier shall use reasonable efforts
to collect said accounts (but not greater than those efforts used in
the collection of its own accounts) but Supplier shall not be required
to institute suit for collection or incur any extraordinary expenses in
attempting to collect these receivables unless such action is approved
by and the costs are paid by CHC.
B. ACCOUNTING AND FINANCIAL REPORTING. Supplier shall provide the
following accounting and financial reporting services required by CHC in the
conduct of its Drug Therapy Business: schedules of accounts receivable, and cash
applications, (after applying cash received to appropriate invoices, applying
credits to patient accounts and applying write-offs and adjustments approved by
CHC). CHC shall make available to Supplier such information and documentation as
may be needed to enable Supplier to prepare the tax returns and financial
reports specified herein.
C. SALE OF DRUG.
(a) DRUG. During the term of this Agreement, CHC shall purchase from
Supplier and Supplier shall sell and provide to CHC, or arrange for the
provision of, such units of Drug, which are required by CHC to meet the
needs of its Drug Therapy Business. Said Drug will be sold and provided
to CHC when and as requested by CHC for resale by CHC to its patients.
Supplier shall only be obligated to provide Drug to, or on behalf of,
CHC for resale to patients pursuant to a physician's prescription.
Supplier shall provide such Drug as is prescribed by the Physician,
(or if not specifically described in the prescription, as determined by
CHC), subject to product availability. If Drugs are not available,
Supplier shall promptly notify CHC. In the event of Drug
unavailability, Supplier shall provide Drugs to CHC on a "most favored
nations" basis and CHC shall be free to purchase any shortfall of Drugs
elsewhere. "Most favored Nations" basis shall mean that Supplier shall
provide Drugs to CHC on the same basis that it provides Drugs to any
other
3
<PAGE>
entity with which it has a management contract, but shall not require
Supplier to treat CHC the same as Supplier's direct patients.
(b) HANDLING AND LABELING. Supplier agrees that all Drug
provided by Supplier hereunder shall be labeled in accordance with
applicable federal, state and local law and that said Drug shall be
stored, shipped and handled by Supplier in accordance with recognized
professional standards for handling and storage of such products and in
accordance with Supplier policies and procedures to the extent that
same do not contradict the requirements of federal, state and local
law. As part of preparing drug for shipment from Supplier's facility,
Supplier shall pack the goods in cartons or other suitable packaging
with such ice, cooling packs, insulation, or other packing materials as
necessary.
(c) DELIVERY. All Drug provided by Supplier pursuant to this
Agreement, shall be delivered either to (i) CHC's patients on behalf of
CHC, or (ii) CHC for delivery to CHC's patients, or (iii) the
dispensing pharmacy designated by CHC, whichever shall be designated by
CHC. The cost of delivery of all Drugs which are delivered by Supplier
to CHC shall be paid by CHC. Title to said Drug shall pass to CHC upon
delivery of Drug to CHC. Any Drug shipped to a location other than
CHC's pharmacy shall be shipped at CHC's cost with risk of loss in
transit being in CHC. A copy of all shipping confirmations shall be
forwarded to CHC.
(d) DISCLAIMER OF WARRANTY. Supplier makes no warranty as to
any Drug sold hereunder to CHC, and ALL WARRANTIES, EXPRESSED OR
IMPLIED, INCLUDING BUT NOT BEING LIMITED TO WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY
EXPRESSLY DISCLAIMED BY SUPPLIER. CHC shall, where allowable, be
4
<PAGE>
given and shall obtain all rights under, and directly against, the
warranty of any manufacturer of Drug which is acquired by Supplier and
resold to CHC.
2. COMPENSATION. In exchange for the services provided by Supplier
under Sections 1A through 1C of this Agreement, CHC agrees to pay Supplier in
accordance with the prices set out on Exhibit A attached hereto which exhibit
may be amended from time to time to reflect changes in those prices which
Supplier pays for Product and labor. Said fee shall be determined on a monthly
basis by Supplier and Supplier shall at the end of each calendar month during
the term of this Agreement submit invoices to CHC setting out the amounts due
Supplier for said month. The invoices for Supplier's services shall be due and
payable thirty (30) days from the receipt of same by CHC.
