<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-Q
AMENDMENT NO. 2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________________ TO
________________________
COMMISSION FILE NO. 1-6639
MAGELLAN HEALTH SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-1076937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
3414 PEACHTREE ROAD, NE, SUITE 1400
ATLANTA, GEORGIA 30326
(Address of principal executive offices)
(Zip Code)
(404) 841-9200
(Registrant's telephone number, including area code)
SEE TABLE OF ADDITIONAL REGISTRANTS BELOW.
------------------------
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___No ___
The number of shares of the Registrant's Common Stock outstanding as of
January 31, 1998, was 30,543,065.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Allied Specialty Care Services, Inc. Florida 58-1761155 3106 Commerce Pkwy.
Miramar, FL 33025
(800) 789-4618
Behavioral Health Systems of Indiana, Inc. Indiana 35-1990127 3414 Peachtree
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Behavioral Healthcare Solutions, Inc. Delaware 87-0552566 10150 S. Centennial Pkwy.
Sandy. UT 84070
(801) 256-7300
Beltway Community Hospital, Inc. Texas 58-1324281 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Blue Grass Physician Kentucky 66-1294402 3414 Peachtree Rd. N.E.
Management Group, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
C.A.C.O. Services, Inc. Ohio 58-1751511 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
CCM, Inc. Nevada 58-1662418 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
CMCI, Inc. Nevada 88-0224620 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282
CMFC, Inc. Nevada 88-0215629 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282
CPS Associates, Inc. Virginia 58-1761039 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Advantage, LLC Delaware 58-2292977 3414 Peachtree Rd. N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Alvarado Behavioral Health System, California 58-1394959 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Asheville Behavioral North Carolina 58-2097827 3414 Peachtree Rd. N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Arbor Indy Behavioral Delaware 58-2265776 3414 Peachtree Rd. N.E.
Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
i
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Charter Augusta Behavioral Georgia 58-1615676 3414 Peachtree Rd. N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Bay Harbor Behavioral Florida 58-1640244 3414 Peachtree Rd. N.E.
Health System, Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
The Charter Beacon Behavioral Delaware 35-1994155 3414 Peachtree Rd., N.E.
Health System, LLC Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Behavioral Corporation Delaware 91-1819015 1061 E. Flamingo Rd.
Suite One
Las Vegas, NV 89119
(702) 737-0282
Charter Behavioral Health System at Fair Oaks, New Jersey 58-2097832 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Behavioral Health System Maryland 52-1866212 3414 Peachtree Rd., N.E.
at Hidden Brook, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System at Los Altos, California 33-0606642 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System at Manatee Florida 65-0519663 3414 Peachtree Rd., N.E.
Adolescent Treatment Services, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Maryland 52-1866221 3414 Peachtree Rd., N.E.
at Potomac Ridge, Inc. Suite 1400
Atlanta, GA 33026
(404) 841-9200
Charter Behavioral Health Systems, Inc. Delaware 58-2213642 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Athens, Georgia 58-1513304 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Austin, Texas 58-1440665 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Baywood, Texas 76-0430571 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Bradenton, Florida 58-1527678 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
ii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Charter Behavioral Health System of Central Georgia 58-1408670 3414 Peachtree Rd., N.E.
Georgia, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavorial Health System of Central Virginia 54-1765921 3414 Peachtree Rd., N.E.
Virginia, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of South Carolina 58-1761157 3414 Peachtree Rd., N.E.
Charleston, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Virginia 58-1616917 3414 Peachtree N.E.
of Charlottesville, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Chicago, Illinois 58-1315760 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 58-1473063 3414 Peachtree Rd., N.E.
of Chula Vista, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Columbia, Missouri 61-1009977 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Corpus Texas 58-1513305 3414 Peachtree Rd., N.E.
Christi, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Dallas, Texas 58-1513306 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Delmarva, Maryland 52-1866214 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Behavioral Health System Delaware 35-1994080 3414 Peachtree Rd., N.E.
of Evansville, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Fort Texas 58-1643151 3414 Peachtree Rd., N.E.
Worth, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Jackson, Mississippi 58-1616919 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Florida 58-1483015 3414 Peachtree Rd., N.E.
of Jacksonville, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
iii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
The Charter Behavioral Health System Delaware 35-1994087 3414 Peachtree Rd., N.E.
of Jefferson, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Kansas 58-1603154 3414 Peachtree Rd., N.E.
of Kansas City, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Lafayette, Louisiana 72-0686492 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Lake Louisiana 62-1152811 3414 Peachtree Rd., N.E.
Charles, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Maryland, Maryland 52-2026699 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Behavioral Health System Delaware 35-1994736 3414 Peachtree Rd., N.E.
of Michigan City, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Mississippi 58-2138622 3414 Peachtree Rd., N.E.
Mississippi, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Mobile, Alabama 58-1569921 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Nashua, New Hampshire 02-0470752 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Nevada, Nevada 58-1321317 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System New Mexico 58-1479480 5901 Zuni Road, SE
of New Mexico, Inc. Albuquerque, NM 87108
(505) 265-8800
Charter Behavioral Health System of Northern California 58-1857277 3414 Peachtree Rd., N.E.
California, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Northwest Arkansas 58-1449455 3414 Peachtree Rd., N.E.
Arkansas, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Behavioral Health System of Delaware 35-1994154 3414 Peachtree Rd., N.E.
Northwest Indiana, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
iv
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Charter Behavioral Health System of Paducah, Kentucky 61-1006115 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health of Puerto Rico, Inc. Georgia 66-0523678 Caso Bldg., Suite 1504
1225 Ponce de Leon Avenue
Santurce, PR 00907
Charter Behavioral Health System of San Jose, California 58-1747020 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Savannah, Georgia 58-1750583 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Texarkana, Arkansas 71-0752815 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 95-2685883 3414 Peachtree Rd., N.E.
of the Inland Empire, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Toledo, Ohio 58-1731068 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Tucson, Arizona 86-0757462 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Visalia, California 33-0606644 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Waverly, Minnesota 41-1775626 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System North Carolina 56-1050502 3414 Peachtree Rd., N.E.
of Winston-Salem, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 33-0606646 3414 Peachtree Rd., N.E.
of Yorba Linda, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health Systems of Atlanta, Georgia 58-1900736 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Talbott Behavioral Health System, Inc. Georgia 58-0979827 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
v
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Charter By-The-Sea Behavioral Health System, Georgia 58-1351301 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Call Center, Inc. Georgia 58-2318455 2151 Peachford Rd.
Atlanta, GA 30338
(888) 222-4302
Charter Call Center of Texas, Inc. Texas 75-2709908 920 South Main St.
Suite 250
Grapevine, TX 76051
(817) 481-9998
Charter Canyon Behavioral Health System, Inc. Utah 58-1557925 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Canyon Springs Behavioral California 33-0606640 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Centennial Peaks Behavioral Colorado 58-1761037 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Community Hospital, Inc. California 58-1398708 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Contract Services, Inc. Georgia 58-2100699 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Cove Forge Behavioral Health System, Pennsylvania 25-1730464 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Fairmount Behavioral Health System, Pennsylvania 58-1616921 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Fenwick Hall Behavioral Health System, South Carolina 57-0995766 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Financial Offices, Inc. Georgia 58-1527680 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Forest Behavioral Health System, Inc. Louisiana 58-1508454 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Grapevine Behavioral Health System, Texas 58-1818492 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
vi
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Charter Greensboro Behavioral Health System, North Carolina 58-1335184 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Health Management of Texas, Inc. Texas 58-2025056 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Columbus, Inc. Ohio 58-1598899 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Denver, Inc. Colorado 58-1662413 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Ft. Collins, Inc. Colorado 58-1768534 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Laredo, Inc. Texas 58-1491620 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Miami, Inc. Florida 61-1061599 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Mobile, Inc. Alabama 58-1318870 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Santa Teresa, Inc. New Mexico 58-1584861 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of St. Louis, Inc. Missouri 58-1583760 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Torrance, Inc. California 58-1402481 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Indiana BHS Holding, Inc. Indiana 58-2247985 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Indianapolis Behavioral Delaware 35-1994923 3414 Peachtree Rd., N.E.
Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Lafayette Behavioral Delaware 35-1994151 3414 Peachtree Rd., N.E.
Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
vii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Charter Lakehurst Behavioral Health System, New Jersey 22-3286879 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Lakeside Behavioral Health Network, Tennessee [Applied for] 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Lakeside Behavioral Health System, Tennessee 62-0892645 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Laurel Heights Behavioral Georgia 58-1558212 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Linden Oaks Behavioral Health System, Illinois 36-3943776 852 West Street
Inc. Naperville, IL 60540
(708) 305-5500
Charter Little Rock Behavioral Health System, Arkansas 58-1747019 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Louisiana Behavioral Health System, Louisiana 72-1319231 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Louisville Behavioral Health System, Kentucky 58-1517503 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Managed Care Services, LLC Georgia 58-2324879 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Meadows Behavioral Health System, Inc. Maryland 52-1866216 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--California, Inc. Georgia 58-1357345 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--Clayton County, Inc. Georgia 58-1579404 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--Cleveland, Inc. Texas 58-1448733 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--Long Beach, Inc. California 58-1366604 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
viii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Charter Medical--New York, Inc. New York 58-1761153 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical (Cayman Islands) Ltd. Cayman Islands, 58-1841857 Caledonian Bank & Trust
BWI Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical Information Services, Inc. Georgia 58-1530236 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical International, & Trust Inc. Cayman Islands, N/A Caledonian Bank
BWI Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical International, S.A., Inc. Nevada 58-1605110 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Managed Care Sales and Services, Inc. Georgia 58-1195352 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of East Valley, Inc. Arizona 58-1643158 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of England Limited United Kingdom N/A 111 Kings Road
Box 323
London SW3 4PB
London, England
44-71-351-1272
Charter Medical of North Phoenix, Inc. Arizona 58-1643154 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of Puerto Rico, Inc. Commonwealth of 58-1208667 Caso Building, Suite 1504
Puerto Rico 1225 Ponce De Leon Avenue
Santurce, P.R. 00907
(809) 723-8666
Charter Milwaukee Behavioral Health System, Wisconsin 58-1790135 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Mission Viejo Behavioral Health California 58-1761156 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter MOB of Charlottesville, Inc. Virginia 58-1761158 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
ix
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Charter North Behavioral Health System, Inc. Alaska 58-1474550 2530 DeBarr Road
Anchorage, AK 99508-2996
(907) 258-7575
Charter Northbrooke Behavioral Health System, Wisconsin 39-1784461 46000 W. Schroeder Drive
Inc. Brown Deer, WI 53223
(414) 355-2273
Charter North Counseling Center, Inc. Alaska 58-2067832 2530 DeBarr Road
Anchorage, AK 99508-2996
(907) 258-7575
Charter Northridge Behavioral Health System, North Carolina 58-1463919 400 Newton Road
Inc. Raleigh, NC 27615
(919) 847-0008
Charter Oak Behavioral Health System, Inc. California 58-1334120 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter of Alabama, Inc. Alabama 63-0649546 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Palms Behavioral Health System, Inc. Texas 58-1416537 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Peachford Behavioral Health System, Georgia 58-1086165 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Pines Behavioral Health System, Inc. North Carolina 58-1462214 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Plains Behavioral Health System, Inc. Texas 58-1462211 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter-Provo School, Inc. Utah 58-1647690 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Real Behavioral Health System, Inc. Texas 58-1485897 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Ridge Behavioral Health System, Inc. Kentucky 58-1393063 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Rivers Behavioral Health System, Inc. South Carolina 58-1408623 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Rockford Behavioral Health System, Delaware 1-0374617 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
</TABLE>
x
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Charter San Diego Behavioral Health System, California 58-1669160 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Sioux Falls Behavioral Health System, South Dakota 58-1674278 2812 South Louise Avenue
Inc. Sioux Falls, SD 57106
(605) 361-8111
The Charter South Bend Behavioral Delaware 35-1994307 3414 Peachtree Rd., N.E.
Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Springs Behavioral Health System, Inc. Florida 58-1517461 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Springwood Behavioral Health System, Virginia 58-2097829 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Suburban Hospital of Mesquite, Inc. Texas 75-1161721 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter System, LLC Nevada 91-1819015 1061 E. Flamingo Rd.
Suite One
Las Vegas, NV 89119
(702) 737-0282
The Charter Terre Haute Behavioral Delaware 35-1994308 3414 Peachtree Rd., N.E.
Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Thousand Oaks Behavioral California 58-1731069 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Westbrook Behavioral Health System, Virginia 54-0858777 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter White Oak Behavioral Health System, Maryland 52-1866223 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Wichita Behavioral Health System, Inc. Kansas 58-1634296 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Woods Behavioral Health System, Inc. Alabama 58-1330526 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Correctional Behavioral Solutions, Inc. Delaware 58-2180940 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
xi
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Correctional Behavioral Solutions of Indiana, Indiana 35-1978792 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Correctional Behavioral Solutions of New New Jersey 22-3436964 3000 Atrium Way
Jersey, Inc. Suite 410
Mount Laurel, NJ
(609) 235-2339
Correctional Behavioral Solutions of Ohio, Ohio 34-1826431 Allen Correctional Institute
Inc. 2338 North West Street
Lima, OH 45801
(419) 224-8000
Desert Springs Hospital, Inc. Nevada 88-0117696 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Employee Assistance Services, Inc. Georgia 58-1501282 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
First Step Independent Living Program, Inc. California 95-3574845 1174 Nevada St.
Redlands, CA 92374
(909) 307-6584
Florida Health Facilities, Inc. Florida 58-1860493 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Gulf Coast EAP Services, Inc. Alabama 58-2101394 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Horrigan Cole Enterprises, Inc. California 33-0152162 1174 Nevada St.
Redlands, CA 92374
(909) 307-6584
Hospital Investors, Inc. Georgia 58-1182191 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Human Affairs of Alaska, Inc. Alaska 92-0155098 4300 "B' St.
Anchorage, AK 99503
(907) 562-0794
Human Affairs International, Incorporated Utah 87-0300539 10150 S. Centennial Pkwy.
Sandy, UT 84070
(801) 256-7300
Illinois Mentor, Inc. Illinois 36-3643670 313 Congress St.
Boston, MA 02210
(617) 790-4800
Magellan Executive Corporation Georgia 58-2310891 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Magellan Public Solutions, Inc. Delaware 58-2227841 222 Berkeley St.
Boston, MA 02117
(617) 437-6400
</TABLE>
xii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Magellan Public Network, Inc. Delaware 51-0374654 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Magellan Public Solutions of Ohio, Inc. Ohio [Applied for] 222 Berkeley St.
Boston, MA 02117
(617) 437-6400
Massachusetts Mentor, Inc. Massachusetts 04-2799071 313 Congress St.
Boston, MA 02210
(617) 790-4800
Metroplex Behavioral Healthcare Services, Inc. Texas 58-2138596 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
National Mentor, Inc. Delaware 04-3250732 313 Congress St.
Boston, MA 02210
(617) 790-4800
National Mentor Healthcare, Inc. Massachusetts 04-2893910 313 Congress St.
Boston, MA 02210
(617) 790-4800
NEPA--Massachusetts, Inc. Massachusetts 58-2116751 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
NEPA--New Hampshire, Inc. New Hampshire 58-2116398 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
New Allied, Inc. Florida 58-1324269 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Ohio Mentor, Inc. Ohio 31-1098345 313 Congress St.
Boston, MA 02210
(617) 790-4800
Pacific-Charter Medical, Inc. California 58-1336537 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
South Carolina Mentor, Inc. South Carolina 57-0782160 313 Congress St.
Boston, MA 02210
(617) 790-4800
Southeast Behavioral Systems, Inc. Georgia 58-2100700 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Schizophrenia Treatment and Rehabilitation, Georgia 58-1672912 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Sistemas De Terapia Respiratoria, S.A., Inc. Georgia 58-1181077 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
</TABLE>
xiii
<PAGE>
ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
<S> <C> <C> <C>
Western Behavioral Systems, Inc. California 58-1662416 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Wisconsin Mentor, Inc. Wisconsin 39-1840054 313 Congress St.
Boston, MA 00210
(617) 790-4800
</TABLE>
- ------------------------
(1) The Additional Registrants listed are wholly-owned subsidiaries of the
Registrant and are guarantors of the Registrant's 11 1/4% Series A Senior
Subordinated Notes due 2004. The Additional Registrants have been
conditionally exempted, pursuant to Section 12(h) of the Securities Exchange
Act of 1934, from filing reports under Section 13 of the Securities Exchange
Act of 1934.
xiv
<PAGE>
FORM 10-Q
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C>
PART I--FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets--
September 30, 1997 and December 31, 1997........................................................ 1
Condensed Consolidated Statements of Operations--
For the Three Months ended December 31, 1996 and 1997........................................... 3
Condensed Consolidated Statements of Cash Flows--
For the Three Months ended December 31, 1996 and 1997........................................... 4
Notes to Condensed Consolidated Financial Statements.............................................. 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................. 17
PART II--OTHER INFORMATION:
Item 1.--Legal Proceedings........................................................................ 25
Item 6.--Exhibits and Reports on Form 8-K......................................................... 25
Signatures........................................................................................ 27
</TABLE>
<PAGE>
The undersigned Registrant hereby amends Note F--Income per Common Share of
the Notes to Condensed Consolidated Financial Statements of its Report on Form
10-Q for the quarterly period ended December 31, 1997.
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
PART I--FINANCIAL INFORMATION
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 372,878 $ 170,459
Accounts receivable, net.......................................................... 107,998 140,219
Refundable income taxes........................................................... 2,466 --
Other current assets.............................................................. 23,696 34,438
------------- ------------
Total Current Assets............................................................ 507,038 345,116
Assets restricted for settlement of unpaid claims
and other long-term liabilities................................................... 87,532 73,020
Property and equipment:
Land.............................................................................. 11,667 11,687
Buildings and improvements........................................................ 70,174 72,102
Equipment......................................................................... 63,719 74,319
------------- ------------
145,560 158,108
Accumulated depreciation.......................................................... (37,038) (41,169)
------------- ------------
108,522 116,939
Construction in progress.......................................................... 692 995
------------- ------------
Total property and equipment.................................................... 109,214 117,934
------------- ------------
Deferred income taxes............................................................... 1,158 2,178
Investment in CBHS.................................................................. 16,878 5,390
Other long-term assets.............................................................. 20,893 42,932
Goodwill, net....................................................................... 114,234 242,968
Other intangible assets, net........................................................ 38,673 67,576
------------- ------------
$ 895,620 $ 897,114
------------- ------------
------------- ------------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
1
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................. $ 45,346 $ 37,663
Accrued liabilities............................................................... 170,429 191,645
Income taxes payable.............................................................. -- 781
Current maturities of long-term debt and capital lease obligations................ 3,601 3,604
------------- ------------
Total Current Liabilities....................................................... 219,376 233,693
Long-term debt and capital lease obligations........................................ 391,693 391,550
Reserve for unpaid claims........................................................... 49,113 40,201
Deferred credits and other long-term liabilities.................................... 16,110 15,023
Minority interest................................................................... 61,078 64,785
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, without par value
Authorized--10,000 shares
Issued and outstanding--none.................................................... -- --
Common Stock, par value $0.25 per share
Authorized--80,000 shares
Issued and outstanding--33,439 shares at September 30, 1997 and 33,543 shares at
December 31, 1997............................................................. 8,361 8,387
Other Stockholders' Equity
Additional paid-in capital...................................................... 340,645 338,961
Accumulated deficit............................................................. (129,955) (122,327)
Warrants outstanding............................................................ 25,050 25,050
Common Stock in Treasury, 4,424 shares at September 30, 1997 and 4,969 shares at
December 31, 1997............................................................. (82,731) (95,187)
Cumulative foreign currency adjustments......................................... (3,120) (3,022)
------------- ------------
Total stockholders' equity.................................................... 158,250 151,862
------------- ------------
$ 895,620 $ 897,114
------------- ------------
------------- ------------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
2
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Net revenue............................................................................ $ 346,819 $ 216,097
---------- ----------
Costs and expenses:
Salaries, cost of care and other operating expenses.................................. 284,123 175,621
Bad debt expense..................................................................... 20,235 1,070
Depreciation and amortization........................................................ 13,099 6,969
Interest, net........................................................................ 13,569 7,401
Stock option expense (credit)........................................................ 604 (3,959)
Equity in loss of CBHS............................................................... -- 11,488
---------- ----------
331,630 198,590
---------- ----------
Income before provision for income taxes,
minority interest and extraordinary item............................................. 15,189 17,507
Provision for income taxes............................................................. 6,075 7,003
---------- ----------
Income before minority interest and extraordinary item................................. 9,114 10,504
Minority interest...................................................................... 1,973 2,876
---------- ----------
Income before extraordinary item....................................................... 7,141 7,628
Extraordinary item--loss on early extinquishment
of debt (net of income tax benefit of $1,967)........................................ (2,950) --
---------- ----------
Net income............................................................................. $ 4,191 $ 7,628
---------- ----------
---------- ----------
Average number of common shares outstanding--basic..................................... 28,589 28,969
---------- ----------
---------- ----------
Average number of common shares outstanding--diluted................................... 28,983 29,784
---------- ----------
---------- ----------
Income per common share--basic:
Income before extraordinary item..................................................... $ 0.25 $ 0.26
---------- ----------
---------- ----------
Net income........................................................................... $ 0.15 $ 0.26
---------- ----------
---------- ----------
Income per common share--diluted:
Income before extraordinary item..................................................... $ 0.25 $ 0.26
---------- ----------
---------- ----------
Net income........................................................................... $ 0.14 $ 0.26
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................................. $ 4,191 $ 7,628
---------- ----------
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization......................................................... 13,099 6,969
Equity in loss of CBHS................................................................ -- 11,488
Stock option expense (credit)......................................................... 604 (3,959)
Non-cash interest expense............................................................. 483 422
Gain on sale of assets................................................................ (493) --
Extraordinary loss on early extinguishment of debt.................................... 4,917 --
Cash flows from changes in assets and liabilities, net of effects from sales and
acquisitions of businesses:
Accounts receivable, net............................................................ (1,984) (16,304)
Other assets........................................................................ (4,109) (9,999)
Accounts payable and other accrued liabilities...................................... (32,046) (21,184)
Reserve for unpaid claims........................................................... (2,351) (9,256)
Income taxes payable and deferred income taxes...................................... 1,517 2,056
Other liabilities................................................................... (9,729) (1,623)
Minority interest, net of dividends paid............................................ 2,296 3,199
Other............................................................................... 216 (1,162)
---------- ----------
Total adjustments................................................................. (27,580) (39,353)
---------- ----------
Net cash used in operating activities........................................... (23,389) (31,725)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................................... (7,012) (4,578)
Acquisitions and investments in businesses, net of cash acquired........................ (1,612) (165,548)
Decrease in assets restricted for settlement of unpaid claims........................... 10,381 14,364
Proceeds from sale of assets............................................................ 4,822 --
Crescent Transaction costs.............................................................. -- (4,253)
---------- ----------
Net cash provided by (used in) investing activities............................. 6,579 (160,015)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt, net of issuance costs................................... 126,825 --
Payments on debt and capital lease obligations.......................................... (116,620) (140)
Proceeds from exercise of stock options and warrants.................................... 112 1,917
Purchases of treasury stock............................................................. -- (12,456)
---------- ----------
Net cash provided by (used in) financing activities............................. 10,317 (10,679)
---------- ----------
Net decrease in cash and cash equivalents................................................. (6,493) (202,419)
Cash and cash equivalents at beginning of period.......................................... 120,945 372,878
---------- ----------
Cash and cash equivalents at end of period................................................ $ 114,452 $ 170,459
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
NOTE A--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 Form 10-Q.
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
adjustments considered necessary for a fair presentation, have been included.
These financial statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended September
30, 1997, included in the Company's Annual Report on Form 10-K.
NOTE B--NATURE OF BUSINESS
The Company's 50% owned hospital business, Charter Behavioral Health
Systems, LLC ("CBHS"), is seasonal in nature, with a reduced demand for certain
services generally occurring in the first fiscal quarter around major holidays,
such as Thanksgiving and Christmas, and during the summer months comprising the
fourth fiscal quarter. The Company's business is also subject to general
economic conditions and other factors. Accordingly, the results of operations
for the interim periods are not necessarily indicative of the actual results
expected for the year.
NOTE C--SUPPLEMENTAL CASH FLOW INFORMATION
Below is supplemental cash flow information related to the three months
ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Income taxes paid, net of refunds received............................... $ 2,540 $ 4,752
Interest paid, net of amounts capitalized................................ 24,939 21,550
</TABLE>
5
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE D--LONG-TERM DEBT AND LEASES
Information with regard to the Company's long-term debt and capital lease
obligations at September 30, 1997 and December 31, 1997 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
(IN THOUSANDS)
Magellan Existing Credit Agreement due through 2002............. $ -- $ --
11.25% Senior Subordinated Notes due 2004....................... 375,000 375,000
6.78125% to 8.00% Mortgage and other notes payable through
1999.......................................................... 7,721 7,577
7.5% Swiss Bonds................................................ 6,443 6,443
3.95% Capital lease obligations due through 2014................ 6,438 6,438
------------- ------------
395,602 395,458
Less amounts due within one year.............................. 3,601 3,604
Less debt service funds....................................... 308 304
------------- ------------
$ 391,693 $ 391,550
------------- ------------
------------- ------------
</TABLE>
On February 12, 1998, the Company terminated the Magellan Existing Credit
Agreement and extinguished the $375 million 11.25% Senior Subordinated Notes in
connection with the acquisition of Merit Behavioral Care Corporation ("Merit").
See Note J--"Subsequent Events--Merit Acquisition".
NOTE E--ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
Salaries, wages and other benefits.............................. $ 21,647 $ 21,596
Amounts due health insurance programs........................... 14,126 8,159
Medical claims payable.......................................... 36,508 63,877
Interest........................................................ 19,739 9,322
Crescent Transactions........................................... 14,648 9,805
Other........................................................... 63,761 78,886
------------- ------------
$ 170,429 $ 191,645
------------- ------------
------------- ------------
</TABLE>
NOTE F--INCOME PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"), effective October 1, 1997. Income per common
share for the quarter ended December 31, 1996 has been restated to conform to
FAS 128 as required. The effect of adopting FAS 128 was not material.
6
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE F--INCOME PER COMMON SHARE (CONTINUED)
The following table presents the components of weighted average common
shares outstanding-- diluted:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Weighted average common shares outstanding--basic.......................... 28,589 28,969
Common stock equivalents--stock options.................................... 377 762
Common stock equivalents--warrants......................................... 17 53
--------- ---------
Weighted average common shares outstanding--diluted........................ 28,983 29,784
--------- ---------
--------- ---------
</TABLE>
Options to purchase approximately 363,000 shares of common stock at $26.65
to $31.41 per share were outstanding during the quarter ended December 31, 1997
but were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common shares.
The options, which expire between fiscal 2006 and 2007, were still outstanding
at December 31, 1997.
Warrants to purchase approximately 2,713,000 shares of common stock at
$30.00 to $38.70 per share were outstanding during the quarter ended December
31, 1997 but were not included in the computation of diluted EPS because the
warrants' exercise price was greater than the average market price of the common
shares. The warrants, which expire between fiscal 2001 and 2009, were still
outstanding at December 31, 1997.
The Company owned a 61% equity interest in Green Spring Health Services,
Inc. ("Green Spring") at December 31, 1997. The four minority stockholders of
Green Spring have the option to exchange their ownership interests in Green
Spring for 2,831,516 shares of the Company's common stock or $65.1 million of
subordinated notes (the "Exchange Option"). The Exchange Option was considered a
potentially dilutive security for the quarters ended December 31, 1996 and 1997
for the purpose of computing diluted income per common share. The Exchange
Option was anti-dilutive for the quarters ended December 31, 1996 and 1997 and,
therefore, was excluded from the respective diluted income per common share
calculations.
Each of the minority stockholders of Green Spring exercised the Exchange
Option in January 1998, which resulted in the issuance of 2,831,516 shares of
the Company's common stock. See Note J-- "Subsequent Events--Green Spring
Minority Shareholder Conversion".
NOTE G--INVESTMENT IN CBHS
The Company became a 50% owner of CBHS upon consummation of the Crescent
Transactions (as defined) on June 17, 1997, which are further described in the
Company's Annual Report on Form 10-K for the year ended September 30, 1997. The
Company accounts for its investment in CBHS using the equity method.
7
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE G--INVESTMENT IN CBHS (CONTINUED)
A summary of financial information for CBHS is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
Current assets.................................................. $ 148,537 $ 149,724
Property and equipment, net..................................... 18,424 18,217
Other noncurrent assets......................................... 8,633 8,081
------------- ------------
Total Assets.................................................. $ 175,594 $ 176,022
------------- ------------
------------- ------------
Current liabilities............................................. $ 68,497 $ 83,478
Long-term debt.................................................. 65,860 65,846
Other noncurrent liabilities.................................... 7,481 16,820
Members' capital................................................ 33,756 9,878
------------- ------------
Total liabilities and members' capital........................ $ 175,594 $ 176,022
------------- ------------
------------- ------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31,
1997
-----------------
<S> <C>
Net revenue................................................................ $ 178,058
--------
Operating expenses......................................................... 199,664
Interest, net.............................................................. 1,370
--------
Net loss before preferred member distribution............................ $ (22,976)
--------
Cash used in operating activities.......................................... $ (2,176)
--------
Magellan equity loss....................................................... $ (11,488)
--------
</TABLE>
The Company's transactions with CBHS and related balances are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Franchise Fee revenue...................................................... $ 19,575
-------
Costs:
Accounts receivable collection fees...................................... 1,054
Hospital-based joint venture management fees............................. 1,630
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Due (to) from CBHS, net (1).......................... $ (5,090) $ 6,188
------- -------
------- -------
Prepaid CHARTER call center management fees.......... $ -- $ 5,905
</TABLE>
8
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE G--INVESTMENT IN CBHS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
------- -------
------- -------
</TABLE>
- ------------------------
(1) The nature of hospital accounts receivable billing and collection processess
have resulted in the Company and CBHS receiving remittances from payors
which belong to the other party. Additionally, the Company and CBHS have
established a settlement and allocation process for the accounts receivable
related to those patients who were not yet discharged from their treatment
on June 16, 1997. In an effort to settle these amounts on a timely basis,
and in light of CBHS start up operations and cash flow requirements, the
Company made advances to CBHS periodically during the quarter ending
December 31, 1997. Such advances, net of all settlement activity and certain
other amounts due to CBHS for certain shared services and related matters,
resulted in the amount shown above as due from CBHS.
9
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE G--INVESTMENT IN CBHS (CONTINUED)
The Company is in continuing discussions with Crescent Operating, Inc.
("COI"), the other 50% owner of CBHS, and its affiliates concerning the possible
sale of the Company's franchise operations, together with related intellectual
property, the Company's interest in CBHS and six hospital-based joint ventures
("JV Hospitals") and certain other assets. In connection with the proposed sale,
it is anticipated that CBHS and its affiliates will be an important part of the
Company's managed behavioral care preferred provider network under the terms of
a long-term arrangement. The parties have not yet reached agreement on all the
terms of the transaction. Significant issues regarding the terms of the proposed
sale remain under discussion. In addition to resolution of such issues,
completion of the proposed sale would be subject to a number of conditions,
including regulatory approvals and the obtaining by COI and its affiliates of
all necessary debt and equity financing. If the sale is completed, the Company
intends to use the cash proceeds remaining after payment of fees and expenses to
repay indebtedness. There can be no assurance that any such transaction will
occur.
NOTE H--ACQUISITIONS
ALLIED HEALTH GROUP, INC. ACQUISITION.
On December 5, 1997, the Company purchased the assets of Allied Health
Group, Inc. and certain affiliates ("Allied"). Allied provides specialty
risk-based products and administrative services to a variety of insurance
companies and other customers for its 3.4 million members. Allied manages over
80 physician networks across the eastern United States. Allied's networks
include physicians specializing in cardiology, oncology and diabetes. The
Company paid $70 million for Allied, of which $50 million was paid to the
sellers at closing with the remaining $20 million placed in escrow.
The Company funded the acquisition of Allied with cash on hand and has
accounted for the acquisition of Allied using the purchase method of accounting.
The escrowed amount is payable if Allied achieves specified earnings targets
during the three years following the closing. Additionally, the purchase price
may be increased during the three year period by $40 million if Allied's
performance exceeds specified earnings targets. The maximum purchase price
payable is $110 million.
The preliminary allocation of the Allied purchase price to goodwill and
identifiable intangible assets was based on the Company's preliminary
valuations, which are subject to change upon receiving independent appraisals of
identifiable intangible assets.
HAI ACQUISITION. On December 4, 1997, the Company acquired the outstanding
common stock of Human Affairs International, Incorporated ("HAI"), a
wholly-owned subsidiary of Aetna Insurance Company of Connecticut and a unit of
Aetna U.S. Healthcare ("Aetna"), for approximately $122.1 million. HAI manages
the care of over 16 million covered lives, primarily through employee assistance
programs and other managed behavioral healthcare plans. The Company funded the
acquisition of HAI with cash on hand and has accounted for the acquisition of
HAI using the purchase method of accounting.
The Company may be required to make additional contingent payments of up to
$300 million to Aetna (the "Contingent Payments") over the five-year period
(each year a "Contract Year") subsequent to closing. The amount and timing of
the Contingent Payments will depend upon HAI's receipt of additional covered
lives, under two separate calculations. Under the first calculation, the Company
may be required
10
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE H--ACQUISITIONS (CONTINUED)
to pay up to $25 million per year for each of five years following the
acquisition based on the net annual growth in the number of lives covered in
specified HAI products. Under the second calculation, the Company may be
required to pay up to $35 million per Contract Year, based on the net cumulative
increase in lives covered by certain other HAI products. The Company expects to
fund the Contingent Payments, if any, with a combination of cash on hand, future
cash flows from operations and borrowing capacity under the New Credit Agreement
(as defined).
The preliminary allocation of the HAI purchase price to goodwill and
identifiable intangible assets was based on the Company's preliminary
valuations, which are subject to change upon receiving independent appraisals of
identifiable intangible assets.
The unaudited pro forma information for the quarters ended December 31, 1996
and 1997 have been prepared assuming the Crescent Transactions (as defined),
Allied acquisition and HAI acquisition were consummated on October 1, 1996. The
unaudited pro forma information does not purport to be indicative of the results
that would have actually been obtained had such transactions been consummated,
or which may be attained in future periods (in thousands, except per share
data):
<TABLE>
<CAPTION>
PRO FORMA
FOR THE THREE MONTHS ENDED
--------------------------
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Net revenue...................................................... $ 235,506 $ 264,427
Income before extraordinary item................................. 10,317 10,384
Net income....................................................... 7,367 10,384
Income per common share--basic:
Income before extraordinary item............................... 0.36 0.36
Net income..................................................... 0.26 0.36
Income per common share--diluted:
Income before extraordinary item............................... 0.36 0.35
Net income..................................................... 0.25 0.35
</TABLE>
NOTE I--CONTINGENCIES
The Company is self-insured for a substantial portion of its general and
professional liability risks. The reserves for self-insured general and
professional liability losses, including loss adjustment expenses, are based on
actuarial estimates that are discounted at an average rate of 6% to their
present value based on the Company's historical claims experience adjusted for
current industry trends. The reserve for unpaid claims is adjusted periodically
as such claims mature, to reflect changes in actuarial estimates based on actual
experience. During the quarter ended December 31, 1997, the Company recorded
reductions in malpractice claim reserves of approximately $4.1 million as a
result of updated actuarial estimates. This reduction resulted primarily from
updates to actuarial assumptions regarding the Company's expected losses for
more recent policy years. These revisions are based on changes in expected
values of ultimate losses resulting from the Company's claim experience, and
increased reliance on such claim experience. While management and its actuaries
believe that the present reserve is reasonable, ultimate settlement of losses
may vary from the amount provided.
11
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE I--CONTINGENCIES (CONTINUED)
Certain of the Company's subsidiaries are subject to claims, civil suits,
and governmental investigations and inquiries relating to their operations and
certain alleged business practices. In the opinion of management, based on
consultation with counsel, resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
On August 1, 1996, the United States Department of Justice, Civil Division,
filed an Amended Complaint in a civil QUI TAM action initiated in November 1994
against the Company and its Orlando South hospital subsidiary ("Charter
Orlando") by two former employees. The First Amended Complaint alleges that
Charter Orlando violated the federal False Claims Act (the "Act") in billing for
impatient treatment provided to elderly patients. The Court granted the
Company's motion to dismiss the government's First Amended Complaint yet granted
the government leave to amend its First Amended Complaint. The government filed
a Second Amended Complaint on December 12, 1996 which, similar to the First
Amended Complaint, alleges that the Company and its subsidiary violated the Act
in billing for the treatment of geriatric patients. Like the First Amended
Complaints, the Second Amended Complaint is based on disputed clinical and
factual issues which the Company believes do not constitute a violation of the
Act. On the Company's motion, the Court has ordered the ordered the parties to
participate in mediation of the matter. As a result of the mediation, the
parties are engaged in settlement discussions which may lead to a resolution of
the matter. The parties have reached a tentative financial settlement of this
matter for approximately $4.8 million, which has been accrued, however,
negotiations concerning substantive non-monetary issues continue, and resolution
of such non-monetary issues will be material in connection with the Company's
decision to finalize a settlement. There can be no assurance at this time that
the non-monetary terms will be resolved to the Company's satisfaction. In any
event, the Company and its subsidiary deny the allegations made in the Second
Amended Complaint and will vigorously defend against its claims. The Company
does not believe this matter will have a material adverse effect on its
financial position or results of operations.
In October 1996, a group of eight plaintiffs purporting to represent an
uncertified class of psychiatrists, psychologists and clinical social workers
brought an action under the federal antitrust laws in the United States District
Court for the Southern District of New York against nine behavioral health
managed care organizations, including Merit, CMG, Green Spring and HAI
(collectively, the "Defendants"). The complaint alleges that the Defendants
violated Section 1 of the Sherman Act by engaging in a conspiracy to fix the
prices at which the Defendants purchase services from mental healthcare
providers such as the plaintiffs. The complaint further alleges that the
Defendants engaged in a group boycott to exclude mental healthcare providers
from the Defendants' networks in order to further the goals of the alleged
conspiracy. The complaint also challenges the propriety of the Defendants'
capitation arrangements with their respective customers, although it is unclear
from the complaint whether the plaintiffs allege that the Defendants unlawfully
conspired to enter into capitation arrangements with their respective customers.
The complaint seeks treble damages against the Defendants in an unspecified
amount and a permanent injunction prohibiting the Defendants from engaging in
the alleged conduct which forms the basis of the complaint, plus costs and
attorney's fees. Subsequent to the quarterly period ended December 31, 1997 for
which this Report on Form 10-Q was filed, on May 12, 1998, the District Court
granted the Defendants' motion to dismiss the complaint with prejudice. On May
27, 1998, the plaintiffs filed a notice of appeal of the District Court's
dismissal of their complaint with the United States Second Circuit Court of
Appeals. The Defendants intend to vigorously contest this appeal and to further
defend themselves in
12
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE I--CONTINGENCIES (CONTINUED)
this matter. The Company does not believe this matter will have a material
adverse effect on its financial position or results of operations.
NOTE J--SUBSEQUENT EVENTS
MERIT ACQUISITION. On February 12, 1998, the Company acquired all of the
outstanding stock of Merit for approximately $448.9 million in cash plus the
repayment of long-term debt. The Company refinanced its $375 million 11.25%
Senior Subordinated Notes as part of the Merit acquisition. The Company will
account for the Merit acquisition using the purchase method of accounting. Merit
manages healthcare programs for over 21 million covered lives across all
segments of the healthcare industry, including HMOs, Blue Cross/Blue Shield
organizations and other insurance companies, corporations and labor unions,
federal, state and local government agencies, and various state Medicaid
programs.
In connection with the consummation of the Merit acquisition, the Company
consummated certain related transactions (together with the Merit acquisition,
collectively, the "Transactions"), as follows: (i) the Company terminated its
Credit Agreement; (ii) the Company repaid all loans outstanding pursuant to and
terminated Merit's existing credit agreement (the "Merit Existing Credit
Agreement"); (iii) the Company completed a tender offer for its 11 1/4% Series A
Senior Subordinated Notes due 2004 (the "Magellan Outstanding Notes"); (iv)
Merit completed a tender offer for its 11 1/2% Senior Subordinated Notes due
2005 (the "Merit Outstanding Notes"); (v) the Company entered into a new senior
secured bank credit agreement (the "New Credit Agreement") with The Chase
Manhattan Bank and a syndicate of financial institutions, providing for credit
facilities of up to $700 million; and (vi) the Company issued $625 million in 9%
Senior Subordinated Notes due 2008 (the "Notes").
13
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE J--SUBSEQUENT EVENTS (CONTINUED)
The following table sets forth the sources and uses of funds for the
Transactions at closing (in thousands):
<TABLE>
<S> <C>
SOURCES:
Cash and cash equivalents....................................... $ 59,290
New Credit Agreement:
Revolving Facility (1)........................................ 20,000
Term Loan Facility............................................ 550,000
The Notes....................................................... 625,000
---------
Total sources................................................. $1,254,290
---------
---------
USES:
Cash paid to Merit shareholders................................. $ 448,867
Repayment of Merit Existing Credit Agreement (2)................ 196,357
Purchase of Magellan Outstanding Notes (3)...................... 432,102
Purchase of Merit Outstanding Notes (4)......................... 121,651
Transaction costs (5)........................................... 55,314
---------
Total uses...................................................... $1,254,290
---------
---------
</TABLE>
- ------------------------
(1) The Revolving Facility provides for borrowings of up to $150.0 million. The
Company had $112.5 million available for borrowing pursuant to the Revolving
Facility after consummating the Transactions, excluding approximately $17.5
million of availability reserved for certain letters of credit.
(2) Includes principal amount of $193.6 million and accrued interest of $2.7
million.
(3) Includes face amount of $375.0 million, tender premium of $43.4 million and
accrued interest of $13.7 million.
(4) Includes face amount of $100.0 million, tender premium of $18.9 million and
accrued interest of $2.8 million.
(5) Transaction costs include, among other things, expenses payable at closing
associated with the Debt Tender Offers, the Offering, the Merit acquisition
and the New Credit Agreement.