The parties agree that the fees set forth in this Section 2 reflect
fair market value for the products and services provided by Supplier.
3. CHC COSTS. It is agreed and understood that during the term of this
Agreement, Supplier shall be responsible for the costs incurred in providing the
services which it is obligated to provide. Notwithstanding the preceding
provision, CHC shall be responsible for the costs of salaries and fringe
benefits for CHC's employees, if any; cost of goods; outside auditor fees; state
taxes; principal and interest on CHC loans; depreciation; and payroll taxes for
its employees, if any, and the cost of preparing CHC's Federal and State Income
tax returns. All such expenses shall be contracted for and in the name of CHC,
based solely upon CHC's credit, and Supplier shall not be liable to third party
providers for the costs of such goods and services. CHC shall file all sales and
use tax returns necessary in the operation of CHC's Drug Therapy Business, and
CHC shall remit the amount of said taxes, if any, out of its own funds and
Supplier shall not be responsible for paying these taxes.
5
<PAGE>
4. SALES TAX. With respect to the sale of products supplied by Supplier
to CHC or its patients under this Agreement, CHC shall provide Supplier an
appropriate state resale certificate, or CHC shall be responsible for remitting
to Supplier any state sales or use taxes that may be due relating to such sales.
5. DISCOUNT. Supplier and CHC acknowledge that CHC is obligated to
disclose any discount from Supplier's usual and customary charges reflected in
the prices for the products listed on Schedule A and any price reduction made on
account of the warranties set forth in this Agreement under all applicable state
and federal programs that provide cost or charged-based reimbursement to CHC for
the goods and services provided and that this Section and the disclosure
contained on any invoice delivered to CHC are intended to constitute notice from
Supplier to CHC of such obligation.
6. SUBCONTRACTING. The parties to this Agreement recognize that
Supplier may provide to CHC certain of the goods and services which it is
obligated to provide under this Agreement by means of subcontracts with third
parties. Supplier shall notify CHC of all subcontracting arrangements, and shall
obtain CHC's approval, which approval shall not be unreasonably withheld or
delayed.
7. INDEMNITY AND INSURANCE. Supplier and CHC hereby agree that:
(i) Supplier shall assume responsibility for and shall indemnify and
hold CHC harmless, and defend CHC, from all losses (including claims
for injuries to employees of Supplier or of CHC), expenses,
attorneys' fees, damages, claims and judgments resulting from the
negligent acts or omissions or wrongful acts of Supplier, its agents
or employees;
6
<PAGE>
(ii) CHC shall assume responsibility for and shall indemnify and
hold Supplier harmless, and defend Supplier, from all losses
(including claims for injuries to employees of Supplier or of CHC),
expenses, attorneys' fees, damages, claims and judgments resulting
from the negligent acts or omissions or wrongful acts of CHC, its
agents or employees.
The party seeking indemnification pursuant to this Section shall notify
the other party in writing by registered mail of the assertion of any claim, or
the commencement of any suit, action or proceeding by any party in respect of
which indemnity may be sought under this agreement within thirty (30) days of
the party's actual knowledge of such assertion or commencement. Failure to
notify the other party will not result in the waiver of indemnity rights with
respect to such claim, suit, action or proceeding, unless such failure shall
prejudice the rights of the other party. The parties shall cooperate with each
other in the defense and settlement of any such claim, suit, action or
proceeding.
The indemnities and assumptions of liabilities and obligations herein
provided for shall continue in full force and effect notwithstanding the
termination of this Agreement whether by expiration of time, by operation of law
or otherwise.
During the term of this Agreement, Supplier will at its sole cost and
expense, maintain general public liability, products liability and property
damage insurance with limits of not less than $1,000,000.00 per incident; and
$3,000,000.00 per annum aggregate. All policies insuring against liability for
bodily injury or death or damage to property shall include coverage for
malpractice if such exposure exists and shall insure Supplier against the
matters covered by Supplier's contractual duty to indemnify CHC set out
hereinabove.