GREEN SPRING MINORITY SHAREHOLDER CONVERSION. The four minority
shareholders of Green Spring converted their ownership interests into 2,831,516
shares of Magellan common stock in accordance with the terms in the Green Spring
Exchange Agreement at various dates during January 1998. The Company will
account for the Green Spring Minority Shareholder Conversion as a purchase of
the minority interests in Green Spring at the fair value of the consideration
paid.
14
<PAGE>
NOTE K--GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
ASSETS SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents....................... $ 102,419 $ 62,326 $ 208,133 $ -- $ 372,878
Accounts receivable, net........................ 46,652 60,185 1,161 -- 107,998
Other current assets............................ 2,346 10,215 13,601 -- 26,162
----------- ------------- ------------ ------------ ------------
Total Current Assets........................ 151,417 132,726 222,895 -- 507,038
Assets restricted for settlement of unpaid claims
and other long-term liabilities................. -- 71,501 16,031 -- 87,532
Property and equipment
Land............................................ 5,406 5,389 872 -- 11,667
Buildings and improvements...................... 35,789 31,517 2,868 -- 70,174
Equipment....................................... 19,704 35,023 8,992 -- 63,719
----------- ------------- ------------ ------------ ------------
60,899 71,929 12,732 -- 145,560
Accumulated depreciation........................ (15,168) (17,288) (4,582) -- (37,038)
Construction in progress........................ 4 611 77 -- 692
----------- ------------- ------------ ------------ ------------
Total property and equipment................ 45,735 55,252 8,227 -- 109,214
----------- ------------- ------------ ------------ ------------
Investment in CBHS................................ 16,878 -- -- -- 16,878
Deferred income taxes............................. -- 4,428 (3,270) -- 1,158
Other long-term assets (1)........................ 114,642 (5,757) 978,588 (1,027,907) 59,566
Goodwill, net..................................... 17,966 96,268 -- -- 114,234
----------- ------------- ------------ ------------ ------------
$ 346,638 $ 354,418 $1,222,471 $(1,027,907) $ 895,620
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................ $ 23,057 $ 17,097 $ 5,192 $ -- $ 45,346
Accrued liabilities and income tax payable...... 27,800 73,586 69,043 -- 170,429
Current maturities of long-term debt and capital
lease obligations............................. 466 3,135 -- -- 3,601
----------- ------------- ------------ ------------ ------------
Total Current Liabilities................... 51,323 93,818 74,235 -- 219,376
Long-term debt and capital lease obligations...... (793,325) 3,913 1,181,105 -- 391,693
Reserve for unpaid claims......................... -- 56,339 (7,226) -- 49,113
Deferred credits and other long-term
liabilities(1).................................. 8,393 6,290 (183,893) 185,320 16,110
Minority interest................................. -- -- -- 61,078 61,078
Stockholders' Equity
Common Stock, par value $0.25 per share;
Authorized--80,000 shares Issued and
outstanding--33,439 shares.................... 2,752 (483) 8,361 (2,269) 8,361
Committments and contingencies
Other Stockholders' Equity
Additional paid-in capital...................... 1,000,935 125,624 340,645 (1,126,559) 340,645
Retained earnings (Accumulated deficit)......... 76,035 71,317 (129,955) (147,352) (129,955)
Warrants outstanding............................ -- -- 25,050 -- 25,050
Common Stock in treasury, 4,424 shares.......... -- -- (82,731) -- (82,731)
Cumulative foreign currency adjustments......... 525 (2,400) (3,120) 1,875 (3,120)
----------- ------------- ------------ ------------ ------------
Total stockholders equity................... 1,080,247 194,058 158,250 (1,274,305) 158,250
----------- ------------- ------------ ------------ ------------
$ 346,638 $ 354,418 $1,222,471 $(1,027,907) $ 895,620
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
</TABLE>
- ------------------------
(1) Elimination entry related to intercompany receivables and payables and
investment in consolidated subsidiaries.
15
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
ASSETS SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents....................... $ 79,896 $ 61,733 $ 28,830 $ -- $ 170,459
Accounts receivable, net........................ 41,406 76,057 22,756 -- 140,219
Other current assets............................ 6,135 12,011 16,292 -- 34,438
----------- ------------- ------------ ------------ ------------
Total Current Assets........................ 127,437 149,801 67,878 -- 345,116
Assets restricted for settlement of unpaid claims
and other long-term liabilities................. -- 66,028 6,992 -- 73,020
Property and equipment
Land............................................ 5,450 5,365 872 -- 11,687
Buildings and improvements...................... 36,261 31,647 4,194 -- 72,102
Equipment....................................... 27,253 38,031 9,035 -- 74,319
----------- ------------- ------------ ------------ ------------
68,964 75,043 14,101 -- 158,108
Accumulated depreciation........................ (16,483) (19,713) (4,973) -- (41,169)
Construction in progress........................ 22 896 77 -- 995
----------- ------------- ------------ ------------ ------------
52,503 56,226 9,205 -- 117,934
Investment in CBHS................................ 5,390 -- -- -- 5,390
Deferred income taxes............................. (9) 4,425 (2,238) -- 2,178
Other long-term assets (1)........................ 145,692 (5,743) 1,293,918 (1,323,359) 110,508
Goodwill, net..................................... 145,163 97,805 -- -- 242,968
----------- ------------- ------------ ------------ ------------
$ 476,176 $ 368,542 $1,375,755 $(1,323,359) $ 897,114
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................ $ 20,758 $ 14,236 $ 2,669 $ -- $ 37,663
Accrued liabilities............................. 48,491 81,664 61,490 -- 191,645
Income taxes payable............................ (309) 1,227 (137) -- 781
Current maturities of long-term debt and capital
lease obligations............................. 477 3,127 -- -- 3,604
----------- ------------- ------------ ------------ ------------
Total Current Liabilities................... 69,417 100,254 64,022 -- 233,693
Long-term debt and capital lease obligations...... (818,540) 13,890 1,196,200 -- 391,550
Reserve for unpaid claims......................... 1,006 46,530 (7,335) -- 40,201
Deferred credits and other long-term liabilities
(1)............................................. 133,831 15,377 (28,994) (105,191) 15,023
Minority interest................................. -- -- -- 64,785 64,785
Commitments and contingencies
Stockholders' Equity
Common Stock, par value $0.25 per share;
Authorized--80,000 shares Issued and
outstanding--33,543 shares.................... 2,752 (483) 8,387 (2,269) 8,387
Other Stockholders' Equity
Additional paid-in capital...................... 1,120,638 122,262 338,961 (1,242,900) 338,961
Retained earnings (Accumulated deficit)......... (33,402) 73,107 (122,327) (39,705) (122,327)
Warrants outstanding............................ -- -- 25,050 -- 25,050
Common stock in Treasury, 4,969 shares.......... -- -- (95,187) -- (95,187)
Cumulative foreign currency adjustments......... 474 (2,395) (3,022) 1,921 (3,022)
----------- ------------- ------------ ------------ ------------
Total stockholders' equity.................. 1,090,462 192,491 151,862 (1,282,953) 151,862
----------- ------------- ------------ ------------ ------------
$ 476,176 $ 368,542 $1,375,755 $(1,323,359) $ 897,114
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
</TABLE>
- ------------------------
(1) Elimination entry related to intercompany receivables and payables and
investment in consolidated subsidiaries.
16
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
----------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenue............................... $ 223,877 $ 112,591 $ 10,706 $ (355) $ 346,819
Costs and expenses
Salaries, cost of care and other
operating expenses.................... 177,681 100,260 6,537 (355) 284,123
Bad debt expense........................ 19,024 1,211 -- -- 20,235
Depreciation and amortization........... 8,617 3,750 732 -- 13,099
Interest, net........................... (12,106) (443) 26,118 -- 13,569
Stock option expense.................... -- -- 604 -- 604
----------- ------------- ------------- ------------- ------------
193,216 104,778 33,991 (355) 331,630
----------- ------------- ------------- ------------- ------------
Income (loss) before income taxes and
equity in earnings (loss) of
subsidiaries............................ 30,661 7,813 (23,285) -- 15,189
Provision for (benefit from) income
taxes................................... 831 2,855 2,389 -- 6,075
----------- ------------- ------------- ------------- ------------
Income (loss) before equity in earnings
(loss) of subsidiaries.................. 29,830 4,958 (25,674) -- 9,114
Equity in earnings (loss) of
subsidiaries............................ (53) (1,842) 32,815 (32,893) (1,973)
----------- ------------- ------------- ------------- ------------
Income (loss) before extraordinary item... 29,777 3,116 7,141 (32,893) 7,141
Extraordinary item--loss on early
extinguishment of debt (net of income
tax benefit of $1,967).................. (1,193) -- (2,950) 1,193 (2,950)
----------- ------------- ------------- ------------- ------------
Net income (loss)......................... $ 28,584 $ 3,116 $ 4,191 $ (31,700) $ 4,191
----------- ------------- ------------- ------------- ------------
----------- ------------- ------------- ------------- ------------
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating
activities.............................. $ 18,476 $ (22,153) $ (19,712) $ -- $ (23,389)
----------- ------------- ------------- ------------- ------------
Cash Flows from Investing Activities:
Capital expenditures.................... (3,133) (3,663) (216) -- (7,012)
Acquisitions of businesses.............. (170) (1,442) -- -- (1,612)
Decrease in assets restricted for the
settlement of unpaid claims........... -- 6,670 3,711 -- 10,381
Proceeds from the sale of assets........ 4,822 -- -- -- 4,822
----------- ------------- ------------- ------------- ------------
Cash provided by investing activities..... 1,519 1,565 3,495 -- 6,579
----------- ------------- ------------- ------------- ------------
Cash Flows from Financing Activities:
Payments on debt and capital lease
obligations........................... (71,435) (207) (44,978) -- (116,620)
Proceeds from the issuance of debt...... 71,616 -- 55,209 -- 126,825
Proceeds from exercise of stock options
and warrants.......................... -- -- 112 -- 112
----------- ------------- ------------- ------------- ------------
Cash provided by (used in) financing
activities.............................. 181 (207) 10,343 -- 10,317
----------- ------------- ------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents............................. 20,176 (20,795) (5,874) -- (6,493)
Cash and cash equivalents at beginning of
period.................................. 29,751 79,552 11,642 -- 120,945
----------- ------------- ------------- ------------- ------------
Cash and cash equivalents at end of
period.................................. $ 49,927 $ 58,757 $ 5,768 $ -- $ 114,452
----------- ------------- ------------- ------------- ------------
----------- ------------- ------------- ------------- ------------
</TABLE>
17
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
---------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenue............................... $ 85,862 $ 130,191 $ 44 $ -- $ 216,097
Costs and expenses
Salaries, cost of care and other
operating expenses.................... 61,343 110,841 3,437 -- 175,621
Bad debt expense........................ 179 891 -- -- 1,070
Depreciation and amortization........... 2,260 4,067 642 -- 6,969
Interest, net........................... (21,031) (682) 29,114 -- 7,401
Stock option expense (credit)........... -- -- (3,959) -- (3,959)
Equity in loss of CBHS.................. 11,488 -- -- -- 11,488
----------- ------------- ------------ ------------- ------------
54,239 115,117 29,234 -- 198,590
----------- ------------- ------------ ------------- ------------
Income (loss) before income taxes and
equity in earnings (loss) of
subsidiaries............................ 31,623 15,074 (29,190) -- 17,507
Provision for (benefit from) income
taxes................................... 138 4,284 2,581 -- 7,003
------------- ------------ ------------- ------------
Income (loss) before equity in earnings
(loss) of subsidiaries.................. 31,485 10,790 (31,771) -- 10,504
Equity in earnings (loss) of
subsidiaries............................ (206) (2,633) 39,399 (39,436) (2,876)
----------- ------------- ------------ ------------- ------------
Net income (loss)......................... $ 31,279 $ 8,157 $ 7,628 $ (39,436) $ 7,628
----------- ------------- ------------ ------------- ------------
----------- ------------- ------------ ------------- ------------
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating
activities.............................. $ (36,449) $ (238) $ 4,962 $ -- $ (31,725)
----------- ------------- ------------ ------------- ------------
Cash Flows from Investing Activities:
Capital expenditures.................... (1,825) (2,710) (43) -- (4,578)
Acquisition and investments in
businessess, net of cash acquired..... 15,751 (2,979) (178,320) -- (165,548)
Decrease in assets restricted for the
settlement of unpaid claims........... -- 5,474 8,890 -- 14,364
Crescent Transaction costs.............. -- -- (4,253) -- (4,253)
----------- ------------- ------------ ------------- ------------
Cash provided by (used in) investing
activities.............................. 13,926 (215) (173,726) -- (160,015)
----------- ------------- ------------ ------------- ------------
Cash Flows from Financing Activities:
Payments on debt and capital lease
obligations........................... -- (140) -- -- (140)
Proceeds from exercise of stock options
& warrants............................ -- -- 1,917 -- 1,917
Purchases of treasury stock............. -- -- (12,456) -- (12,456)
----------- ------------- ------------ ------------- ------------
Cash used in financing activities......... -- (140) (10,539) -- (10,679)
----------- ------------- ------------ ------------- ------------
Net decrease in cash and cash
equivalents............................. (22,523) (593) (179,303) -- (202,419)
Cash and cash equivalents at beginning of
period.................................. 102,419 62,326 208,133 -- 372,878
----------- ------------- ------------ ------------- ------------
Cash and cash equivalents at end of
period.................................. $ 79,896 $ 61,733 $ 28,830 $ -- $ 170,459
----------- ------------- ------------ ------------- ------------
----------- ------------- ------------ ------------- ------------
</TABLE>
18
<PAGE>
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
DECEMBER 31, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Although
the Company believes that its plans, intentions and expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such plans, intentions or expectations will be achieved. Important factors that
could cause actual results to differ materially from the Company's
forward-looking statements are set forth in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997. All forward-looking
statements attributable to the Company or persons acting on behalf of the
Company are expressly qualified in their entirety by the cautionary statements
set forth in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997.
OVERVIEW
The Company has historically derived the majority of its revenue from
providing healthcare services in an inpatient setting. Payments from third-party
payors are the principal source of revenue for most healthcare providers. In the
early 1990's, many third-party payors sought to control the cost of providing
care to their patients by instituting managed care programs or seeking the
assistance of managed care companies. Providers participating in managed care
programs agree to provide services to patients for a discount from established
rates, which generally results in pricing concessions by the providers and lower
margins. Additionally, managed care programs generally encourage alternatives to
inpatient treatment settings and reduce utilization of inpatient services. As a
result, third-party payors established managed care programs or engaged managed
care companies in many areas of healthcare, including behavioral healthcare. The
Company, which until June 1997 was the largest operator of psychiatric hospitals
in the United States, was adversely affected by the adoption of managed care
programs by third-party payors.
Prior to the first quarter of fiscal 1996, the Company was not a provider of
behavioral managed care services. During the first quarter of fiscal 1996, the
Company acquired a 61% ownership interest in Green Spring. At that time, the
Company intended to become a fully integrated behavioral healthcare provider by
combining the managed behavioral healthcare products offered by Green Spring
with the direct treatment services offered by the Company's psychiatric
hospitals. The Company believed that an entity that participated in both the
managed care and provider segments of the behavioral healthcare industry could
more efficiently provide and manage behavioral healthcare for insured
populations than an entity that was solely a managed care company. The Company
also believed that earnings from its managed care business would offset, in
part, the negative impact on the financial performance of its psychiatric
hospitals caused by managed care. Green Spring was the Company's first
significant involvement in managed behavioral healthcare.
Subsequent to the Company's acquisition of Green Spring, the growth of the
managed behavioral healthcare industry accelerated. Under the Company's majority
ownership, Green Spring increased its base of covered lives from 12.0 million as
of the end of calendar year 1995 to 21.1 million as of the end of calendar year
1997, a compound annual growth rate of over 32%. While growth in the industry
was accelerating, the managed behavioral healthcare industry also began to
consolidate. The Company concluded that consolidation presented an opportunity
for the Company to enhance its stockholder value by increasing its participation
in the managed behavioral healthcare industry, which the Company believed
offered growth and earnings prospects superior to those of the psychiatric
hospital industry. Therefore, the Company decided to sell its domestic
psychiatric facilities to obtain capital for expansion in the managed behavioral
healthcare business.
19
<PAGE>
During the third quarter of fiscal 1997, the Company sold substantially all
of its domestic acute-care psychiatric hospitals and residential treatment
facilities (the "Psychiatric Hospital Facilities") to Crescent Real Estate
Equities Limited Partnership ("Crescent") for $417.2 million in cash (before
costs of approximately $16.0 million) and certain other consideration (the
"Crescent Transactions"). The sale of the Psychiatric Hospital Facilities
provided the Company with approximately $200 million of net cash proceeds, after
debt repayment, for use in implementing its business strategy. The Company used
the net cash proceeds to finance the acquisitions of HAI and Allied in December
1997. The Company has further implemented its business strategy through the
Merit acquisition. See Note J--"Subsequent Events--Merit Acquisition".
The Company now generates a significant portion of its revenue and earnings
from its managed care business. A significant portion of the Company's managed
care revenue and earnings are generated from risk-based products, and such
portion will increase following the Merit acquisition. The Company believes
enrollment in risk-based products will continue to grow through new covered
lives and the transition of covered lives in administrative services-only
products and employee assistance programs to higher revenue risk-based products.
Risk-based products typically generate significantly higher amounts of revenue
than other managed behavioral healthcare products. Because the Company is
responsible for the cost of care, risk-based products typically have lower
margins than non-risk-based products.
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1996 COMPARED TO THE QUARTER ENDED DECEMBER 31,
1997.
REVENUE. Managed care revenue increased 61.8% to $134.1 million for the
quarter ended December 31, 1997 from $82.9 million in the same period in fiscal
1997. The increase resulted primarily from the acquisition of HAI and Allied in
December 1997 and continued revenue growth at Green Spring. HAI and Allied
revenues were approximately $9.2 million and $18.5 million, respectively, for
the quarter ended December 31, 1997. Green Spring revenues were positively
impacted by the award of several new contracts and acquisitions since December
31, 1996, resulting in a 54% increase in covered lives to 21.1 million as of
December 31, 1997 as compared to December 31, 1996.
Public sector revenue increased 36.1% to $29.3 million for the quarter ended
December 31, 1997 from $21.5 million in the same period in fiscal 1997. The
increase was primarily attributable to a 26% increase in placements in Mentor
homes and $1.7 million in additional revenues from correctional contracts.
Healthcare franchising revenue was $19.6 million for the quarter ended
December 31, 1997. The healthcare franchising revenue consisted of franchise
fees payable by CBHS pursuant to the master franchising agreement entered into
as part of the Crescent Transactions (the "Franchise Fees").
Provider business revenue decreased 86.3% to $33.1 million for the quarter
ended December 31, 1997 from $242.4 million in the same period in fiscal 1997.
The decrease resulted primarily from the effect of the consummation of the
Crescent Transactions on June 17, 1997, following which revenue from the
Psychiatric Hospital Facilities and other facilities transferred to CBHS was no
longer recorded as part of the Company's revenue. During the quarters ended
December 31, 1996 and 1997, the Company recorded revenue of $11.0 million and
$0.7 million, respectively, for settlements and adjustments related to
reimbursement issues with respect to psychiatric hospitals owned or formerly
owned by the Company. During fiscal 1997, the Company recorded $27.4 million for
such settlements. Management anticipates that revenue related to such
settlements will decline significantly for fiscal 1998.
SALARIES, COST OF CARE AND OTHER OPERATING EXPENSES. Salaries, cost of care
and other operating expenses attributable to the managed care business increased
61.7% to $119.6 million for the quarter ended December 31, 1997 from $73.9
million in the same period in fiscal 1997. The increase resulted primarily from
the acquisition of HAI and Allied, which had expenses of $6.8 million and $17.6
million, respectively, for the quarter ended December 31, 1997, and from
continued growth at Green Spring.
20
<PAGE>
Public sector salaries, cost of care and other operating expenses increased
39.0% to $27.4 million for the quarter ended December 31, 1997 from $19.7
million in the same period in fiscal 1997. The increase was due primarily to
internal growth and increases in costs related to expansion and new product
development.
Healthcare franchising operating expenses were $2.2 million for the quarter
ended December 31, 1997. The Company recorded no expenses with respect to the
healthcare franchising business during the quarter ended December 31, 1996
because the Crescent Transactions were not consummated until the third quarter
of fiscal 1997.
Salaries, cost of care and other operating expenses attributable to the
provider business decreased 88.0% to $22.1 million for the quarter ended
December 31, 1997 from $184.7 million in the same period in fiscal 1997. The
decrease resulted primarily from the effect of the consummation of the Crescent
Transactions, following which operating expenses of the Psychiatric Hospital
Facilities and other facilities transferred to CBHS were no longer accounted for
as part of the Company's operating expenses. During the quarter ended December
31, 1997, the Company recorded reductions of expenses of approximately $4.1
million as a result of updated actuarial estimates related to malpractice claim
reserves. These reductions resulted primarily from updates to actuarial
assumptions regarding the Company's expected losses for more recent policy
years. These revisions are based on changes in expected values of ultimate
losses resulting from the Company's claim experience, and increased reliance on
such claim experience. While management and its actuaries believe that the
present reserve is reasonable, ultimate settlement of losses may vary from the
amount recorded and result in additional fluctuations in income in future
periods.
BAD DEBT EXPENSE. Bad debt expense, which is primarily attributable to the
provider business, decreased 94.7%, or $19.2 million, for the quarter ended
December 31, 1997 compared to the same period in fiscal 1997. The decrease was
primarily attributable to the effect of the consummation of the Crescent
Transactions, following which the bad debt expense incurred by the Psychiatric
Hospital Facilities and other facilities transferred to CBHS was no longer
accounted for as part of the Company's bad debt expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
46.8%, or $6.1 million, for the quarter ended December 31, 1997 compared to the
same period in fiscal 1997. The decrease was primarily attributable to the
effect of the consummation of the Crescent Transactions, whereby the Psychiatric
Hospital Facilities were sold to Crescent, offset by increases in depreciation
and amortization resulting from the HAI and Allied acquisitions.
INTEREST, NET. Interest expense, net, decreased 45.5%, or $6.2 million, for
the quarter ended December 31, 1997 compared to the same period in fiscal 1997.
The decrease was primarily the result of lower interest expense due to lower
average borrowings and higher interest income due to temporary investments of
the cash received in the Crescent Transactions.
OTHER ITEMS. Stock option expense (credit) for the quarter ended December
31, 1997 decreased $4.6 million from the quarter ended December 31, 1996
primarily due to fluctuations in the market price of the Company's common stock.
The Company recorded equity in the loss of CBHS of $11.5 million for the
quarter ended December 31, 1997, representing the Company's proportionate (50%)
loss in CBHS for the quarter ended December 31, 1997. See Note G--"Investment in
CBHS".
Minority interest increased $0.9 million during the quarter ended December
31, 1997 compared to the same period in fiscal 1997. The increase was primarily
due to Green Spring's net income growth in fiscal 1998.
21
<PAGE>
The Company recorded an extraordinary loss on early extinguishment of debt,
net of tax, of $3.0 million during the quarter ended December 31, 1996 related
to the termination of its then existing credit agreement.
IMPACT OF CRESCENT TRANSACTIONS
The Company owns a 50% equity interest in CBHS, from which it receives the
Franchise Fees. The Franchise Fees represent a significant portion of the
Company's earnings and cash flows. The following is a discussion of certain
matters related to the Company's ownership of CBHS that may have a bearing on
the Company's future results of operations.
CBHS may consolidate services in selected markets by closing facilities
depending on market conditions and evolving business strategies. For example,
during fiscal 1995 and 1996, the Company consolidated, closed or sold 15 and 9
psychiatric hospitals, respectively. During fiscal 1997, the Company
consolidated or closed three psychiatric hospitals prior to the Crescent
Transactions. If CBHS closes additional psychiatric hospitals, it could result
in charges to income for the costs attributable to the closures, which would
result in lower equity in earnings of CBHS for the Company.
The Company's JV Hospitals and CBHS' hospitals continue to experience a
shift in payor mix to managed care payors from other payors, which contributed
to a reduction in revenue per equivalent patient day in fiscal 1996 and a
decline in average length of stay in fiscal 1995, 1996 and 1997. Management
anticipates a continued shift in hospital payor mix towards managed care payors
as a result of changes in the healthcare marketplace. Future shifts in hospital
payor mix to managed care payors could result in lower revenue per equivalent
patient day and lower average length of stay in future periods for the Company's
JV Hospitals and CBHS' hospitals, which could result in lower equity in earnings
from CBHS for the Company and cash flows to pay the Franchise Fees. The
hospitals currently managed or operated by CBHS, including hospitals closed or
sold in 1997, reported a 10% reduction in equivalent patient days, a 7%
reduction in average length of stay and a 4% decrease in admissions in fiscal
1997 compared to fiscal 1996.
The Balanced Budget Act of 1997 (the "Budget Act"), which was enacted by
Congress in August 1997, includes provisions that eliminated the TEFRA bonus
payment and reduced reimbursement of certain costs previously paid by Medicare
and eliminated the Medicaid "disproportionate share" program. These provisions,
along with other provisions in the Budget Act, will reduce the amount of revenue
and earnings that CBHS hospitals will receive for the treatment of Medicare
patients. CBHS management estimates that such reductions will approximate $10
million in fiscal 1998, and due to the phase-in effects of the Budget Act,
approximately $15 million annually in subsequent fiscal years.
Based on projections of fiscal 1998 operations prepared by management of
CBHS and results of operations through December 31, 1997, the Company believes
that CBHS will be unable to pay the full amount of the Franchise Fees it is
contractually obligated to pay the Company during fiscal 1998. The Company
currently estimates that CBHS will be able to pay approximately $58 to $68
million of the Franchise Fees in fiscal 1998, a $10 to $20 million shortfall
relative to amounts payable under the master franchise agreement. The Company
may be required to record bad debt expense related to Franchise Fees receivable
from CBHS, if any, in fiscal 1998 or future periods if CBHS's operating
performance does not improve to levels achieved prior to the consummation of the
Crescent Transactions. If CBHS defaults in payment of the Franchise Fees, the
Company will pursue all remedies available to it under the master franchise
agreement.
IMPACT OF THE MERIT ACQUISITION
Following the Merit acquisition, the Company provides managed behavioral
healthcare services in the United States to over 58 million covered lives. The
Company believes it has the number one market position in each of the major
product markets in which it competes. The Company believes its industry
22
<PAGE>
leading position will enhance its ability to (1) provide a consistent level of
high quality service on a nationwide basis; (ii) enter into favorable agreements
with behavioral healthcare providers that allow it to effectively control
healthcare costs for its customers; and (iii) effectively market its managed
care products to large corporate, HMO and insurance customers, which, the
Company believes, increasingly prefer to be serviced by a single-source provider
on a national basis.
The Company believes that the Merit acquisition creates opportunities for
the Company to achieve significant cost savings in its managed behavioral
healthcare business. Management believes that cost saving opportunities will
result from leveraging fixed overhead over a larger revenue base and an
increased number of covered lives and from reducing duplicative corporate and
regional selling, general and administrative expenses. As a result, the Company
expects to achieve approximately $60.0 million of cost savings in its managed
behavioral healthcare business on an annual basis within eighteen months
following the consummation of the Merit acquisition. The Company expects to
spend approximately $26.0 million during the eighteen months following the
consummation of the Merit acquisition in connection with achieving such costs.
The Company expects to finalize its plans for the integration of the
businesses of Green Spring, HAI and Merit by March 31, 1998. The Company expects
to record charges to operations during the quarter ended March 31, 1998 to the
extent the integration plan results in the elimination of personnel and facility
closures at HAI and Green Spring and for integration plan costs incurred that
benefit future periods.
The full implementation of the integration plan is expected to take eighteen
months. The Merit acquisition and related transactions are expected to be
dilutive to future earnings until the integration plan is substantially
complete. Accordingly, such earnings dilution will be most significant during
the remaining quarters of fiscal 1998.
The Company expects to record an extraordinary loss of approximately $30.0
million to $35.0 million, net of tax benefits, in connection with the
termination of its Credit Agreement and extinguishing the $375 million in 11.25
% Senior Subordinated Notes as part of the Transactions.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Company's net cash used in operating activities
was approximately $23.4 million and $31.7 million for the quarters ended
December 31, 1996 and 1997, respectively. The Company typically has negative
operating cash flows in the December quarter each year due to the interest
payment previously due in October each year for the $375 million 11.25% Senior
Subordinated Notes and annual employee incentive payments. Operating cash flows
for the quarter ended December 31, 1997 were also adversely affected by the
change in due to/from CBHS, primarily due to working capital advances, of $11.3
million, the prepayment of CHARTER call center management fees to CBHS of $5.9
million and insurance settlement payments of $6.8 million.
INVESTING ACTIVITIES. The Company utilized $165.5 million in funds, net of
cash acquired, for acquisitions and investments in businesses, including Allied
and HAI, during the quarter ended December 31, 1997. In addition, the Company
paid approximately $4.3 million for Crescent Transaction costs during the
quarter ended December 31, 1997. The Company expects to fund an additional $6.6
million in transaction costs and construction costs in fiscal 1998 related to
the Crescent Transactions.
FINANCING ACTIVITIES. The Company borrowed approximately $126.8 million,
net of issuance costs, in the first quarter of fiscal 1997, primarily to
refinance its then existing credit agreement. The Company repurchased
approximately 545,000 shares of its common stock for approximately $12.5 million
during the quarter ended December 31, 1997.
As of February 12, 1998, the Company had approximately $112.5 million of
availability under the Revolving Facility of the New Credit Agreement.
23
<PAGE>
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
Following the consummation of the Merit acquisition, interest payments on
the Notes and interest and principal payments on indebtedness outstanding
pursuant to the New Credit Agreement will represent significant liquidity
requirements for the Company. Borrowings under the New Credit Agreement will
bear interest at floating rates and will require interest payments on varying
dates depending on the interest rate option selected by the Company. Borrowings
pursuant to the New Credit Agreement will include $550 million in Term Loans and
up to $150 million under the Revolving Facility. Commencing in the second
quarter of fiscal 1999, the Company will be required to make principal payments
with respect to the Term Loans.
The Company is in the process of finalizing its plans for the integration of
the businesses of Green Spring, HAI and Merit. The Company expects to achieve
approximately $60.0 million of cost savings on an annual basis within eighteen
months following the consummation of the Merit acquisition. Such cost savings
are measured relative to the combined budgeted amounts of the Company, Merit and
HAI for the current fiscal year prior to the cost savings initiatives. The
Company expects to spend approximately $26.0 million during the eighteen months
following the consummation of the Merit acquisition in connection with achieving
such cost savings, including expenses related to reducing duplicative personnel
in its managed care organizations, contractual terminations for eliminating
excess real estate (primarily locations under operating leases) and other
related costs in connection with the integration plan. Certain of such costs
will be capital expenditures.
During December 1997, the Company purchased HAI and Allied for approximately
$122.1 million and $70.0 million, respectively, excluding transaction costs. In
addition, the Company incurred the obligation to make contingent payments to the
former owners of HAI and Allied. With respect to HAI, the Company may be
required to make additional contingent payments of up to $60.0 million annually
to Aetna over the five-year period subsequent to closing. The Company is
obligated to make contingent payments under two separate calculations. Under the
first calculation, the amount and timing of the contingent payments will be
based on growth in the number of lives covered by certain HAI products during
the next five years. The Company may be required to make contingent payments of
up to $25.0 million per year for each of the five years following the HAI
acquisition depending on the net annual growth in the number of lives covered by
such HAI products. The amount to be paid per incremental covered life decreases
during the five-year term of the Company's contingent payment obligation. Under
the second calculation, the Company may be required to make contingent payments
of up to $35.0 million per year for each of five years based on the net
cumulative growth in the number of lives covered by certain other HAI products.
Aetna will receive a specified amount per net incremental life covered by such
products. The amount to be paid per incremental covered life increases with the
number of incremental covered lives.
The Company may be required to pay up to $40.0 million during the three
years following the closing of the Allied acquisition based on Allied's
performance relative to certain earnings targets. In connection with Merit's
acquisition of CMG Health, Inc. ("CMG"), the Company, by acquiring Merit, may be
required to make certain future contingent cash payments over the next two years
to the former shareholders of CMG based upon the performance of certain CMG
customer contracts. Such contingent payments are subject to an aggregate maximum
of $23.5 million.
The Company believes that the cash flow generated from its operations
together with amounts available for borrowing under the New Credit Agreement,
should be sufficient to fund its debt service requirements, anticipated capital
expenditures, contingent payments, if any, with respect to HAI, Allied and CMG
and other investing and financing activities. The Company currently estimates
that it will spend approximately $50.0 million to $60.0 million for capital
expenditures in fiscal 1998. On a combined basis, the Company (excluding its
provider business), Merit and HAI spent approximately $40 million for capital
expenditures during fiscal 1997. The majority of the Company's budgeted capital
expenditures relate to
24
<PAGE>
management information systems and related equipment. The Revolving Facility
will provide the Company with revolving loans and letters of credit in an
aggregate principal amount at any time not to exceed $150.0 million. Immediately
after the consummation of the Transactions, $112.5 million, including $17.5
million for letters of credit, was available to the Company for borrowing
pursuant to the Revolving Facility. The Company's future operating performance
and ability to service or refinance the Notes or to extend or refinance the
indebtedness outstanding pursuant to the New Credit Agreement will be subject to
future economic conditions and to financial, business and other factors, many of
which are beyond the Company's control.
The New Credit Agreement provides for the Term Loan Facility in an aggregate
principal amount of $550 million, consisting of an approximately $183.3 million
Tranche A Term Loan (the "Tranche A Term Loan"), an approximately $183.3 million
Tranche B Term Loan (the "Tranche B Term Loan") and an approximately $183.3
million Tranche C Term Loan (the "Tranche C Term Loan") and the Revolving
Facility providing for revolving loans to the Company and the "Subsidiary
Borrowers" (as defined therein) and the issuance of letters of credit for the
account of the Company and the Subsidiary Borrowers in an aggregate principal
amount (including the aggregate stated amount of letters of credit) of $150
million.
The Tranche A Term Loan and the Revolving Facility will mature on the date
that is six years after the closing of the Transactions. The Tranche B Term Loan
will mature on the date that is seven years after the closing of the
Transactions and the Tranche C Term Loan will mature on the date that is eight
years after the closing of the Transactions. The Tranche A Term Loan will be
amortized in installments in amounts equal to $22.0 million in the second year
following the closing date, $30.0 million in the third year following the
closing date, $36.0 million in the fourth year following the closing date, $48.0
million in the fifth year following the closing date, and $47.3 million in the
sixth year following the closing date. The Tranche B Term Loan will be amortized
in installments in amounts equal to $2.2 million in each of the second through
fifth years following the closing date, $55.0 million in the sixth year
following the closing date, and $119.5 million in the seventh year following the
closing date. The Tranche C Term Loan will be amortized in installments in
amounts equal to $2.2 million in each of the second through sixth years
following the closing date, $55.0 million in the seventh year following the
closing date and $117.3 million in the eighth year following the closing date.
In addition, the credit facilities are subject to mandatory prepayment and
reductions (to be applied first to the Term Loan Facility) in an amount equal to
(a) 100% of the net proceeds of certain offerings of equity securities by the
Company or any of its subsidiaries, (b) 100% of the net proceeds of certain debt
issuances of the Company or any of its subsidiaries, (c) 75% of the Company's
excess cash flow, as defined, and (d) 100% of the net proceeds of certain asset
sales or other dispositions of property of the Company and its subsidiaries, in
each case subject to certain limited exceptions.
The New Credit Agreement will impose restrictions on the Company's ability
to make capital expenditures and both the New Credit Agreement and the Indenture
governing the Notes limit the Company's ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged financial
condition of the Company subsequent to the Merit acquisition, could limit the
Company's ability to respond to market opportunities. The covenants contained in
the New Credit Agreement will also, among other things, restrict the ability of
the Company to dispose of assets, repay other indebtedness, amend other debt
instruments (including the Indenture), pay dividends, create liens on assets,
enter into sale and leaseback transactions, make investments, loans or advances,
redeem or repurchase common stock and make acquisitions.
25
<PAGE>
MODIFICATION OF COMPUTER SOFTWARE FOR THE YEAR 2000
The Company and its subsidiaries have internally developed computer software
systems that process transactions based on storing two digits for the year of a
transaction (i.e., "97" for 1997) rather than four digits, which will be
required for year 2000 transaction processing. CBHS expects to spend $1.0
million in the aggregate during fiscal 1998 and fiscal 1999 to modify internal
use software. The Company expects to spend approximately $1.6 million in the
aggregate during fiscal 1998 and fiscal 1999 to modify internal use software.
The Company does not anticipate incurring any other significant costs for year
2000 software modification. The cost of modifying internal use software for the
year 2000 is charged to expense as incurred.
26
<PAGE>
PART II--OTHER INFORMATION
ITEM 1.--LEGAL PROCEEDINGS
Certain of the Company's subsidiaries are subject to or parties to claims,
civil suits and governmental investigations and inquiries relating to their
operations and certain alleged business practices. In the opinion of management,
based on consultation with counsel, resolution of these matters will not have a
material adverse effect on the Company's financial position or results or
operations.
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2(a) Stock Purchase Agreement, dated August 5, 1997, between the Company and
Aetna Insurance Company of Connecticut, which was filed as Exhibit 2(a)
to the Company's current report on Form 8-K, which was filed on December
17, 1997, and is incorporated herein by reference.
2(b) Master Service Agreement, dated August 5, 1997, between the Company,
Aetna U.S. Healthcare, Inc. and Human Affairs International,
Incorporated, which was filed as Exhibit 2(b) to the Company's current
report on Form 8-K, which was filed on December 17, 1997, and is
incorporated herein by reference.
2(c) Amendment to Stock Purchase Agreement, dated December 4, 1997, between
the Company and Aetna Insurance Company of Connecticut, which was filed
as Exhibit 2(c) to the Company's current report on Form 8-K, which was
filed on December 17, 1997, and is incorporated herein by reference.
2(d) First Amendment to Master Services Agreement, dated December 4, 1997,
between the Company, Aetna U.S. Healthcare, Inc. and Human Affairs
International, Incorporated, which was filed as Exhibit 2(d) to the
Company's current report on Form 8-K, which was filed on December 17,
1997, and in incorporated herein by reference.
2(e) Asset Purchase Agreement, dated October 16, 1997, among the Company;
Allied Health Group, Inc.; Gut Management, Inc.; Sky Management Co.;
Florida Specialty Network, LTD; Surgical Associates of South Florida,
Inc.; Surginet, Inc.; Jacob Nudel, M.D.; David Russin, M.D. and Lawrence
Schimmel, M.D.
2(f) First Amendment to Asset Purchase Agreement, dated December 5, 1997,
among the Company; Allied Health Group, Inc.; Gut Management, Inc.; Sky
Management Co.; Florida Specialty Network, LTD; Surgical Associates of
South Florida, Inc.; Surginet, Inc.; Jacob Nudel, M.D.; David Russing
M.D. and Lawrence Schimmel, M.D.
2(g) Agreement and Plan of Merger, dated October 24, 1997, among the
Company, Merit Behavioral Care Corporation and MBC Merger Corporation.
27 Financial Data Schedule
27
<PAGE>
(b) Report on Form 8-K
The following current reports on Form 8-K were filed by the
Registrant with the Securities and Exchange Commission during the quarter
ended December 31, 1997.
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
DATE OF REPORT ITEM REPORTED AND DESCRIPTION FILED
- ---------------------- --------------------------------- ---------------
<S> <C> <C>
December 17, 1997 Acquisition--HAI Acquisition Yes (1)
</TABLE>
- ------------------------
(1) Audited financial statements for the two years in the period ended
December 31, 1996, unaudited financial statements for the nine months
ended September 30, 1997 and 1996 and as of September 30, 1997, unaudited
pro forma statement of operations for the year ended September 30, 1997
and unaudited pro forma balance sheet as of September 30, 1997.
28
<PAGE>
EXHIBIT 2(e)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
AMONG
CMSF, INC., AS THE BUYER,
AND
ALLIED HEALTH GROUP, INC.,
GUT MANAGEMENT, INC.,
SKY MANAGEMENT CO.,
FLORIDA SPECIALTY NETWORK, LTD.,
SURGICAL ASSOCIATES OF SOUTH FLORIDA, INC.,
SURGINET, INC., AS SELLERS,
AND
JACOB NUDEL, M.D., DAVID RUSSIN, M.D. AND LAWRENCE SCHIMMEL, M.D.
AND
MAGELLAN HEALTH SERVICES, INC., AS PARENT
DATED AS OF OCTOBER 16, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C> <C>
SECTION 1. DEFINITIONS................................................................... 1
Section 1.1 Definitions.................................................. 1
Section 1.2 Principles of Construction................................... 13
SECTION 2. PURCHASE AND SALE OF THE PURCHASED PROPERTY................................... 14
Section 2.1 Transfer of Assets........................................... 14
Section 2.2 Sale at Closing Date......................................... 14
Section 2.3 Subsequent Documentation..................................... 14
Section 2.4 Assumption of Liabilities.................................... 15
Section 2.5 Excluded Liabilities......................................... 16
Section 2.6 Breach of Representations.................................... 17
Section 2.7 Right of Enforcement......................................... 17
SECTION 3. PURCHASE PRICE; EARN-OUT...................................................... 17
Section 3.1 Purchase Price............................................... 17
Section 3.2 Working Capital Adjustment................................... 18
Section 3.3 Earn-Out..................................................... 19
Section 3.4 Payment of Adjustment and Earn-Out; Distribution of Escrow... 25
Section 3.5 Prorations and Other Adjustments............................. 26
SECTION 4. CLOSING....................................................................... 27
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND THE EXECUTIVE
SHAREHOLDERS.................................................................. 28
Section 5.1 Organization; Qualification to Do Business; Subsidiaries..... 29
Section 5.2 Authorization and Validity of Agreement...................... 29
Section 5.3 No Conflict or Violation..................................... 30
Section 5.4 Consents and Approvals....................................... 30
Section 5.5 Financial Statements and Projections......................... 30
Section 5.6 Absence of Certain Changes or Events......................... 31
Section 5.7 Tax Matters.................................................. 35
Section 5.8 Absence of Undisclosed Liabilities........................... 35
Section 5.9 Accounts Receivable; Banking................................. 36
Section 5.10 Real Property; Leases........................................ 36
Section 5.11 Equipment and Machinery...................................... 37
Section 5.12 Intellectual Property; Intangible Assets..................... 37
Section 5.13 Licenses and Permits......................................... 38
Section 5.14 Litigation................................................... 39
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C> <C>
Section 5.15 Professional Liability Claims................................ 39
Section 5.16 Contracts.................................................... 40
Section 5.17 Employee Plans and Benefits; Employees and Independent
Contractors.................................................. 42
Section 5.18 Insurance.................................................... 44
Section 5.19 Compliance with Law.......................................... 45
Section 5.20 Change in Ownership.......................................... 48
Section 5.21 Files and Records............................................ 48
Section 5.22 Related Party Transactions................................... 48
Section 5.23 Sufficiency of and Title to Assets........................... 48
Section 5.24 Accuracy of Information...................................... 49
Section 5.25 Brokers...................................................... 49
Section 5.26 Disclosure................................................... 49
Section 5.27 Survival..................................................... 49
SECTION 6. REPRESENTATIONS AND WARRANTIES
OF THE BUYER AND PARENT....................................................... 49
Section 6.1 Corporate Organization....................................... 49
Section 6.2 Authorization and Validity of Agreement...................... 50
Section 6.3 No Conflict or Violation..................................... 50
Section 6.4 Consents and Approvals....................................... 50
Section 6.5 Litigation................................................... 50
Section 6.6 Financing.................................................... 51
Section 6.7 Brokers...................................................... 51
Section 6.8 Accuracy of Representations and Warranties................... 51
Section 6.9 Survival..................................................... 51
SECTION 7. COVENANTS..................................................................... 51
Section 7.1 Information and Certain Tax Matters.......................... 51
Section 7.2 Conduct of the Businesses.................................... 53
Section 7.3 Tax Reporting and Allocation of Consideration................ 56
Section 7.4 Supplemental Schedules....................................... 56
Section 7.5 Transferred Persons.......................................... 57
Section 7.6 Consents and Approvals....................................... 58
Section 7.7 Negotiations................................................. 59
Section 7.8 Further Assurances........................................... 59
Section 7.9 Covenant Not to Compete...................................... 59
Section 7.10 Non-Solicitation of Employees................................ 60
Section 7.11 Assignment of Contracts and Warranties....................... 60
Section 7.12 Notice of Breach............................................. 61
Section 7.13 Bulk Sales Compliance........................................ 61
Section 7.14 Conduct of the Businesses after Closing...................... 61
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C> <C>
Section 7.15 Meetings of the Board of Directors of Buyer.................. 62
Section 7.16 Information Technologies Budget.............................. 62
Section 7.17 Indemnification for Certain Liabilities...................... 62
Section 7.18 Refinancing of Existing Bank Loan............................ 63
SECTION 8. CONDITIONS TO OBLIGATIONS OF BUYER............................................ 63
Section 8.1 Representations and Warranties............................... 63
Section 8.2 Performance of Seller's and Shareholders' Obligations........ 63
Section 8.3 Consents and Approvals....................................... 64
Section 8.4 No Violation of Orders....................................... 64
Section 8.5 No Material Adverse Change................................... 64
Section 8.6 Due Diligence with Respect to Third Party Payors............. 64
Section 8.7 Consents under Key Contracts................................. 64
Section 8.8 Farrell Consulting Arrangement............................... 65
Section 8.9 Employment Agreement with Dr. Jones.......................... 66
Section 8.10 Financial Statements and Projections......................... 66
Section 8.11 Opinion of Counsel........................................... 66
Section 8.12 Other Closing Documents...................................... 66
Section 8.13 Legal Matters................................................ 66
Section 8.14 TPA and UR Licenses.......................................... 67
SECTION 9. CONDITIONS TO OBLIGATIONS OF THE SELLERS...................................... 67
Section 9.1 Representations and Warranties of the Buyer.................. 67
Section 9.2 Performance of the Buyer's Obligations....................... 67
Section 9.3 Consents and Approvals....................................... 67
Section 9.4 No Violation of Orders....................................... 67
Section 9.5 Opinion of Counsel........................................... 67
Section 9.6 Other Closing Documents...................................... 68
Section 9.7 Legal Matters................................................ 68
SECTION 10. TERMINATION AND ABANDONMENT................................................... 68
Section 10.1 Methods of Termination; Upset Date........................... 68
Section 10.2 Procedure Upon Termination................................... 69
SECTION 11. INDEMNIFICATION............................................................... 70
Section 11.1 Indemnification by the Sellers and the Executive
Shareholders................................................. 70
Section 11.2 Procedures for Indemnification by the Sellers................ 71
Section 11.3 The Buyer's Right of Set-Off................................. 72
Section 11.4 Indemnification by the Buyer and Parent...................... 72
Section 11.5 Procedures for Indemnification by the Buyer and Parent....... 73
Section 11.6 The Sellers' and Executive Shareholders'
Right of Set-Off............................................. 73
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C> <C>
Section 11.7 Purchase Price Adjustment.................................... 74
SECTION 12. MISCELLANEOUS................................................................. 74
Section 12.1 Successors and Assigns; Restrictions on Assignment and
Transfer of Purchase Price................................... 74
Section 12.2 Governing Law, Jurisdiction.................................. 74
Section 12.3 Expenses..................................................... 74
Section 12.4 Joint and Several Obligations................................ 74
Section 12.5 Severability................................................. 74
Section 12.6 Notices...................................................... 75
Section 12.7 Amendments; Waivers.......................................... 76
Section 12.8 Public Announcements......................................... 76
Section 12.9 Entire Agreement............................................. 77
Section 12.10 Parties in Interest.......................................... 77
Section 12.11 Scheduled Disclosures........................................ 77
Section 12.12 Section and Paragraph Headings............................... 77
Section 12.13 Counterparts................................................. 77
Section 12.14 Post-Closing Survival........................................ 77
Section 12.15 Confidentiality.............................................. 77
Section 12.16 Litigation................................................... 78
Section 12.17 Specific Performance......................................... 78
Section 12.18 Retention of Independent Accounting Firms.................... 78
Section 12.19 Limited Obligations of Parent................................ 78
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
<C> <C> <S>
A -- Form of Assumption Agreement
B -- Form of Escrow Agreement
C -- Form of Opinion of Broad and Cassel
D -- Form of Opinion of Dow, Lohnes & Albertson, PLLC
</TABLE>
iv
<PAGE>
SCHEDULES
<TABLE>
<S> <C>
1.1(k) Best Knowledge and Knowledge
1.1(yyy) Permitted Encumbrances
1.1(hhhh) Excluded Assets
1.1(llll) Shareholders
2.4(a) Certain Excluded Contracts
2.4(b) Certain Payables
5.1(a) Equity Interests
5.1(b) Partnership Interests
5.3 Conflicts or Violations
5.4 Consents, Waivers, Authorizations and Approvals for Sellers
5.5 Financial Statements
5.6(a) Material Changes or Events
5.6(b) Exceptions to Section 5.6(b)
5.6(b)(13) Certain Encumbrances
5.6(c) Exceptions to Section 5.6(c)
5.7(b) Tax Matter Exceptions
5.7(c) Tax Jurisdictions
5.9(b) Bank Accounts
5.10(a) Owned Real Property
5.10(b) Leased Real Property
5.10(c) Amendments to Leases; Defaults
5.10(d) Subleases; Restrictive Covenants
5.11 Equipment and Machinery
5.12(a) Intellectual Property
5.12(b) Intangible Assets
5.13(a) Licenses, Permits and Governmental Approvals
5.14 Litigation
5.15(a) Professional Liability Claims
5.16(a) Contracts
5.16(c) Material Compliance with Contracts
5.16(d) Restrictions on Assignment
5.16(e) Co-Contractants; Change of Control Payments
5.16(f) Capitation Fees
5.16(h)(i) Non-Competition Provisions (Payors)
5.16(h)(ii) Non-Competition Provisions (Network Physicians, Consultants)
5.16(i) Significant Terminations
5.17(a) Plans and Compensation Arrangements
5.17(d) Determination Letters; Material Liability
5.17(e)(i) Network Physicians
5.17(e)(ii) Consultants
5.17(e)(iii) Employees
5.18(a) Insurance
5.18(b) Insurance for Third Parties
5.19 Compliance with Law
5.22 Related Party Transactions
6.3 Conflicts
6.4 Consents, Waivers, Authorizations and Approvals for Buyer
7.2 Conduct of Business
7.3(b) Allocation
7.5(a) Employees to be Engaged by the Buyer
8.7 Key Contracts
</TABLE>
v
<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of October 16, 1997, among CMSF, Inc.,a
Florida corporation (the "BUYER"), Allied Health Group, Inc., a Florida
corporation ("AHG"), Gut Management, Inc., a Florida corporation ("GUT"), Sky
Management Co., a Florida corporation ("SKY"), Florida Specialty Network, Ltd.,
a Florida limited partnership ("FSN"), Surgical Associates of South Florida,
Inc., a Florida corporation ("SASF"), Surginet, Inc., a Florida corporation
("SURGINET" and, together with AHG, Gut, Sky, FSN and SASF, the "SELLERS"), and
Jacob Nudel, M.D., David Russin, M.D. and Lawrence Schimmel, M.D. (each, in his
individual capacity, an "EXECUTIVE SHAREHOLDER", and collectively, the
"EXECUTIVE SHAREHOLDERS"), and Magellan Health Services, Inc., a Delaware
corporation, the ultimate corporate parent of the Buyer ("PARENT"),
W I T N E S S E T H:
WHEREAS, AHG is engaged in the business of managing physician networks and
providing administrative tasks relating thereto under a variety of
administrative services and managed care network agreements;
WHEREAS, Sky, SASF, Surginet and Gut are each engaged in the business of
providing surgical specialty networks which, in the case of Gut, is specialized
in gastroenterology, and certain related administrative tasks under a variety of
managed care agreements;
WHEREAS, FSN is engaged in performing various administrative and data
processing tasks for certain of the foregoing Sellers as well as to various
health maintenance organizations and managed care physician networks; and
WHEREAS, the Buyer desires to purchase the businesses of the Sellers by
purchasing all the assets relating to all the business activities and operations
of each Seller, including the activities described above (each, a "BUSINESS,"
and collectively, taking into account the Business of each Seller, the
"Businesses") from the Sellers, and the Sellers desire to sell such Businesses
and assets to the Buyer, in each case upon the terms and subject to the
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the respective
covenants and agreements hereinafter contained, the parties hereby agree:
SECTION 1. DEFINITIONS.
Section 1.1 DEFINITIONS. Unless the context otherwise requires, as used in
this Agreement, the following terms shall have the following meanings (terms
defined in the singular to have the same meanings when used in the plural and
VICE VERSA):
(a) "Accounts Receivable" shall mean all accounts and notes receivable,
claims, debtor obligations and other rights to receive payments from third
parties of each Seller relating to its Business, existing on the Closing Date.
(b) "Accountants" shall have the meaning set forth in Section 3.3(a).
(c) "Affiliates" shall mean any individual, corporation, partnership, joint
venture, association, trust or unincorporated organization that controls, is
controlled by or is under common control with a Person and "control" of a Person
(including, with correlative meaning, the terms "control by" and "under common
control with") means the power to direct or cause the direction of the
management, policies or affairs of the controlled Person, whether through
ownership of securities or partnership or other ownership interests, by contract
or otherwise, PROVIDED, HOWEVER, that in the case of any Seller, the term
"Affiliates" shall also include each other Seller, and each Shareholder of such
Seller.
(d) "Agreement" shall mean this Asset Purchase Agreement, as it may be
amended, modified or supplemented from time to time in accordance with its
terms.
(e) "Allocation" shall have the meaning set forth in Section 7.3(b).
<PAGE>
(f) "Applicable Percentage" shall mean the percentage of the Closing Cash
Installment of the Purchase Price being paid to each Seller at Closing in
relation to the other Sellers as set forth in a schedule to be provided by the
Sellers to the Buyer at least 5 Business Days prior to the Closing Date.
(g) "Asset Acquisition Statement" shall have the meaning set forth in
Section 7.3(b).
(h) "Assumed Liabilities" shall mean the liabilities and obligations of the
Sellers expressly assumed by the Buyer pursuant to Section 2.4 and no others.
(i) "Audited Financial Statements" shall mean, collectively, (i) for each of
Gut, Sky, and SASF, the audited balance sheets as of December 31, 1994, 1995 and
1996 and the related statements of operations and retained earnings, and cash
flows for the years then ended; (ii) the audited balance sheets of FSN as of
December 31, 1994, 1995 and 1996 and the related statements of operations,
partners' equity, and cash flows for the years then ended; (iii) the audited
balance sheets of AHG as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows from inception
(May 15, 1995) to December 31, 1996; (iv) the audited balance sheets of Surginet
as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity and cash flows from inception (April 12, 1995) to December
31, 1996; and (v) collectively, for the Sellers taken as a whole, the audited
combined balance sheets as of December 31, 1994, 1995 and 1996, and the related
combined statements of operations, owners' equity and cash flows for the years
then ended.
(j) "Best Efforts" means that the obligated party is required to make a
diligent and good faith effort to accomplish the applicable objective. Such
obligation, however, does not require a material expenditure of funds or the
incurrence of a material liability on the part of the obligated party, nor does
it require that the obligated party act in a manner that would be contrary to
normal commercial practices in order to accomplish the objective. The failure to
accomplish a given objective is no indication that the obligated party did not
in fact utilize its Best Efforts in attempting to accomplish the objective.
(k) "Best Knowledge" or "best knowledge" when used with respect to: (i) a
Seller shall mean the collective knowledge of the persons identified on SCHEDULE
1.1(K), as well as all of the officers, directors and the Executive Shareholders
of such Seller, including the knowledge any such Person has or could reasonably
be expected to have after due inquiry, and (ii) an Executive Shareholder shall
mean the knowledge of such Executive Shareholder, including the knowledge such
Executive Shareholder has or could reasonably be expected to have after due
inquiry. For purposes of this definition, "due inquiry" shall mean reasonable
inquiry of those Persons who are, in the judgment of such Person, likely to have
knowledge of the facts which are the subject of the inquiry.
(l) "Business" shall have the meaning set forth in the recitals hereto.
(m) "Business Day" shall mean days other than Saturdays, Sundays and other
legal holidays or days on which the principal office of First Union National
Bank of North Carolina is closed.
(n) "Buyer" shall have the meaning set forth in the introductory paragraph
hereto.
(o) "Buyer Indemnitees" shall have the meaning set forth in Section 11.1.
(p) "Buyer's Event of Breach" shall have the meaning set forth in Section
11.4.
(q) "Cash and Cash Equivalents" shall mean the amount of cash on hand and
cash in any bank account or brokerage account of each of the Sellers, including
any securities with maturities of less than 90 days.
(r) "Change of Control Payment" shall have the meaning set forth in Section
5.16(e).
(s) "Closing" shall have the meaning set forth in Section 4.
(t) "Closing Cash Installment" shall have the meaning set forth in Section
3.1.
2
<PAGE>
(u) "Closing Date" shall have the meaning set forth in Section 4.
(v) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(w) "Compensation Arrangements" shall have the meaning set forth in Section
5.17(a).
(x) "Consultants" means all consultants, agents and independent contractors
providing consulting services, including marketing, promotion, software
development, administrative services and related services, engaged by any Seller
in connection with its Business, each of whom has been identified pursuant to
Section 5.17(e) and SCHEDULE 5.17(E)(II).
(y) "Contracts" shall mean, collectively, the Third Party Payor Agreements,
Leases, Purchase Orders and Other Contracts all of which are listed on SCHEDULE
5.16(A) hereto, and no others. The term Contracts shall not include any of the
Excluded Contracts regardless of whether such Excluded Contracts are also listed
on SCHEDULE 5.16(A).
(z) "December 31, 1996 Combined Balance Sheet" shall mean the audited
combined balance sheet of the Sellers at December 31, 1996, which is included in
the Financial Statements.
(aa) "Earn-Out Period" shall have the meaning set forth in Section 3.3(a).
(x) "EBITDA" shall have the meaning set forth in Section 3.3(a).
(bb) "EBITDA Statement" shall have the meaning set forth in Section 3.3(b).
(cc) "Employees" means the employees of each Seller who are employed in
connection with its Business (excluding temporary, leased and contract
personnel), each of whom as of ten Business Days prior to the date of this
Agreement has been identified pursuant to Section 5.17(e) and SCHEDULE
5.17(E)(III).
(dd) "Encumbrance" shall mean any encumbrance or lien of any character
whatsoever, including, any option, right to purchase, right to convert,
mortgage, charge, claim, pledge, conditional sales contract, judgment lien,
materialman's lien, mechanic's lien or security interest.
(ee) "Engagement Notice" shall have the meaning set forth in Section 7.5(a).
(ff) "Environmental Law" means the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA), 42 U.S.C. SectionSection 9601 et seq.;
the Resource Conservation and Recovery Act (RCRA), 42 U.S.C. SectionSection 6901
et seq.; the Federal Water Pollution Control Act, 33 U.S.C. SectionSection 1251
et seq.; the Clean Air Act, 42 U.S.C. SectionSection 7401 et seq.; the Hazardous
Materials Transportation Act, 49 U.S.C. SectionSection 1801 et seq.; the Toxic
Substances Control Act, 15 U.S.C., SectionSection 2601-2629; the Safe Drinking
Water Act, 42 U.S.C. SectionSection300f-300j; and any state and local laws and
ordinances that regulate in any way hazardous materials or wastes and the
regulations implementing such statutes.
(gg) "Equipment and Machinery" shall mean (i) the equipment, computer
hardware, machinery, furniture, fixtures and improvements, spare parts, supplies
and vehicles owned or leased by each Seller with respect to the operations of
its Business on the Closing Date (including all such items as set forth on the
June 30, 1997 Combined Balance Sheet), (ii) the replacements for any of the
foregoing owned or leased by such Seller, (iii) the warranties, service and
maintenance documents, bills of sale, assignments and licenses (to the extent
assignable) received from manufacturers and sellers of the aforesaid items and
(iv) any related claims, credits, rights of recovery and set-off with respect
thereto.
(hh) "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
(ii) "ERISA Affiliate" shall have the meaning set forth in Section 5.17(a).
(jj) "Escrow Agent" shall have the meaning set forth in Section 3.1(b).
3
<PAGE>
(kk) "Escrow Agreement" shall mean the Escrow Agreement by and among the
Buyer, the Sellers, and the Escrow Agent, substantially in the form attached
hereto as EXHIBIT B.
(ll) "Escrow Deposit" shall have the meaning set forth in Section 3.1(b).
(mm) "Excluded Contracts" shall have the meaning set forth in Section
2.4(a).
(nn) "Excluded Liabilities" shall have the meaning set forth in Section 2.5.
(oo) "Excluded Employee Obligations" has the meaning set forth in Section
2.5(d).
(pp) "Farrell Consulting Agreement" shall mean that certain agreement, made
as of June 1, 1996, by and among FSN, Inc., FSN, AHG, and each of the Farrell
Parties.
(qq) "Farrell Parties" shall mean, collectively, Morgan Chase Company, a
Missouri corporation, and Joseph Farrell and Stephen Wulf.
(rr) "Files and Records" shall mean all files, books and records, whether in
hard copy or magnetic or optical format, of each Business or the Purchased
Property, including the following types of files, books and records relating to
such Business: patient and supplier files, commitments, reports of examination,
correspondence or internal memoranda regarding Contracts or other Purchased
Property, equipment maintenance records, equipment warranty information and all
files relating to Employees or independent contractors of such Business employed
or engaged by the Buyer, including Form I-9's, credit records, and other similar
documents and records used and/or useful in connection with such Business, and
correspondence with Governmental Authorities relating to the operation of such
Business and related files and records of each Seller, in each case, whether
created prior to or following the Closing.
(ss) "Financial Statements" shall mean, collectively, (i) the Audited
Financial Statements, (ii) the Management Prepared Financial Statements, and
(iii) the Projections, each as defined herein.
(tt) "FSN, Inc." shall have the meaning set forth in Section 5.1(a).
(uu) "FSN Limited Partnership Agreement" shall have the meaning set forth in
Section 5.1(b).
(vv) "GAAP" shall mean generally accepted accounting principles as in effect
from time to time.
(ww) "Governmental Authority" shall mean any agency, division, department,
regulatory body, subdivision, commission, board, bureau, court, audit group,
procuring office or other instrumentality of the government of the United
States, any state or local government, or any foreign national or local
government, any subdivision thereof, including the employees, officers,
representatives or agents thereof, as well as any arbitrator.
(xx) "Hazardous Materials" shall have the meaning set forth in Section
5.19(f).
(yy) "IAF EBITDA Statement" shall have the meaning set forth in Section
3.3(b).
(zz) "IBNR" shall have the meaning set forth in Section 5.5(b).
(aaa) "Independent Accounting Firm" shall have the meaning set forth in
Section 3.3(a).
(bbb) "Information Technologies Budget" shall have the meaning set forth in
Section 7.16.
(ccc) "Initial Purchase Price" shall have the meaning set forth in Section
3.1.
(ddd) "Intangible Assets" shall mean all intangible personal property
rights, including the proceeds of any insurance policies and all claims on the
part of each Seller for recoupment, reimbursement and coverage under any
insurance policies, in each case in connection with its Business and all
goodwill of each Seller relating to its Business, and including those items
listed in SCHEDULE 5.12(B).
(eee) "Intellectual Property" shall mean all letters patent, patent
qualifications, patent applications, trademarks, trademark applications, service
marks, service mark applications, trade names, brands, trade
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dress, logos, designs, private labels, copyrights, know-how, trade secrets and
licenses, including software, computer network systems, claims processing
procedures and other rights relating to the administration of Third Party Payor
Agreements or otherwise relating to the Businesses, and rights with respect to
the foregoing that each Seller holds or possesses the rights to use relating to
the Purchased Property or the operations of its Business, including those items
listed in SCHEDULE 5.12(A) hereto. Without limiting the generality of the
foregoing, the name "Allied Health Group" falls within the foregoing definition.
(fff) "Inventory" means all (i) inventoriable supplies held by each Seller
on the Closing Date (including all such items as set forth on the June 30, 1997
Combined Balance Sheet) for use in the operations of its Business, (ii) any
supplies delivered to each Seller's Business after the Closing Date which such
Seller has agreed to purchase in the ordinary course of business consistent with
past practices and (iii) any warranties received from each Seller's suppliers
with respect to such inventory (to the extent assignable) and related claims,
credits, rights of recovery and set-off with respect thereto.
(ggg) "June 30, 1997 Combined Balance Sheet" shall mean the unaudited
combined balance sheet of the Sellers at June 30, 1997, which is included in the
Financial Statements.
(hhh) "Key Contracts" shall have the meaning set forth in Section 8.7.
(iii) "Knowledge" or "knowledge" when used with respect to: (i) a Seller
shall mean the collective actual knowledge of the persons identified on SCHEDULE
1.1(K), as well as all of the other officers, directors and the Executive
Shareholders of such Seller; and (ii) an Executive Shareholder shall mean the
actual knowledge of such Executive Shareholder.
(jjj) "Leased Real Property" shall have the meaning set forth in Section
5.10(b).
(kkk) "Leases" shall have the meaning set forth in Section 5.10(b).
(lll) "Licenses and Permits" shall have the meaning set forth in Section
5.13.
(mmm) "Losses" shall have the meaning set forth in Section 11.1.
(nnn) "Management Agreement" shall mean the management agreement, to be
effective as of the Closing Date, between the Buyer and a corporation formed by
the Executive Shareholders pursuant to which the services of the Executive
Shareholders will be made available to the Buyer for a period of three years in
consideration of the payment by the Buyer of $250,000 per year in the aggregate
and upon such other terms and conditions as shall be mutually agreed to by the
Buyer and the Executive Shareholders.
(ooo) "Management Prepared Financial Statements" shall mean, collectively,
(i) for each Seller the unaudited balance sheet as of June 30, 1997, and the
related income statement for the six months then ended, (ii) collectively, for
the Sellers taken as a whole, the unaudited combined balance sheet as of June
30, 1997, and the related income statement for the six months then ended, (iii)
for the Sellers monthly combined and combining unaudited balance sheets and the
related income statements as of and for the month ending July 31, 1997 and each
month thereafter through the month ending thirty days prior to the Closing Date,
prepared by management of the Sellers, and (iv) for the Sellers combined and
combining unaudited balance sheets and the related income statements for the
period commencing January 1, 1997 through the month ending 30 days prior to the
Closing Date and the corresponding period in the prior year.
(ppp) "Minimum Amount" shall have the meaning set forth in Section 3.2(c).
(qqq) "Multiemployer Plan" shall have the meaning set forth in ERISA Section
3(37).
(rrr) "Net Revenue" shall have the meaning set forth in Section 3.3(a).
(sss) "Network Physicians" means primary care or specialist physicians
serving as independent contractors of any Seller or any Person contracting with
a Seller for the provision of health care or medical
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services but who is not an Employee, each of whom has been identified pursuant
to Section 5.17(e) and SCHEDULE 5.17(E)(I).
(ttt) "New Farrell Consulting Agreement" shall have the meaning set forth in
Section 8.8(c).
(uuu) "Objection Notice" shall have the meaning set forth in Section 3.3(b).
(vvv) "Occurrence" shall have the meaning set forth in Section 5.15(b).
(www) "Other Contracts" shall mean all Equipment and Machinery leases, and
all loan agreements, security agreements, partnership or joint venture
agreements, license agreements, software licenses, service contracts, suretyship
contracts, guarantees, letters of credit, reimbursement agreements, distribution
agreements, contracts or commitments limiting or restraining any Seller with
respect to its Business from engaging or competing in any lines of business or
with any person, firm or corporation, contracts or commitments granting any
Seller rights of first refusal or exclusive rights or similar rights with
respect to its Business or any lines of business, documents granting the power
of attorney with respect to the affairs of any Seller, agreements not made in
the ordinary course of business of any Seller's Business, options to purchase
any assets or property rights of the Business, working capital maintenance or
other form of guaranty agreements, and all other agreements to which any Seller
is a party and which are related to the operation of its Business, all of which
are listed on SCHEDULE 5.16(A), but excluding Leases, Third Party Payor
Agreements and Purchase Orders.
(xxx) "Parent" shall have the meaning set forth in the introductory
paragraph hereto.
(yyy) "Permitted Encumbrances" means the Encumbrances set forth on SCHEDULE
1.1(YYY).
(zzz) "Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization or Governmental Authority.
(aaaa) "Plans" shall have the meaning set forth in Section 5.17(a).
(bbbb) "Post-Closing Statement" shall have the meaning set forth in Section
3.2(a).
(cccc) "Premises" shall mean the Leased Real Property.
(dddd) "Professional Liability Claims" shall have the meaning set forth in
Section 5.15(a).
(eeee) "Projections" shall mean collectively, (i) the projected statement of
operations for the twelve months ending September 30, 1998 of AHG and FSN, and
(ii) run rates of Gut, Sky, SASF and Surginet for the twelve months ending
September 30, 1998. All such projections have been prepared by the management of
the Sellers.
(ffff) "Purchase Orders" shall mean any outstanding purchase orders,
contracts or other commitments to suppliers of goods and services for materials,
supplies or other items used in the Business and listed on SCHEDULE 5.16(A).
(gggg) "Purchase Price" shall mean the aggregate amount payable to the
Sellers pursuant to Section 3.
(hhhh) "Purchased Property" shall mean the (i) Accounts Receivable, (ii)
Contracts (except as set forth on SCHEDULE 2.4(A)), (iii) Equipment and
Machinery, (iv) Files and Records, (v) Intangible Assets, (vi) Intellectual
Property, (vii) Inventory, (viii) Licenses and Permits (to the extent
transferable by the Sellers), (ix) Cash and Cash Equivalents, (x) any prepaid
expenses and other assets relating to the operations of each Business on the
Closing Date, (xi) all software, software systems, databases and all other
information systems used in the Businesses, (xii) all other tangible and
intangible assets of the Sellers and the Executive Shareholders (other than
items of personal property owned by the Executive Shareholders which are not
material to the operations of the Businesses and do not have an aggregate fair
market value of more than $25,000) used in the respective Businesses (whether or
not such assets are reflected on
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the June 30, 1997 Combined Balance Sheet) and related thereto, (xiii) all
proceeds (including any Cash and Cash Equivalents) received by the Sellers or
the Shareholders in respect of any or all of the foregoing on or after the
Closing Date, (xiv) all proceeds (including any Cash and Cash Equivalents)
received by the Sellers or the Shareholders in respect of any insurance policy
of the Sellers relating to an event occurring on or after July 1, 1997, and (xv)
all of the goodwill associated with the Businesses and the Purchased Property;
provided; however, that the Purchased Property shall not include those items
described on SCHEDULE 1.1(HHHH)hereto.
(iiii) "Seller" and "Sellers" shall have the respective meanings set forth
in the introductory paragraph hereto.
(jjjj) "Sellers' Event of Breach" shall have the meaning set forth in
Section 11.1.
(kkkk) "Seller Indemnitees" shall have the meaning set forth in Section
11.4.
(llll) "Shareholders" shall mean the shareholders or partners (including
general and limited partners), as the case may be, of each of the Sellers,
including the Executive Shareholders, as set forth on SCHEDULE 1.1(LLLL).
(mmmm) "Subject Business" shall mean contracting with independent physician
delivery systems and third party payors for the management of established
independent physician networks (including providing MSO services, quality
management, utilization review and claims processing), where the physician
providers are compensated on a fee for service basis out of a capitated pool.
(nnnn) "Subsidiaries" (or "Subsidiary" as the context may require) shall
mean each entity as to which a Person, directly or indirectly, owns or has the
power to vote, or to exercise a controlling influence with respect to, 10% or
more of the securities of any class of such entity the holders of which are
ordinarily, in the absence of contingencies, entitled to vote for the election
of directors (or persons performing similar functions) of such Person.
(oooo) "Tax Returns" shall mean any return, report, information return or
other document (including any related or supporting information) filed or
required to be filed with any Governmental Authority in connection with the
determination, assessment, collection or administration of any Taxes and shall
include any amended returns required as a result of any examination adjustments
made by the Internal Revenue Service or other Tax authority.
(pppp) "Taxes" shall mean for all purposes of this Agreement all taxes
however denominated, including any interest, penalties or additions to tax that
may become payable in respect thereof, imposed by any Governmental Authority,
which taxes shall include, without limiting the generality of the foregoing, all
income taxes, payroll and employee withholding taxes, unemployment insurance,
social security, sales and use taxes, excise taxes, franchise taxes, gross
receipts taxes, occupation taxes, real and personal property taxes, stamp taxes,
utility, severance, production, premium, capital stock, license, transfer and
transfer gains taxes, workmen's compensation taxes and other obligations of the
same or a similar nature, whether arising before, on or after the Closing; and
"Tax" shall mean any one of them.
(qqqq) "Third Party Payor Agreements" shall mean all agreements listed on
SCHEDULE 5.16(A) hereto to which any Seller is a party relating to the
furnishing, management or maintenance of, or administration or data processing
services relating to, physician or other professional service networks in
connection with professional, medical or health maintenance services or other
health cost arrangements in connection with any of the Businesses.
(rrrr) "Transferred Consultant" shall have the meaning set forth in Section
7.5(a).
(ssss) "Transferred Employee" shall have the meaning set forth in Section
7.5(a).
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(tttt) "Transferred Network Physician" shall mean a Network Physician who is
offered engagement as a Network Physician by the Buyer and who serves as an
independent contractor of the Buyer as of the Closing Date.
(uuuu) "Unrestricted Cash" shall mean the aggregate of cash of the Sellers
immediately available for disbursement without restriction or limitation of any
kind, plus Due from Plan/Client amounts, less Contract Reserve amounts, less
Physician Payable amounts, as said terms are historically used and reflected in
the Financial Statements.
(vvvv) "Working Capital Amount" shall have the meaning set forth in Section
3.2(c).
(wwww) "Year 1 Adjustment" shall have the meaning set forth in Section
3.3(a).
(xxxx) "Year 2 Adjustment" shall have the meaning set forth in Section
3.3(a).
(yyyy) "Year 3 Adjustment" shall have the meaning set forth in Section
3.3(a).
(zzzz) "Year 1 Earn-Out" shall have the meaning set forth in Section 3.3(a).
(aaaaa) "Year 2 Earn-Out" shall have the meaning set forth in Section
3.3(a).
(bbbbb) "Year 3 Earn-Out" shall have the meaning set forth in Section
3.3(a).
(ccccc) "Year 1 EBITDA" shall have the meaning set forth in Section
3.3(c)(1).
(ddddd) "Year 2 EBITDA" shall have the meaning set forth in Section
3.3(d)(1).
(eeeee) "Year 3 EBITDA" shall have the meaning set forth in Section
3.3(e)(1).
(fffff) "Year 1 Earn-Out Period" shall have the meaning set forth in Section
3.3(a).
(ggggg) "Year 2 Earn-Out Period" shall have the meaning set forth in Section
3.3(a).
(hhhhh) "Year 3 Earn-Out Period" shall have the meaning set forth in Section
3.3(a).
(iiiii) "Year 1 Threshold EBITDA" shall have the meaning set forth in
Section 3.3(a).
(jjjjj) "Year 2 Threshold EBITDA" shall have the meaning set forth in
Section 3.3(a).
(kkkkk) "Year 3 Threshold EBITDA" shall have the meaning set forth in
Section 3.3(a).
Section 1.2 PRINCIPLES OF CONSTRUCTION. Definitions used in this Agreement
shall apply equally to both the singular and plural forms of the terms defined.
Whenever used in this Agreement, the words "include," "includes" and "including"
shall be deemed to be followed by the phrase "without limitation." Unless the
context otherwise requires, all references herein to Articles, Sections,
Exhibits and Schedules shall be deemed references to articles and sections of,
and schedules to this Agreement. Unless the context otherwise requires, the term
"party" when used in this Agreement means a party to this Agreement, and
references to a party or other Person shall be deemed to include successors and
permitted assigns of such party. All references herein to any agreement or
document shall be deemed to include such agreement or document (unless specific
reference is made to that agreement or document as in effect on a specific
date), as the same may be amended, supplemented or otherwise modified from time
to time. The parties acknowledge and agree that they have been represented by
counsel and that each of the parties has participated in the drafting of this
Agreement. Accordingly, it is the intention and agreement of the parties that
the language, terms and conditions of this Agreement are not to be construed in
any way against or in favor of any party hereto by reason of the
responsibilities in connection with the preparation of this Agreement.
SECTION 2. PURCHASE AND SALE OF THE PURCHASED PROPERTY.
Section 2.1 TRANSFER OF ASSETS. Subject to the terms and conditions herein
set forth, each Seller shall sell, convey, transfer, assign and deliver to the
Buyer, and the Buyer shall purchase, acquire and accept
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from each Seller on the Closing Date, all right, title and interest of each
Seller and its Affiliates in or to the Purchased Property, wherever located,
free and clear of all Encumbrances except for Permitted Encumbrances.
Notwithstanding anything to the contrary contained in this Agreement, to the
extent that the sale or assignment of any Account Receivable is prohibited by
applicable contract, law or regulation, this Agreement shall not constitute an
agreement to sell or assign such Account Receivable, provided however, each
Seller agrees to pay to the Buyer the equivalent cash value of any and all such
Account Receivable(s), and upon each Seller's collection of any such Account
Receivable shall immediately remit a check to the Buyer for such amount. Each
Seller covenants and agrees to use its Best Efforts to collect any such Account
Receivable and shall deliver to Buyer on a monthly basis a report setting forth
the status of any such outstanding Account Receivable and describing its
collection efforts.
Section 2.2 SALE AT CLOSING DATE. The sale, transfer, assignment and
delivery by each Seller of the Purchased Property to the Buyer, as herein
provided, shall be effected on the Closing Date by deeds, bills of sale,
endorsements, assignments and other instruments of transfer and conveyance
reasonably satisfactory in form and substance to counsel for the Buyer.
Section 2.3 SUBSEQUENT DOCUMENTATION. Each Seller and each Executive
Shareholder shall, at any time and from time to time after the Closing Date,
upon the reasonable request of the Buyer and at the expense of the Sellers and
the Executive Shareholders, do, execute, acknowledge and deliver, or cause to be
done, executed, acknowledged and delivered (whether by any Seller, any
Shareholder or any other Person), all such further deeds, assignments, transfers
and conveyances as may be required for the better assigning, transferring,
granting, conveying and confirming to the Buyer or its successors and assigns or
for aiding and assisting in collecting and reducing to possession, any or all of
the Purchased Property. Each Seller and each Executive Shareholder hereby
constitutes and appoints, effective as of the Closing Date, the Buyer, its
successors and assigns as the true and lawful attorney-in-fact of such Seller or
Executive Shareholder with full power of substitution in the name of such Buyer
or in the name of the Seller or Executive Shareholder but for the benefit of the
Buyer (a) to collect for the account of the Buyer any item of Purchased Property
and (b) to institute and prosecute all proceedings which the Buyer may in its
discretion deem proper in order to assert or enforce any right, title or
interest in or to the Purchased Property and to defend or compromise (subject to
Section 10, if applicable) any and all actions, suits or proceedings in respect
of any of the Purchased Property. The Buyer shall be entitled to retain for its
own account any amounts collected pursuant to the foregoing powers, including
any amounts payable as interest in respect thereof. EACH SELLER AND EACH
EXECUTIVE SHAREHOLDER HEREBY DECLARES THAT THE FOREGOING APPOINTMENT IS COUPLED
WITH AN INTEREST AND SHALL BE IRREVOCABLE AND PERPETUAL AND SHALL NOT BE
TERMINATED BY ANY ACT OF ANY SELLER, ANY EXECUTIVE SHAREHOLDER OR THEIR
RESPECTIVE SUCCESSORS OR ASSIGNS, BY OPERATION OF LAW OR BY THE OCCURRENCE OF
ANY OTHER EVENT OR IN ANY OTHER MANNER.
Section 2.4 ASSUMPTION OF LIABILITIES. On the Closing Date, the Buyer
shall execute and deliver an assumption agreement in the form attached hereto as
EXHIBIT A, pursuant to which the Buyer shall accept, assume and agree to pay,
perform and discharge when due, in accordance with the respective terms and
subject to the respective conditions thereof, all of the liabilities and
obligations of the Sellers pursuant to and under the Assumed Liabilities. The
"ASSUMED LIABILITIES" shall mean:
(a) All liabilities and obligations of each Seller of any kind arising from
the operations of the Businesses beginning on or after the first day following
the Closing Date, other than those (i) to which the Buyer is entitled to
indemnification by the Executive Shareholders pursuant to Section 11 of the
Agreement, (ii) Taxes with respect to periods ending on or prior to the Closing
Date, and (iii) Change of Control Payments, if any; provided, however, that in
the case of Contracts, Third Party Payor Agreements, Leases, and Other
Contracts, only to the extent such Contracts, Third Party Payor Agreement, Lease
or Other Contract is described in SCHEDULE 5.16(A) of this Agreement; and
PROVIDED, FURTHER, that in no event shall the Buyer assume or be responsible for
the contracts listed on SCHEDULE 2.4(A) (the "EXCLUDED
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CONTRACTS"); PROVIDED, FURTHER, that in the event that the parties hereto become
aware of the fact at any time after the Closing that a contract of any of the
Sellers in existence on the Closing Date is not listed on either SCHEDULE
5.16(A) or SCHEDULE 2.4(A), such contract, at the sole election of Buyer, shall
be assigned to and assumed by Buyer and shall for all purposes under this
Agreement be treated as a Contract under this Agreement; and
(b) Additional payables arising from the operations of the Businesses prior
to the first day following the Closing Date and specified on SCHEDULE 2.4(B), as
such Schedule may be amended by the mutual agreement of the Sellers and Buyer
prior to the Closing Date.
Section 2.5 EXCLUDED LIABILITIES. The Assumed Liabilities shall not
include, and the Buyer shall not assume or be liable for any liabilities and
obligations of the Sellers or any of their Affiliates not expressly assumed in
Section 2.4 (collectively, the "EXCLUDED LIABILITIES"), including, without
limitation:
(a) Any liability or obligation relating to Professional Liability Claims
arising from services performed on or before the Closing Date;
(b) Any liability or obligation relating to the Plans or the Compensation
Arrangements (as such terms are defined in Section 5.17);
(c) Other than as required pursuant to Sections 2.4(a) or (b), any
liabilities or obligations to current or former employees of, or independent
contractors with, any Seller who do not become Transferred Network Physicians,
Transferred Consultants or Transferred Employees, as the case may be;
(d) Any employment-related liabilities for which the Buyer is indemnified
under Section 11.1(d) (an "EXCLUDED EMPLOYEE OBLIGATION") and any other
liability for which the Buyer is indemnified under Section 11;
(e) Any liabilities with respect to Taxes of any Seller or Shareholder or
relating to any period ending on or prior to the Closing Date, including
liabilities related to (i) income Taxes of the Sellers or any of their
Affiliates whether arising before or after the Closing Date, (ii) Taxes relating
to the Purchased Property acquired under the terms and conditions of this
Agreement for all periods (or portions thereof) ending on or prior to the
Closing Date, (iii) Taxes attributable to or imposed with respect to the
transfer, assignment and delivery of the Purchased Property under Section 12.3
hereof or otherwise or to any other transactions contemplated by this Agreement
and (iv) Taxes of any other Person for which any of the Sellers may be liable by
contract or otherwise;
(f) Any liabilities to any Shareholders or any of their Affiliates;
(g) Any liabilities or obligations relating to or arising under the Farrell
Consulting Agreement;
(h) Any liability arising from operations of the Businesses before the
Closing Date not expressly assumed pursuant to Section 2.4;
(i) Any liability or obligations under Contracts not included in Purchased
Property;
(j) Any liability or obligations relating to Nudel & Gluck, M.D., P.A. and
Young, Schimmel & Kanter Surgical Associates, M.D., P.A.(d/b/a South Florida
Surgical Group); and
(k) Any other liability not expressly assumed pursuant to Section 2.4
notwithstanding the inclusion of any such liability on the June 30, 1997
Combined Balance Sheet or any Management Prepared Financial Statements.
Section 2.6 BREACH OF REPRESENTATIONS. Nothing in Section 2.4 shall limit
the Buyer's right to indemnification for the breach by any Seller or any
Executive Shareholder of any of its representations, warranties or covenants
hereunder.