7
<PAGE>
Supplier will provide CHC with certificates evidencing the insurance
required hereunder, and all such policies shall provide that notice of
cancellation or termination thereof shall be provided in advance to CHC. In the
event of cancellation or termination of the coverage described herein, Supplier
shall immediately obtain substitute or replacement coverage.
8. TERM. This Agreement shall be for a term of EIGHT years from the
date of execution ("Initial Term"), unless otherwise terminated in accordance
with this section. This Agreement shall thereafter be automatically renewed for
additional 12 month periods ("Renewal Term"), unless otherwise terminated in
accordance with the provisions herein. The parties hereto expressly agree that
they have intentionally negotiated a ten year term which cannot be terminated
except as set forth herein and the parties acknowledge that Supplier would be
severely damaged if CHC were to breach the terms of this Agreement. This
Agreement shall automatically terminate upon (i) CHC transferring its Drug
Therapy Business to Childrens Home Service, or (ii) the mutual agreement of the
parties. If CHC shall breach the terms of this Agreement, and if said breach is
not cured within 14 business days following the giving of notice by Supplier,
CHC agrees that it will pay to Supplier as liquidated damages the sum of
$190,000.00, or if (i) CHC shall be financially unable to pay that amount, or
(ii) a Court shall determine that the above provision providing for liquidated
damages is unenforceable, CHC shall transfer to Supplier for the sum of $10.00
all of CHC's interest in the partnership known as Childrens Home Services
("CHS"), free and clear of all liens and encumbrances, and CHC shall be subject
to all of the restrictions set out in the Restrictive Agreement of even date to
which it and Supplier are parties. If CHS does not exist at the time that CHC is
obligated to sell its interest to NFI, CHC will sell its retail pharmacy and all
of the assets, licenses and permits used therein, to Supplier for an amount
equal to the fair market value of said Pharmacy as established by an independent
third party appraiser selected by Supplier. Either purchase shall be on an all
cash basis and shall close within sixty days of Supplier's demand.
8
<PAGE>
9. FORCE MAJEURE. The obligations of Supplier hereunder shall be
excused during any period of delay caused by matters such as strikes, acts of
God, shortages of raw materials or power, governmental action or compliance with
governmental requirements, whether voluntary or pursuant to order, or any other
matter which is beyond the reasonable efforts of Supplier to control.
10. INDEPENDENT CONTRACTOR. It is agreed that Supplier shall be an
independent contractor, and not an employee or agent, of CHC. Supplier shall
have sole control and discretion in the manner of performing its obligations
under this Agreement and CHC shall not be responsible for the acts of Supplier
while Supplier is performing services under this Agreement. Supplier is solely
responsible for its employees' salaries, federal and state income withholding,
social security tax withholding, workmen's compensation benefits and fringe
benefits.
11. SEVERABILITY. If any one or more of the provisions of this
Agreement shall for any reason be held illegal or invalid, such illegality or
invalidity shall not affect any other provision of this Agreement and this
Agreement shall be enforced as if such illegal or invalid provision had not been
contained herein.
12. CONFIDENTIALITY. Each party has developed or may during the term
hereof develop certain formulae, products, methods of doing business, customer
lists and other proprietary information which that party deems to be
confidential and a trade secret. In the course of fulfilling their respective
obligations hereunder, some of these formulae, products, methods and other
proprietary information will become known to the other party hereto. It is
contemplated that each employee or agent of the parties who will be exposed to
such confidential information will be required to execute a confidentiality
agreement with each party hereto. Each party also agrees that it will not
duplicate, make use of, or disclose, in any manner whatsoever, any
9
<PAGE>
information which is deemed to be confidential by the other party, either during
or after the term of this Agreement, without the express prior written consent
of the other party hereto.
In the event that any information deemed to be confidential by a party
is provided to the other party or its employees or agents in writing, the party
providing same shall mark the writing as "confidential." In the event that such
information is provided in non-written form such as orally, by audiotape,
videotape or computer software or disc, the party claiming such information to
be confidential shall furnish to the other party a written list containing a
brief description of such item and designating such item as confidential. Upon
termination of this Agreement, all copies of any information hereunder deemed,
or designated by a party as, confidential shall be returned to the party who
supplied the information, or who designated same as confidential.