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Section 2.7 RIGHT OF ENFORCEMENT. Commencing on the Closing Date, the
Buyer will have complete control over the payment, settlement or other
disposition of the Assumed Liabilities and the right to commence, conduct and
control all negotiations and proceedings with respect thereto. The Sellers and
the Executive Shareholders will notify the Buyer promptly of any claim made with
respect to any Assumed Liabilities or Purchased Property and shall not, except
with the Buyer's prior written consent, voluntarily make any payment of,
settlement or offer to settle, or consent to any compromise or admit liability
with respect to, any Assumed Liabilities or Purchased Property. The Sellers will
cooperate, with the Buyer in connection with any negotiations or proceedings
involving any Assumed Liabilities or Purchased Property.
SECTION 3. PURCHASE PRICE; EARN-OUT.
Section 3.1 PURCHASE PRICE. As consideration for the sale and transfer of
the Purchased Property, the Buyer shall pay on the Closing Date an amount equal
to $70,000,000 (the "INITIAL PURCHASE PRICE"), payable as follows:
(a) The Buyer will pay to the Sellers, collectively, an amount equal to
$50,000,000, subject to the proration provisions of Section 3.4 (the "CLOSING
CASH INSTALLMENT") in cash by wire transfer to the "Broad and Cassel Trust
Account" in accordance with wire transfer instructions to be furnished in
writing by the Executive Shareholders (which shall be provided to the Buyer not
less than three Business Days before the Closing Date), for further credit to
each Seller in accordance with such Seller's Applicable Percentage.
(b) The Buyer will pay to the escrow agent designated in the Escrow
Agreement (the "ESCROW AGENT") in cash by wire transfer of immediately available
funds $20,000,000 (the "ESCROW DEPOSIT," which together with the interest or
other proceeds from the investment thereof and the amount of the Year 1
Earn-Out, Year 2 Earn-Out and Year 3 Earn-Out, if any, deposited pursuant to
Section 3.3 and not yet released from escrow, but less such amounts, if any,
previously distributed to the Buyer or to any of the Sellers pursuant to Section
3.3, is collectively referred to as the "ESCROW FUNDS"). The Escrow Funds shall
be held in escrow by the Escrow Agent pursuant to the terms and conditions of
the Escrow Agreement in order to provide a fund for the payment to the Sellers
of any upward adjustments to the Initial Purchase Price and/or the payment to
the Buyer of any downward adjustments to the Initial Purchase Price to which
such party or parties may be entitled from time to time pursuant to this Section
3. At such times as payments to be made from the Escrow Funds are due and
payable pursuant to the terms and conditions of this Section 3, the Buyer and
the Sellers agree to give the Escrow Agent prompt notice to make the applicable
disbursements from the Escrow Funds.
Section 3.2 WORKING CAPITAL ADJUSTMENT. The Purchase Price shall be
subject to a working capital adjustment after the Closing as follows:
(a) Within 60 days after the Closing, the Buyer shall prepare (with the full
cooperation and assistance of the Sellers and the Executive Shareholders, to the
extent requested by the Buyer) a statement of the Businesses' (taken as a whole)
current liabilities (to the extent assumed by the Buyer) and current assets (to
the extent purchased by the Buyer) as of the Closing (the "POST-CLOSING
STATEMENT"), and shall submit such statement to the Sellers for review and
approval.
(b) Within 30 days after receipt of the Post-Closing Statement, the Sellers
shall notify the Buyer of any objections the Sellers may have to the
Post-Closing Statement. In the absence of any such objections, the Sellers shall
be deemed to have approved the Post-Closing Statement for purposes of the
adjustment to be made pursuant to this Section 3.2. If the Sellers notify the
Buyer of any such objections, the Buyer and the Sellers shall attempt to resolve
such objections in good faith for a period of 15 days from the date of such
notice of objection. If any objections of the Sellers cannot be resolved by the
Sellers and the Buyer within such 15-day period, such dispute shall immediately
be referred to an Independent Accounting Firm mutually selected by the parties.
The determination of such Independent Accounting Firm with respect to such
dispute shall be conclusive and binding on the Sellers and the Buyer. The party
whose determination
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differs the most from the determination of such Independent Accounting Firm
shall pay the fees of such firm.
(c) Upon final determination of the Post-Closing Statement in accordance
with the foregoing, in the event that the current assets of the Businesses
(taken as a whole and to the extent purchased by the Buyer) less the current
liabilities of the Businesses (taken as a whole and to the extent assumed by the
Buyer), as stated in the Post-Closing Statement (the "WORKING CAPITAL AMOUNT"),
is an amount which is less than $1,000,000 (the "MINIMUM AMOUNT"), then the
Purchase Price shall be reduced by the difference between the Working Capital
Amount and the Minimum Amount and the Sellers shall be jointly and severally
obligated to pay to the Buyer an amount equal to such difference with 5 Business
Days of the final determination of the Post-Closing Statement.
Section 3.3 EARN-OUT. The Purchase Price shall be subject to adjustment
after the Closing as set forth in this Section 3.3:
(a) EARN-OUT DEFINITIONS. Unless the context otherwise requires, as used
in this Agreement, the following terms shall have the following meanings:
(1) "Accountants" shall mean the independent public accountants of the
Buyer.
(2) "Earn-Out Period" shall mean each of the Year 1 Earn-Out Period, the
Year 2 Earn-Out Period and the Year 3 Earn-Out Period.
(3) "EBITDA" shall mean the aggregate Net Revenue from the operations of the
Businesses, minus all expenses incurred in operating the Businesses but before
interest, income taxes, depreciation and amortization, prepared in accordance
with GAAP, consistently applied, and adjusted as follows: (1)Introduced Business
will be deemed to have been conducted at the Businesses' cost of providing
services for such Introduced Business plus the applicable IB Profit Margin. (2)
Any increase in EBITDA earned by the Businesses through the restructuring of the
Farrell Consulting Agreement that requires one-time cash payments by Buyer or
Buyer's Affiliates shall be deducted from EBITDA. (3) As long as the Businesses
are operated as a separate subsidiary or division, administrative services
provided to the Businesses will be actual corporate overhead, including services
provided by Parent or Parent's Affiliates, on a cost basis, and will only
include administrative services that are reasonably and directly related to the
Businesses. In the event the Businesses are integrated into Parent or an
Affiliate of Parent to the extent that the corporate overhead attributable to
the Businesses cannot be readily determined, then, in lieu of actual overhead,
an amount equal to a percentage of Net Revenue of the Businesses shall be
allocated to the Businesses as deemed overhead, which percentage will be
established by dividing (A) the amount of actual overhead incurred with respect
to the Businesses for the six month period immediately preceding such
integration by (B) the Net Revenue of the Businesses for said six-month period.
Said fixed percentage shall thereafter be applied to the Net Revenue of the
Businesses for purposes of determining the deemed overhead to be allocated to
the Businesses. (4) Net proceeds from dispositions of assets of the Businesses
shall be reinvested in the Businesses. (5) With respect to acquisitions made
from and after the Closing, in lieu of including Net Revenue and expenses
related to such acquisition in the calculation of EBITDA, net income, determined
in accordance with GAAP, from such acquisition shall be included in EBITDA. (6)
Expenses and capital expenditures with respect to the items set forth in the
Information Technologies Budget, will be allocated and treated as set forth in
the Information Technologies Budget regardless of their treatment under GAAP.
(7) Any and all amounts payable under, or in connection with the termination of,
any Leases which are assumed by the Buyer as part of the Contracts for Leased
Real Property which is no longer used in any of the Businesses shall be treated
as current expenses for purposes of calculating EBITDA regardless of their
treatment under GAAP.
(4) "IB Profit Margin" shall mean a profit margin equal to fifty percent
(50%) or such other agreed upon percentage (the "IB PROFIT MARGIN PERCENTAGE")
of the average profit margin of the Businesses for services similar to the
applicable Introduced Business provided during the fiscal quarter immediately
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preceding the fiscal quarter in which the Businesses are to begin to provide
services for the Introduced Business. The proposed IB Profit Margin Percentage
and the proposed calculation of the IB Profit Margin (collectively, the "IB
PROFIT MARGIN CALCULATION") will be made by the Buyer in good faith and
presented in writing to the Executive Shareholders as soon as practicable prior
to the date on which services relating to the Introduced Business are to be
rendered. The Executive Shareholders shall, not later that five Business Days
after receipt of the IB Profit Margin Calculation, notify the Buyer in writing
of any objections thereto. Absent delivery of a written objection as provided
above, the IB Profit Margin Calculation will be conclusive and binding upon the
parties to this Agreement. If written objection is delivered to the Buyer and
the Buyer and the Executive Shareholders are unable, within 5 Business Days
after the receipt by the Buyer of such written objection, to resolve the
dispute, the Buyer, in its sole discretion, may elect either (i) to not make the
Introduced Business available to the Buyer or (ii) to submit the IB Profit
Margin Calculation to an Independent Accounting Firm mutually acceptable to the
Executive Shareholders and the Buyer whose determination shall be conclusive and
binding on the parties. In the event the Buyer elects to submit the matter to an
Independent Accounting Firm, the Businesses shall provide services for the
Introduced Business pending determination of the IB Profit Margin Calculation.
(5) "Independent Accounting Firm" shall mean one of the "big-six" certified
public accounting firms that does not have a conflict of interest with respect
to the preparation or review of the EBITDA Statements.
(6) "Introduced Business" shall mean business introduced to the Buyer by
Parent or Parent's Affiliates (i) as part of a contract with Parent or its
Affiliates, or (ii) by reason of introductions to the Buyer made by Parent or
Parent's Affiliates. The Executive Shareholders acknowledge and agree that
neither Parent nor any Parent Affiliate shall be obligated to introduce any
business to the Buyer or to otherwise cause any business that could be conducted
by the Buyer as Introduced Business to be referred to or conducted by the Buyer.
(7) "Net Revenue" shall be defined as the combined revenues of the
Businesses (including income on operating cash and monies held on behalf of
third parties remaining after Buyer distributes cash in excess of working
capital requirements to Parent) (after elimination of all inter-Business
transactions and balances) which are capitation fees (net of physician services
expenses for AHG only, and net of any retroactive adjustments under the terms of
any managed care plans), service bureau billing fees, administrative fees,
facility fees, and fee for service billings (less contractual adjustments, bad
debt expense, charity adjustments, refunds, NSF checks, collection agency fees
and other adjustments to gross revenues), all as computed in accordance with
GAAP.
(8) "Year 1 Adjustment" shall mean the amount, if any, payable to the Buyer
from the Escrow Funds in accordance with the provisions of Section 3.3(c) and
Section 3.4(a).
(9) "Year 2 Adjustment" shall mean the amount, if any, payable to the Buyer
from the Escrow Funds in accordance with the provisions of Section 3.3(d) and
Section 3.4(b).
(10) "Year 3 Adjustment" shall mean the amount, if any, payable to the Buyer
from the Escrow Funds in accordance with the provisions of Section 3.3(e) and
Section 3.4(c).
(11) "Year 1 Earn-Out" shall mean the amount, if any, payable by the Buyer
to the Escrow Agent in accordance with the provisions of Section 3.3(c) and
Section 3.4(a).
(12) "Year 2 Earn-Out" shall mean the amount, if any, payable by the Buyer
to the Escrow Agent in accordance with the provisions of Section 3.3(d) and
Section 3.4(b).
(13) "Year 3 Earn-Out" shall mean the amount, if any, payable by the Buyer
to the Escrow Agent in accordance with the provisions of Section 3.3(e) and
Section 3.4(c).
(14) "Year 1 EBITDA" shall have the meaning set forth in Section 3.3(c)(1).
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(15) "Year 2 EBITDA" shall have the meaning set forth in Section 3.3(d)(1).
(16) "Year 3 EBITDA" shall have the meaning set forth in Section 3.3(e)(1).
(17) "Year 1 Earn-Out Period" shall mean the 12-month period ending on
September 30, 1998.
(18) "Year 2 Earn-Out Period" shall mean the 12-month period ending on
September 30, 1999.
(19) "Year 3 Earn-Out Period" shall mean the 12-month period ending on
September 30, 2000.
(20) "Year 1 Threshold" shall mean $11,000,000.
(21) "Year 2 Threshold" shall mean the greater of (i) $11,000,000 or (ii)
Year 1 EBITDA.
(22) "Year 3 Threshold" shall mean the greater of (i) $11,000,000, (ii) Year
1 EBITDA, or (iii) Year 2 EBITDA.
(b) EBITDA STATEMENT. Within 75 calendar days after the last day of each
of the Year 1 Earn-Out Period, the Year 2 Earn-Out Period and the Year 3
Earn-Out Period, the Buyer shall prepare, the Accountants shall review, and the
Buyer shall deliver to AHG a statement reflecting the EBITDA from the
consolidated operations of the Businesses during such Earn-Out Period (each, an
"EBITDA STATEMENT"), which statement will be determined in accordance with GAAP,
applied on a basis consistent with the financial statements of the Buyer and
Parent for such period. The parties shall ensure that the Accountants have full
access to the books, records, facilities and employees of the Businesses for
purposes of reviewing the EBITDA Statement and shall cooperate with the
Accountants to the extent reasonably requested to review the EBITDA Statement.
The EBITDA Statement will be examined by AHG (and, if AHG so chooses, by a firm
of independent certified public accountants), who shall, not later than 45
calendar days after receipt of the EBITDA Statement, raise any objections it has
to the EBITDA Statement by notifying the Buyer in writing within such time
period in a statement indicating the item or items disputed, AHG's proposed
adjustments and an adjusted EBITDA Statement reflecting such adjustments (an
"OBJECTION NOTICE"). During such 45 day period, AHG and any such independent
certified public accountants shall have full access to the books and records,
other financial information (including the working papers of the Accountants)
and appropriate financial personnel of the Buyer reasonably necessary for the
preparation of an Objection Notice. Absent delivery of an Objection Notice as
provided above, the EBITDA Statement will be conclusive and binding upon the
parties to this Agreement for the purposes of any purchase price adjustment
under this Section 3.3. In the event that an Objection Notice is delivered by
AHG as provided above, and if the Buyer and AHG are unable, within 15 calendar
days after receipt by the Buyer of such Objection Notice, to resolve the
disputed exceptions, such disputed exceptions will be referred to an Independent
Accounting Firm mutually acceptable to AHG and the Buyer. The Independent
Accounting Firm shall, within 60 days following its engagement by the Buyer and
AHG for this purpose, deliver to AHG and the Buyer a written report determining
such disputed exceptions (the "IAF EBITDA STATEMENT"). During such 60 day
period, the Independent Accounting Firm shall have full access to the books and
records, other financial information (including the working papers of the
Accountants and AHG's accountants, if any) and appropriate financial personnel
of the Buyer which the Independent Accounting Firm reasonably deems necessary or
advisable for the preparation of the IAF EBITDA Statement. The EBITDA reflected
in the IAF EBITDA Statement will be conclusive and binding upon the parties to
this Agreement for the purposes of any purchase price adjustment under this
Section 3.3, subject to application of the following provisions: (i) if the IAF
EBITDA Statement reflects EBITDA in excess of $300,000 over the amount of the
EBITDA reflected in the EBITDA Statement for the Earn-Out Period at issue, then
EBITDA for such Earn-Out Period shall be deemed to be equal to the EBITDA
reflected in the IAF EBITDA Statement, and the Buyer shall bear all the fees and
disbursements of the Independent Accounting Firm in respect of its services
under this Section 3.3 for such Earn-Out Period; (ii) if the IAF EBITDA
Statement reflects EBITDA that is equal to or less than $300,000 over the amount
of the EBITDA reflected in the EBITDA Statement for such Earn-Out Period, but
greater than the amount of the EBITDA reflected in such EBITDA Statement, then
EBITDA for such Earn-Out Period shall be
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deemed to be equal to (A) the sum of (1) the EBITDA reflected in the EBITDA
Statement and (2) the EBITDA reflected in the IAF EBITDA Statement divided by
(B) two, and AHG and the Executive Shareholders, on a joint and several basis,
shall bear all the fees and disbursements of the Independent Accounting Firm in
respect of its services under this Section 3.3 for the Earn-Out Period at issue;
and (iii) if the IAF EBITDA Statement reflects EBITDA that is equal to or less
than the amount of the EBITDA reflected in the EBITDA Statement for such
Earn-Out Period, then EBITDA for such Earn-Out Period shall be deemed to be
equal to the EBITDA reflected in the IAF EBITDA Statement, and AHG and the
Executive Shareholders, on a joint and several basis, shall bear all the fees
and disbursements of the Independent Accounting Firm in respect of its services
under this Section 3.3 for the Earn-Out Period at issue.
(c) YEAR 1 ADJUSTMENT/YEAR 1 EARN-OUT CALCULATION.
(1) In the event the EBITDA for the Year 1 Earn-Out Period calculated
pursuant to Section 3.3(b)above (the "YEAR 1 EBITDA") is less than
$10,000,000, then the Year 1 Adjustment is the amount equal to seven
multiplied by the difference between the Year 1 EBITDA and $10,000,000.
(2) In the event the Year 1 EBITDA is equal to or less than the Year 1
Threshold and equal to or greater than $10,000,000, then the Year 1
Adjustment is $0.00.
(3) In the event the Year 1 EBITDA is greater than the Year 1 Threshold,
then the Year 1 Earn-Out is the amount equal to six multiplied by the
difference between the Year 1 EBITDA and the Year 1 Threshold.
(d) YEAR 2 ADJUSTMENT/YEAR 2 EARN-OUT CALCULATION.
(1) In the event the EBITDA for the Year 2 Earn-Out Period calculated
pursuant to Section 3.3(b) above (the "YEAR 2 EBITDA") is equal to or less
than the Year 2 Threshold, then the Year 2 Adjustment is the amount equal to
the sum of (i) six multiplied by the difference between the Year 2 Threshold
and the greater of (x) $11,000,000 or (y) the Year 2 EBITDA, plus (ii) the
amount equal to seven multiplied by the amount, if any, by which the Year 2
EBITDA is less than $10,000,000; PROVIDED, HOWEVER, that the Year 2
Adjustment will be $0.00 if the Year 2 EBITDA is equal to or greater than
$10,000,000 but less than or equal to $11,000,000.
(2) In the event the Year 2 EBITDA is greater than the Year 2 Threshold,
then the Year 2 Earn-Out is the amount equal to six multiplied by the
difference between the Year 2 EBITDA and the Year 2 Threshold; PROVIDED,
HOWEVER, that the Year 2 Earn-Out will be $0.00 if the Year 2 EBITDA is
equal to or greater than $10,000,000 but less than or equal to $11,000,000.
(e) YEAR 3 ADJUSTMENT/YEAR 3 EARN-OUT CALCULATION.
(1) In the event the EBITDA for the Year 3 Earn-Out Period calculated
pursuant to Section 3.3(b) above (the "YEAR 3 EBITDA") is equal to or less
than the Year 3 Threshold, then the Year 3 Adjustment is the amount equal to
the sum of (i) four multiplied by the difference between Year 3 Threshold
and the greater of (x) $11,000,000 or (y) the Year 3 EBITDA, plus (ii) the
amount equal to seven multiplied by the amount, if any, by which the Year 3
EBITDA is less than $10,000,000; PROVIDED, HOWEVER, that the Year 3
Adjustment will be $0.00 if the Year 3 EBITDA is equal to or greater than
$10,000,000 but less than or equal to $11,000,000.
(2) In the event the Year 3 EBITDA is greater than the Year 3 Threshold,
then the Year 3 Earn-Out is the amount equal to four multiplied by the
difference between the Year 3 EBITDA and the Year 3 Threshold; PROVIDED,
HOWEVER, that the Year 3 Earn-Out will be $0.00 if the Year 3 EBITDA is
equal to or greater than $10,000,000 but less than or equal to $11,000,000.
Section 3.4 PAYMENT OF ADJUSTMENT AND EARN-OUT; DISTRIBUTION OF
ESCROW. The Year 1 Adjustment or Year 1 Earn-Out, Year 2 Adjustment or Year 2
Earn-Out and Year 3 Adjustment or Year 3 Earn-Out, if
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any, shall be paid within 5 Business Days of final determination of EBITDA for
the applicable Earn-Out Period pursuant to Section 3.3(b) and shall be paid to
the Buyer or the Escrow Agent, as the case may be, in the following manner:
(a) YEAR 1 ADJUSTMENT/YEAR 1 EARN-OUT.
(1) In the event the Year 1 Adjustment is calculated pursuant to Section
3.3(c)(1) above, then the Escrow Agent shall deliver to Buyer from the
Escrow Funds an amount equal to the Year 1 Adjustment, together with the
interest or earnings thereon as set forth in Section 3.4(d).
(2) In the event the Year 1 Earn-Out is calculated pursuant to Section
3.3(c)(3) above, the Buyer shall pay to the Escrow Agent the Year 1 Earn-Out
in cash by wire transfer of immediately available funds, which shall be held
by the Escrow Agent as part of the Escrow Funds. Upon receipt by the Escrow
Agent of the Year 1 Earn-Out, the Escrow Agent shall then deliver to AHG, on
behalf of the Sellers, an amount equal to one-third of the principal of the
Escrow Funds, together with the interest or earnings thereon as set forth in
Section 3.4(d).
(b) YEAR 2 ADJUSTMENT/YEAR 2 EARN-OUT.
(1) In the event the Year 2 Adjustment is calculated pursuant to Section
3.3(d)(1) above, then the Escrow Agent shall deliver to the Buyer from the
Escrow Funds an amount equal to the Year 2 Adjustment, together with the
interest or earnings thereon as set forth in Section 3.4(d).
(2) In the event the Year 2 Earn-Out is calculated pursuant to Section
3.3(d)(2) above, then the Buyer shall pay to the Escrow Agent the Year 2
Earn-Out in cash by wire transfer of immediately available funds, which
shall be held by the Escrow Agent as part of the Escrow Funds. Upon receipt
by the Escrow Agent of the Year 2 Earn-Out, the Escrow Agent shall then
deliver to AHG, on behalf of the Sellers, an amount equal to one-half of the
principal of the Escrow Funds, together with the interest or earnings
thereon as set forth in Section 3.4(d).
(c) YEAR 3 ADJUSTMENT/YEAR 3 EARN-OUT.
(1) In the event the Year 3 Adjustment is calculated pursuant to Section
3.3(e)(1) above, then the Escrow Agent shall deliver to the Buyer from the
Escrow Funds an amount equal to the Year 3 Adjustment, together with the
interest or earnings thereon as set forth in Section 3.4(d). Any Escrow
Funds remaining after distribution of the Year 3 Adjustment to the Buyer
shall be disbursed to AHG, on behalf of the Sellers, promptly after
disbursement of the Year 3 Adjustment, together with interest or earnings
thereon, to the Buyer.
(2) In the event the Year 3 Earn-Out is calculated pursuant to Section
3.3(e)(2) above, then the Buyer shall pay to AHG, on behalf of the Sellers,
the Year 3 Earn-Out in cash by wire transfer of immediately available funds,
and the Escrow Agent shall transfer the Escrow Funds to AHG, on behalf of
the Sellers.
(d) DISTRIBUTIONS OF INTEREST OR EARNINGS ON THE ESCROW FUNDS. Interest or
other earnings on the Escrow Deposit and additional amounts paid by the Buyer to
the Escrow Agent pursuant to this Section 3.4 shall be disbursed prorata to the
recipient of principal held in the Escrow Funds. For income tax purposes, it
shall be assumed that the Sellers will be entitled to receive all interest and
other earnings on the principal amounts held in the Escrow Fund and the Buyer
and AHG agree to direct the Escrow Agent pursuant to joint instructions to
disburse to AHG, on behalf of the Sellers, an amount from the Escrow Funds
necessary for the Sellers to pay their federal income tax liability on said
interest and earnings, assuming for purposes hereof an effective tax rate of
31%. The amount of any previous distributions for taxes made to AHG, on behalf
of the Sellers, shall be taken into account in the event that disbursements from
the Escrow Funds are later made to the Buyer and appropriate adjustments will be
made in accordance with joint instructions from the Buyer and AHG to the Escrow
Agent.
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(e) LIMITATIONS ON PURCHASE PRICE ADJUSTMENTS/ EARN-OUTS. Notwithstanding
anything to the contrary contained in this Section 3, in no event shall the
Purchase Price, as adjusted pursuant to the provisions of Sections 3.3 and 3.4,
be greater than $110,000,000 nor less than $50,000,000.
(f) ADJUSTMENTS IN EXCESS OF ESCROW FUNDS. In the event that the
Adjustment for any Earn-Out Period should exceed the amount of the remaining
Escrow Funds, the amount of such excess shall be applied as a credit in favor of
the Buyer and shall be deducted from the amount otherwise payable by the Buyer
as the Year 2 Earn-Out and Year 3 Earn-Out, as applicable.
Section 3.5 PRORATIONS AND OTHER ADJUSTMENTS.
(a) All revenues and expenses arising from the business and operations of
the Businesses, including without limitation business and license fees (and any
retroactive adjustments thereof), utility charges, property and equipment
rentals, real and personal property Taxes and assessments, and similar prepaid
and deferred items shall be prorated between the Buyer and the Sellers in
accordance with the principle that the Sellers shall receive all revenues and
all refunds and shall be responsible for all expenses, payables, costs,
liabilities and obligations allocable to the conduct and operations of the
Businesses for the period on or prior to the Closing Date, and the Buyer shall
receive all revenues and be responsible for all expenses, payables, costs,
liabilities and obligations allocable to the conduct and operations of the
Businesses for the period after the Closing Date; provided, however, that the
parties shall allocate any real property Tax in accordance with Section 164(d)
of the Code. The Buyer and the Sellers shall deliver a statement setting forth
such prorations at the time of making any such proration payment.
Notwithstanding the foregoing, there shall be no proration with regard to, and
the Sellers shall remain solely liable with respect to, any Excluded Liabilities
and any assets not included in the Purchased Property.
(b) Any adjustments and prorations pursuant to this Section 3.5 will,
insofar as feasible, be determined and paid on the Closing Date, with final
settlement and payment by the appropriate party or parties occurring no later
than 30 days after the actual amount becomes known.
SECTION 4. CLOSING.
The closing hereunder (the "CLOSING") shall take place on the first
practicable date after all required regulatory and other approvals have been
obtained and after the satisfaction or waiver of all other conditions precedent
set forth in Sections 8 and 9, but in any event no later than November 30, 1997,
or such other date as Buyer and AHG shall mutually agree, and shall be held at
the offices of Broad and Cassel, Miami, Florida, at 9:00 a.m. or at such other
place and time as may be mutually agreed to by the Buyer and AHG (the "CLOSING
DATE"). Notwithstanding the actual time the following steps are taken on the
Closing Date, the parties hereto agree that the Closing shall be effective and
deemed for all purposes to have occurred as of 12:01 a.m. local time on the date
immediately following the Closing Date.
At the Closing, the parties agree to take the following steps in the order
listed below (provided, however, that upon their completion all of these steps
shall be deemed to have occurred simultaneously):
(a) Each of the Sellers and the Buyer shall deliver to the other a copy of
the resolutions of its Board of Directors and, in the case of each Seller, its
shareholders or partners, as the case may be, authorizing the transactions
contemplated by this Agreement as to such Seller, certified in each case by its
Secretary or Assistant Secretary or partner, as the case may be;
(b) Each of the Sellers and the Buyer shall deliver to the other a good
standing certificate of such party (which is dated not more than 15 days prior
to the Closing);
(c) Each of the Sellers shall deliver to the Buyer instruments reasonably
satisfactory to the Buyer and its counsel for such Seller to assign the
Purchased Property (including, without limitation, the Cash and Cash
Equivalents, which, at the election of the Buyer, shall be either by bank check
or wire transfer of immediately available funds) to the Buyer, and the Buyer
shall deliver to the Sellers the Assumption Agreement;
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(d) Each of the Sellers shall deliver to the Buyer, or make available at the
locations specified by the Buyer prior to the Closing, the originals of the
Files and Records, Licenses and Permits and Contracts, together with originals
of any required consents to assignment;
(e) Each of the Sellers and their Affiliates shall have delivered to the
Buyer all other agreements, documents and certificates required by this
Agreement to be delivered by them to the Buyer at or before the Closing;
(f) Each of the Sellers and the Buyer shall deliver to each other
certificates by appropriate officers of such parties certifying the fulfillment
of the conditions set forth in Section 8, and, in the case of the Buyer, the
fulfillment of the conditions set forth in Section 9;
(g) The Buyer shall pay the Closing Cash Installment to the Sellers and the
Escrow Deposit to the Escrow Agent in accordance with Section 3.1, and each of
the Sellers, the Buyer and the Escrow Agent shall execute and deliver the Escrow
Agreement and documents acknowledging receipt from the other, respectively, of
the Purchased Property, the Closing Cash Installment and the Escrow Deposit.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND THE EXECUTIVE
SHAREHOLDERS.
Each of the Sellers and each of the Executive Shareholders, on a joint and
several basis, hereby represents and warrants to, and covenants with, the Buyer
as follows, each of which is relied upon by the Buyer in consummating the
transactions contemplated hereby regardless of any other investigation made or
information obtained by the Buyer; PROVIDED, HOWEVER, that the representations,
warranties and covenants of each Executive Shareholder in this Section 5 shall
be made only as to himself and to each Seller in which such Executive
Shareholder owns any shares or partnership interests, as the case may be:
Section 5.1 ORGANIZATION; QUALIFICATION TO DO BUSINESS; SUBSIDIARIES.
(a) Each of the Sellers (except FSN), and Florida Specialty Network, Inc.
("FSN INC."), is a corporation duly organized, validly existing and in good
standing under the laws of the State of Florida, and is duly qualified as a
foreign corporation in each jurisdiction in which it is required to be so
qualified, and has all requisite corporate power and authority to own its
properties and assets and to conduct its business as now conducted. The Sellers
have furnished the Buyer true, complete and correct copies of the Articles of
Incorporation and By-laws of each Seller (except FSN), and FSN Inc., with all
amendments thereto. SCHEDULE 5.1(A) sets forth as to each Seller the name and
security ownership of each holder of equity or any right to acquire equity of
such Seller.
(b) FSN is a limited partnership duly organized, validly existing and in
good standing under the laws of the State of Florida, and is duly qualified as a
foreign limited partnership in each jurisdiction in which it is required to be
so qualified, and has all partnership powers necessary to own its properties and
conduct its business as now conducted. The Sellers have furnished the Buyer
true, complete and correct copies of FSN's limited partnership agreement, with
all amendments thereto (the "FSN LIMITED PARTNERSHIP AGREEMENT"). FSN's sole
general partner, FSN Inc. has all requisite corporate power and authority to
fulfill its duties as the sole general partner of FSN in accordance with the FSN
Limited Partnership Agreement. SCHEDULE 5.1(B) sets forth the name and ownership
interest of each partner of FSN and of each person who has a right to acquire
any interest in FSN.
(c) None of the Sellers has any direct or indirect Subsidiaries, or has made
any advances to or investments in, or owns any securities of or other interests
in, any Person.
(d) Each Shareholder has full power to vote his or her shares without
obtaining the consent or approval of any Person.
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Section 5.2 AUTHORIZATION AND VALIDITY OF AGREEMENT. Each Seller has all
requisite corporate (or, in the case of FSN, partnership) power and authority to
enter into this Agreement and to carry out its obligations hereunder. Except for
FSN, the execution and delivery of this Agreement and the performance of each
Seller's obligations hereunder have been duly authorized by all necessary
corporate action by the Board of Directors and shareholders of such Seller, and
no other corporate or shareholder proceedings on the part of such Seller are
necessary to authorize such execution, delivery and performance. The execution
and delivery of this Agreement and the performance of FSN's obligations
hereunder have been duly authorized by all necessary partnership action on
behalf of FSN, and by FSN Inc., as sole general partner on behalf of FSN, and no
other proceedings on the part of FSN or FSN Inc. are necessary to authorize such
execution, delivery and performance. This Agreement has been duly executed and
delivered by each Seller and each Executive Shareholder and constitutes its or
his legal, valid and binding obligation, enforceable against it or him in
accordance with its terms.
Section 5.3 NO CONFLICT OR VIOLATION. The execution, delivery and
performance by each Seller and each Executive Shareholder of this Agreement (a)
does not and will not, as of the Closing Date, violate or conflict with any
provision of the Articles of Incorporation or By-laws (or, in the case of FSN,
the Certificate of Limited Partnership or the FSN Limited Partnership Agreement)
of such Seller, (b) does not and, as of the Closing Date, will not violate any
order, judgment or decree of any court, arbitrator or other Governmental
Authority or, except as set forth on SCHEDULE 5.19, to the knowledge of each
Seller and each Executive Shareholder, any provision of law, (c) as of the date
hereof, except as set forth on SCHEDULE 5.3 does not, and as at the Closing Date
will not, violate or result in a breach of or constitute (with due notice or
lapse of time or both) a default under, or give rise to a right to terminate or
modify, any Contract or any other contract, lease, loan agreement, mortgage,
security agreement or other agreement or instrument (whether or not the same is
in writing) to which any Seller or Shareholder is a party or by which it or any
of them is bound or to which any of its or their properties or assets is
subject, and (d) will not result in the creation or imposition of any
Encumbrance upon any of the Purchased Property or accelerate any indebtedness of
any Seller to which the Purchased Property may be bound, or result in the
cancellation, modification, revocation or suspension of any of the Licenses and
Permits.
Section 5.4 CONSENTS AND APPROVALS. SCHEDULE 5.4 sets forth a true and
complete list of (i) each consent, waiver, authorization or approval of any
Governmental Authority, or of any other Person, and (ii) to the knowledge of
each Seller and each Executive Shareholder, each declaration to or filing or
registration with any such Governmental Authority that is required in connection
with the execution and delivery of this Agreement by each Seller or the
performance by each Seller of its obligations hereunder.
Section 5.5 FINANCIAL STATEMENTS AND PROJECTIONS.
(a) The Sellers have heretofore delivered to the Buyer true and complete
copies of the Financial Statements, accompanied in the case of the Audited
Financial Statements by reports thereon from the Sellers' independent certified
public accountants. The Audited Financial Statements and the Management Prepared
Financial Statements (i) were prepared in accordance with GAAP applied on a
consistent basis, (ii) present fairly the financial condition, results of
operation and cash flows of each Business (and, in the case of the Audited
Financial Statements presenting combined financial statements, the Businesses
taken as a whole) as of their respective dates, (iii) are complete, correct and
in accordance with the books of account and records of each Seller, (iv) can be
legitimately reconciled with the financial statements and the financial records
maintained and the accounting methods applied by each Seller for federal income
tax purposes, and (v) in the case of the Audited Financial Statements, contain
all entries recommended by the Sellers' independent certified public
accountants. Except as provided in the Audited Financial Statements or the
Management Prepared Financial Statements, or as fully disclosed in SCHEDULE 5.5,
no Seller has any liabilities or obligations (whether accrued, absolute,
contingent, whether due or to become due or otherwise) which might be or become
a charge against the Purchased Property, including any "loss contingencies"
considered "probable" or "reasonably possible" within the meaning of the
Financial Accounting Standard Board's Statement of Financial Accounting
Standards No. 5, except trade payables
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and similar liabilities and obligations incurred in the ordinary and regular
course of business since the dates of the Audited Financial Statements and the
Management Prepared Financial Statements, respectively. The Audited Financial
Statements were audited by Rachlin, Cohen & Holtz. The Projections are
reasonable in light of the historical operations and results of the Businesses,
represent each Seller's management's good faith best estimate of the future
operating performance of such Seller's Business, and were prepared on an
accounting basis consistent with historical earnings reports of each Seller as
set forth in the Financial Statements.
(b) The most recent Management Prepared Financial Statements as at the date
hereof reflect all adjustments, which consist only of normal accruals, including
provision for accrued liabilities, including vacation and sick, medical claims
and extended reporting endorsement for each of the Sellers (including all
incurred but not reported ("IBNR") amounts).
Section 5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as set forth in SCHEDULE 5.6(A), since January 1, 1997:
(1) there has not been any material adverse change in the assets,
properties, business, operations, prospects, net income or condition
(financial or other) of any Business, no event has occurred and, to the
knowledge of each Seller and each Executive Shareholder, no factor or
condition exists that would reasonably be likely to result in any such
change;
(2) there has not been any material loss, damage, destruction or other
casualty to the Purchased Property (whether or not insured);
(3) there has been no adverse change in the amount of total assets set
forth on the December 31, 1996 Combined Balance Sheet except for reductions
attributable to amortization and/or depreciation on a basis consistent with
past practice as reflected in the Audited Financial Statements or the
Management Prepared Financial Statements;
(4) there has not been any change in any method of accounting or
accounting practice of any Business or any Seller relating to its Business;
(5) there has not been a loss of the employment, services or benefits of
any Consultants or Employees, or of any Network Physicians (A) in excess of
8% of the number of Network Physicians engaged in respect of any single
Third Party Payor Agreement, or (B) which would cause any Seller to be in
breach of any Third Party Payor Agreement to which it is a party; and
(6) there has not been any default, breach or termination of, or any
notification of any of the foregoing, or any modification or requested
modification that would be materially adverse to any Seller, in respect of,
any Third Party Payor Agreement or any Contract;
(b) Since January 1, 1997, each Seller has operated its Business in the
ordinary course of its business consistent with past practice (including without
limitation by keeping in full force and effect insurance comparable in amount
and scope to the coverage maintained by it (or on behalf of it) at such date),
and, except as set forth in SCHEDULE 5.6(B) hereto, no Seller has:
(1) permitted any of the Purchased Property (real or personal, tangible
or intangible) to be sold, licensed or subjected to any Encumbrance (other
than a Permitted Encumbrance) except in dispositions of inventory or of
worn-out or obsolete equipment for fair or reasonable value in the ordinary
course of business consistent with past practices, canceled any debts or
claims, or waived or released any rights material to such Business relating
to the operations of such Business, or defaulted on any material obligation
relating to the operations of its Business;
(2) failed to exercise all Best Efforts to maintain and preserve for the
Buyer its relationships with customers, suppliers, managers, Employees,
Network Physicians, Consultants, parties to Third Party Payor Agreements and
actively sought prospective parties to Third Party Payor Agreements
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(including, without limitation PruCare), active patients and others having
business relationships with the Business;
(3) acquired any assets or properties, or entered into any other
transaction, other than in the ordinary course of business consistent with
past practice and which does not require payment of aggregate amounts
exceeding $10,000;
(4) made or committed to make any capital expenditure other than
ordinary repairs or maintenance;
(5) paid, lent or advanced any amount to, or sold, transferred or leased
any properties or assets to, or entered into any agreement or arrangement
with, any of its Affiliates;
(6) issued, granted or sold any capital stock, partnership interests,
options, or other right to purchase any equity interests in such Seller, or
issued any security convertible into such capital stock, partnership
interests or equity interests, or entered into any subscription contract or
other arrangements obligating such Seller to issue or sell any of the
foregoing, or redeem, purchase or otherwise acquire any such capital stock
or equity interests;
(7) made any change in any method of accounting or accounting principle,
method, estimate or practice except for any such change required by reason
of a concurrent change in GAAP, or written down the value of any inventory
or written off as uncollectible any accounts receivable except in the
ordinary course of business consistent with past practice;
(8) settled, released or forgiven any claim or litigation or waived any
right thereto;
(9) made, entered into, modified, amended or terminated any Contract,
including any Third Party Payor Agreement or bid with respect to any of the
Businesses, that could be materially adverse to any Seller;
(10) deferred the payment of any expense or liability, or prepaid any
expense or liability, in anticipation of the consummation of the
transactions contemplated hereby;
(11) accelerated the collection of any accounts receivable or any other
amounts owed to it;
(12) decreased by a material amount the quantity of Equipment and
Machinery or Inventory maintained for use in its Business;
(13) failed to discharge or satisfy any Encumbrance or pay or satisfy
any obligation or liability (whether absolute, accrued, contingent or
otherwise) arising from the operation of its Business in a timely manner,
other than liabilities being contested in good faith and for which adequate
reserves have been provided, each of which is set forth on SCHEDULE
5.6(B)(13) hereof, and Permitted Encumbrances;
(14) failed to continue to maintain the Purchased Property in accordance
with past practice; or
(15) entered into any agreement or made any commitment to do any of the
foregoing or taken any other action that would cause any of the
representations and warranties made by any Seller in this Agreement not to
remain true and correct.
(c) Except as set forth on SCHEDULE 5.6(C):
(1) from and after July 1, 1997, no Seller has declared, set aside, paid
or made any dividend or other distribution or payment (whether in cash,
stock, interests, equity or property) with respect to, or purchased or
redeemed, any shares of the capital stock or any partnership interests or
other equity interests (including profit sharing plans or distributions
relating to such Seller's financial results) of such Seller, or otherwise
withdrawn any cash from such Seller for the direct or indirect benefit of
the holders of any such shares or interests or for any third party, or made
or agreed to make any other
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payments to any Shareholder or any of his or her Affiliates; PROVIDED,
HOWEVER, that nothing set forth in this Section 5.6(c)shall prohibit or
require disclosure of cash distributions to the extent that after giving
effect to such cash distributions the Sellers still have at least $1,000,000
in Unrestricted Cash in the aggregate;
(2) from and after July 1, 1997, no Seller has entered into any new (or
amended any existing) employee benefit plan, program or arrangement or any
new (or amend any existing) employment, independent contractor, severance or
consulting agreement, granted any general increase in the compensation of
officers or Employees (including any such increase pursuant to any bonus,
pension, profit-sharing or other plan or commitment) or granted any increase
in the compensation payable or to become payable to any Network Physician,
Consultant or Employee, except (i) in accordance with pre-existing
contractual provisions or consistent with past practice, (ii) increases on
an annual basis for the 1997 calendar year up to a maximum amount of five
percent in excess of such Person's aggregate compensation for the 1996
calendar year and (iii) in respect of the Executive Shareholders, as
permitted in Section 7.2(i) below; and
(3) from and after July 1, 1997, no Seller has made or agreed to make
any payment or incurred or agreed to incur any obligation or liability
(whether absolute, accrued, contingent or otherwise) with respect to any
Contract except in accordance with the terms of such Seller's Contracts as
in effect on June 30, 1997, or in accordance with the terms of Contracts
which such Seller has modified or entered into after June 30, 1997 with the
prior written consent of the Buyer.
Section 5.7 TAX MATTERS.
(a) The Sellers have provided the Buyer a true and complete copy of all Tax
Returns filed by each Seller since January 1, 1994.
(b) Except as set forth in SCHEDULE 5.7(B), all Tax Returns required to be
filed before the Closing Date in respect of each Seller have been filed on a
timely basis, and each Seller has paid when due, Taxes required to be paid in
respect of the periods covered by such Tax Returns and has adequately reserved
for the payment of all Taxes with respect to periods ended on or before the
Closing Date for which tax returns have not yet been filed. All Taxes of each
Seller have been paid or adequately provided for, there are not any proposed
additional Tax assessments against any Seller not adequately provided for in the
June 30, 1997 Combined Balance Sheet. There are no unpaid Taxes which are or
could become an Encumbrance on the Purchased Property. No Tax liens have been
filed against the Purchased Property of any Seller and there are no audits
pending with respect to any Seller with any Governmental Authority. The charges,
accruals and reserves with respect to Taxes on the books of each Seller are
adequate (as determined in accordance with GAAP). All Taxes that any Seller is
or was legally required to withhold or collect have been duly withheld or
collected and, to the extent required, have been paid to the proper Governmental
Authority.
(c) To the knowledge of each Seller and each Executive Shareholder, SCHEDULE
5.7(C) sets forth each state and locality with jurisdiction to impose any Tax on
the Purchased Property or the Business at any time prior to the Closing Date.
Each of the Sellers represent that they have properly and timely filed all Tax
Returns required to be filed in such jurisdictions on or before the Closing
Date.
Section 5.8 ABSENCE OF UNDISCLOSED LIABILITIES. None of the Sellers has
any indebtedness or liability, absolute or contingent, known or unknown relating
to its Business, which is not shown or provided for on the most recent
Management Prepared Financial Statements, other than liabilities as shall have
been incurred or accrued in the ordinary course of business since the date of
such Management Prepared Financial Statements, and which are consistent in
amount and type with those incurred during the year ended December 31, 1996.
Except as shown in the most recent Management Prepared Financial Statements,
none of the Sellers is directly or indirectly liable upon or with respect to (by
discount, repurchase agreements or otherwise), or obliged in any other way to
provide funds in respect of, or to guarantee or
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assume, any debt, obligation or dividend of any Person in connection with its
Business, except endorsements in the ordinary course of business in connection
with the deposit, in banks or other financial institutions, of items for
collection.
Section 5.9 ACCOUNTS RECEIVABLE; BANKING.
(a) All Accounts Receivable (i) reflected on the June 30, 1997 Combined
Balance Sheet or (ii) acquired by each Business after June 30, 1997 have been
collected or are (or will be) current and collectible in amounts not less than
the aggregate amount thereof (net of reserves established in accordance with
prior practice) carried or to be carried on the books of each Business, are not
subject to any counterclaims or set-offs, and have arisen only in the ordinary
course of business in accordance with the customary credit policies of each of
the Sellers.
(b) SCHEDULE 5.9(B) contains a complete list of all of each Seller's bank
accounts (including name, location, and account number)and all lines of credit
owned or used by each Seller, and the names of all persons with authority to
withdraw funds from, or execute drafts or checks on, each such account.
Section 5.10 REAL PROPERTY; LEASES.
(a) None of the Sellers, the Shareholders or their respective Affiliates
owns, directly or indirectly, any real property that is used in its Business
except as set forth on SCHEDULE 5.10(A).
(b) SCHEDULE 5.10(B) sets forth a list of all properties in which any Seller
has a leasehold interest and which is used in connection with its Business
(each, a "LEASE" and collectively, the "LEASES"; the property covered by such
Leases is referred to herein as the "LEASED REAL PROPERTY"). None of the Leased
Real Property consists of a Lease of an entire building.
(c) Except as set forth in SCHEDULE 5.10(C), no Lease has been modified or
amended in writing. No party to any Lease has given any Seller written notice of
or made a claim with respect to any breach or default.
(d) Except as set forth in SCHEDULE 5.10(D), none of the Leased Real
Property is subject to (i) any sublease, license or other agreement granting to
any person or entity any right to the use, occupancy or enjoyment of such
property or any portion thereof or (ii) to the knowledge of each Seller and each
Executive Shareholder, any restrictive covenant, zoning ordinance, building
code, use or occupancy restriction that restricts the use of such Leased Real
Property in connection with the Businesses.
(e) To the knowledge of each Seller and each Executive Shareholder, the
plumbing, electrical, heating, air conditioning, elevator, ventilating and all
other mechanical or structural systems for which any Seller is responsible under
the Leases in the buildings or improvements are in good working order and
condition, and the roof, basement and foundation walls of such buildings and
improvements for which such Seller is responsible under the Leases are in good
condition and free of leaks and other defects. To the knowledge of each Seller
and each Executive Shareholder, all such mechanical and structural systems and
such roofs, basement and foundation walls for which others are responsible under
said Leases are in good working order and condition and free of leaks and other
defects. To each Seller's and each Executive Shareholder's knowledge, there is
no asbestos-containing material in any of the buildings or facilities on the
Leased Real Property or any polychlorinated biphenyls in any hydraulic oils,
transformers, capacitors or other electrical equipment, nor does any Seller or
Executive Shareholder operate any underground or aboveground tanks on the Leased
Real Property.
Section 5.11 EQUIPMENT AND MACHINERY. SCHEDULE 5.11 sets forth a complete
and correct list and brief description of each item of Equipment and Machinery
having an original purchase cost or aggregate lease cost exceeding $2,500. Each
Seller has good title, free and clear of all title defects and objections, and
Encumbrances (other than the Encumbrance of current property taxes and
assessments not yet due and payable, if any), to the Equipment and Machinery
owned by it. Except as set forth on SCHEDULE 5.3, each Seller holds good and
transferable leaseholds in all of the Equipment and Machinery leased by it, in
each
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case under valid and enforceable leases. No Seller is in default with respect to
any item of Equipment and Machinery purported to be leased by it, and no event
has occurred that constitutes or with due notice or lapse of time or both may
constitute a default under any lease thereof. To the knowledge of each Seller
and each Executive Shareholder, the Equipment and Machinery is sufficient and
adequate to carry on the Business of each Seller as presently conducted and, to
the knowledge of each Seller and each Executive Shareholder, all material items
thereof have generally been maintained in satisfactory operating condition and
repair, ordinary wear and tear excepted.
Section 5.12 INTELLECTUAL PROPERTY; INTANGIBLE ASSETS.
(a) SCHEDULE 5.12(A) sets forth a complete and correct listing of the
Intellectual Property. Except as described in SCHEDULE 5.12, all Intellectual
Property listed therein is owned by the Sellers, free and clear of all
Encumbrances and is in good standing and is not known to be the subject of any
challenge. As of the date hereof, except as described in SCHEDULE 5.12(A), there
are no unresolved claims made and there has not been communicated to any of the
Sellers the threat of any claim that the holder of such Intellectual Property is
in violation or infringement of any service mark, patent, trademark, trade name,
trademark or trade name registration, copyright, copyright registration or other
intellectual property of any other Person. Each Seller is the owner of the
Intellectual Property and other proprietary and trade rights necessary for the
conduct of its Business as now conducted, and without any known conflict with
the rights of others, and no Seller has knowingly forfeited or otherwise
relinquished any such Intellectual Property or other proprietary right necessary
for the conduct of its Business as conducted on the date hereof. Each Seller
owns or has the right to use all computer software, software systems and
databases and all other information systems included in the Purchased Property
and has the right to transfer title thereto or such rights of the use thereof to
the Buyer free and clear of any Encumbrances. All of the Intellectual Property
listed on SCHEDULE 5.12(A) are subsisting and have not been abandoned, and all
required annuities, renewal fees, maintenance fees, royalty payments, amendments
and/or other filings or payments which are necessary to preserve and maintain
such Intellectual Property have been filed and/or made.
(b) SCHEDULE 5.12(B) sets forth a true and complete list of all of the
Intangible Assets. There is no restriction affecting the use of any of the
Intangible Assets, and no license has been granted with respect thereto. Each of
the Intangible Assets is valid and in good standing, is not currently being
challenged, is not involved in any pending or, to the knowledge of each Seller
and each Executive Shareholder, threatened administrative or judicial
proceeding, and, to the knowledge of each Seller and each Executive Shareholder,
does not conflict with any rights of any other Person. Each Seller's rights in
and to the Intangible Assets are sufficient and adequate in all respects to
permit the conduct of its Business as now conducted and none of the products or
operations of such Business involves any infringement of any proprietary right
of any other Person.
Section 5.13 LICENSES AND PERMITS.
(a) SCHEDULE 5.13(A) sets forth a true and complete list of all licenses,
permits, franchises, authorizations and approvals issued or granted to each
Seller with respect to its Business by any Governmental Authority (the "LICENSES
AND PERMITS"), and all pending applications therefor. Such list, where
applicable, specifies the date issued, granted or applied for, the expiration
date and the current status thereof. Each License and Permit has been duly
obtained, is valid and in full force and effect, and is not subject to any
pending or threatened administrative or judicial proceeding to revoke, cancel,
suspend or declare such License and Permit invalid in any respect. To the
knowledge of each Seller and each Executive Shareholder, no license, permit,
franchise, authorization or approval by or from any Governmental Authority,
other than the Licenses and Permits, is required to permit the continued lawful
conduct of the Businesses in the manner now conducted and none of the operations
of the Businesses are being conducted in a manner that violates any of the terms
or conditions under which any License and Permit was granted. Except as set
forth in SCHEDULE 5.13(A), no such License and Permit will in any way be
affected by, or terminate or lapse by reason of, the transactions contemplated
by this Agreement.
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(b) To the knowledge of each Seller and Executive Shareholder, no Network
Physician ever has (i) had his/her license to practice medicine in any
jurisdiction denied, surrendered, limited, suspended, revoked or subject to
probationary conditions or is subject to any pending proceedings regarding any
of the foregoing, (ii) had his/her Federal or State Drug Enforcement Agency
controlled substance authorization denied, revoked, suspended, reduced or not
renewed or has been subject to institution of, or is subject to any pending or
threatened proceedings regarding any of the foregoing, or (iii) been the subject
of administrative sanctions or been suspended from or lost eligibility for
participating in Medicare, Medicaid or other medical insurance programs offered
by any Governmental Authority or any non-governmental body or is subject to any
pending or threatened proceedings regarding any of the foregoing.
Section 5.14 LITIGATION. Except as set forth in SCHEDULE 5.14, there are
no claims, actions, suits, proceedings, labor disputes or investigations pending
or, to the knowledge of each Seller and each Executive Shareholder, threatened,
before any Governmental Authority, or before any arbitrator or mediator of any
nature, domestic or foreign, brought by or against any Seller or any of its
officers, directors, employees, agents or Affiliates involving, affecting or
relating to its Business, the Purchased Property or the transactions
contemplated by this Agreement, nor is any basis known to any Seller or any
Executive Shareholder for any such action, suit, proceeding or investigation.
SCHEDULE 5.14 sets forth a list and a summary description of all such pending
actions, suits, proceedings, disputes or investigations. Neither any Business
nor any Purchased Property is subject to any order, writ, judgment, award,
injunction or decree of any Governmental Authority or arbitrator, domestic or
foreign, that affects any Businesses or Purchased Property, or that would or
might interfere with the transactions contemplated by this Agreement.
Section 5.15 PROFESSIONAL LIABILITY CLAIMS.
(a) Except as set forth in SCHEDULE 5.15(A), to the knowledge of each Seller
and each Executive Shareholder, in respect of Network Physicians: (i) there is
no notice, demand, claim, action, suit, inquiry, hearing, proceeding, notice of
violation or investigation of a civil, criminal or administrative nature before
any Governmental Authority or before any arbitrator or mediator of any nature
against or involving any professional services performed in connection with or
on behalf of any Business, or class of claims or lawsuits involving the same or
similar services performed in connection with or on behalf of any Business
which, in any such case, is pending or, to the knowledge of the Sellers and the
Executive Shareholders, threatened (collectively, "PROFESSIONAL LIABILITY
CLAIMS") and (ii) there has not been any Occurrence (as such term is defined
below).
(b) The term "OCCURRENCE" shall mean any accident, happening or event which
takes place at any time which is caused or allegedly caused by any such
accident, happening or event otherwise involving any professional services
performed in connection with or on behalf of any Business that is likely to
result in a claim or loss.
Section 5.16 CONTRACTS.
(a) SCHEDULE 5.16(A) sets forth a complete and correct list of all Contracts
(as in effect on the date hereof), which list of Contracts constitutes all the
contracts, agreements, understandings or commitments, whether or not the same
are in writing, to which each Seller is a party in connection its Business.
(b) Each Contract is valid, binding and enforceable against the parties
thereto in accordance with its terms, and in full force and effect. Each Seller
has performed all material obligations required to be performed by it under, and
is not in default or delinquent in performance, status or any other respect
(claimed or actual) in connection with any Contract, and no event has occurred
which, with due notice or lapse of time or both, would constitute such a
default. To the knowledge of each Seller and each Executive Shareholder, no
other party to any Contract is in default in respect thereof, and no event has
occurred which, with due notice or lapse of time or both, would constitute such
a default.
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(c) Except as set forth in SCHEDULE 5.16(C), with respect to each Contract,
each Seller which is a party thereto has complied in all material respects with
and expects to comply in all material respects with all material terms thereof,
all certifications and representations of such Seller with respect thereto and
all statutes and regulations applicable thereto. By way of example, and not by
way of limitation, "material obligations" or "material terms" shall include (i)
any obligation to comply with rules or regulations imposed by any party to a
Third Party Payor Agreement, whether or not such rules or regulations are
attached to the relevant Contract, (ii) any obligation to provide most favored
pricing terms, (iii) non-competition agreements, (iv) exclusive service
requirements, (v) requirements to report information, or to furnish reports,
(vi) confidentiality obligations, (vii) indemnification obligations and
obligations to maintain insurance, and (viii) any term in respect of which the
failure to observe or comply with would, with due notice or lapse of time or
both, constitute a ground for default or termination.
(d) Each Seller has permitted the Buyer to inspect and review true and
complete copies of all of the Contracts to which it is a party (and, in the case
of oral agreements, true and complete written summaries of the material terms of
such oral agreements), all attachments, schedules, exhibits, annexes, all rules,
regulations or other documents referenced in such Contracts, together with and
all amendments and addendums thereto (including any and all oral modifications
to such agreements and all amendments that do not require the consent of any
Seller). Except as set forth in SCHEDULE 5.16(D), each Seller has full legal
power and authority to assign its rights under such Contracts to the Buyer in
accordance with this Agreement, and such assignment will not affect the
validity, enforceability or continuity of any of such Contracts. All consents,
waivers, approvals and authorizations which may be required under the Contracts
with respect to the transactions contemplated hereby are listed on SCHEDULE
5.16(D).
(e) Except as set forth in SCHEDULE 5.16(E), none of the Contracts that any
Seller has with its Network Physicians, Consultants or Employees provides or
requires that (i) any Person other than the aforementioned personnel and such
Seller will be a party to such Contracts (including any party to any Third Party
Payor Agreement), and the assignment of each Seller's agreements with such
Persons to the Buyer does not require the consent or approval of any party to
any Third Party Payor Agreement or any other Person, or (ii) any compensation or
payment be made to any such Person (a "CHANGE OF CONTROL PAYMENT") by reason of
(A) the transactions contemplated by this Agreement, including by reason of the
sale of all or substantially all of the assets relating to the Businesses or (B)
the acquisition by any Person of beneficial ownership of 50% or more of the
voting securities of the Buyer or any of its Affiliates or (C) the merger of the
Buyer or any of its Affiliates with and into another Person.
(f) Set forth in SCHEDULE 5.16(F) is a true and correct schedule reflecting
the monthly capitation fees required to be paid by each party to a Third Party
Payor Agreement to any Seller in accordance with each Third Party Payor
Agreement.
(g) None of the Sellers is required to make any payments to, or to receive
lower capitation fees from, any party to any Third Party Payor Agreement in
accordance with the foregoing provisions or by reason of any other provision in
any Third Party Payor Agreement, and none of the Sellers has any reason to
believe that any such payment or reduction in capitation fees will be required
under the terms of any Third Party Payor Agreement in the foreseeable future.
(h) Except as set forth in SCHEDULE 5.16(H), there are no non-competition or
exclusive service agreements (i) between any Executive Shareholder, any Seller
or their respective Affiliates, and any party to any Third Party Payor
Agreement, that would restrict any such Seller, Executive Shareholder or
Affiliate in the manner in which it conducts, or could conduct, its Business, or
that would restrict the manner in which the Buyer or its Affiliates conducts, or
could conduct, its (or their) businesses, including, after the Closing, the
Businesses or (ii) between any Seller and any Network Physician, Consultant,
Employee or Shareholder, that would restrict any such Person from performing
services for the Buyer or its Affiliates. Each Seller has previously furnished
the Buyer with true, correct and complete copies of all the agreements
(including all amendments thereto) set forth in SCHEDULE 5.16(H).
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(i) Except as set forth on SCHEDULE 5.16(I), since June 30, 1997, no party
to any Third Party Payor Agreement has terminated or changed significantly, or
to the knowledge of the Sellers and the Executive Shareholders, intends to
terminate or change significantly, its relationship with any of the Businesses.
(j) There has been no material change in the terms of or manner of
administering any of the Contracts since June 30, 1997.
(k) To the knowledge of each Seller and each Executive Shareholder, no
current Network Physician, Consultant, or Employee intends to terminate or
materially change the terms of his agreements with any of the Sellers relating
to its Business.
Section 5.17 EMPLOYEE PLANS AND BENEFITS; EMPLOYEES AND INDEPENDENT
CONTRACTORS.
(a) Except as set forth on SCHEDULE 5.17(A), neither any Seller nor any
member of a "controlled group" (within the meaning of Section 4971(e)(2)(B) of
the Code) that includes a Seller (hereinafter referred to as an "ERISA
AFFILIATE") is a party to or participates in or has any liability or contingent
liability with respect to:
any "employee welfare benefit plan" or "employee pension plan" (as those
terms are respectively defined in ERISA Sections 3(1)and 3(2)) or a
Multiemployer Plan (referred to collectively as the "PLANS"); or
any retirement or deferred compensation plan, incentive compensation
plan, stock plan, unemployment compensation plan, vacation pay, severance
pay, bonus or benefit arrangement, insurance or hospitalization program or
any other fringe benefit arrangements for any employee, director, consultant
or agent, whether pursuant to contract, arrangement, custom or informal
understanding, which does not constitute an "employee benefit plan," as
defined in Section 3(3) of ERISA (referred to collectively as "COMPENSATION
ARRANGEMENTS".
Complete and accurate copies of any such written Plans and Compensation
Arrangements (or related insurance policies), including any amendments thereto,
have been furnished to Buyer, along with copies of any employee handbooks or
similar documents describing such Employee Plans and Compensation Arrangements.
Any unwritten Employee Plans or Compensation Arrangements also are listed in
SCHEDULE 5.17(A), and complete descriptions thereof have been furnished to
Buyer. Except as disclosed in SCHEDULE 5.17(A), neither Seller nor any ERISA
Affiliate is a party to and or has in effect or to become effective after the
date of this Agreement any plan or arrangement that will become a Plan or
Compensation Arrangement.
(b) Each Plan and Compensation Arrangement has been administered in
compliance with its own terms and in material compliance with the provisions of
ERISA, the Code, the Age Discrimination in Employment Act and any other
applicable Federal or state laws.
(c) No Seller has within the last six (6) years, does or is required to
contribute to any Multiemployer Plan with respect to the Employees, and neither
any or the Sellers nor any ERISA Affiliate of any of them has incurred, within
the last six (6) years, or reasonably expect to incur any "withdrawal
liability," as defined under Section 4201 et seq. of ERISA.
(d) Except as described in SCHEDULE 5.17(D), with respect to each Plan and,
to the extent applicable, each Compensation Arrangement: (i) each Plan that is
intended to be tax-qualified, and each amendment thereto, is the subject of a
favorable determination letter, and no plan amendment that is not the subject of
a favorable determination letter would affect the validity of a Plan's letter;
(ii) no condition or event exists or is expected to occur that could subject,
directly or indirectly, any assets to any material liability, contingent or
otherwise, or the imposition of any lien under the Code or Title IV of ERISA.
(e) Attached hereto as SCHEDULES 5.17(E)(I), (II) AND (III), respectively,
are true and complete lists, as of ten Business Days prior to the date of this
Agreement, of (i) all Network Physicians, (ii) all Consultants,
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and (iii) all Employees. Set forth opposite the name of each Employee is such
Employee's employment position title, the base salary, any bonus provisions, any
additional compensation arrangements, all other benefits to which such person is
entitled. Each Seller, for each of the persons who are, or may be deemed,
Employees of such Seller's Business, as listed on SCHEDULE 5.17(E)(III), has
either paid or adequately provided for the payment of all accrued benefits such
Employees are entitled to receive as of the Closing Date as set forth on
SCHEDULE 5.17(E)(III), including all accrued vacation, sick or personal time and
benefits due under any Plans.
(f) There are no severance pay, stay or retention bonus, continuation pay or
termination pay arrangements between any Seller and any officer, director,
employee, independent contractor, consultant or Shareholder thereof, that will
become Assumed Liabilities. Each Seller has paid on a current basis and will
continue to pay on a current basis through the Closing Date all amounts owed to
any officer, employee, independent contractor and consultant. Each Seller has
previously permitted Buyer to inspect and review true and correct copies of all
the agreements described in the foregoing sentence. The Buyer assumes no
liability or obligation with respect to, and receives no right or interest in,
any of the employment, consulting or independent contractor agreements to which
any Seller or Affiliate thereof is or was from time to time a party.
(g) None of the Sellers or the Executive Shareholders has received notice or
has any knowledge (i) of any discrepancy in any application filed with any
Seller at any time by such Network Physician or (ii) that any Network Physician
(whether or not credentialed by any Seller) has been decredentialed by any party
to a Third Party Payor Agreement or otherwise. With respect to each Network
Physician, (i) no regulatory authority has asserted any claim against any Seller
challenging the characterization of such Network Physician as an independent
contractor, and no such assertion is pending, or to each of the Seller's and
Executive Shareholder's knowledge, threatened, and (ii) no liability exists or
is pending or, to each of the Seller's and Executive Shareholder's knowledge,
threatened, which results from characterization of any Network Physician as an
independent contractor.
(h) The Sellers have permitted Buyer to inspect and review true, complete
and correct copies of their forms of independent contractor or employment
agreements used with respect to each of the Network Physicians.
Section 5.18 INSURANCE.
(a) SCHEDULE 5.18(A) lists (i) the fidelity bonds, (ii) the aggregate
coverage amount, (iii) the type and generally applicable deductibles, (iv) a
brief description of each claim of more than $10,000, and (v) the aggregate
amounts paid out under each such policy during the period from January 1, 1995
to the date hereof, of or relating to all policies of general and professional
liability and other forms of insurance of each Seller insuring each Business,
Consultants and all Employees of the Sellers, the Purchased Property, and all
insurance required under the Contracts or the Leases. Each Seller has furnished
a true, complete and accurate copy of all such policies and bonds to the Buyer.
Except as set forth in SCHEDULE 5.18(A), all such policies and bonds are in full
force and effect, and are sufficient for all Contracts and, to the knowledge of
the Sellers and the Executive Shareholders, all applicable requirements of law.
None of the Sellers is in material default under any provisions of any such
policy of insurance or has received notice of cancellation of any such
insurance. None of the Sellers has received (i) any notice that any issuer of
any such policy has filed for protection under applicable bankruptcy laws or is
otherwise in the process of liquidating or has been liquidated, (ii) any other
indication that such policies are no longer in full force and effect or that the
issuer of any such policy is no longer willing or able to perform its
obligations thereunder. There is no claim by any Seller pending under any of
such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds or any notice that a
defense will be afforded with reservation of rights. Since December 31, 1996,
except as set forth in SCHEDULE 5.18(A), none of the Sellers or the Executive
Shareholders has received any written notice from or on behalf of any insurance
carrier issuing such policies, that there will hereafter be a cancellation, or
an increase in a
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deductible or non-renewal of existing policies. All premiums due on such
policies have been paid, and the aggregate amount of all claims under such
policies do not exceed policy limits. Each Seller has given notice to the
insurers of all claims that may be insured thereunder. The insurance maintained
by each Seller in connection with its Business is adequate in accordance with
the requirements of any applicable Leases. After the Closing each Seller will
provide the Buyer with all reasonable assistance and information necessary to
enable the Buyer to obtain and maintain insurance coverage for the Businesses
and the Purchased Property.
(b) Except as set forth on SCHEDULE 5.18(B), none of the Sellers is
obligated, pursuant to any of the Contracts or otherwise, to maintain insurance
for the benefit of any Person (including any Network Physician or customer), or
to name any Person (including any Network Physician or customer) as an
additional insured party.
Section 5.19 COMPLIANCE WITH LAW.
(a) Except as set forth on SCHEDULE 5.19, and except with respect to
Environmental Laws which are referred to in Section 5.19(f), the operations of
each Business have been conducted in accordance with all applicable laws,
regulations, orders and other requirements of all courts and other Governmental
Authorities having jurisdiction over any Seller or its Network Physicians,
Consultants, Employees, assets, properties and operations, including all such
laws, regulations, orders and requirements promulgated by or relating to
consumer protection, equal opportunity, health, architectural barriers to the
handicapped, fire, zoning and building and occupation safety, and, to the
knowledge of each Seller and each Executive Shareholder, there are no
circumstances arising out of the operation of any Business prior to the Closing
that will give rise to any claim against the Buyer under any such laws if the
Closing occurs, except where the failure to comply would not have material
adverse effect on the Purchased Property, operations, prospects, net income or
condition (financial or other) of such Business. None of the Sellers, Executive
Shareholders or their respective Affiliates has received notice of any violation
of any such law, regulation, order or other legal requirement or, to the best
knowledge of each Seller and each Executive Shareholder, are in default with
respect to any order, writ, judgment, award, injunction or decree of any
Governmental Authority or arbitrator, domestic or foreign, applicable to any
Business or any of the assets, properties or operations with respect thereto.
(b) None of the Sellers, the Shareholders, or persons or entities providing
professional services for any Business, and, to the knowledge of the Sellers and
the Executive Shareholders, the Network Physicians, have engaged in any
activities which are prohibited under Section 1320a-7b to Title 42 of the United
States Code or the regulations promulgated thereunder, or related state or local
statutes or regulations, or which are prohibited by rules of professional
conduct including, but not limited to, the following: (i) knowingly and
willfully making or causing to be made any false statement or representation of
a fact in any application for any benefit or payment; (ii) any failure by a
claimant to disclose knowledge of the occurrence of any event affecting the
initial or continued right to any benefit or payment on its own behalf or on
behalf of another, with the intent to secure fraudulently such benefit or
payment; (iii) knowingly and willfully offering, paying, soliciting or receiving
any remuneration (including any kickback, bribe or rebate) directly or
indirectly, overtly or covertly, in cash or in kind, or offering to receive such
remuneration (A) in return for referring an individual to a person or accepting
a referral of an individual from a person for the furnishing or arranging for
the furnishing of any item or service for which payment may be made in whole or
in part by the Medicare or Medicaid programs, or (B) in return for purchasing,
leasing or ordering or arranging for, or recommending any good, facility,
service or item for which payment may be made in whole or in part by the
Medicare or Medicaid programs or (iv) knowingly and willfully making or causing
to be made, agreeing to be made, or aware that there is any agreement to make,
any political contribution or any contributions, payments or gifts of their
respective funds or property to or for the private use of any employee, official
or agent of any Governmental Authority, in circumstances in which the payment or
the purpose of such contribution, payment or gift relates to any Business and is
illegal under the laws of any Governmental Authority. Furthermore, each Seller
has at all
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times billed for professional services in accordance with 42 U.S.C. Section
1395nn and the regulations promulgated thereunder, and has not been engaged in
any conduct violation of 42 U.S.C. Section 1395nn or the regulations thereunder,
including, without limitation, billing for or receiving payment for a service
which arose out of a refund prohibited by that Section.
(c) All bills submitted by or on behalf of each Seller, its Consultants,
Employees or Executive Shareholders, and, to the knowledge of each Seller and
Executive Shareholder, its Network Physicians, to Medicare or Medicaid have been
submitted in compliance with all laws, regulations and manual instructions
pertaining to billing for services rendered to recipients and beneficiaries of
the Medicaid and Medicare programs.
(d) Each Seller and each Executive Shareholder has at all times complied
with the requirements of all state laws relating to self referrals, including,
without limitation, the 1992 Florida Patient Self Referral Act, as amended, and
codified at Sections 455.236 and 455.237, Florida Statutes, which prohibits
physicians who have an ownership or investment interest in certain health care
facilities from referring patients to such facilities for the provisions of
designated and other health services. Furthermore, each Seller and each
Executive Shareholder has filed all reports required to be filed by state and
federal law regarding compensation arrangements and financial relationships
between a physician and an entity to which the physician refers patients.
(e) Each Seller is in compliance with all federal, state and local laws,
rules and regulations relating to the employment authorization of its employees
and independent contractors (including the Immigration Reform and Control Act of
1986, as amended and supplemented, and Sections 212(n) and 274A of the
Immigration and Nationality Act, as amended and supplemented, and all
implementing regulations relating thereto), and no Seller is employing or
engaging as an independent contractor any unauthorized aliens (as such term is
defined under 8 CFR Section274a.1(a)(1994)). No Seller or Executive Shareholder
is a party to, or is otherwise bound by, any agreement or arrangement, including
any confidentiality, non-competition or proprietary rights agreement, between
such individual and any other Person that in any way adversely affects the
performance of his duties or the ability of any Seller to conduct its Business.
(f) To the knowledge of the Sellers, the operations of each Business have
been conducted in accordance with all applicable Environmental Laws except where
the failure to comply would not have a material adverse effect on the Purchased
Property, operations, prospects, net income or condition (financial or other) of
such Business. None of the Sellers or Executive Shareholders has received notice
from any Governmental Authority with respect to, nor do they have any knowledge
of, any material violation by any Seller of any law, regulation or ordinance of
any federal, state or local government relating to the storage, disposal or
release of Hazardous Materials. For purposes of this Section 5.19(f), the term
"Hazardous Materials" means any flammable materials, explosives, radioactive
materials, hazardous wastes, hazardous or toxic substances, infectious wastes,
medical wastes or related or similar materials.
Section 5.20 CHANGE IN OWNERSHIP. Neither the purchase of the Purchased
Property by the Buyer nor the consummation of the transactions contemplated by
this Agreement will result in any material adverse change in the Businesses or
in the loss of the benefits of any material relationship with any party to any
Third Party Payor Agreement or any other customer or supplier.
Section 5.21 FILES AND RECORDS. All the Files and Records included in the
Purchased Property are true and complete in all material respects, are
maintained in accordance with good business practice and all laws and
regulations of any Governmental Authority applicable to the business, and
accurately present and reflect in all material respects all of the transactions
therein described.
Section 5.22 RELATED PARTY TRANSACTIONS. SCHEDULE 5.22 hereto sets forth,
in respect of the Businesses, (i) all management, computer, telephone or other
services, and all space, facilities and services, provided by any Seller or its
Affiliates to any other Seller or its Affiliates at any time since January 1,
1994 that could or will result in aggregate payments by any Seller of $2,500 or
more, and (ii) all other Contracts
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and transactions between any Seller or its Affiliates and any other Seller or
its Affiliates currently in effect or which were in effect or occurred since
January 1, 1994 that resulted in or will result in aggregate payments by any
Seller of $2,500 or more.
Section 5.23 SUFFICIENCY OF AND TITLE TO ASSETS. Upon the consummation of
the transactions contemplated by this Agreement, the Sellers will have assigned,
transferred and conveyed to the Buyer all of the Purchased Property free and
clear of any Encumbrances, except for Permitted Encumbrances, which Purchased
Property (a) constitutes all of the properties and assets now held or employed
by the Sellers or any of their Affiliates that are attributable to the
Businesses, (b) constitutes and on the Closing Date will constitute, all of the
property and assets that are necessary to permit the operation of the Businesses
as historically and currently conducted, (c) is suitable for the purposes for
which it is currently used, and (d) is to be conveyed hereunder in good
operating condition and repair, subject to reasonable use, wear and tear. No
assets used in the Businesses are owned by any party other than one of the
Sellers except for property that is the subject of the Contracts.
Section 5.24 ACCURACY OF INFORMATION. None of the Sellers' or Executive
Shareholders' representations, warranties or statements contained in this
Agreement, or in the schedules, exhibits and other attachments hereto, contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make any of such representations, warranties or statements
in light of the circumstances under which they were made not misleading.
Section 5.25 BROKERS. Except for Mr. Jeffrey Binder of JeMJ Financial
Services, Inc. and for Mr. Joseph Farrell, the fees and expenses of which shall
be the sole responsibility of the Sellers and the Executive Shareholders, no
broker, investment banker, financial advisor or other Person is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of any Seller. The Sellers and the Executive
Shareholders, jointly and severally, agree to indemnify and hold harmless the
Buyer against any fee, loss or expense arising out of any claim by any broker of
finder employed or alleged to have been employed by any of them.
Section 5.26 DISCLOSURE. Each of the Shareholders has been furnished with
a copy of this Agreement and has been given sufficient opportunity to ask
questions and receive answers from the Sellers and the Executive Shareholders as
to all financial terms and all other material terms of this Agreement.
Section 5.27 SURVIVAL. Each of the representations and warranties set
forth in this Article 5 shall survive the Closing, notwithstanding any
investigation on the part of the Buyer, for a period terminating on the second
anniversary of the Closing Date; PROVIDED, HOWEVER, that the representations and
warranties contained in Sections 5.1, 5.2, 5.7, 5.14, 5.15, 5.17 and 5.19 shall
survive until the fourth anniversary of the Closing Date.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE BUYER AND PARENT.
The Buyer and Parent hereby, jointly and severally represent and warrant to,
and covenant with, the Sellers as follows:
Section 6.1 CORPORATE ORGANIZATION. Each of the Buyer and Parent is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Florida and the State of Delaware, respectively, is duly
qualified as a foreign corporation in each jurisdiction in which it is required
to be so qualified, and each has all requisite corporate power and authority to
own its properties and assets and to conduct its businesses as now conducted.
The Buyer is a wholly owned subsidiary of Parent. Each of Parent and the Buyer
has furnished to the Sellers true, complete and correct copies of its Articles
or Certificate of Incorporation and By-laws, with all amendments thereto.
Section 6.2 AUTHORIZATION AND VALIDITY OF AGREEMENT. Each of the Buyer and
Parent has all requisite corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder. The
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execution and delivery of this Agreement and the performance of the respective
obligations of the Buyer and Parent hereunder have been duly authorized by all
necessary corporate action by the Buyer and Parent, respectively, and no other
corporate or shareholder proceedings on the part of the Buyer or Parent are
necessary to authorize such execution, delivery and performance. This Agreement
has been duly executed and delivered by each of the Buyer and Parent,
respectively, and constitutes the legal, valid and binding obligation of the
Buyer and Parent, enforceable against each in accordance with its terms.
Section 6.3 NO CONFLICT OR VIOLATION. Except as set forth on SCHEDULE 6.3,
the execution, delivery and performance by the Buyer and Parent of this
Agreement do not and will not violate or conflict with any provision of the
Articles or Certificate of Incorporation or By-Laws of the Buyer or Parent,
respectively, and do not and will not violate any provision of law, or any
order, judgment or decree of any Governmental Authority, nor violate nor will
result in a breach of or constitute (with due notice or lapse of time or both) a
default under, or give rise to a right to terminate or modify, any contract,
lease, loan agreement, mortgage, security agreement, trust indenture or other
agreement or instrument to which the Buyer or Parent is a party or by which it
is bound or to which any of its properties or assets is subject.
Section 6.4 CONSENTS AND APPROVALS. Except as disclosed on SCHEDULE 6.4,
the execution, delivery and performance of this Agreement on behalf of the Buyer
and Parent does not require the consent or approval of, or filing with, any
Governmental Authority or other entity or person except such consents, approvals
and filings, of which the failure to obtain or make would not, individually or
in the aggregate, have a material adverse effect on the ability of the Buyer or
Parent to consummate the transactions contemplated hereby.
Section 6.5 LITIGATION. There are no claims, actions, suits, proceedings,
labor disputes or investigations pending, or to the knowledge of the Buyer or
Parent, threatened, before any Governmental Authority, or before any arbitrator
or mediator of any nature, domestic or foreign, brought by or against the Buyer
or Parent or any of their respective officers, directors, employees, agents or
Affiliates, involving, affecting or relating to the transactions contemplated by
this Agreement or which would prohibit the Buyer or Parent from consummating the
transactions contemplated by this Agreement nor is any basis known to the Buyer
or Parent for any such action, suit, proceeding or investigation.
Section 6.6 FINANCING. As of the date hereof, neither the Buyer nor Parent
has any reason to believe that the Buyer will not be able to obtain the
financing necessary for it to consummate the transactions contemplated by this
Agreement.
Section 6.7 BROKERS. No broker, investment banker, financial advisor or
other Person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based on arrangements made by or on behalf of the Buyer. The
Buyer and the Parent, jointly and severally, agree to indemnify and hold
harmless the Sellers and the Shareholders against any fee, loss or expense
arising out of any claim by any broker or finder employed or alleged to have
been employed by Buyer or Parent.
Section 6.8 ACCURACY OF REPRESENTATIONS AND WARRANTIES. None of the
Buyer's or Parent's representations, warranties or statements contained in this
Agreement contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make any such representations or warranties
not misleading or includes any untrue statement of a material fact or omits to
state any material fact necessary in order to make such statements, in the light
of the circumstances under which they were made, not misleading.
Section 6.9 SURVIVAL. Each of the representations and warranties set forth
in this Article 6 shall survive the Closing, notwithstanding any investigation
on the part of the Sellers or the Executive Shareholders, for a period
terminating on the second anniversary of the Closing Date; PROVIDED, HOWEVER,
that the representation and warranty contained in Sections 6.1, 6.2 and 6.5
shall survive until the fourth anniversary of the Closing Date.
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SECTION 7. COVENANTS.
Each Seller and each of the Executive Shareholders, jointly and severally,
and, to the extent expressly specified, the Buyer and Parent, covenants as
follows:
Section 7.1 INFORMATION AND CERTAIN TAX MATTERS.
(a) Each Seller will give to the Buyer and to its officers, employees,
accountants, counsel and other representatives reasonable access during its
normal business hours throughout the period prior to the Closing to all of such
Seller's properties, Files and Records, Licenses and Permits, Contracts, Tax
Returns, and other Purchased Property relating to the Businesses (subject to any
limitations that are reasonably required to preserve any applicable
attorney-client privilege or third-party confidentiality obligation). Such
access by the Buyer will be coordinated through one of the Executive
Shareholders, as representatives of the Sellers.
(b) After the Closing Date, the Sellers and the Buyer will provide to each
other and to their respective officers, employees, counsel and other
representatives, upon request (subject to any limitations that are reasonably
required to preserve any applicable attorney-client privilege or third-party
confidentiality obligation), access for inspection and copying, of all Files and
Records, Licenses and Permits, Contracts and any other information existing as
of the Closing Date and relating to the Businesses or the Purchased Property,
and will make their respective personnel reasonably available to provide
information relating to the Businesses or the Purchased Property prior to the
Closing Date, and as otherwise may be necessary or desirable to enable the party
requesting such assistance to: (i) comply with reporting, filing or other
requirements imposed by any foreign, local, state or federal court, agency or
regulatory body; (ii) assert or defend any claims or allegations in any
litigation or arbitration or in any administrative or legal proceeding other
than claims or allegations that one party to this Agreement has asserted against
the other; or (iii) subject to clause (ii) above, perform its obligations under
this Agreement. The party requesting such information or assistance shall
reimburse the other party for all out-of-pocket costs and expenses incurred by
such party in providing such information and in rendering such assistance. The
access to files, books and records contemplated by this Section 7.1(b) shall be
during normal business hours and upon not less than two Business Days' prior
written request and shall be subject to such reasonable limitations as the party
having custody or control thereof may impose to preserve the confidentiality of
information contained therein. For a period of seven years after the Closing
Date, the Buyer shall keep and preserve all medical and other records of the
Sellers in its possession which are existing as of the Closing Date and which
are required to be kept and preserved (i) by any applicable federal or state law
or regulation or (ii) in connection with any claim or controversy still pending
involving any of the Sellers.
(c) The Buyer, Parent, the Sellers and the Executive Shareholders shall
cooperate fully, as and to the extent reasonably requested by the other party,
in connection with any Tax audit, litigation or other Tax proceeding relating to
the Businesses or the Purchased Property. Such cooperation shall include the
retention and, upon the other party's request, the provision of records and
information reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any records and information
provided hereunder. The Buyer, Parent, the Sellers and the Executive
Shareholders further agree to furnish or cause to be furnished to each other, as
promptly as practicable, such information and assistance relating to the
Businesses as is reasonably necessary to the preparation and filing of any Tax
Return, claim for refund or other required or optional filings relating to Tax
matters, for the preparation for and proof of facts during any Tax audit, for
the preparation for any Tax protest, for the prosecution or defense of any suit
or other proceeding relating to Tax matters and for the answer to any inquiry
relating to Tax matters by any Governmental Authority.
(d) Without limiting the generality of the foregoing, each Seller agrees (i)
to provide both before and after the Closing Date financial information
reasonably requested by the Buyer from time to time in connection with the
preparation by the Buyer of financial statements relating to the Businesses and
(ii) to
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use its Best Efforts to cause Sellers' independent accountants to provide any
such information (including copies of all workpapers) reasonably promptly upon
the request of the Buyer. The Buyer will use such information for its normal
business purposes only, including, without limitation, preparation of financial
information required to be included in reports filed with the Securities
Exchange Commission and each Seller will use its Best Efforts to provide or
cause to be provided to the Buyer such information in a timely fashion.
(e) The Sellers agree to retain possession of all accounting, business,
financial and Tax records and information (i) relating to the Businesses in
existence on the Closing Date transferred to the Buyer hereunder and (ii) coming
into existence after the Closing Date which relate to the Businesses before the
Closing Date, for the period not less than seven years from the Closing Date. In
addition, from and after the Closing Date, the Sellers agree that they will not
unreasonably withhold access by the Buyer and its attorneys, accountants and
other representatives (after reasonable notice and during normal business hours
and with reasonable charge), to such personnel, books, records, documents and
any or all other information relating to the Businesses as the Buyer may
reasonably deem necessary to properly prepare for, file, prove, answer,
prosecute and/or defend any such return, filing, audit, protest, claim, suit,
inquiry or other proceeding or for other legitimate business purposes. Such
access shall include, without limitation, access to any computerized information
retrieval systems relating to the Businesses.