Notwithstanding the preceding provision, the following types of information
provided by a party shall always be deemed confidential, whether or not so
designated: patient records; prescription files; costs of goods and supplies;
and financial records of the party.
It is recognized and acknowledged that damages caused by a party's
breach of this Section would be difficult to ascertain and would not adequately
compensate the other party for its losses. Therefore, both parties agree that
the party claiming a breach of this Section shall be entitled to injunctive
relief to restrain the commission or continued commission of said breach by
seeking such relief from a court of competent jurisdiction.
Notwithstanding the preceding paragraphs, this restriction shall not
apply (i) to any information which is not deemed confidential hereunder, or
which has not been designated as confidential in the manner specified herein,
(ii) to any information which was known to a party prior to its disclosure by
the other party, (iii) to any information which is or becomes public knowledge
through no failure of a party bound by this Agreement, (iv) to any information
which is independently developed by a party hereto, (v) to any information
reasonably required by
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<PAGE>
healthcare providers involved in a particular patient's care, (vi) to the extent
that such restrictions conflict with the terms of Partnership Agreement
evidencing CHC, or (vii) to information provided to voluntary accreditation
agencies government agencies or third party payors as required by law or
consented to by the affected party.
This provision shall not negate or in any way affect any other similar
agreement by which any of the parties are bound.
13. PATIENT REFERRALS. No part of this Agreement shall be construed to
induce or encourage the referral of patients. The parties acknowledge that there
is no requirement under this Agreement or any other agreement between Supplier
and CHC that either party refer any patients to the other or any affiliate.
Patients that receive products from CHC purchased pursuant to this Agreement are
patients of CHC and not Supplier. No payment made under this Agreement shall be
in return for the referral of patients. CHC is free to refer patients to or
purchase healthcare goods and services from any source it chooses.
14. SERVICE TO OTHER BUSINESSES. CHC acknowledges that Supplier offers
its services to other businesses and CHC agrees that no provision contained
herein shall restrict or prohibit Supplier from providing services to others in
addition to CHC as long as the performance of said services does not interfere
with the performance of Supplier's obligations hereunder.
15. CHANGE IN LAW. No party shall make or receive any payment under
this Agreement if any judicial decision, legislative action, or regulatory or
other administrative interpretation, whether federal or state, would render
illegal the conduct of either party under this Agreement. If performance by
either party of any term of this Agreement should be deemed illegal for any such
reason, the affected party shall have the right to require that the other party
renegotiate the terms of this Agreement, such renegotiated terms to become
effective not later
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<PAGE>
than fifteen (15) days after receipt of written notice of such request for
renegotiations. If the parties fail to reach an agreement satisfactory to both
parties within fifteen (15) days after the receipt of the request for
renegotiations, either party may terminate this Agreement upon fifteen (15)
days' prior written notice to the other party, or sooner if required by law.
Neither party will make payments under this Agreement which would be prohibited
by law.
16. LEGAL COMPLIANCE. It is the intent of the parties to establish a
business relationship which complies with the requirement of the "safe harbor"
regulations regarding price discounts set forth in 42 CFR Section 1001.952(h)
and which also complies with the requirements of the Medicare and Medicaid
anti-kickback statute (set for the at 42 U.S.C. 1320 a-7b (b)) and the
parties believe that this Agreement satisfies those requirements.
17. RECORDS. To the extent required by Section 1861(b)(1)(I) of the
Social Security Act, Supplier shall, upon proper request, allow the United
States Department of Health and Human Services, the Comptroller General of the
United States and their duly authorized representatives, access to this
Agreement and to all books, documents and records necessary to verify the nature
and extent of the costs of the services provided by Supplier under this
Agreement at any time during the term of this Agreement and for an additional
period of four (4) years following the last date services are furnished under
this Agreement.
18. NONASSIGNABILITY. The rights, duties and responsibilities of the
parties hereto are personal in nature and, except as stated herein, shall not be
assigned without the express written consent of the other party.
19. APPLICABLE LAW. This Agreement shall be construed in accordance
with the laws of the State of Tennessee and the laws of the State of Tennessee
shall govern the rights, duties, liabilities and responsibilities created
hereunder.