Section 7.2 CONDUCT OF THE BUSINESSES.
From and after the date of this Agreement and until the Closing Date, except
as set forth on SCHEDULE 7.2 or as otherwise contemplated by this Agreement or
as the Buyer shall otherwise consent to in writing, each Seller will, with
respect to its Business, and each Executive Shareholder will cause each Seller
in which he or his Affiliates have any direct or indirect ownership interest to:
(a) carry on its Business in the ordinary course in a manner consistent with
past practice, including without limitation by keeping in full force and effect
insurance comparable in amount and scope to the coverage maintained by it (or on
behalf of it) on the date hereof, not cancel any debts or claims, or waive or
release any rights material to such Business relating to the operations of such
Business, or default on any material obligation relating to the operations of
its Business;
(b) not permit all or any of the Purchased Property (real or personal,
tangible or intangible) to be sold, licensed or subjected to any Encumbrance
(other than a Permitted Encumbrance) except in dispositions of inventory or of
worn-out or obsolete equipment for fair or reasonable value in the ordinary
course of business consistent with past practices;
(c) exercise all Best Efforts to maintain and preserve for the Buyer its
relationships with customers, suppliers, managers, Employees, Network
Physicians, Consultants, parties to Third Party Payor Agreements and actively
sought prospective parties to Third Party Payor Agreements (including, without
limitation PruCare) and others having business relationships with the Business;
(d) not acquire any assets or properties, or enter into any other
transaction, other than in the ordinary course of business consistent with past
practice and which does not require payment of aggregate amounts exceeding
$10,000;
(e) not enter into any new (or amend any existing) Plan, including, any
employee benefit plan, program or arrangement or any new (or amend any existing)
employment, independent contractor, severance or consulting agreement, grant any
general increase in the compensation of officers or Employees (including any
such increase pursuant to any bonus, pension, profit-sharing or other plan or
commitment) or grant any increase in the compensation payable or to become
payable to any Network Physician, Consultant or Employee, except (i) in
accordance with pre-existing contractual provisions or consistent with past
practice, (ii) increases on an annual basis for the 1997 calendar year up to a
maximum amount of five percent in excess of such Person's aggregate compensation
for the 1996 calendar year and (iii) in respect of the Executive Shareholders,
as permitted in Section 7.2(i)(B) below;
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(f) not issue, grant or sell any capital stock, partnership interests,
options, or other right to purchase any equity interests in such Seller, or
issue any security convertible into such capital stock, partnership interests or
equity interests, or enter into any subscription contract or other arrangements
obligating such Seller to issue or sell any of the foregoing, or redeem,
purchase or otherwise acquire any such capital stock or equity interests;
(g) not make or commit to make any capital expenditure except as expressly
contemplated by the Information Technologies Budget, other than ordinary repairs
or maintenance;
(h) not pay, lend or advance any amount to, or sell, transfer or lease any
properties or assets to, or enter into any agreement or arrangement with, any of
its Affiliates;
(i) not declare, set aside, pay or make any dividend or other distribution
or payment (whether in cash, stock, interests, equity or property) with respect
to, or purchase or redeem, any shares of the capital stock or any partnership
interests or other equity interests (including profit sharing plans or
distributions relating to such Seller's financial results) of such Seller, or
otherwise withdraw any cash from such Seller for the direct or indirect benefit
of the holders of any such shares or interests or for any third party, or make
or agree to make any other payments to any Shareholder or any of his or her
Affiliates; PROVIDED, HOWEVER, that nothing set forth in this Section 7.2(i)
shall prohibit cash distributions to the extent that after giving effect to such
cash distributions the Sellers still have at least $1,000,000 in Unrestricted
Cash in the aggregate;
(j) not make any change in any method of accounting or accounting principle,
method, estimate or practice except for any such change required by reason of a
concurrent change in GAAP, or write down the value of any inventory or write off
as uncollectible any accounts receivable except in the ordinary course of
business consistent with past practice;
(k) not settle, release or forgive any claim or litigation or waive any
right thereto;
(l) not make, enter into, modify, amend or terminate any Contract, including
any Third Party Payor Agreement or bid with respect to any of the Businesses;
(m) not defer the payment of any expense or liability, or prepay any expense
or liability, in anticipation of the consummation of the transactions
contemplated hereby;
(n) not accelerate the collection of any accounts receivable or any other
amounts owed to it;
(o) not decrease by a material amount the quantity of Equipment and
Machinery or Inventory maintained for use in its Business;
(p) discharge or satisfy all Encumbrances and pay or satisfy all obligations
or liabilities (whether absolute, accrued, contingent or otherwise) arising from
the operation of its Business in a timely manner, other than liabilities being
contested in good faith and for which adequate reserves have been provided, each
of which is set forth on SCHEDULE 5.6(B)(13) hereof, and Permitted Encumbrances;
(q) continue to maintain the Purchased Property in accordance with present
practice; and
(r) not enter into any agreement or make any commitment not in compliance
with any of the foregoing and not take any other action that would cause any of
the representations and warranties made by any Seller in this Agreement not to
remain true and correct.
Section 7.3 TAX REPORTING AND ALLOCATION OF CONSIDERATION.
(a) Each of the Sellers and the Buyer acknowledge and agree that (i) the
Sellers will be responsible for and will perform all Tax withholding, payment
and reporting duties with respect to any wages and other compensation paid by
any Seller to any Transferred Employee (and, if applicable, any Transferred
Consultant) in connection with operating the Businesses prior to or on the
Closing Date and (ii) the Buyer will be responsible for and will perform all Tax
withholding payment and reporting duties with respect to
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any wages and other compensation paid by Buyer to any employee or independent
contractor in connection with operating the Businesses after the Closing Date.
(b) The Buyer and each of the Sellers recognize their mutual obligations
pursuant to Section 1060 of the Code to timely file IRS Form 8594 (the "ASSET
ACQUISITION STATEMENT") with each of their respective federal income Tax
Returns. The Buyer and each of the Sellers acknowledge that they will allocate
the Purchase Price and the Assumed Liabilities among the Purchased Property in
the manner set forth on SCHEDULE 7.3(B) (such agreed allocation hereinafter
referred to as the "ALLOCATION"). The Buyer and each of the Sellers further
agree to act in accordance with the Allocation, if any, in any Tax Returns or
similar filings. In the event that any Tax authority disputes the Allocation, if
any, the Sellers or the Buyer, as the case may be, shall promptly notify the
other party of the nature of such dispute and shall provide reasonable
cooperation with the goal of resolving such dispute.
Section 7.4 SUPPLEMENTAL SCHEDULES. The Sellers and the Executive
Shareholders shall, from time to time prior to the Closing (but no later than
three Business Days prior to the Closing), by notice in accordance with this
Agreement, supplement or amend any Schedule to correct any matter which would
constitute a breach of any representation or warranty herein contained. No such
supplemental or amended Schedule shall be deemed to cure any breach of such
representation or warranty for purposes of conditions to Closing or termination,
or for any other purpose, and the Buyer shall continue to have all of its rights
and remedies hereunder.
Section 7.5 TRANSFERRED PERSONS.
(a) The Buyer, in its sole discretion, may offer employment or engagement,
as the case may be, to as many Consultants and Employees whose Contracts are not
being assumed by the Buyer as is consistent with, and subject to, the Buyer's
requirements and employment policies. Notwithstanding anything to the contrary
in the previous sentence, within five Business Days prior to the Closing, the
Buyer shall offer employment to the Employees listed on SCHEDULE 7.5(A), such
terms of employment to be no more advantageous to such Employees than the terms
on which such Employees are currently employed as set forth on SCHEDULE
5.17(E)(III) opposite their respective names (an "ENGAGEMENT NOTICE"), PROVIDED,
HOWEVER, that nothing herein requires the Buyer to employ any such Employees for
any period of time after the Closing Date except that (i) the Buyer agrees not
to terminate the employment of any such Employees without the prior consent of
the Executive Shareholders, which consent will not be unreasonably withheld or
delayed, for a period ending 90 days after the Closing Date, and (ii) the Buyer
agrees to offer to employ each of Judith Margulies and Greta Gottlieb at her
respective current salary and not to terminate the employment of either one
without the prior consent of the Executive Shareholders, which consent will not
be unreasonably withheld or delayed, for a period ending one year after the
Closing Date. All Employees hired by Buyer shall be referred to as "TRANSFERRED
EMPLOYEES" and all Consultants engaged by Buyer, including Consultants relating
to Contracts assumed by Buyer, shall be referred to as "TRANSFERRED
CONSULTANTS." Promptly following the delivery by the Buyer of the list of
Transferred Consultants and Transferred Employees, each Seller will make
appropriate arrangements with each of its Consultants, and Employees being so
transferred, in order to terminate any existing agreements which are not being
assigned to the Buyer, including any non-competition restrictions that may be
contained in related agreements, or, if requested by the Buyer, provide for the
assignment of such employment, consulting or independent contractor agreements
to the Buyer at the Closing to the extent such contracts or agreements
constitute Contracts.
(b) All Transferred Employees (but not Network Physicians or Transferred
Consultants) shall participate in the employee benefit plans, programs, policies
and arrangements of the Buyer in accordance with the terms thereof generally
applicable to employees of the Buyer. Except to the extent expressly provided
for in Section 7.5(a), nothing herein requires the Buyer to employ any
Transferred Employee or to engage any Network Physicians, or Transferred
Consultants for any period of time after the Closing Date.
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(c) Except as otherwise expressly provided in Section 2.4, neither the Buyer
nor its Affiliates shall assume or have any direct or indirect obligation or
liability of any nature, whether matured or unmatured, accrued or contingent,
due or to become due or otherwise, to any Network Physician, Transferred
Consultant or Transferred Employee or other present or former employee of or
independent contractor with any of the Sellers or its Affiliates, or to any
dependent, survivor or beneficiary thereof, arising out of or in relation to
such person's employment or engagement with any of the Sellers or its Affiliates
or the termination of such employment, nor shall the Buyer or its Affiliates
have any such liability to any such Person to make any Change of Control
Payments.
(d) Sellers shall assume full responsibility and liability for offering and
providing "continuation coverage" to any "qualified beneficiary" who is covered
by a "group health plan" sponsored or contributed to by any Seller and who has
experienced a "qualifying event" or is receiving "continuation coverage" on or
prior to the Closing. "Continuation coverage," "qualified beneficiary,"
"qualifying event" and "group health plan" all shall have the meanings given
such terms under Section 4980B of the Code and Section 601 et seq. of ERISA.
Sellers, jointly and severally, shall hold Buyer and any entity required to be
combined with Buyer (within the meaning of Sections 414(b), (c), (m) or (i) of
the Code) harmless from and fully indemnify them against any costs, expenses,
losses, damages and liabilities incurred or suffered by them directly or
indirectly, including, but not limited to, reasonable attorneys' fees and
expenses, which relate to continuation coverage and arise as a result of any
action or omission by Seller or because Buyer is deemed to be a successor
employer to any Seller.
Section 7.6 CONSENTS AND APPROVALS. The Sellers and the Executive
Shareholders (a) shall, at their own cost and expense, use their Best Efforts to
obtain all necessary consents, waivers, authorizations, domestic and foreign,
and of all other persons, firms or corporations required in connection with the
execution, delivery and performance by them of this Agreement, and (b) shall
diligently assist and cooperate with the Buyer in preparing and filing all
documents required to be submitted by the Buyer to any Governmental Authority in
connection with such transactions and in obtaining any consents, waivers,
authorizations or approvals from any Governmental Authority which may be
required to be obtained by the Buyer in connection with such transactions (which
assistance and cooperation shall include timely furnishing to the Buyer all
information concerning the Sellers, the Executive Shareholders and their
respective Affiliates that counsel to the Buyer reasonably determines is
required to be included in such documents or would be helpful in obtaining any
such required consent, waiver, authorization or approval).
Section 7.7 NEGOTIATIONS. From and after the date hereof through and until
the earlier to occur of Closing or termination of this Agreement, neither the
Sellers, nor their respective officers, directors, Employees or Shareholders nor
anyone acting on behalf of the Sellers or any of the foregoing persons shall,
directly or indirectly, encourage, solicit, engage in discussions or
negotiations with, or provide any information to, any person, firm, or other
entity or group (other than the Buyer or its representatives) concerning any
merger, sale of substantial assets, purchase or sale of shares of capital stock
or similar transaction involving any Seller or any of the Businesses or any
other transaction inconsistent with the transactions contemplated hereby. The
Sellers and the Executive Shareholders shall promptly communicate to the Buyer
any inquiries or communications concerning any such transaction which they may
receive or of which they may become aware prior to the termination of this
Agreement.
Section 7.8 FURTHER ASSURANCES. Upon the reasonable request of the Buyer
at any time after the Closing Date, each Seller shall forthwith execute and
deliver such further instruments of assignment, transfer, conveyance,
endorsement, direction or authorization and other documents as the Buyer or its
counsel may request to perfect title of the Buyer and its successors and assigns
to the Purchased Property or otherwise to effectuate the purposes of this
Agreement.
Section 7.9 COVENANT NOT TO COMPETE.
(a) The Sellers and the Executive Shareholders agree for themselves and
their respective Affiliates that, for a period commencing on the Closing Date
hereof and ending on the fifth anniversary of the
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Closing Date, without the written consent of the Buyer, they shall not, jointly
or severally, provide or have any interest in any Person that provides or is
engaged in, whether as an owner, employee, officer, director, shareholder,
partner, contractor, consultant, agent, joint venturer, or advisor, (i)
subspecialty capitated or discounted fee for service networks, or related
administrative or management services, to any Person providing, directly or
indirectly, health care services or (ii) the business presently engaged in, or
engaged in at such time by any Seller, any Executive Shareholder, the Buyer, or
any of their respective Affiliates, in either case in the United States of
America, its territories and possessions.
(b) The Sellers and the Executive Shareholders acknowledge and agree that
the restrictions set forth in Section 7.9(a), including the territory set forth
therein, are reasonable and necessary to protect the legitimate business
interests of the Buyer including the goodwill of the Sellers, the Executive
Shareholders, and their respective Affiliates being purchased by the Buyer
pursuant to this Agreement and the substantial relationships (as reflected, in
part, in the Contracts) with payors and other medical providers and patients
that are being transferred to the Buyer as contemplated by this Agreement.
(c) The Sellers and the Executive Shareholders agree that a monetary remedy
for a breach of the agreement set forth in Section 7.9(a) hereof will be
inadequate and impracticable and further agree that such a breach would cause
the Buyer irreparable harm, and that the Buyer shall be entitled to temporary
and permanent injunctive relief without the necessity of proving actual damages.
In the event of such a breach, the Sellers and the Executive Shareholders agree
that, in addition to all other remedies available at law or in equity, the Buyer
shall be entitled to such injunctive relief, including temporary restraining
orders, preliminary injunctions and permanent injunctions as a court of
competent jurisdiction shall determine.
(d) If any provision of this Section 7.9 is invalid, void or unenforceable
in part, it shall be curtailed, both as to time and location, to the minimum
extent required for its validity under applicable laws and shall be binding and
enforceable with respect to each Seller and each Shareholder as so curtailed.
(e) The foregoing five-year period shall be tolled for any period(s) of
violation or period(s) of time required for litigation to enforce the covenants
herein.
Section 7.10 NON-SOLICITATION OF EMPLOYEES. The Sellers and the Executive
Shareholders agree for themselves and their respective Affiliates, for a period
commencing on the Closing Date hereof and ending on the fifth anniversary of the
Closing Date, not to make, offer, solicit or induce to enter into, any written
or oral arrangement, agreement or understanding regarding employment or
retention as a consultant or independent contractor with any person who (i) was,
on the date hereof, a Network Physician, Consultant, or an Employee of any
Seller and employed or engaged in any Business, or (ii) is at the time of such
solicitation, or who was at any time during the six-month period prior to such
solicitation, an employee or consultant or independent contractor of Buyer or an
Affiliate of Buyer, without the written consent of the Buyer.
Section 7.11 ASSIGNMENT OF CONTRACTS AND WARRANTIES. Each Seller assigns
to the Buyer effective from and after the Closing all right, title and interest
of each Seller and its Affiliates in, to and under the Contracts.
Notwithstanding the foregoing, no Contract shall be assigned contrary to law or
the terms of such Contract and, with respect to Contracts that cannot be
assigned to the Buyer, the performance obligations of the applicable Seller
thereunder shall, unless not permitted by such Contract, be deemed to be
subleased or subcontracted to the Buyer until such Contract has been assigned.
The Buyer shall reasonably assist each Seller in obtaining any necessary
approvals to such subleases and subcontracts. The Buyer shall take all necessary
actions to perform and complete all Contracts in accordance with their terms if
neither assignment, subleasing nor subcontracting is permitted by the other
party, and each Seller shall pay over to the Buyer any amounts received by such
Seller after the Closing Date as a result of performance by the Buyer of such
Contracts; PROVIDED; HOWEVER, to the extent any such Contract is a Key Contract,
nothing set forth herein shall require the Buyer to assume any obligation of any
of the Sellers under such Key Contract until the consent to assignment with
respect thereto has been obtained unless the
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Buyer shall have waived the requirement that such consent be obtained as a
condition to Closing as contemplated in Section 8.7 hereof.
Section 7.12 NOTICE OF BREACH.
(a) The Sellers and the Executive Shareholders shall promptly give the Buyer
and Parent notice with particularity upon having knowledge of any matter that
may constitute a breach of any of their respective representations, warranties,
agreements or covenants contained in this Agreement.
(b) Each of the Buyer and Parent shall promptly give the Sellers and the
Executive Shareholders written notice with particularity upon having knowledge
of any matter that may constitute a breach of any of their respective
representations, warranties, agreements or covenants contained in this
Agreement.
Section 7.13 BULK SALES COMPLIANCE. The Sellers and the Executive
Shareholders shall take all action necessary such that all transactions
contemplated by this Agreement comply in all material respects with any "Bulk
Transfer" provisions of the Uniform Commercial Code which may be in effect in
each applicable jurisdiction.
Section 7.14 CONDUCT OF THE BUSINESSES AFTER CLOSING. Each of Parent, the
Buyer, the Sellers and the Executive Shareholders covenant and agree that the
business of the Buyer shall be conducted in accordance with the provisions of
this Section 7.14 from and after the Closing Date through and including the
third anniversary of the Closing Date:
(a) Parent, the Buyer and the Executive Shareholders acknowledge that it is
their intent to exercise their Best Efforts to facilitate the growth and
profitability of the Subject Business; provided, however, that nothing set forth
in this Agreement shall require the Parent or any Affiliate of the Parent to
refer any business to or to otherwise conduct any business through the Buyer.
Parent is not prohibited from acquiring or merging with other entities engaged
in the Subject Business, or from being acquired by or merged with those who are,
but in the event the Buyer is sold or otherwise ceases to be an Affiliate of the
Parent, the Parent will seek to obtain contractual protection from the acquiring
entity or entities to agree not to interfere with the existing business of the
Buyer or with the Buyer's existing contractual relationships.
(b) Notwithstanding anything to the contrary in this Section 7.14, the prior
approval of the Board of Directors of the Buyer shall be required for any Third
Party Payor Agreements to which the Buyer or any of its subsidiaries is a party
and which involves aggregate payments or liabilities in excess of $100,000.
Parent shall use its Best Efforts to cause the directors designated by it to
vote in favor of any such contract unless Parent determines in good faith that
the operations, prospects, net income or condition (financial or other) of
Parent or any Affiliate of Parent would be adversely affected by entering into
or performing the contract.
(c) Without the consent of the Executive Shareholders, Buyer shall not sell,
merge, transfer, consolidate or otherwise dispose of any material part of the
Businesses to any other party, other than as a whole entity or entities;
PROVIDED, HOWEVER, that nothing set forth in this Section 7.14 shall prohibit or
restrict Buyer from making any distributions of any kind to the Parent.
Section 7.15 MEETINGS OF THE BOARD OF DIRECTORS OF BUYER. From and after
the Closing Date through and including the third anniversary of the Closing
Date, the Executive Shareholders shall be entitled to attend and participate in
a non-voting capacity in all meetings of the board of directors of the Buyer. In
this regard, the Executive Shareholders will receive all notices and other
materials distributed to members of the board of directors of the Buyer in such
capacity.
Section 7.16 INFORMATION TECHNOLOGIES BUDGET. Within 30 days following the
date of this Agreement, Buyer and AHG shall mutually agree upon a budget for
information technologies expenditures (the "INFORMATION TECHNOLOGIES BUDGET").
The Information Technologies Budget will designate which items will be expensed
and which items will be capitalized for purposes of calculating EBITDA
regardless of the treatment of such items under GAAP.
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Section 7.17 INDEMNIFICATION FOR CERTAIN LIABILITIES. Jacob Nudel, M.D.
and Gut agree to jointly and severally indemnify and hold harmless Buyer
Indemnitees (as said term is define in Section 11) from and against any Losses
(as said term is defined in Section 11) arising out of, relating to or resulting
from the following legal action: Charles Gluck, M.D., Plaintiff, vs. Jacob
Nudel, M.D., ET AL, Defendants, filed in the Circuit Court of the Seventeenth
Judicial Circuit in and for Broward County, Florida, General Jurisdiction
Division, Case No. 97 04553. In the event said action has not been dismissed
with prejudice on or before the Closing Date or in the event that all
Encumbrances on any of the Purchased Property arising out of said litigation or
the settlement thereof have not been released in full on or before the Closing
Date to the Buyer's satisfaction, at the election of the Buyer, in its sole
discretion, it shall withhold from the Closing Cash Installment payable to Gut
an amount not to exceed 50% of such sum and to pay said sum to a mutually
acceptable escrow agent to be held in escrow and released pursuant to the terms
and conditions of a mutually acceptable escrow agreement in order to provide a
fund for the payment of any indemnification claim to which the Buyer Indemnitees
may be entitled pursuant to the terms and conditions set forth in this Section
7.17. At the election of Buyer, in its sole discretion, it may also direct that
up to 50% of Gut's share of any future distributions to be made to AHG, on
behalf of the Sellers, pursuant to Section 3.4 be deposited into the escrow
agreement entered into pursuant to this Section 7.17. Jacob Nudel, M.D. and Gut
acknowledge and agree that if the indemnification claims under this Section
exceed the amount held pursuant to said indemnification agreement, Jacob Nudel,
M.D. and Gut shall remain liable for any such excess.
Section 7.18 REFINANCING OF EXISTING BANK LOAN. Pursuant to that certain
Business Loan Agreement dated March 7, 1997 between FSN and Executive National
Bank, FSN borrowed the principal amount of $240,000. Magellan agrees to
refinance the outstanding indebtedness under said bank loan as follows. At the
Closing, Magellan agrees to loan the Buyer such amount as is necessary to enable
the Buyer to pay said bank loan, including all accrued interest, in full. The
loan from Magellan shall bear interest at the same rate as that of the bank loan
and shall be payable in three equal annual installments on each of the first
three anniversaries of the Closing Date. Payments of principal shall be taken
into account in connection with the calculation of the earn-out and/or
adjustment amounts pursuant to Section 3.3.
SECTION 8. CONDITIONS TO OBLIGATIONS OF BUYER.
The obligations of the Buyer to consummate the transactions contemplated by
this Agreement are subject to the fulfillment, at or before the Closing Date, of
the following conditions, any one or more of which may be waived by the Buyer in
its sole discretion.
Section 8.1 REPRESENTATIONS AND WARRANTIES. All representations and
warranties made by each Seller and each Executive Shareholder in this Agreement
shall be true and correct on and as of the Closing Date as if again made by such
Seller and such Executive Shareholder on and as of such date.
Section 8.2 PERFORMANCE OF SELLER'S AND SHAREHOLDERS' OBLIGATIONS. Each
Seller and each Executive Shareholder shall have performed in all respects all
obligations required under this Agreement to be performed by them on or before
the Closing Date.
Section 8.3 CONSENTS AND APPROVALS. All consents, waivers, authorizations
and approvals of any Governmental Authority, and of any other person, firm or
corporation, required of each Seller and each Shareholder in connection with the
execution, delivery and performance of this Agreement, shall have been duly
obtained and shall be in full force and effect on the Closing Date.
Section 8.4 NO VIOLATION OF ORDERS. No preliminary or permanent injunction
or other order issued by any Governmental Authority, nor any statute, rule,
regulation, decree or executive order promulgated or enacted by any Governmental
Authority, which declares this Agreement invalid in any respect or prevents the
consummation of the transactions contemplated hereby, or which materially and
adversely affects the Purchased Property, operations, prospects, net income or
financial condition of any Seller shall be in effect; and no action or
proceeding before any Governmental Authority shall have been instituted or
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threatened by any Governmental Authority or by any other person, or entity which
seeks to prevent or delay the consummation of the transactions contemplated by
this Agreement or which challenges the validity or enforceability of this
Agreement.
Section 8.5 NO MATERIAL ADVERSE CHANGE. During the period from July 1,
1997 to the Closing Date, there shall not have been any material adverse change
in the Purchased Property, business, operations, prospects, net income or
condition (financial or other) of the Businesses of the Sellers, taken as a
whole.
Section 8.6 DUE DILIGENCE WITH RESPECT TO THIRD PARTY PAYORS. The Buyer
shall have completed its due diligence investigation of the Third Party Payor
Agreements, the parties thereto and actively sought prospective parties to Third
Party Payor Agreements (including, without limitation PruCare) and shall have
concluded, in its sole and absolute discretion, that the results of such
investigation are satisfactory to it and that it is willing, following such
review, to consummate the transactions contemplated by this Agreement. The
Sellers and the Executive Shareholders acknowledge and agree that the Buyer may
conclude for any reason deemed sufficient by it that the results of such
investigation are not satisfactory.
Section 8.7 CONSENTS UNDER KEY CONTRACTS. On or before the Closing Date,
the Sellers shall have obtained all necessary or appropriate consents,
approvals, notations, authorizations, exemptions or waivers from parties to the
Contracts, Licenses and Permits listed or referred to on SCHEDULE 8.7 (as the
same shall be amended at the Buyer's request to reflect Contracts, Licenses and
Permits disclosed on any supplemental Schedule delivered pursuant to Section
7.4) (collectively, the "KEY CONTRACTS") on terms satisfactory to the Buyer;
PROVIDED, HOWEVER, that the Buyer shall not require any changes to any such
Contracts or Licenses and Permits in connection with such consents, approvals,
notations, authorizations, exemptions or waivers; and PROVIDED, FURTHER that
none of the Sellers shall make any changes to any such Contracts or Licenses and
Permits in connection with such consents, approvals, notations, authorizations,
exemptions or waivers.
Section 8.8 FARRELL CONSULTING ARRANGEMENT.
(a) The Sellers shall have demonstrated and presented evidence to the
Buyer's satisfaction that the Farrell Consulting Agreement shall have been
terminated as of the Closing, which termination shall provide an express
exculpation of each of the Buyer and its Affiliates, the Sellers and the
Executive Shareholders as to any past, present or future liability or obligation
toward the Farrell Parties arising out of the Farrell Consulting Agreement and
each of the Farrell Parties shall have agreed to indemnify and hold harmless, on
a joint and several basis, each of the Sellers, the Executive Shareholders and
the Buyer and its Affiliates from and against any damages, costs and expenses
suffered by any such party arising from any such claim.
(b) Each of the Farrell Parties shall have executed and delivered to the
Buyer a buy-out agreement with the Buyer (with its effectiveness conditioned on
completion of the Closing) in such form as shall be mutually acceptable to the
parties.
(c) Joseph Farrell shall have executed and delivered to the Buyer a
consulting agreement with the Buyer (with its effectiveness conditioned on
completion of the Closing) in such form as shall be mutually acceptable to the
parties(the "NEW FARRELL CONSULTING AGREEMENT"). Notwithstanding anything to the
contrary set forth in the New Farrell Consulting Agreement, Buyer shall not be
responsible for any compensation or other benefits or expenses owing to Mr.
Farrell in excess of $800,000 per year, and the Sellers and the Executive
Shareholders agree, jointly and severally, to be responsible for and to
indemnify and hold Buyer and its Affiliates harmless from and against any and
all liability for amounts owing to Mr. Farrell in excess of $800,000 per year.
(d) Global Health Systems, Inc., a limited partner of FSN, shall have agreed
to provide software support services to the Buyer relating to the Business of
and the Purchased Property relating to FSN for no more than $60,000 per year
during the Earn-Out Periods in substantially the same manner as Global Health
Systems, Inc. performed such services prior to the Closing, such agreement to be
in form and
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substance reasonably satisfactory to the Buyer, and the Buyer shall have
received such assurances as it deems necessary or advisable that the Buyer will
continue to have a perpetual license to the underlying software with the right
to make modifications.
Section 8.9 EMPLOYMENT AGREEMENT WITH DR. JONES. The Buyer and Dr. J.R.
Jones shall have executed and delivered an amendment to that certain employment
agreement with Dr. Jones identified on SCHEDULE 5.16(A) (with its effectiveness
conditioned on completion of the Closing), containing mutually acceptable
non-solicitation and non-competition provisions in favor of the Buyer in such
form as shall be mutually acceptable to the parties.
Section 8.10 FINANCIAL STATEMENTS AND PROJECTIONS. On the Closing Date,
the most recent Management Prepared Financial Statements available prior to the
Closing reflect provision for accrued liabilities, including vacation and sick,
medical claims and extended reporting endorsement for each of the Sellers
(including all IBNR amounts), in an amount which the Sellers and Executive
Shareholders reasonably believe will be adequate to meet such accrued
liabilities. On the Closing Date, the Sellers shall have Cash and Cash
Equivalents and Accounts Receivable in an amount sufficient to satisfy the
aggregate current liabilities of the Sellers as set forth in the most recent
Management Prepared Financial Statements. The Audited Financial Statements and
the Management Prepared Financial Statements reflect all professional liability
claims and reserves, including all IBNR amounts, as at the respective dates of
the Audited Financial Statements and the Management Prepared Financial
Statements.
Section 8.11 OPINION OF COUNSEL. The Buyer shall have received a favorable
opinion, dated as of the Closing Date, from Broad and Cassel, counsel to the
Sellers and the Executive Shareholders, in form and substance reasonably
satisfactory to the Buyer and its counsel, to the effect set forth on EXHIBIT C.
Section 8.12 OTHER CLOSING DOCUMENTS. The Buyer shall have received such
other certificates, instruments and documents in confirmation of the
representations and warranties of the Sellers and the Shareholders or in
furtherance of the transactions contemplated by this Agreement as the Buyer or
its counsel may reasonably request, including, without limitation, the
Management Agreement in form and substance satisfactory to the Buyer.
Section 8.13 LEGAL MATTERS. All certificates, instruments, opinions and
other documents required to be executed or delivered by or on behalf of any of
the Sellers and the Shareholders under the provisions of this Agreement, and all
other actions and proceedings required to be taken by or on behalf of any of the
Sellers and the Shareholders in furtherance of the transactions contemplated
hereby, shall be reasonably satisfactory in form and substance to counsel for
the Buyer. Each of the Sellers shall have provided the Buyer with a certificate
stating that it is not a "foreign person" within the meaning of Treasury
Regulations Section 1.1445-2(b). The certificate shall be in such form as shall
be mutually acceptable to the parties.
Section 8.14 TPA AND UR LICENSES. The Buyer shall have received approval
from all required state agencies, including Florida's and Texas' Department of
Insurance, to operate as a "third party administrator" or the Buyer shall have
otherwise received such assurances as the Buyer, in its sole discretion, deems
necessary or advisable, that it will be able to operate the Businesses pursuant
to an agreement with a holder of a TPA license upon such terms and conditions
acceptable to the Buyer in its sole discretion.
SECTION 9. CONDITIONS TO OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to consummate the transactions contemplated
by this Agreement are subject to the fulfillment, at or before the Closing Date,
of the following conditions, any one or more of which may be waived by the
Sellers in their sole discretion:
Section 9.1 REPRESENTATIONS AND WARRANTIES OF THE BUYER. All
representations and warranties made by the Buyer and Parent in this Agreement
shall be true and correct on and as of the Closing Date as if again made by the
Buyer and Parent on and as of such date.
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Section 9.2 PERFORMANCE OF THE BUYER'S OBLIGATIONS. Each of the Buyer and
Parent shall have performed in all respects all obligations required under this
Agreement to be performed by it on or before the Closing Date.
Section 9.3 CONSENTS AND APPROVALS. All consents, waivers, authorizations
and approvals of any Governmental Authority and of any other person, firm or
corporation, required of the Buyer and Parent in connection with the execution,
delivery and performance of this Agreement, shall have been duly obtained and
shall be in full force and effect on the Closing Date.
Section 9.4 NO VIOLATION OF ORDERS. No preliminary or permanent injunction
or other order issued by any Governmental Authority, nor any statute, rule,
regulation, decree or executive order promulgated or enacted by any Governmental
Authority which declares this Agreement invalid or unenforceable in any respect
or which prevents the consummation of the transactions contemplated hereby shall
be in effect and no action or proceeding before any Governmental Authority shall
have been instituted or threatened by any Governmental Authority or by any other
person which seeks to prevent or declare the consummation of the transactions
contemplated by this Agreement or which challenges the validity or
enforceability of this Agreement.
Section 9.5 OPINION OF COUNSEL. The Sellers shall have received a
favorable opinion, dated as of the Closing Date, from Dow, Lohnes & Albertson,
PLLC, counsel to the Buyer and Parent, in form and substance reasonably
satisfactory to the Sellers and their counsel, to the effect set forth on
EXHIBIT D. In addition, the Sellers shall have received a favorable opinion,
dated as of the Closing Date, from in-house counsel of the Buyer and Magellan,
in form and substance reasonably satisfactory to the Sellers and their counsel,
to the effect that the execution and delivery of this Agreement by the Buyer and
Parent did not, and the performance of this Agreement by the Buyer and Parent
will not violate or conflict with any provision of the Articles or Certificate
of Incorporation or By-Laws of the Buyer or Parent, respectively, and did not
and will not violate any provision of any order, judgment or decree of any
Governmental Authority to which either the Buyer or Parent is bound, and (other
than as disclosed in SCHEDULE 6.4) did not and will not violate or result in a
breach of or constitute (with due notice or lapse of time or both) a default
under any material loan agreement, mortgage, security agreement or trust
indenture to which the Buyer or Parent is a party or by which it is bound or to
which any of its properties or assets is subject, which violation, breach or
default would have a material adverse effect on the financial condition of the
Buyer or Parent, taken as a whole.
Section 9.6 OTHER CLOSING DOCUMENTS. The Sellers shall have received such
other certificates, instruments and documents in confirmation of the
representations and warranties of the Buyer and Parent or in furtherance of the
transactions contemplated by this Agreement as the Sellers, the Executive
Shareholders or their counsel may reasonably request, including, without
limitation, the Management Agreement in form and substance satisfactory to the
Executive Shareholders.
Section 9.7 LEGAL MATTERS. All certificates, instruments, opinions and
other documents required to be executed or delivered by or on behalf the Buyer
and Parent under the provisions of this Agreement, and all other actions and
proceedings required to be taken by or on behalf of the Buyer and Parent in
furtherance of the transactions contemplated hereby, shall be reasonably
satisfactory in form and substance to counsel for the Sellers.
SECTION 10. TERMINATION AND ABANDONMENT.
Section 10.1 METHODS OF TERMINATION; UPSET DATE. This Agreement may be
terminated and the transactions contemplated hereby may be abandoned at any time
before the Closing:
(a) By the mutual written consent of the Buyer and all of the Sellers;
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(b) By the Buyer, if all the conditions set forth in Section 8 of this
Agreement shall not have been satisfied or waived on or before November 30, 1997
unless such satisfaction has been frustrated or made impossible by any act or
failure to act of the Buyer;
(c) By agreement of all the Sellers if all the conditions set forth in
Section 9 of this Agreement shall not have been satisfied or waived on or before
November 30, 1997, unless such satisfaction has been frustrated or made
impossible by any act or failure to act of any Seller or any Shareholder;
(d) By either the Buyer, on the one hand, or the agreement of all the
Sellers, on the other, if the Buyer, in the case of the Sellers, or any of the
Sellers or the Executive Shareholders, in the case of the Buyer, fails to comply
in any material respect with any of its covenants or agreements contained herein
or in any document delivered in connection herewith, or breaches any of its
representations and warranties in any material way;
(e) By the Buyer or agreement of all the Sellers if a Governmental Authority
of competent jurisdiction shall have issued an order, decree or ruling or taken
any other action (which order, decree or ruling the parties hereto shall use
their reasonable efforts to lift), which permanently restrains, enjoins or
otherwise prohibits the transactions contemplated by this Agreement; or
(f) By the Buyer on or before October 23, 1997, in the event Parent and the
minority shareholders of Care Management Resources, Inc. (i) shall not have
terminated that certain shareholders agreement with respect to their interests
in said corporation, or (ii) shall not have otherwise amended said shareholders
agreement to Parent's satisfaction, or (iii) shall not have otherwise entered
into an agreement providing for such termination or amendment, all upon such
terms and conditions acceptable to Parent, in its sole discretion.
Section 10.2 PROCEDURE UPON TERMINATION. In the event of termination and
abandonment of this Agreement by the Sellers or the Buyer pursuant to Section
10.1, written notice thereof shall forthwith be given to the other party or
parties, as applicable, and this Agreement shall terminate and the transactions
contemplated hereby shall be abandoned, without further action by the Sellers or
the Buyer. If this Agreement is terminated as provided herein, no party to this
Agreement shall have any liability or further obligation to any other party to
this Agreement except as provided below and elsewhere in this Agreement,
including Sections 12.3, 12.4, 12.8 and 12.14 hereof; PROVIDED, HOWEVER, that no
termination of this Agreement pursuant to this Section 10 shall relieve any
party of liability for a breach of any provision of this Agreement occurring
before such termination. Upon the termination of this Agreement, Parent and
Buyer, on the one hand, and the Sellers and Executive Shareholders, on the
other, shall return all confidential materials previously furnished to the other
except to the extent that a party may require such materials for purposes of
enforcing its rights or pursuing any of its remedies under this Agreement, at
law or in equity. This provision shall survive the termination of this
Agreement.
SECTION 11. INDEMNIFICATION.
Section 11.1 INDEMNIFICATION BY THE SELLERS AND THE EXECUTIVE
SHAREHOLDERS. Notwithstanding the Closing or the delivery of the Purchased
Property and regardless of any investigation at any time made by or on behalf of
the Buyer or Parent or of any knowledge or information that the Buyer or Parent
may have, each Seller and each of the Executive Shareholders agrees to jointly
and severally indemnify and fully defend, save and hold the Buyer, any Affiliate
of the Buyer and their respective directors, officers and employees (the "BUYER
INDEMNITEES"), harmless if any Buyer Indemnitee shall at any time or from time
to time suffer any damage, liability, loss, cost, expense (including all
reasonable attorneys' and experts' fees and disbursements), deficiency,
interest, penalty, impositions, assessments or fines, whether or not arising
with respect to any claim, charge, suit, proceeding, investigation, arbitration
or mediation and, if instituted, whether at any trial or appellate level, and
whether raised by the parties hereto or any third party (collectively, "LOSSES")
arising out of or resulting from, or shall pay or become obliged to pay any sum
on
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account of, any Sellers' Event of Breach. As used herein, "SELLERS' EVENT OF
BREACH" shall be and mean any one or more of the following:
(a) any untruth or inaccuracy in any representation of any Seller or any
Executive Shareholder or the breach of any warranty of any Seller or Executive
Shareholder, without giving effect to any "materiality" qualification or
limitation stated in such representation or warranty and without regard to
whether the indemnifying Seller or Executive Shareholder made such
representation or breached such warranty (including, without limitation, (i) any
misrepresentation in, or omission from, any statement, certificate, schedule,
exhibit, annex or other document furnished pursuant to this Agreement by any
Seller or any Shareholder (or any of their representatives) to the Buyer (or any
representative of the Buyer) and any misrepresentation in or omission from any
document furnished to the Buyer in connection with the Closing and (ii) any and
all liabilities of or claims against any Business, the Purchased Property, or
any Buyer Indemnitee arising out of any action, suit, proceeding, dispute or
investigation or order, writ, judgment, award, injunction or decree of the
character described in Section 5.15 or out of any Contract to the extent not set
forth in SCHEDULE 5.16(A) or with respect to any obligation under any such
Contract with respect to any period prior to the Closing Date);
(b) any failure of any Seller or any Executive Shareholder to perform or
observe any term, provision, covenant, agreement or condition on the part of any
Seller or any Executive Shareholder to be performed or observed;
(c) any claim or cause of action by any party against any Buyer Indemnitee,
with respect to the Excluded Liabilities; or with respect to Losses arising with
respect to the operation of any Business or the Purchased Property on or prior
to the Closing Date or with respect to any services provided by the Seller or
its employees, independent contractors or consultants on or prior to the Closing
Date;
(d) any direct or indirect obligations or liabilities described in Section
7.5(c) that may arise before or after the Closing Date; or
(e) any claim or cause of action against any Buyer Indemnitee by any
Shareholder (other than the Executive Shareholders) other than by reason of
their employment agreements, if any, with the Buyer;
PROVIDED, HOWEVER, that, except as otherwise stated in the following
proviso, the Sellers and the Executive Shareholders shall have no obligation to
make any payment under Section 11.1(a) with respect to any representation or
warranty made in good faith without actual knowledge or notice of falsity unless
the aggregate amount to which all Buyer Indemnitees are entitled by reason of
all such claims exceeds $100,000, it being understood that once such amount is
exceeded, the aggregate of all such claims (including such $100,000 amount and
any amount in excess thereof) shall be payable jointly and severally by the
Sellers and the Executive Shareholders to the Buyer. In addition, the Sellers
and the Executive Shareholders shall have no obligation to make any payment
under Section 11.1(a) with respect to the representation and warranty made in
Section 5.13(b), made in good faith without actual knowledge or notice of
falsity, unless such Losses arise as a result of events, conditions or facts
existing before the Closing Date.
Section 11.2 PROCEDURES FOR INDEMNIFICATION BY THE SELLERS. If a Sellers'
Event of Breach occurs or is alleged and a Buyer Indemnitee asserts that the
Sellers or any of the Executive Shareholders has become obligated to such Buyer
Indemnitee pursuant to Section 11.1, or if any suit, action, investigation,
mediation, claim or proceeding is begun, made or instituted as a result of which
the Sellers or any of the Executive Shareholders may become obligated to a Buyer
Indemnitee hereunder, such Buyer Indemnitee shall give written notice to the
Sellers and the Executive Shareholders. The Sellers and the Executive
Shareholders agree to jointly and severally defend, contest or otherwise protect
the Buyer Indemnitee against any such suit, action, investigation, claim or
proceeding at their sole cost and expense. The Buyer Indemnitee shall have the
right, but not the obligation, to participate at its own expense in the defense
thereof by counsel of the Buyer Indemnitee's choice and shall in any event
cooperate with and assist the
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Sellers and the Executive Shareholders to the extent reasonably possible. If the
Sellers and the Executive Shareholders fail to timely defend, contest or
otherwise protect against such suit, action, investigation, claim or proceeding,
the Buyer Indemnitee shall have the right to do so, including the right to make
any compromise or settlement thereof, and the Buyer Indemnitee shall be entitled
to recover the entire cost thereof jointly and severally from the Sellers or the
Executive Shareholders, including reasonable attorneys' fees, disbursements and
amounts paid as the result of such suit, action, investigation, mediation, claim
or proceeding.
Section 11.3 THE BUYER'S RIGHT OF SET-OFF. In the event the Buyer has a
claim against any of Sellers or Executive Shareholders for indemnification
pursuant to this Section 11 or as a result of the failure by the Sellers or the
Executive Shareholders to pay the Buyer any amounts owed to it pursuant to
Section 3, the Buyer may set-off the amount of such Losses against any amounts
payable directly or indirectly by or on behalf of the Buyer to the Sellers from
time to time pursuant to this Agreement or the agreements and documents
referenced herein, including without limitation any amounts payable by the Buyer
to the Escrow Agent pursuant to Section 3.
Section 11.4 INDEMNIFICATION BY THE BUYER AND PARENT. Notwithstanding the
Closing or the delivery of the Purchased Property and regardless of any
investigation at any time made by or on behalf of the Sellers or the Executive
Shareholders or of any knowledge or information that the Sellers or the
Executive Shareholders may have, the Buyer and Parent shall jointly and
severally indemnify and agree to fully defend, save and hold each of the
Sellers, and its directors, officers and employees, and each Executive
Shareholder (collectively, the "SELLER INDEMNITEES"), harmless if any Seller
Indemnitee shall at any time or from time to time suffer any Losses arising out
of or resulting from, or shall pay or become obligated to pay any sum on account
of, any Buyer's Event of Breach. As used herein, "BUYER'S EVENT OF BREACH" shall
be and mean any one or more of the following:
(i) any untruth or inaccuracy in any representation of the Buyer or
Parent or the breach of any warranty of the Buyer or Parent contained in
this Agreement;
(ii) any failure of the Buyer or Parent duly to perform or observe any
term, provision, covenant, agreement or condition contained in this
Agreement on the part of the Buyer or Parent to be performed or observed;
and
(iii) any claim or cause of action by any party against any Seller
Indemnitees with respect to Assumed Liabilities;
PROVIDED, HOWEVER, that neither the Buyer nor Parent shall have any obligation
to make any payment under Section 11.4(a) with respect to any representation or
warranty made in good faith without actual knowledge or notice of falsity unless
the aggregate amount to which all Seller Indemnitees are entitled by reason of
all such claims exceeds $100,000, it being understood that once such amount is
exceeded, the aggregate of all such claims (including such $100,000 amount and
any amount in excess thereof) shall be payable by the Buyer and Parent on demand
by the Seller Indemnitees.
Section 11.5 PROCEDURES FOR INDEMNIFICATION BY THE BUYER AND PARENT. If a
Buyer's Event of Breach occurs or is alleged and a Seller Indemnitee asserts
that the Buyer or Parent has become obligated to it pursuant to Section 11.4, or
if any suit, action, investigation, claim or proceeding is begun, made or
instituted as a result of which the Buyer or Parent may become obligated to a
Seller Indemnitee hereunder, such Seller Indemnitee shall give written notice to
the Buyer and Parent. The Buyer and Parent agree to defend, contest or otherwise
protect such Seller Indemnitee against any such suit, action, investigation,
claim or proceeding at its sole cost and expense. Such Seller Indemnitee shall
have the right, but not the obligation, to participate at its own expense in the
defense thereof by counsel of its choice and shall in any event cooperate with
and assist the Buyer or Parent to the extent reasonably possible. If the Buyer
or Parent fails timely to defend, contest or otherwise protect against such
suit, action, investigation, claim or proceeding, such Seller Indemnitee shall
have the right to do so, including the right to make any
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compromise or settlement thereof, and such Seller Indemnitee shall be entitled
to recover the entire cost thereof from the Buyer or Parent including reasonable
attorneys' fees, disbursements and amounts paid as the result of such suit,
action, investigation, claim or proceeding.
Section 11.6 THE SELLERS' AND EXECUTIVE SHAREHOLDERS' RIGHT OF SET-OFF. In
the event the Sellers or Executive Shareholders have a claim against the Buyer
or Parent for indemnification pursuant to this Section 11 or as a result of the
failure by the Buyer or Parent to pay the Sellers any amounts owed to them
pursuant to Section 3, the Sellers and Executive Shareholders may set-off the
amount of such Losses against any amounts payable directly or indirectly by or
on behalf of the Sellers or Executive Shareholders to the Buyer or Parent from
time to time pursuant to this Agreement or the agreements and documents
referenced herein, including without limitation any amounts payable by the
Sellers or Executive Shareholders pursuant to Section 3.
Section 11.7 PURCHASE PRICE ADJUSTMENT. The Buyer and each of the Sellers
agree to treat any payments under this Section 11 as an adjustment to the
Purchase Price for all federal, state and local Tax purposes.
SECTION 12. MISCELLANEOUS.
Section 12.1 SUCCESSORS AND ASSIGNS; RESTRICTIONS ON ASSIGNMENT AND
TRANSFER OF PURCHASE PRICE. Except as otherwise provided in this Agreement, no
party hereto shall assign this Agreement or any rights or obligations hereunder
without the prior written consent of the other party hereto and any such
attempted assignment without such prior written consent shall be void and of no
force and effect, PROVIDED, that the Buyer may assign its rights hereunder to
any of its Affiliates, and the Buyer may assign its rights to indemnification or
damages hereunder to the lender or lenders providing financing to the Buyer;
PROVIDED, FURTHER, that no such assignment shall reduce or otherwise vitiate any
of the obligations of any of the Sellers, the Executive Shareholders or Parent
hereunder. This Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective successors, permitted assigns,
heirs, beneficiaries, estates, executors and personal representatives.
Section 12.2 GOVERNING LAW, JURISDICTION. This Agreement shall be
construed, performed and enforced in accordance with, and governed by, the laws
of the State of Florida, without giving effect to the principles of conflicts of
laws thereof.
Section 12.3 EXPENSES. Except as otherwise provided herein, each of the
parties hereto shall pay its own expenses in connection with this Agreement and
the transactions contemplated hereby, including any legal and accounting fees,
whether or not the transactions contemplated hereby are consummated. The Sellers
shall pay all state and local sales, use, transfer, excise, value-added or other
similar Taxes and all recording and filing fees that may be imposed by reason of
the sale, transfer, assignment and delivery of the Purchased Property and shall
prepare and file all Tax Returns related thereto. The Buyer shall pay 50% and
the Sellers shall pay 50% of the Hart-Scott-Rodino filing fee, if any, required
in connection with the transaction contemplated hereby.
Section 12.4 JOINT AND SEVERAL OBLIGATIONS. Notwithstanding anything to
the contrary contained in this Agreement, each and every obligation of any
Seller or Executive Shareholder hereunder shall be a joint and several
obligation of all the Sellers and Executive Shareholders.
Section 12.5 SEVERABILITY. In the event that any part of this Agreement is
declared by any court or other judicial or administrative body to be null, void
or unenforceable, said provision shall survive to the extent it is not so
declared, and all of the other provisions of this Agreement shall remain in full
force and effect.
Section 12.6 NOTICES. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given (i) on the date of service if served personally on the
party to whom notice is to be given; (ii) on the day of transmission if sent via
facsimile
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transmission to the facsimile number given below, and telephonic confirmation of
receipt is obtained promptly after completion of transmission; (iii) on the day
after delivery to Federal Express or similar overnight courier; or (iv) on the
fifth day after mailing, if mailed to the party to whom notice is to be given,
by first class mail, registered or certified, postage prepaid and properly
addressed, to the party as follows:
If to the Sellers and/or the Executive Shareholders:
Allied Health Group, Inc.
Florida Specialty Network, Ltd.
3106 Commerce Parkway
Miramar, FL 33025
Gut Management, Inc.
2245 North University Drive
Pembroke Pines, FL 33024
Sky Management Co.
11410 North Kendall Drive
Suite 212
Miami, FL 33176
Surginet, Inc.
3106 Commerce Parkway
Miramar, FL 33025
Surgical Associates of South Florida, Inc.
3106 Commerce Parkway
Miramar, FL 33025
Florida Specialty Network, Ltd.
3106 Commerce Parkway
Miramar, FL 33025
Lawrence Schimmel, M.D.
9320 S.W. 61st Court
Miami, Florida 33156
Jacob Nudel, M.D.
4281 Casper Court
Hollywood, FL 33021
David Russin, M.D.
715 West 49th Street
Miami Beach, Florida 33140
Copy to:
Broad and Cassel
201 S. Biscayne Boulevard
Suite 3000
Miami, Florida 33131
Attention: Mike Segal, P.A.
Telecopy: (305) 373-9443
If to the Buyer and/or Parent:
Magellan Health Services, Inc.
3414 Peachtree Road, NE, Suite 1400
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Atlanta, Georgia 30326
Attention: Vice President-Mergers and Acquisitions
Copy to:
Magellan Health Services, Inc.
3414 Peachtree Road, NE, Suite 1400
Atlanta, Georgia 30326
Attention: General Counsel
Any party may change its address for the purpose of this Section by giving
the other party written notice of its new address in the manner set forth above.
Section 12.7 AMENDMENTS; WAIVERS. This Agreement may be amended or
modified, and any of the terms, covenants, representations, warranties or
conditions hereof may be waived, only by a written instrument executed by the
parties hereto, or in the case of a waiver, by the party waiving compliance. Any
waiver by any party of any condition, or of the breach of any provision, term,
covenant, representation or warranty contained in this Agreement, in any one or
more instances, shall not be deemed to be nor construed as further or continuing
waiver of any such condition, or of the breach of any other provision, term,
covenant, representation or warranty of this Agreement.
Section 12.8 PUBLIC ANNOUNCEMENTS. The parties agree that after the
signing of this Agreement, neither party shall make any press release or public
announcement concerning this transaction without the prior written approval of
the other party unless, in the opinion of such party's counsel, a press release
or public announcement is required by applicable law or stock exchange rules.
If, in the opinion of such party's counsel, any such announcement or other
disclosure is required by applicable law or stock exchange rules, the disclosing
party agrees to give the nondisclosing party prior notice and an opportunity to
comment on the proposed disclosure.
Section 12.9 ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the parties hereto with respect to the transactions
contemplated hereby and supersedes and replaces all prior and contemporaneous
agreements and understandings, oral or written, with regard to such
transactions. All exhibits and schedules hereto and any documents and
instruments delivered pursuant to any provision hereof are expressly made a part
of this Agreement as fully as though completely set forth herein.
Section 12.10 PARTIES IN INTEREST. Nothing in this Agreement is intended
to confer any rights or remedies under or by reason of this Agreement on any
persons other than the Sellers, and the Buyer and their respective successors
and permitted assigns. Nothing in this Agreement is intended to relieve or
discharge the obligations or liability of any third persons to the Sellers or
the Buyer. No provision of this Agreement shall give any third persons any right
of subrogation or action over or against the Sellers or the Buyer.
Section 12.11 SCHEDULED DISCLOSURES. Disclosure of any matter, fact or
circumstance in a Schedule to this Agreement shall not be deemed to be
disclosure thereof for purposes of any other Schedule hereto.
Section 12.12 SECTION AND PARAGRAPH HEADINGS. The section and paragraph
headings in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
Section 12.13 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same instrument.
Section 12.14 POST-CLOSING SURVIVAL. All covenants and agreements which by
their respective terms are intended to survive the consummation of the
transactions contemplated by this Agreement shall survive such consummation in
accordance with their respective terms and conditions.
Section 12.15 CONFIDENTIALITY. After the Closing, the Sellers and the
Executive Shareholders hereby agree to hold in strict confidence all business
and other information relating to the Purchased Property and
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the Business and, except as otherwise required by law or as to information which
becomes publicly available, not to disclose or otherwise reveal any such
confidential information to any other person or entity without in each instance
the prior written consent of the Buyer.
Section 12.16 LITIGATION. It is recognized by the parties to this
Agreement that litigation may arise at some time in the future relating to the
Sellers, the Buyer, Parent, the Purchased Property or the Assumed Liabilities
which may be related directly or indirectly to the period prior to the Closing
or the period subsequent to the Closing, or both. Each of the parties to this
Agreement agrees, therefore, that to the extent reasonable under the
circumstances, it will fully cooperate with and provide information, records,
documents and assistance of employees to the other parties with respect to any
litigation or potential litigation in which the other party is or may be
involved.
Section 12.17 SPECIFIC PERFORMANCE. Each of the Sellers and the Executive
Shareholders acknowledge that the Buyer will be irreparably harmed and the Buyer
will have no adequate remedy at law if any of the Sellers or the Executive
Shareholders fail to perform any of their obligations under this Agreement. It
is accordingly agreed that, in addition to any other remedies which may be
available to it, the Buyer will have the right to obtain injunctive relief to
restrain a breach or threatened breach of, or otherwise obtain specific
performance of, the Sellers' and the Executive Shareholders' covenants and other
agreements contained in this Agreement.
Section 12.18 RETENTION OF INDEPENDENT ACCOUNTING FIRMS. If an Independent
Accounting Firm is retained pursuant to Section 3 of this Agreement, the Buyer,
the Sellers and the Executive Shareholders shall each execute such accounting
firm's retention agreement, if any, and shall each be bound by the obligation,
if any, contained therein to provide indemnification, contribution and related
expense reimbursement to such Independent Accounting Firm.
Section 12.19 LIMITED OBLIGATIONS OF PARENT. Parent hereby guarantees the
full and prompt payment when due of the Purchase Price payable pursuant to and
in accordance with the provisions set forth in Section 3. The parties expressly
agree that, notwithstanding anything to the contrary contained in this
Agreement, Parent shall not be liable to any third parties in respect of any of
the Assumed Liabilities or in respect of any other matter not related to
Parent's express obligations as set forth in this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed either in an individual capacity or by their respective officers
thereunto duly authorized, as the case may be, as of the date first above
written.
<TABLE>
<S> <C> <C>
CMSF, INC.
By: -------------------------------------------
Name:
Title:
ALLIED HEALTH GROUP, INC.
By: -------------------------------------------
Name:
Title:
GUT MANAGEMENT, INC.
By: -------------------------------------------
Name:
Title:
SKY MANAGEMENT CO.
By: -------------------------------------------
Name:
Title:
FLORIDA SPECIALTY NETWORK, LTD., BY ITS GENERAL
PARTNER, FLORIDA SPECIALTY NETWORK, INC.
By: -------------------------------------------
Name:
Title:
SURGICAL ASSOCIATES OF SOUTH FLORIDA, INC.
By: -------------------------------------------
Name:
Title:
</TABLE>
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<TABLE>
<S> <C> <C>
SURGINET, INC.
By: -------------------------------------------
Name:
Title:
THE EXECUTIVE SHAREHOLDERS:
------------------------------------------------
Lawrence Schimmel, M.D.,
Individually
------------------------------------------------
Jacob Nudel, M.D., Individually
------------------------------------------------
David Russin, M.D., Individually
MAGELLAN HEALTH SERVICES, INC.
By: -------------------------------------------
Name:
Title:
</TABLE>
52
<PAGE>
EXHIBIT 2(f)
FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT (this "FIRST AMENDMENT"),
made this 5th day of December, 1997, among Allied Specialty Care Services, Inc.,
a Florida corporation, f/ k/a CMSF, Inc. (the "BUYER"), Allied Health Group,
Inc., a Florida corporation ("AHG"), Gut Management, Inc., a Florida corporation
("GUT"), Sky Management Co., a Florida corporation ("SKY"), Florida Specialty
Network, Ltd., a Florida limited partnership ("FSN"), Surgical Associates of
South Florida, Inc., a Florida corporation ("SASF"), Surginet, Inc., a Florida
corporation ("SURGINET" and, together with AHG, Gut, Sky, FSN and SASF, the
"SELLERS"), and Jacob Nudel, M.D., David Russin, M.D. and Lawrence Schimmel,
M.D. (each, in his individual capacity, an "EXECUTIVE SHAREHOLDER", and
collectively, the "EXECUTIVE SHAREHOLDERS"), and Magellan Health Services, Inc.,
a Delaware corporation, the ultimate corporate parent of the Buyer ("PARENT"),
W I T N E S S E T H:
WHEREAS, the Buyer, the Sellers, the Executive Shareholders and the Parent
entered into that certain Asset Purchase Agreement (the "AGREEMENT") as of
October 16, 1997, pursuant to which the Buyer will acquire substantially all of
the assets of the Sellers upon the terms and conditions set forth therein; and
WHEREAS, the Buyer, the Sellers, the Executive Shareholders and the Parent
desire to amend the Agreement as set forth hereinafter;
NOW, THEREFORE, in consideration of the premises, the mutual promises and
covenants contained herein and in the Agreement, and of other good and valuable
consideration, the receipt, sufficiency and adequacy of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. Capitalized terms used in this First Amendment and not otherwise defined
herein shall have the respective meanings assigned to them in the Agreement.
2. The Schedules to the Agreement are hereby amended as set forth in the
supplemental Schedules attached hereto.
3. Notwithstanding anything set forth in the Agreement to the contrary and
notwithstanding the actual time the Closing occurs on the Closing Date, the
parties hereto agree that to the extent permissible under applicable law the
Closing shall be effective and deemed to have occurred as of 12:01 a.m. local
time on December 1, 1997 (the "EFFECTIVE DATE").
4. Section 3.2(c) is hereby amended by deleting said Section in its entirety
and inserting in lieu thereof the following:
(c) Upon final determination of the Post-Closing Statement in accordance
with the foregoing, in the event that the current assets of the Businesses
(taken as a whole and to the extent purchased by the Buyer) less the current
liabilities of the Businesses (taken as a whole and to the extent assumed by
the Buyer), as stated in the Post-Closing Statement (the "WORKING CAPITAL
AMOUNT"), is an amount which is less than $600,000 (the "MINIMUM AMOUNT"),
then the Purchase Price shall be reduced by the difference between the
Working Capital Amount and the Minimum Amount and the Sellers shall be
jointly and severally obligated to pay to the Buyer an amount equal to such
difference within 5 Business Days of the final determination of the
Post-Closing Statement. In the event the Working Capital Amount is an amount
which is greater than the Minimum Amount, then the Purchase Price shall be
increased by the difference between the Working Capital Amount and the
Minimum Amount and the Buyer shall to pay to the Sellers an amount equal to
such difference within 5 Business Days of the final determination of the
Post-Closing Statement.
<PAGE>
5. Sections 3.3(a)(17), 3.3(a)(18) and 3.3(a)(19) are hereby amended by
deleting said Sections in their entirety and inserting in lieu thereof the
following:
(17) 'Year 1 Earn-Out Period" shall mean the 12-month period ending on
November 30, 1998.
(18) 'Year 2 Earn-Out Period" shall mean the 12-month period ending on
November 30, 1999.
(19) 'Year 3 Earn-Out Period" shall mean the 12-month period ending on
November 30, 2000.
6. Section 3.5(a) is hereby amended by inserting in the 8th line thereof
before the word "shall" the phrase "except as otherwise provided on SCHEDULE
2.4(B)" such that the first sentence of Section 3.5(a) shall read as follows:
All revenues and expenses arising from the business and operations of the
Businesses, including without limitation business and license fees (and any
retroactive adjustments thereof), utility charges, property and equipment
rentals, real and personal property Taxes and assessments, and similar
prepaid and deferred items shall be prorated between the Buyer and the
Sellers in accordance with the principle that the Sellers shall receive all
revenues and all refunds and, except as otherwise provided on SCHEDULE
2.4(B), shall be responsible for all expenses, payables, costs, liabilities
and obligations allocable to the conduct and operations of the Businesses
for the period on or prior to the Closing Date, and the Buyer shall receive
all revenues and be responsible for all expenses, payables, costs,
liabilities and obligations allocable to the conduct and operations of the
Businesses for the period after the Closing Date; provided, however, that
the parties shall allocate any real property Tax in accordance with Section
164(d) of the Code.
7. Section 5.6(c)(1) is hereby amended by deleting the proviso at the end of
said Section in its entirety and inserting in lieu thereof the following:
PROVIDED, HOWEVER, that nothing set forth in this Section 5.6(c)shall
prohibit or require disclosure of cash distributions to the extent that
after giving effect to such cash distributions the Sellers still have
Unrestricted Cash and the account receivable from Prudential Health Care
Plan, Inc. [Tri-State] in the approximate amount of $118,000, in the
aggregate, in excess of the current liabilities of the Businesses by an
amount of at least $600,000.
8. Section 7.2(i) is hereby amended by deleting the proviso at the end of
said Section in its entirety and inserting in lieu thereof the following:
PROVIDED, HOWEVER, that nothing set forth in this Section 7.2(i) shall
prohibit cash distributions to the extent that after giving effect to such
cash distributions the Sellers still have Unrestricted Cash and the account
receivable from Prudential Health Care Plan, Inc. [Tri-State] in the
approximate amount of $118,000, in the aggregate, in excess of the current
liabilities of the Businesses by an amount of at least $600,000.
9. Notwithstanding anything set forth in the Agreement to the contrary, the
parties agree to finalize the Allocation and to deliver SCHEDULE 7.3(B) for each
Seller as soon as reasonably practicable following the Closing but in no event
later than December 31, 1997.
10. Notwithstanding anything to the contrary set forth in Section 7.5 of the
Agreement or in the Assumption Agreement with respect to Dr. Jones, the parties
agree that Employees of the Sellers shall not become Transferred Employees until
January 1, 1998. Until December 31, 1997, the Sellers shall loan the Employees
to the Buyer pursuant to and in accordance with that certain Loaned Employees
Agreement of even date herewith between the Sellers and the Buyer.
11. Notwithstanding anything set forth in Section 7.16 of the Agreement to
the contrary, the parties agree to finalize and deliver the Information
Technologies Budget as soon as reasonably practicable following the Closing but
in no event later than December 31, 1997.
2
<PAGE>
12. Notwithstanding anything to the contrary set forth in the Agreement,
until such time as new bank accounts are opened by the Buyer for the operation
of the Business, the Sellers will continue to maintain its existing bank
accounts used in the operation of the Business for the sole and exclusive
benefit and account of the Buyer. During said period, the Sellers will only make
such deposits into and withdrawals from said bank accounts as shall be
authorized by the Buyer. At such times as new bank accounts are opened by the
Buyer, the Sellers will transfer the account balances in the applicable bank
accounts of the Sellers to such of Buyer's bank accounts designated by the
Buyer.
13. All other terms and conditions of the Agreement shall remain in full
force and effect and are hereby preserved, affirmed, adopted and ratified.
14. This First Amendment may be executed in multiple counterpart copies,
each of which will be considered an original and all of which constitute one and
the same instrument, binding on all parties hereto, even though all the parties
are not signatory to the same counterpart. Any counterpart of this First
Amendment which has attached to it separate signature pages, which together
contain the signature of all parties hereto, shall for all purposes be deemed a
fully executed original.
[SIGNATURES ON FOLLOWING PAGES]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this First
Amendment as of the day and year first above written.
<TABLE>
<S> <C> <C>
ALLIED SPECIALTY CARE SERVICES, INC.
By: ----------------------------------------
Title: ----------------------------------------
ALLIED HEALTH GROUP, INC.
By: ----------------------------------------
Title: ----------------------------------------
GUT MANAGEMENT, INC.
By: ----------------------------------------
Title: ----------------------------------------
SKY MANAGEMENT CO.
By: ----------------------------------------
Title: ----------------------------------------
FLORIDA SPECIALTY NETWORK, LTD., BY ITS GENERAL
PARTNER, FLORIDA SPECIALTY NETWORK, INC.
By: ----------------------------------------
Title: ----------------------------------------
SURGICAL ASSOCIATES OF SOUTH FLORIDA, INC.
By: ----------------------------------------
Title: ----------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
SURGINET, INC.
By: ----------------------------------------
Title: ----------------------------------------
---------------------------------------------
Lawrence Schimmel, M.D., Individually
---------------------------------------------
Jacob Nudel, M.D., Individually
---------------------------------------------
David Russin, M.D., Individually
MAGELLAN HEALTH SERVICES, INC.
By: ----------------------------------------
Title: ----------------------------------------
</TABLE>
5
<PAGE>
EXHIBIT 2(g)
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 24, 1997
AMONG
MERIT BEHAVIORAL CARE CORPORATION
MAGELLAN HEALTH SERVICES, INC.
AND
MBC MERGER CORPORATION
------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE I. DEFINITIONS..................................................................................... 2
SECTION 1.01. Certain Defined Terms.................................................................... 2
SECTION 1.02. Other Defined Terms...................................................................... 6
ARTICLE II. MERGER......................................................................................... 8
SECTION 2.01. The Merger............................................................................... 8
SECTION 2.02. Effective Time of the Merger............................................................. 8
SECTION 2.03. Closing.................................................................................. 8
SECTION 2.04. Effect of the Merger..................................................................... 8
SECTION 2.05. Certificate of Incorporation and Bylaws of the Surviving Corporation..................... 8
SECTION 2.06. Directors and Officers of the Surviving Corporation...................................... 8
SECTION 2.07. Conversion of Securities................................................................. 9
SECTION 2.08. Exchange of Certificates................................................................. 10
SECTION 2.09. Stock Transfer Books..................................................................... 12
SECTION 2.10. Company Options.......................................................................... 12
SECTION 2.11. Dissenting Shares........................................................................ 13
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................................. 14
SECTION 3.01. Incorporation and Authority of the Company............................................... 14
SECTION 3.02. Incorporation and Qualification of the Company and the Company 14
Subsidiaries.............................................................................
SECTION 3.03. Capital Stock of the Company............................................................. 14
SECTION 3.04. Subsidiaries............................................................................. 15
SECTION 3.05. No Conflict.............................................................................. 16
SECTION 3.06. Financial Statements..................................................................... 17
SECTION 3.07. Labor Matters............................................................................ 17
SECTION 3.08. Absence of Certain Changes or Events..................................................... 17
SECTION 3.09. Absence of Litigation.................................................................... 19
SECTION 3.10. Compliance with Laws..................................................................... 19
SECTION 3.11. Consents, Approvals, Licenses............................................................ 19
SECTION 3.12. Personal Property; Information Systems................................................... 20
SECTION 3.13. Real Property............................................................................ 21
SECTION 3.14. Employee Benefit Matters................................................................. 21
SECTION 3.15. Taxes.................................................................................... 23
SECTION 3.16. Certain Contracts........................................................................ 24
SECTION 3.17. Customers................................................................................ 25
SECTION 3.18. Undisclosed Liabilities.................................................................. 26
SECTION 3.19. Transactions with Affiliates............................................................. 26
SECTION 3.20. Undisclosed Liabilities.................................................................. 26
SECTION 3.21. Brokers.................................................................................. 26
SECTION 3.22. Restricted Cash.......................................................................... 27
SECTION 3.23. SEC Documents............................................................................ 27
SECTION 3.24. Accounts Receivable...................................................................... 27
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF PARENT 27
AND MERGER SUB................................................................................
SECTION 4.01. Incorporation and Authority of Parent and Merger Sub..................................... 27
SECTION 4.02. No Conflict.............................................................................. 28
SECTION 4.03. Consents and Approvals................................................................... 28
SECTION 4.04. Absence of Litigation.................................................................... 28
SECTION 4.05. Financing................................................................................ 28
SECTION 4.06. Other Transactions....................................................................... 29
SECTION 4.07. Brokers.................................................................................. 29
ARTICLE V. ADDITIONAL AGREEMENTS........................................................................... 29
SECTION 5.01. Conduct of Business Prior to the Closing................................................. 29
SECTION 5.02. Parent Action Prior to the Closing....................................................... 32
SECTION 5.03. Access to Information.................................................................... 32
SECTION 5.04. Confidentiality.......................................................................... 33
SECTION 5.05. Efforts; Regulatory and Other Authorizations; Consents................................... 33
SECTION 5.06. Further Action........................................................................... 35
SECTION 5.07. No Solicitation.......................................................................... 35
SECTION 5.08. Notification of Certain Matters.......................................................... 35
SECTION 5.09. Indemnification of Officers and Directors................................................ 36
SECTION 5.10. Repayment of Bank Debt and Senior Subordinated Notes..................................... 36
ARTICLE VI. EMPLOYEE MATTERS............................................................................... 37
Section 6.01. Employee Benefits........................................................................ 37
Section 6.02. Severance Arrangements................................................................... 37
ARTICLE VII. CONDITIONS TO CLOSING......................................................................... 37
SECTION 7.01. Conditions to Obligations of the Company................................................. 37
SECTION 7.02. Conditions to Obligations of Parent and Merger Sub....................................... 38
ARTICLE VIII. TERMINATION, AMENDMENT AND WAIVER............................................................ 39
SECTION 8.01. Termination.............................................................................. 39
SECTION 8.02. Effect of Termination.................................................................... 40
SECTION 8.03. Waiver................................................................................... 40
ARTICLE IX. GENERAL PROVISIONS............................................................................. 40
SECTION 9.01. Nonsurvival of Representations, Warranties and Agreements................................ 40
SECTION 9.02. Expenses................................................................................. 40
SECTION 9.03. Notices.................................................................................. 40
SECTION 9.04. Public Announcements..................................................................... 41
SECTION 9.05. Headings................................................................................. 42
SECTION 9.06. Severability............................................................................. 42
SECTION 9.07. Entire Agreement......................................................................... 42
SECTION 9.08. Assignment............................................................................... 42
SECTION 9.09. No Third Party Beneficiaries............................................................. 42
SECTION 9.10. Waivers and Amendments................................................................... 42
SECTION 9.11. Specific Performance..................................................................... 42
SECTION 9.12. Governing Law............................................................................ 43
SECTION 9.13. Counterparts............................................................................. 43
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of October 24, 1997 (the
"Agreement"), among MAGELLAN HEALTH SERVICES, INC., a Delaware corporation
("Parent"), MERIT BEHAVIORAL CARE CORPORATION, a Delaware corporation (the
"Company"), and MBC MERGER CORPORATION, a Delaware corporation and a wholly
owned Subsidiary of Parent ("Merger Sub").
WITNESSETH:
WHEREAS, the Directors of the Company have unanimously determined that the
merger of Merger Sub with and into the Company, upon the terms and subject to
the conditions set forth in this Agreement (the "Merger"), is fair to and in the
best interests of the Company and its stockholders;
WHEREAS, in the Merger, the Company will be the surviving corporation, and
each share of common stock, par value $.01 per share, of the Company (the
"Common Stock") will be converted into the right to receive the cash
consideration specified in Section 2.07(c) hereof;
WHEREAS, the Boards of Directors of the Company, the Parent and Merger Sub
have each approved and adopted this Agreement and approved the Merger and the
other transactions contemplated hereby, and the Company has recommended approval
and adoption of this Agreement and the Merger by its stockholders;
WHEREAS, MBC Associates, L.P., a Delaware limited partnership ("MBC
Associates"), and KKR Partners II, L.P., a Delaware limited partnership ("KKR
Partners"), collectively own 21,000,000 shares of Common Stock, 38 Newbury
Ventures/MBC Limited Partnership, a Massachusetts limited partnership
("Newbury"), owns 600,000 shares of Common Stock, Albert S. Waxman, the Albert
S. Waxman Family Charitable Remainder Unitrust (the "Waxman Trust") collectively
own 2,055,100 shares of Common Stock, Arthur H. Halper owns 100,000 shares of
Common Stock, Michael G. Lenahan owns 100,000 shares of Common Stock and John A.
Budnick owns 50,000 shares of Common Stock, all of which shares represent, as of
the date hereof, in the aggregate approximately 81.3% of the outstanding Common
Stock; and
WHEREAS, MBC Associates, KKR Partners, Newbury, the Waxman Trust and Messrs.
Waxman, Halper, Lenahan and Budnick (collectively, the "Company Stockholders")
have approved this Agreement and the Merger.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements and covenants hereinafter set forth, Parent, the Company and Merger
Sub agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.01. CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms have the following meanings:
"Action" means any claim, action, suit or proceeding, arbitral action,
governmental inquiry, criminal prosecution or other investigation as to
which written notice has been provided to the applicable party.
"Affiliate" means, when used with respect to a specified Person, another
Person that either directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under common control with
the Person specified.
"Aggregate Cash Consideration" means an amount equal to (i)
$750,000,000, plus (ii) Aggregate Option Exercise Price, less (iii) Net
Debt, less (iv) fees and expenses incurred by the Company in connection with
the transactions contemplated hereby (including without limitation the fees
referenced in Section 3.21 and specifically excluding any fees and expenses
associated with obtaining the financing under the Commitment Letter).
"Aggregate Option Exercise Price" means an amount equal to the aggregate
dollar amount of the exercise price on all Company Options outstanding
immediately prior to the Effective Time.
<PAGE>
"Agreement" means this Agreement and Plan of Merger, dated as of October
24, 1997, by and among Parent, the Company and Merger Sub (including the
Disclosure Schedule and Parent Disclosure Schedule) and all amendments
hereto made in accordance with Section 9.10.
"Balance Sheet" means the unaudited consolidated balance sheet of the
Company and the Company Subsidiaries as of the Balance Sheet Date, together
with related notes thereto.
"Balance Sheet Date" means August 31, 1997.
"Books and Records" means all books of account and other financial
records pertaining to the Company and the Company Subsidiaries.
"Business" means the business of providing or administering managed
behavioral health care services or providing behavioral health care
services, including managed mental health programs and substance abuse
programs and employee assistance programs and utilization management, care
management and network management concerning behavioral health care
services, throughout the United States, as conducted by the Company and the
Company Subsidiaries.
"Business Day" means any day that is not a Saturday, a Sunday or other
day on which banks are required or authorized by law to be closed in the
City of New York.
"Company Financial Statements" means audited consolidated financial
statements of the Company for the twelve months ended September 30, 1996,
September 30, 1995 and September 30, 1994 and unaudited condensed financial
statements for the eleven months ended on the Balance Sheet Date.
"Company Options" means options to purchase Common Stock granted
pursuant to the 1995 Plan and the 1996 Plan.
"Company Subsidiaries" means the Subsidiaries of the Company (each of
which is individually referred to as a "Company Subsidiary").
"Compensation Arrangement" means any written plan or compensation
arrangement, other than an Employee Plan, with respect to which the Company
or any ERISA Affiliate contributes, which the Company or any ERISA Affiliate
sponsors or maintains or to which it or any ERISA Affiliate otherwise is
bound, which provides to employees, or former employees, of the Company or
any ERISA Affiliate, with respect to the period of their employment, any
compensation or other benefits, whether deferred or not, in excess of base
salary or wages, including, but not limited to, any bonus or incentive plan,
stock rights plan, deferred compensation arrangement, life insurance, stock
purchase plan, severance pay plan, vacation pay and any other employee
fringe benefit plan.
"Confidentiality Agreement" means the letter agreement between the
Company and Parent dated as of September 2, 1997.
"Contract" means any contract, agreement, indenture, note, bond, loan,
letter of credit, instrument, lease, conditional sales contract, mortgage,
license, franchise agreement, insurance policy, binding commitment or other
agreement, whether written or oral.
"Debt" means any indebtedness, obligation or liability of the Company or
any Company Subsidiary for borrowed money, capitalized leases, and
obligations under reimbursement agreements related to letters of credit
(excluding intercompany indebtedness). The amount of Debt related to a
capitalized lease shall equal that amount required by GAAP to be set forth
on a balance sheet.
"DGCL" means the General Corporation Law of the State of Delaware.
"Disclosure Schedule" means the Disclosure Schedule dated as of the date
of this Agreement delivered to Parent by the Company.
2
<PAGE>
"Employee Plan" means any pension, profit-sharing, deferred
compensation, vacation, bonus, severance, incentive, medical, vision,
dental, disability, life insurance or any other employee benefit plan as
defined in Section 3(3) of ERISA to which the Company or any ERISA Affiliate
contributes, which the Company or any ERISA Affiliate sponsors or maintains,
or to which the Company or any ERISA Affiliate otherwise is bound.
"Encumbrance" means any security interest, pledge, mortgage, lien,
charge, adverse claim of ownership or use, option, right to purchase, right
to convert, judgement or other encumbrance of any kind.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any trade or business under common control with
the Company within the meaning of Sections 414(b), (c), (m) or (o) of the
Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United
States.
"Governmental Authority" means any government, governmental entity,
department, commission, board, agency or instrumentality, and any court,
tribunal, or judicial body, whether federal, state or local.
"Governmental Order" means any statute, rule, regulation, order,
judgment, injunction, decree, stipulation or determination issued,
promulgated or entered by or with any Governmental Authority.
"HSR Act" means the Hart Scott Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder.
"Internal Revenue Code" or "Code" each means the Internal Revenue Code
of 1986, as amended, and the regulations thereunder.
"IRS" means the United States Internal Revenue Service.
"Knowledge" or "known" means, with respect to any matter in question, if
any of Albert Waxman, Arthur Halper, John Budnick, Michael Lenahan, Richard
Surles, David Stone, Doug Wiley, Ken Hawes, John Docherty and Pat
Schmiedeler of the Company and the members of the Board of Directors of the
Company designated by KKR Partners have actual knowledge of such matter as
of the date of this Agreement.
"Law" means any federal, state or local statute, law, ordinance,
regulation, rule, code, order or rule of common law.
"Leased Real Property" means the real property leased by the Company and
the Company Subsidiaries, as tenant, together with, to the extent leased by
the Company and the Company Subsidiaries, all buildings and other
structures, facilities or improvements currently or hereafter located
thereon, all fixtures, systems, equipment and items of personal property of
the Company and the Company Subsidiaries attached or appurtenant thereto,
and all easements, licenses, rights and appurtenances relating to the
foregoing.
"Leases" means the leases for the Leased Real Property.
"Liabilities" means any and all debts, liabilities and obligations,
whether accrued or fixed, absolute or contingent, matured or unmatured or
determined or determinable.
"Licenses" means all of the licenses, permits and other governmental
authorizations required for the operation of the Business as conducted as of
the date of this Agreement.
3
<PAGE>
"Material Adverse Effect" means any change or effect that is materially
adverse to the operations, business, financial condition or results of
operations of the Company and the Company Subsidiaries, taken as a whole,
except for any such changes or effects resulting directly or primarily from
(i) the announcement or other disclosure or consummation of the transactions
contemplated by this Agreement, (including, without limitation, the breach,
termination, cancellation or non-renewal by any customer of any customer
contracts primarily as a result of such announcement, disclosure or
consummation), (ii) regulatory changes or changes in the managed behavioral
health care services industry, or (iii) general economic conditions.
"Merger" shall mean the merger of Merger Sub with and into the Company,
with the Company being the surviving corporation, in accordance with this
Agreement and the Certificate of Merger.
"Multiemployer Plan" means a plan, as defined in ERISA Section 3(37).
"Net Debt" means an amount equal to (i) Debt outstanding at September
30, 1997, less (ii) Unrestricted Cash at September 30, 1997, less (iii) the
amount of notes receivable from officers of the Company outstanding at
September 30, 1997, plus (iv) $8,200,000.
"Parent Disclosure Schedule" means the Parent Disclosure Schedule dated
as of the date of this Agreement delivered to the Company by Parent.
"Permitted Encumbrances" means (i) Encumbrances for inchoate mechanics'
and materialmen's liens for construction in progress and workmen's,
repairmen's, warehousemen's and carriers' liens arising in the ordinary
course of the Business, (ii) Encumbrances for Taxes not yet payable and for
Taxes being contested in good faith, (iii) Encumbrances in favor of Parent
or Merger Sub arising out of, under or in connection with this Agreement and
(iv) Encumbrances and imperfections of title that do not secure payment of
indebtedness and the existence of which would not materially affect the use
of the property subject thereto, consistent with past practice.
"Person" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as
any syndicate or group that would be deemed to be a person under Section
13(d)(3) of the Exchange Act.
"Subsidiaries" with respect to a Person means any other Person in which
such Person has a direct or indirect equity or ownership interest in excess
of 50% or has the right to appoint a majority of directors, in the case of a
corporation, or managers, in the case of a limited liability company (or
persons performing similar functions).
"Tax" or "Taxes" means all federal, state, local and foreign income,
estimated income, gross receipts, sales, use, social security, employees'
withholding, unemployment, disability, excise, franchise, profits, property,
capital stock, premium, minimum and alternative minimum or other taxes,
fees, stamp taxes and duties, assessments or charges of any kind whatsoever
(whether payable directly or by withholding), together with any interest and
any penalties, additions to tax or additional amounts imposed by any taxing
authority with respect thereto.
"Unrestricted Cash" means the aggregate of all amounts included on the
consolidated September 30, 1997 balance sheet of the Company under the line
items "Operating--MBC," "Operating-- CMG" and "Temporary Borrowings," plus
$4,735,000.
4
<PAGE>
SECTION 1.02. OTHER DEFINED TERMS. The following terms have the meanings
defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
TERM SECTION
- --------------------------------------------------------------------------------- -----------
<S> <C>
Annual Gross Revenue Amount...................................................... 5.05(b)
Antitrust Laws................................................................... 5.05(b)
Bank Debt........................................................................ 5.10
Cash Consideration............................................................... 2.07(c)
Certificate of Merger............................................................ 2.02
Certificates..................................................................... 2.08(b)
Closing.......................................................................... 2.03
Closing Date..................................................................... 2.03
Commitment Letter................................................................ 4.05
Common Stock..................................................................... Recitals
Company.......................................................................... Preamble
Company Active Entity............................................................ 3.04
Company Inactive Entity.......................................................... 3.04
Company Other Entity............................................................. 3.04
Company Stockholders............................................................. Recitals
Dissenting Shares................................................................ 2.10
Effective Time................................................................... 2.02
Excess Amount.................................................................... 5.05(b)
Exchange Agent................................................................... 2.08(a)
Exchange Fund.................................................................... 2.08(a)
Hardware......................................................................... 3.12
Indemnified Parties.............................................................. 5.09(a)
Listed Contracts................................................................. 3.16(a)
KKR Partners..................................................................... Recitals
MBC Associates................................................................... Recitals
Merger Sub....................................................................... Preamble
Newbury.......................................................................... Recitals
1995 Plan........................................................................ 2.10(a)
1996 Plan........................................................................ 2.10(b)
Option Certificate............................................................... 2.08(b)
Parent........................................................................... Preamble
Preliminary Schedule............................................................. 2.07(d)
Section 3.13 Leases.............................................................. 3.13
Section 3.19 Affiliates.......................................................... 3.19
Senior Subordinated Notes........................................................ 5.10
Software......................................................................... 3.12
Stock Certificate................................................................ 2.08(b)
Sub Capital Stock................................................................ 2.07(a)
Subsidiary Shares................................................................ 3.04(b)
Term............................................................................. Section
Surviving Corporation............................................................ 2.04
Threshhold Amount................................................................ 5.05(b)
Waxman Trust..................................................................... Recitals
</TABLE>
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ARTICLE II.