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<PAGE>
20. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but which together shall constitute one
instrument. Facsimile signatures shall have the same effect as originals.
21. EFFECT. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, their successors, administrators, trustees and
assigns.
22. MODIFICATION. This Agreement may be changed or modified only with
the written consent of both parties.
23. NOTICES. All notices, demands, requests, consents, reports,
approvals, or other communications which may be or are required to be given,
served, or sent pursuant to this Agreement shall be in writing and shall be
mailed by first class, registered or certified mail, return receipt requested,
postage prepaid, or transmitted by telegram, addressed as set out below. Each
party may designate by notice in writing a new address to which any notice,
demand, request, consent, report, approval or communication may thereafter be so
given, served or sent. Each notice, demand, request, consent, report, approval
or communication which shall be mailed in the manner described above, or which
shall be delivered to a telegraph company, shall be deemed sufficiently given,
served, sent or received for all purposes at such time as it is delivered to the
addressee (with the return receipt or the delivery receipt being deemed
conclusive evidence of such delivery) or at such time as delivery is refused by
the addressee upon presentation.
24. WAIVERS. A waiver of the breach of any provision of this Agreement
shall not be deemed a waiver of any other breach of the same or any other
provision hereof.
25. SECURITY INTEREST. As security for payment CHC shall grant Supplier
a continuing security interest in all of CHC's accounts receivable for the
resale of Drugs, together with all
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<PAGE>
documents, instruments, account cards, computer tapes and disks, printouts and
books and records relating to the accounts receivable. For this purpose, CHC and
Supplier will enter into a Security Agreement substantially in the form set
forth on Exhibit B attached hereto.
26. HEADINGS. All headings used herein are for ease of reference only
and shall in no way be construed as interpreting, decreasing or enlarging the
provisions of this Agreement.
IN WITNESS WHEREOF, the undersigned parties hereto have caused this
Agreement to be executed as of the day and year first above written.
CHILDRENS HOME CARE, a general partnership
By: /s/ TJ McNulty
--------------------------------------
Title: President
------------------------------------
Address: 65 N. Raymond Avenue.,
Suite 305
Pasadena, CA 91103
----------------------------------
NOVA FACTOR, INC.
By: /s/ David D. Stevens
---------------------------------------
Title: Chairman
------------------------------------
Address: 1620 Century Center Parkway, #109
Memphis, TN 38134
----------------------------------
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<PAGE>
Exhibit A
CHILDRENS HOME CARE
GROWTH HORMONE MANAGEMENT FEE PRICE LISTING
<TABLE>
<CAPTION>
Product Per 10MG EQUIVALENT
Genentech Acq. Cost Mgmt. Fee Total
- --------- --------- --------- -----
<C> <S> <S> <S>
Protropin $ * $ * $ *
Nutropin * * *
Nutropin AQ * * *
Lilly
Humantrope * $ * $ *
Pharmacia
Genotropin * $ * $ *
</TABLE>
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF ACCREDO HEALTH, INCORPORATED,
A DELAWARE CORPORATION
---------------------------------------------
Southern Health Systems, Inc. a Tennessee corporation
Horizon Health Systems, Inc., d/b/a Hemophilia Health Services, a Tennessee
corporation
Nova Factor, Inc. a Tennessee corporation
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated (i) August 12, 1998, with respect to the consolidated
financial statements and schedule of Accredo Health, Incorporated, (ii) August
30, 1996 with respect to the financial statements and schedule of Nova Factor,
Inc., (iii) July 30, 1998 with respect to the financial statements of Horizon
Health Systems, Inc. and (iv) August 21, 1998 with respect to the financial
statements and schedule of Texas Health Pharmaceutical Resources, in Amendment
No. 3 to the Registration Statement (Form S-1 No. 333-62679) and related
Prospectus of Accredo Health, Incorporated for the registration of 3,000,000
shares of its common stock.
<TABLE>
<S> <C>
/s/ ERNST & YOUNG, LLP
-------------------------------------------
Ernst & Young, LLP
</TABLE>
Memphis, Tennessee
January 27, 1999