MERGER
SECTION 2.01. THE MERGER. Upon the terms and subject to the provisions of
this Agreement, and in accordance with the DGCL, Merger Sub will merge with and
into the Company at the Effective Time (as defined in Section 2.02).
SECTION 2.02. EFFECTIVE TIME OF THE MERGER. Subject to the provisions of
this Agreement, a certificate of merger with respect to the Merger in form and
substance satisfactory to the parties and in such form as is required by the
relevant provisions of the DGCL (the "Certificate of Merger") shall be duly
prepared, executed and acknowledged and thereafter delivered to the Secretary of
State of the State of Delaware for filing, as provided in the DGCL, as early as
practicable on the Closing Date (as defined in Section 2.03). The Merger shall
become effective at such time as is specified in the Certificate of Merger (the
time at which the Merger has become fully effective being hereinafter referred
to as the "Effective Time").
SECTION 2.03. CLOSING. The closing of the Merger (the "Closing") will take
place at 10:00 a.m., New York time, on a date to be specified by Parent and the
Company, which shall be no earlier than the 45th day following the date of this
Agreement and after such date, shall be no later than the second Business Day
after satisfaction or, if permissible, waiver of the conditions set forth in
Article VII (the "Closing Date"), at the offices of Latham & Watkins, 885 Third
Avenue, Suite 1000, New York, New York, 10022, unless another date, place or
time is agreed to in writing by Parent and the Company. At the Closing (i) the
documents, certificates and instruments referred to in Article VII shall be
executed and delivered, (ii) the cash to be deposited (in immediately available
funds) with the Exchange Agent for disbursement pursuant to Section 2.08 shall
be deposited, and (iii) all amounts contemplated by Section 5.10(i) to be paid
at Closing shall be paid.
SECTION 2.04. EFFECT OF THE MERGER. As a result of the Merger, the separate
corporate existence of Merger Sub shall cease and the Company shall continue as
the surviving corporation (the "Surviving Corporation"). Upon becoming
effective, the Merger shall have the effects set forth in the DGCL. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all properties, rights, privileges, powers and franchises of the Company
and Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
SECTION 2.05. CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING
CORPORATION. At the Effective Time, the Certificate of Incorporation and Bylaws
of the Surviving Corporation shall be amended to be identical to the Certificate
of Incorporation and Bylaws, respectively, of Merger Sub as in effect
immediately prior to the Effective Time until duly amended in accordance with
applicable laws.
SECTION 2.06. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION . The
directors of Merger Sub immediately prior to the Effective Time shall become the
initial directors of the Surviving Corporation, each to hold office from the
Effective Time until their respective successors are duly elected or appointed
and qualified in accordance with the Certificate of Incorporation and Bylaws of
the Surviving Corporation. The officers of the Company specified in the
Certificate of Merger shall be the initial officers of the Surviving
Corporation, each to hold office until their respective successors are duly
elected or appointed and qualified in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The Company shall use
reasonable efforts to cause each director of the Company to tender his or her
resignation prior to the Effective Time, each such resignation to be effective
as of the Effective Time.
SECTION 2.07. CONVERSION OF SECURITIES. At the Effective Time, by virtue of
the Merger and without any action on the part of any of the parties hereto or
the holders of any shares of the following securities:
(a) CAPITAL STOCK OF MERGER SUB. Each issued and outstanding share of
capital stock, par value $.01 per share, of Merger Sub (the "Sub Capital
Stock") shall be converted into and become one fully
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paid and nonassessable share of common stock, par value $.01 per share, of
the Surviving Corporation. At the Effective Time, Parent, as the sole holder
of the Sub Capital Stock, shall surrender any and all certificates
representing such Sub Capital Stock to the Surviving Corporation and shall
be entitled to receive in exchange therefor a certificate representing the
number of shares of common stock of the Surviving Corporation into which the
Sub Capital Stock theretofore represented by the certificates so surrendered
shall have been converted as provided in this Section 2.07(a). From and
after the Effective Time, until so surrendered, each certificate theretofore
representing shares of issued and outstanding Sub Capital Stock shall be
deemed for all corporate purposes to evidence the number of shares of common
stock of the Surviving Corporation into which such shares of Sub Capital
Stock shall have been converted.
(b) CANCELLATION OF TREASURY STOCK. All shares of Common Stock that are
owned by the Company as treasury stock shall be automatically canceled,
retired and extinguished and shall cease to exist and no payment or
consideration shall be made or delivered with respect thereto.
(c) COMMON STOCK OF THE COMPANY. Each issued and outstanding share of
Common Stock (other than shares to be canceled in accordance with Section
2.07(b) and any Dissenting Shares, as defined below) shall be converted into
and represent the right to receive an amount, in cash, equal to the quotient
obtained by dividing (i) the Aggregate Cash Consideration, by (ii) the total
number of shares of Common Stock outstanding immediately prior to the
Effective Time (other than shares to be cancelled in accordance with Section
2.07(b)) plus the number of shares issuable upon exercise of Company Options
outstanding immediately prior to the Effective Time (the "Cash
Consideration"). All such shares of Common Stock, when so converted, shall
no longer be outstanding and shall automatically be canceled, retired and
extinguished and shall cease to exist, and each certificate which
immediately prior to the Effective Time represented any such shares (other
than any Dissenting Shares) shall thereafter represent the right to receive,
upon surrender of such certificate in accordance with the provisions of
Section 2.08, the Cash Consideration into which such shares have been
converted in accordance herewith.
(d) ESTABLISHING THE CASH CONSIDERATION. Five days prior to the
Effective Time, the Company shall provide Parent with a schedule (the
"Preliminary Schedule"), setting forth in reasonable detail, the estimated
Cash Consideration as of the Effective Time. Parent shall promptly review
such schedule and provide any disagreements on such schedule within two days
of receipt of such schedule. The Company and Parent shall resolve any
disputes on the preparation of the Preliminary Schedule and agree upon a
final Cash Consideration which reflects changes, if any, between the date of
delivery of the Preliminary Schedule and the Effective Time.
SECTION 2.08. EXCHANGE OF CERTIFICATES. The procedures for exchanging
certificates which prior to the Effective Time represented shares of Common
Stock for the Cash Consideration pursuant to the Merger are as follows:
(a) EXCHANGE AGENT. As of the Effective Time, Parent shall deposit with
a bank or trust company designated by Parent and the Company (the "Exchange
Agent"), for the benefit of the holders of shares of Common Stock and
Company Options outstanding immediately prior to the Effective Time (other
than Dissenting Shares), for exchange in accordance with this Section 2.08,
through the Exchange Agent, cash in the aggregate amount sufficient to pay
the Cash Consideration for all shares of Common Stock converted pursuant to
Section 2.07(c) and to pay amounts payable to holders of Company Options
pursuant to Section 2.10 (such cash being hereinafter referred to in the
aggregate as the "Exchange Fund"). The Exchange Agent shall, pursuant to
irrevocable instructions, deliver the cash required to be delivered pursuant
to Section 2.07(c) and Section 2.10 out of the Exchange Fund to holders of
shares of Common Stock and Company Options, respectively. Except as
contemplated by Section 2.08(e), the Exchange Fund shall not be used for any
other purpose.
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(b) EXCHANGE PROCEDURES. Commencing on the 35th day after the date
hereof, Parent shall cause the Exchange Agent to promptly deliver to each
holder of record of a certificate or certificates representing outstanding
shares of Common Stock (the "Stock Certificates") and to each holder of
record of a certificate or instrument which immediately prior to the
Effective Time represented any outstanding Company Options (the "Option
Certificates" and, collectively together with the Stock Certificates, the
"Certificates") from whom the Exchange Agent receives a written request (i)
a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only at
or following the Effective Time and upon delivery of the Certificates to the
Exchange Agent and which shall be in such form and have such other
provisions as Parent and the Company may reasonably specify) and (ii)
instructions for effecting the surrender of the Certificates in exchange for
the cash payable pursuant to Section 2.07(c) or 2.10, as the case may be,
with respect to the shares of Common Stock or Company Options formerly
represented thereby. The letter of transmittal with respect to Option
Certificates shall contain language waiving any claims the holders thereof
may have against Parent or the Company or any Affiliates of either with
respect to the Company Options. As soon as reasonably practicable (and in
any event not later than three (3) Business Days) after the Effective Time,
Parent shall cause the Exchange Agent to mail a letter of transmittal and
the instructions described above to each holder of record of a Certificate
who has not previously requested such documents from the Exchange Agent.
Each holder of a Certificate shall be entitled to surrender such
Certificate to the Exchange Agent at the Effective Time in accordance with
the procedures described herein. Upon surrender of a Stock Certificate or
Option Certificate, as the case may be, to the Exchange Agent, together with
such letter of transmittal, duly executed,
(x) the holder of such Stock Certificate shall be entitled to receive
promptly in exchange therefor the Cash Consideration (to be paid in
immediately available funds) which such holder has the right to receive
pursuant to the provisions of Section 2.07(c) (provided that Stock
Certificates delivered to the Exchange Agent at the Closing shall be paid
at the Closing) and the Stock Certificate so surrendered shall
immediately be canceled, and
(y) the holder of such Option Certificate shall be entitled to
receive (to be paid in immediately available funds) promptly (but no
earlier than the seventh day after the Closing Date) in exchange therefor
the consideration which such holder has the right to receive pursuant to
Section 2.10 hereof (which shall include the interest payment specified
in Section 2.10).
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No payment shall
be made to the holder of any unsurrendered Certificate in respect thereof
until the holder of record of such Certificate shall surrender such
Certificate to Parent in accordance herewith.
(d) NO FURTHER OWNERSHIP RIGHTS IN COMMON STOCK OR COMPANY OPTIONS. The
payment made upon the surrender for exchange of Certificates in accordance
with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to the shares of Common Stock or
Company Options, as appropriate, theretofore represented by such
Certificates.
(e) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which
remains undistributed for 180 days after the Effective Time shall be
delivered to Parent upon demand, and any former holder of shares of Common
Stock or Company Options, as appropriate, who has not previously complied
with this Section 2.08 shall thereafter look only to Parent for payment of
such former holder's claim for payment in respect of such holder's shares of
Common Stock or Company Options, as appropriate.
(f) NO LIABILITY. None of the Company, Parent, Merger Sub or the
Exchange Agent shall be liable to any holder of shares of Common Stock for
any cash, stock or other property delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
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(g) WITHHOLDING RIGHTS. Parent, the Surviving Corporation or the
Exchange Agent shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to any holder of
Certificates such amounts as it is required by Law to deduct and withhold
with respect to the making of such payment under the Code, or any provision
of state, local or foreign tax law provided, however, that if a zero or
reduced rate is available by Law, Parent, the Surviving Corporation and
Exchange Agent shall deduct or withhold such lower amounts. To the extent
that amounts are so withheld by Parent, the Surviving Corporation or the
Exchange Agent, as the case may be, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the
shares of Common Stock or Company Options, as appropriate, in respect of
which such deduction and withholding was made.
(h) LOST CERTIFICATES. If any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed in such form as
Parent may reasonably require and, if required by Parent or the Surviving
Corporation, the posting by such Person of a bond in such reasonable amount
as Parent or the Surviving Corporation may direct as indemnity against any
claim that may be made against it with respect to such Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the payment deliverable in respect thereof pursuant to this
Agreement.
SECTION 2.09. STOCK TRANSFER BOOKS. From and after the Effective Time, the
stock transfer books of the Company shall be closed, and there shall be no
further registration of transfers of shares of Common Stock on the books and
records of the Company or the Surviving Corporation. If, after the Effective
Time, any Certificates are presented to the Exchange Agent or the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Section 2.09.
SECTION 2.10. COMPANY OPTIONS.
(a) 1995 OPTION PLAN. Prior to the Effective Time, the Compensation
Committee of the Board of Directors of the Company, as administrator of the 1995
Stock Purchase and Option Plan for Employees of the Company (the "1995 Plan"),
shall pursuant to its authority under Section 9 of the 1995 Plan provide that
each option issued under the 1995 Plan shall (i) upon stockholder approval
pursuant to Code Section 280G(b)(5)(A)(ii) become exercisable immediately prior
to the Effective Time, and (ii) after the Effective Time be exercisable only for
an amount of cash equal to that which would have been received by the holder of
such option as a result of the Merger if such holder had exercised such option
immediately prior to the Effective Time. The Company shall, prior to the
Effective Time, pursuant to the provisions of Section 2.08, offer to pay,
subject to consummation of the Merger, each holder of an option issued under the
1995 Plan an amount equal to (x) the aggregate Cash Consideration into which the
shares of Common Stock issuable upon exercise of such option would have been
converted if such option had been exercised immediately prior to the Effective
Time, reduced by (y)(I) the aggregate exercise price for the shares of Common
Stock then issuable upon exercise of such option, and (II) the amount of any
withholding taxes which may be required thereon, in return for the cancellation
of such option, plus (z) an amount equal to the interest which would accrue at a
fluctuating rate per annum equal to the prime interest rate announced by The
Chase Manhattan Bank, N.A., from time to time, compounded daily, on such
remainder for the period commencing on the Closing Date and ending on the such
payment is made (but in no event shall interest accrue for more than seven
days).
(b) 1996 OPTION PLAN. Prior to the Effective Time, the Compensation
Committee of the Board of Directors of the Company, as administrator of the
Company 1996 Employee Stock Option Plan (the "1996 Plan"), shall pursuant to its
authority under Section 11 of the 1996 Plan provide that each option issued
under the 1996 Plan shall after the Effective Time be exercisable only for an
amount of cash equal to that which would have been received by the holder of
such option as a result of the Merger if such holder had exercised such option
immediately prior to the Effective Time. Subject to stockholder approval
pursuant to Code Section 280G(b)(5)(A)(ii), the Company shall, prior to the
Effective Time, pursuant to the
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provisions of Section 2.08, offer to pay, subject to consummation of the Merger,
each holder of an option issued under the 1996 Plan an amount equal to (x) the
aggregate Cash Consideration into which the shares of Common Stock issuable upon
exercise of such option would have been converted if such option had been
exercised immediately prior to the Effective Time, reduced by (y)(i) the
aggregate exercise price for the shares of Common Stock then issuable upon
exercise of such option, and (ii) the amount of any withholding taxes which may
be required thereon, in return for the cancellation of such option, plus (z) an
amount equal to the interest which would accrue at a fluctuating rate per annum
equal to the prime interest rate announced by The Chase Manhattan Bank, N.A.,
from time to time, compounded daily, on such remainder for the period commencing
on the Closing Date and ending on the such payment is made (but in no event
shall interest accrue for more than seven days).
SECTION 2.11. DISSENTING SHARES.
(a) Notwithstanding any other provision of this Agreement to the contrary,
shares of Common Stock that are outstanding immediately prior to the Effective
Time and which are held by stockholders who shall have not consented to the
Merger in writing and who shall have properly delivered a written demand for
appraisal of such shares in accordance with Section 262 of the DGCL and shall
not have failed to perfect or shall not have effectively withdrawn such demand
or otherwise lost their appraisal rights (the "Dissenting Shares") shall not be
converted into or represent the right to receive Cash Consideration. Such
stockholders shall be entitled to have such shares of Common Stock held by them
appraised in accordance with the provisions of Section 262 of the DGCL, except
that all Dissenting Shares held by stockholders who shall have failed to perfect
or shall have effectively withdrawn or otherwise lost their right to appraisal
of such shares of Common Stock under such Section 262 shall thereupon be deemed
to have been converted into and to have become exchangeable for, as of the
Effective Time, the right to receive, without any interest thereon, the Cash
Consideration therefor, upon surrender in accordance with Section 2.08(b) of the
Stock Certificate or Stock Certificates that formerly evidenced such shares of
Common Stock.
(b) The Company shall give Parent (i) prompt notice of any demands for
appraisal received by the Company, withdrawals of demands for appraisal, and any
other instruments served pursuant to the DGCL and received by the Company and
(ii) the opportunity to participate in all negotiations and proceedings with
respect to demands for appraisal under the DGCL. The Company will not, except
with the prior written consent of Parent, make any payment with respect to any
demands for appraisal, or offer to settle, or settle, any such demand for
appraisal rights.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub as follows:
SECTION 3.01. INCORPORATION AND AUTHORITY OF THE COMPANY. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all necessary corporate power and
authority to enter into this Agreement, to carry out its obligations hereunder
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by the Company, the performance by the Company of its
obligations hereunder and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all requisite corporate action
on the part of the Company. This Agreement has been duly executed and delivered
by the Company and (assuming due authorization, execution and delivery by Parent
and Merger Sub) this Agreement constitutes a legal, valid and binding obligation
of the Company enforceable against the Company in accordance with its terms,
subject to the effect of any applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights generally and to the
effect of general
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principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
SECTION 3.02. INCORPORATION AND QUALIFICATION OF THE COMPANY AND THE COMPANY
SUBSIDIARIES.The Company and each Company Subsidiary is duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization
and has the requisite corporate or other organizational power and authority to
own, operate or lease the properties and assets now owned, operated or leased by
it and to carry on its business in all material respects as currently conducted
by the Company or such Company Subsidiary. The Company and each Company
Subsidiary is duly qualified as a foreign organization to do business, and is in
good standing, in each jurisdiction where the character of its properties owned,
operated or leased or the nature of its activities makes such qualification
necessary, except for such failures which, when taken together with all other
such failures, would not have a Material Adverse Effect. Except as set forth on
Section 3.02 of the Disclosure Schedule, true and complete copies of the
Certificate of Incorporation and Bylaws and stock and minute books of the
Company and each Company Subsidiary, each of the foregoing as amended to the
date of this Agreement, have been made available for review by Parent.
SECTION 3.03. CAPITAL STOCK OF THE COMPANY. The authorized capital stock of
the Company consists of 40,000,000 shares of Common Stock and 1,000,000 shares
of Preferred Stock, par value $.01 per share. As of the date of this Agreement,
29,396,158 shares of Common Stock are issued and outstanding; and no shares of
Preferred Stock are outstanding; and the Company has no other voting securities
outstanding. Such shares of Common Stock have been duly authorized and validly
issued and are fully paid and nonassessable and were not issued in violation of
any preemptive rights. Section 3.03 of the Disclosure Schedule sets forth, as of
the date hereof, all of the record owners of the outstanding Common Stock and
their respective holdings of shares of Common Stock. Except as set forth on
Section 3.03 of the Disclosure Schedule, there are no options, warrants or
rights of conversion or other rights, agreements, arrangements or commitments
relating to the capital stock of the Company obligating the Company to issue or
sell any of its shares of capital stock other than the outstanding Company
Options representing the right to purchase up to 6,992,725 shares of Common
Stock. Except as set forth on Section 3.03 of the Disclosure Schedule, there are
no voting trusts, stockholder agreements, proxies or other agreements in effect
to which the Company is a party with respect to the governance of the Company or
voting or transfer of its shares of capital stock. Except as set forth on
Section 3.03 of the Disclosure Schedule, there are no outstanding obligations of
the Company to repurchase, redeem or otherwise acquire any capital stock or
other securities or equity interests of the Company.
SECTION 3.04. SUBSIDIARIES.
(a) Other than the Company Subsidiaries, and except as set forth in Section
3.04(a) of the Disclosure Schedule, there are no other corporations,
partnerships, joint ventures, limited liability companies, associations or other
entities in which the Company or any Company Subsidiary owns, of record or
beneficially, any direct or indirect equity interest or any right (contingent or
otherwise) to acquire such an equity interest. Except as set forth in Section
3.04(a) of the Disclosure Schedule, neither the Company nor any Company
Subsidiary is a member of any partnership, nor is the Company or any Company
Subsidiary a participant in any joint venture or similar arrangement
constituting a legal entity. The entities disclosed on Section 3.04(a) of the
Disclosure Schedule are referred to each as a "Company Other Entity" and
collectively as the "Company Other Entities." Section 3.04(a) of the Disclosure
Schedule sets forth the jurisdiction of organization of each Company Other
Entity and the current ownership of the Company or any Company Subsidiary of
such equity interest of each Company Other Entity. The equity interest of each
such Company Other Entity owned by the Company or any Company Subsidiary is
owned free and clear of all Encumbrances, except those set forth on Section
3.04(a) of the Disclosure Schedule and Encumbrances arising pursuant to this
Agreement. Except as disclosed on Section 3.04(a) of the Disclosure Schedule,
neither the Company nor any Company Subsidiary is required to make any
additional capital contribution or provide additional funding to, or acquire any
securities or equity interests of any Company Other Entity.
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Section 3.04(aa) of the Disclosure Schedule sets forth those Company Other
Entities which are currently inactive and have not previously been actively
engaged in any material business activity or operations (the "Company Inactive
Entities"; and those Company Other Entities that are not Company Inactive
Entities are referred to as "Company Active Entities"). To the Knowledge of the
Company as of the date hereof, each of the Company Active Entities is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization and has the requisite corporate or other
organizational power and authority to own, operate or lease the properties and
assets now owned, operated or leased by it and to carry on its business in all
material respects as currently conducted by such Company Active Entity and is
duly qualified as a foreign organization in each jurisdiction where the
character of its properties owned, operated or leased or the nature of its
activities makes such qualification necessary, except for such failure which
would not have a Material Adverse Effect. Except as set forth on Section
3.04(aa) of the Disclosure Schedule, to the Company's Knowledge as of the date
hereof, there are no voting trusts, stockholders agreements, proxies or other
agreements in effect to which any Company Active Entity is a party with respect
to the voting or transfer of any equity interest of such Company Active Entity
or the repurchase, redemption or acquisition of any equity interest of such
Company Active Entity.
(b) Section 3.04(b) of the Disclosure Schedule sets forth the jurisdiction
of organization of each Company Subsidiary, its authorized capital stock, the
number and type of its issued and outstanding shares of capital stock, and the
current ownership by the Company and the Company Subsidiaries of such shares
(collectively, the "Subsidiary Shares"). The Subsidiary Shares constitute all
the issued and outstanding shares of capital stock of the Company Subsidiaries
owned by the Company and Company Subsidiaries. The Subsidiary Shares have been
duly authorized and validly issued and are fully paid and nonassessable and were
not issued in violation of any preemptive rights. There are no options, warrants
or rights of conversion or other rights, agreements, arrangements or commitments
relating to the capital stock of any Company Subsidiary obligating any Company
Subsidiary to issue or sell any of its shares of capital stock. Either the
Company or another Company Subsidiary owns the Subsidiary Shares issued by the
respective Company Subsidiaries, free and clear of all Encumbrances, except (i)
as set forth in Section 3.04(b) of the Disclosure Schedule and (ii) Encumbrances
arising pursuant to this Agreement. Except as set forth in Section 3.04(b) of
the Disclosure Schedule, there are no voting trusts, stockholder agreements,
proxies or other agreements in effect to which the Company or any Company
Subsidiary is a party with respect to the governance of a Company Subsidiary,
the voting or transfer of the Subsidiary Shares or the repurchase, redemption or
acquisition of any capital stock or other securities or equity interests of such
Company Subsidiary.
(c) Section 3.04(a) and (b) of the Disclosure Schedule describe any material
earnout arrangement or similar obligation of the Company or any Company
Subsidiary arising from any merger, consolidation or acquisition of stock or
assets or other similar acquisition by the Company or any Company Subsidiary.
SECTION 3.05. NO CONFLICT. Assuming all consents, approvals, authorizations
and other actions described in Section 3.11 have been obtained and all filings
and notifications listed in Section 3.11 of the Disclosure Schedule have been
made, and except as may result from any facts or circumstances relating solely
to Parent or as described in Section 3.05 of the Disclosure Schedule, the
execution, delivery and performance of this Agreement by the Company does not
and will not (a) violate or conflict with the Certificate of Incorporation or
Bylaws of the Company, (b) conflict with or violate in any material respect any
material Law or Governmental Order applicable to the Company, any Company
Subsidiary or, to the Company's Knowledge, any Company Active Entity, or (c)
result in any breach of, or constitute a default (or event which with the giving
of notice or lapse of time, or both, would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of, or
result in the creation of any Encumbrance on any of the assets or properties of
the Company or any Company Subsidiary pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument relating to such assets or properties to which the Company or
any Company Subsidiary is a party or by which any of such assets or properties
is bound or affected.
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SECTION 3.06. FINANCIAL STATEMENTS. The Company has caused to be prepared
and delivered to Parent the Company Financial Statements (copies of which are
included in the Disclosure Schedule). The Company Financial Statements have been
prepared in accordance with GAAP and except as set forth in the Company
Financial Statements, on a consistent basis, and present fairly, in all material
respects, the consolidated financial position, results of operations and cash
flows of the Company at the date and for the period indicated, subject in the
case of unaudited interim financial statements, to normal recurring year-end
adjustments.
SECTION 3.07. LABOR MATTERS. Neither the Company nor any Company Subsidiary
is a party to any labor agreement with respect to its employees with any labor
organization, group or association nor within the last year, have there been any
material attempts to organize. Except as set forth in Section 3.07 of the
Disclosure Schedule, to the Company's Knowledge as of the date hereof, (a) the
Company and each Company Subsidiary is in material compliance with all
applicable Laws respecting employment practices, terms and conditions of
employment and wages and hours, (b) there is no unfair labor practice charge or
complaint against the Company or any Company Subsidiary pending before the
National Labor Relations Board or any comparable state agency, (c) there is no
material complaint, charge or claim pending or threatened in writing against the
Company or any Company Subsidiary with any Governmental Authority, arising out
of, in connection with, or otherwise relating to the employment by the Company
or any Company Subsidiary of any individual, and (d) there is no labor strike,
labor disturbance or work stoppage pending against the Company or any Company
Subsidiary.
SECTION 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since June 30, 1997 to
the date of this Agreement and except as set forth in Section 3.08 of the
Disclosure Schedule or as expressly contemplated by this Agreement, there has
not been:
(a) any damage, destruction or loss to any of the material assets or
properties of the Company or any Company Subsidiary;
(b) any declaration, setting aside or payment of any dividend or
distribution or capital return in respect of any shares of Common Stock or
any redemption, purchase or other acquisition by the Company or any Company
Subsidiaries of any shares of Common Stock;
(c) any sale, assignment, transfer, lease or other disposition or
agreement to sell, assign, transfer, lease or otherwise dispose of any of
the assets of the Company or any Company Subsidiary having a value
individually exceeding $2,000,000;
(d) any acquisition (by merger, consolidation, or acquisition of stock
or assets) by the Company or any Company Subsidiary of any corporation,
partnership or other business organization or division thereof for
consideration individually in excess of $1,000,000;
(e) except as reflected in the Company Financial Statements, (i) any
incurrence by the Company or any Company Subsidiary of any indebtedness for
borrowed money, (ii) any issuance by the Company or any Company Subsidiary
of any debt securities or (iii) any assumption, granting, guarantee or
endorsement, or other accommodation arrangement making the Company or any
Company Subsidiary responsible for, the indebtedness for borrowed money of
any Person (other than another Company Subsidiary), in the case of (i), (ii)
and (iii) above, having an aggregate value exceeding $2,000,000 for all such
occurrences;
(f) except as reflected in the Company Financial Statements, any change
in any method of accounting or accounting practice used by the Company or
any Company Subsidiary, other than such changes required by GAAP;
(g) any Material Adverse Effect;
(h)(i) any employment, deferred compensation, severance or similar
agreement entered into or amended by the Company or any Company Subsidiary,
except any employment agreement providing
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for compensation of less than $100,000 per annum entered into in the
ordinary course of business, (ii) increase in the compensation payable or to
become payable by it to any of its directors or officers, or (iii) any
increase in the coverage or benefits available under any severance pay,
termination pay, vacation pay, company awards, salary continuation or
disability, sick leave, deferred compensation, bonus or other incentive
compensation, insurance, pension or other employee benefit plan, payment or
arrangement made to, for or with such directors, officers, employees, agents
or representatives, other than, in the case of (ii) and (iii) above, normal
increases in the ordinary course of business consistent with past practice
and that in the aggregate have not resulted in a material increase in the
benefits or compensation expense of the Company or the Company Subsidiaries;
(i) any material adverse change in the business relationship of the
Company or any Company Subsidiary with any customer referred to in Section
3.17;
(j) except as reflected in the Company Financial Statements, any writing
down, in accordance with GAAP and consistent with past practice, of the
value of any material accounts receivable or any revaluation by the Company
or any Company Subsidiary of any of its material assets or any cancellation
or writing off as worthless and uncollectible of any debt, note or account
receivable by the Company or any Company Subsidiary, excluding writeoffs and
writedowns individually less than $50,000;
(k) any cancellation, termination or non-renewal of any contract with a
customer which was one of the Company's largest 30 customers (measured by
contribution margin) during the nine months ended June 30, 1997;
(l) Except as set forth in the Company Financial Statements, any loans,
letters of credit, advances or material capital contributions made by or
issued for the account of the Company or any Company Subsidiary to, or
investments by any such party in, any Person (other than another
wholly-owned Company Subsidiary, as to which the uses of the transferred
cash or property are not subject to restrictions greater than those imposed
prior to such transfer), including, without limitation, to any employee,
officer or member of the Board of Directors of the Company or any Company
Subsidiary; or
(m) any agreement to take any actions specified in this Section 3.08,
except for this Agreement.
SECTION 3.09. ABSENCE OF LITIGATION. Section 3.09 of the Disclosure Schedule
sets forth as of the date hereof, all material pending Actions, and, to the
Company's Knowledge, material Actions threatened in writing or otherwise,
against the Company or any Company Subsidiary or to the Company's Knowledge as
of the date hereof, against any Company Active Entity. Except as set forth in
Section 3.09 of the Disclosure Schedule, (a) there are no Actions pending or, to
the Company's Knowledge, threatened, against the Company or any Company
Subsidiary or any of the assets or properties of the Company or any Company
Subsidiary that, individually or in the aggregate, reasonably could be expected
to have a Material Adverse Effect and (b) the Company, each Company Subsidiary
and their respective assets and properties are not subject to any material
order, judgment, injunction, decree, stipulation or determination entered by or
with any Governmental Authority.
SECTION 3.10. COMPLIANCE WITH LAWS. The Company and each Company Subsidiary
and the conduct of their respective businesses and operations are in compliance
in all material respects with all applicable material Laws. As of the date
hereof, neither the Company nor any Company Subsidiary nor, to the Company's
Knowledge as of the date hereof, any Company Active Entity has received any
written notice to the effect that the Company or any Company Subsidiary or
Company Active Entity is not in material compliance with any applicable material
Laws except as set forth in Section 3.10 of the Disclosure Schedule.
SECTION 3.11. CONSENTS, APPROVALS, LICENSES. No material consent, approval,
authorization, license, order or permit of, or declaration, filing or
registration with, or notification to, any Governmental
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Authority or third party is required to be made or obtained by the Company or
the Company Subsidiaries in connection with the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby, except: (a) as set forth in Section 3.11 of the Disclosure
Schedule; (b) applicable requirements, if any, of the DGCL, the Exchange Act,
state securities or blue sky laws and the HSR Act; and (c) as may be necessary
as a result of any facts or circumstances relating solely to Parent. The
Company, each Company Subsidiary and to the Company's Knowledge as of the date
hereof, each Company Active Entity has all material Licenses necessary to
conduct its business and operations and is duly qualified and in good standing
under the HMO laws, utilization review laws, third party administrative laws,
preferred provider organization laws or insurance laws of each State in which
the conduct of its business requires such qualification or authorization, except
for such failures, when taken together with all such other failures, would not
materially impair the Company, the Company Subsidiaries and the Company Active
Entities, taken as a whole, from conducting their respective businesses and
operations as presently conducted. Other than as set forth in Section 3.11 of
the Disclosure Schedule, as of the date hereof no audit of the Company or any
Company Subsidiary is pending before, or to the Company's Knowledge as of the
date hereof has been threatened by, any Governmental Authority (other than the
IRS). As of the date hereof all of the material Licenses of the Company, each
Company Subsidiary and, to the Company's Knowledge as of the date hereof, each
Company Active Entity are in full force and effect and the Company, each Company
Subsidiary and to the Company's Knowledge as of the date hereof, each Company
Active Entity is in material compliance with the respective material Licenses
issued to it, except for such failures, when taken together with all such other
failures, would not materially impair the Company, the Company Subsidiaries and
the Company Active Entities, taken as a whole, from conducting their respective
businesses and operations as presently conducted.
SECTION 3.12. PERSONAL PROPERTY; INFORMATION SYSTEMS.
(a) Except as set forth in Section 3.12 of the Disclosure Schedule, the
Company and the Company Subsidiaries collectively own, have a valid leasehold
interest in or have legal right to use all of the material tangible personal
property necessary to carry on their business and operations, free and clear of
all Encumbrances, except Permitted Encumbrances and Encumbrances reflected on
the Company Financial Statements.
(b) To the Company's Knowledge as of the date hereof, the operating and
applications computer programs and data bases ("Software") which the Company and
the Company Subsidiaries currently use or have available for use are adequate
and sufficient in all material respects to service their existing customers on
the date hereof through the end of the current term of the contracts with such
customers. All material Software is owned outright by the Company or the
applicable Company Subsidiary or, if not so owned, the Company or such Company
Subsidiary has the right to use the same pursuant to valid licenses thereof. To
the Company's Knowledge as of the date hereof, none of the material Software
owned by the Company or any Company Subsidiaries and none of the Software
licensed by the Company or any Company Subsidiary infringes upon or violates any
patent, copyright, trade secret or other proprietary right of any other Person.
(c) To the Company's Knowledge as of the date hereof, the central processing
units, monitors, printers and other computer-related hardware ("Hardware") which
the Company and any Company Subsidiaries currently use or have available for use
are adequate and sufficient to service their existing customers on the date
hereof through the end of the current term of the contracts with such customers.
All such Hardware is owned outright by the Company or the applicable Company
Subsidiary or if not so owned, the Company or such Company Subsidiary has the
right to use the same pursuant to valid licenses therefor, except as would not
materially impair the ability of the Company and the Company Subsidiaries, taken
as a whole, to conduct their business and operations, as presently conducted
SECTION 3.13. REAL PROPERTY
(a) Neither the Company nor any Company Subsidiary owns any real property.
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(b) Section 3.13 of the Disclosure Schedule lists all material Leases to
which the Company or any Company Subsidiary is a party or is bound as of the
date hereof. Except as disclosed in Section 3.13 of the Disclosure Schedule as
of the date of this Agreement, the Company or Company Subsidiary party to the
Leases on Section 3.13 of the Disclosure Schedule which relate to Leased Real
Property with square footage in excess of 15,000 (the "Section 3.13 Leases") (i)
has a valid and subsisting leasehold interest in each such Section 3.13 Lease,
(ii) is in undisturbed possession of all space that it is currently entitled to
possess under each such Section 3.13 Lease and no rights adverse to the rights
of the Company or Company Subsidiary have, to the Knowledge of the Company, been
asserted by any third Persons, and (iii) has not received any written notice of
material default under any such Section 3.13 Lease which is still in effect.
(c) Each of the Section 3.13 Leases is in full force and effect and is valid
and enforceable in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally and general principles of equity (regardless of
whether enforcement is sought in a proceeding at law or in equity), and there is
no default under any Section 3.13 Lease either by the Company or the Company
Subsidiary party thereto, and no event has occurred that with the lapse of time
or the giving of notice or both would constitute a default thereunder.
SECTION 3.14. EMPLOYEE BENEFIT MATTERS.
(a) All of the material Employee Plans and Compensation Arrangements are
listed in Section 3.14(a) of the Disclosure Schedule, and complete and accurate
copies of (including any amendments to) any such Employee Plans and Compensation
Arrangements (or related insurance policies), including any related trust
documents, have been made available to Parent along with copies of any current
employee handbook of general circulation. Any material unwritten arrangements
which would be Compensation Arrangements except for the fact that they are
unwritten also are listed in Section 3.14(a) of the Disclosure Schedule. Except
as disclosed in Section 3.14(a) of the Disclosure Schedule or expressly
contemplated in this Agreement, neither the Company nor any ERISA Affiliate has
any obligations to put into effect any plan, arrangement or other scheme which
will become an Employee Plan or Compensation Arrangement (including, but not
limited to, any bonus, cash or deferred compensation, severance, medical,
pension, profit sharing or thrift, stock option, employee stock ownership, life
or group insurance, death benefit, vacation, sick leave, disability or trust
agreement or arrangement), or any amendment to an Employee Plan or Compensation
Arrangement.
(b) The Company has made available to Parent the Forms 5500 filed for each
of the Employee Plans (including all attachments and schedules), actuarial
reports, summaries of material modifications, summary annual reports, and any
other governmental filings relating to the Employee Plans for the last three
plan years, and also has furnished the current summary plan descriptions. Copies
of the most recent determination letters issued by the IRS with respect to any
Employee Plan have been furnished to Parent.
(c) Each Employee Plan and Compensation Arrangement has been administered in
material compliance with its own terms and in material compliance with the
provisions of ERISA, the Code, the Age Discrimination in Employment Act and any
other applicable federal or state laws.
(d) Neither the Company nor any ERISA Affiliate is contributing to, is
required to contribute to, or has contributed within the last six years to, any
Multiemployer Plan, and neither the Company nor any ERISA Affiliate has incurred
within the last six years, or reasonably expects to incur, any "withdrawal
liability," as defined under Section 4201 et seq of ERISA.
(e) Except as set forth in Section 3.14(e) of the Disclosure Schedule, to
the Company's Knowledge as of the date hereof, there are neither any active
governmental inspections, investigations, audits or examinations of any Employee
Plans or Compensation Arrangements nor any actions, suits or claims (other than
routine claims for benefits) with respect to any Employee Plan or Compensation
Arrangement pending or threatened against any such plan or arrangement.
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(f) Except as described in Section 3.14(f) of the Disclosure Schedule,
neither the Company nor any ERISA Affiliate sponsors, maintains or contributes
to any Employee Plan or Compensation Arrangement that provides medical or death
benefit coverage to former employees of the Company or any ERISA Affiliate,
except to the extent required by Section 4980B of the Code.
(g) Except as described in Section 3.14(g) of the Disclosure Schedule, with
respect to each Employee Plan and, to the extent applicable, each Compensation
Arrangement: (i) each Employee Plan that is intended to be tax-qualified, and
each amendment thereto, is the subject of a favorable determination letter, and
no plan amendment that is not the subject of a favorable determination letter
would affect the validity of an Employee Plan's letter; (ii) no Employee Plan is
subject to Code Section 412; and (iii) to the Knowledge of the Company as of the
date hereof, no prohibited transaction, within the definition of Section 4975 of
the Code or Title I, Part 4 of ERISA, has occurred which would subject the
Company or any ERISA Affiliate to any material liability.
(h) Except as disclosed on Section 3.14(h) of the Disclosure Schedule,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any material payment
(including, without limitation, severance, or unemployment compensation)
becoming due to any director or employee of the Company; (ii) result in the
acceleration of vesting under any Employee Plan or Compensation Arrangement; or
(iii) materially increase any benefits otherwise payable under any Employee
Plan. Subject to stockholder approval under Code Section 280G(b)(5)(A)(ii), any
such payment or increase in benefits shall not fail to be deductible by reason
of Code Sections 162(m), 280G or 404. Except as disclosed on Section 3.14(h) of
the Disclosure Schedule, deductibility of future compensation payments to
employees of the Company are not subject to the limitations of Code Section 280G
solely as a result of prior corporate transactions involving the Company.
(i) The Company has made available to Parent (i) copies of all employment
agreements with officers of the Company and each Company Subsidiary involving
payments in excess of $100,000 and not terminable within 60 days, (ii) copies of
all material severance agreements and plans of the Company and each Company
Subsidiary with or relating to their employees, and (iii) copies of all material
plans and agreements of the Company and each Company Subsidiary with or relating
to its respective employees which contain change in control provisions. Section
3.14(i) of the Disclosure Schedule sets forth a list of all employee agreements
described in this Section 3.14(i).
(j) Except as set forth on Section 3.14(j) of the Disclosure Schedule, there
are no third party agreements which could affect the ability of the Company and
the ERISA Affiliates to terminate or modify the terms of the Employee Plans or
Compensation Arrangements.
(k) Section 3.14(k) of the Disclosure Schedule is a document received by the
Company from Merck & Co., Inc. ("Merck") indicating Merck's records of the
employees of the Company and its ERISA Affiliates who currently possess the
right to exercise options to purchase shares of the common stock of Merck, the
number of shares covered by such options and their respective exercise prices.
SECTION 3.15. TAXES.
(a) (i) All material Tax returns and reports required to be filed before the
Closing Date in respect of the Company and each Company Subsidiary have been
filed on a timely basis; (ii) the Company and each Company Subsidiary has paid
when due all Taxes shown to be due on such returns and reports in respect of the
periods covered by such Tax returns and reports, has paid when due all estimated
Taxes in respect of periods ended on or before the Closing Date and has
adequately reserved for the payment of all Taxes with respect to periods ended
on or before the Closing Date for which Tax returns have not yet been filed;
(iii) there are no proposed additional Tax assessments against the Company or
any Company Subsidiary not adequately provided for in the Company Financial
Statements; (iv) there are no unpaid Taxes which are or could become a lien on
the property of the Company or any Company Subsidiary, and no Tax liens have
been filed against the property of the Company or any Company Subsidiary; (v)
the charges, accruals
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and reserves with respect to Taxes on the Books and Records and Company
Financial Statements are adequate (as determined in accordance with GAAP); and
(vi) all Taxes that the Company and the Company Subsidiaries are or were legally
required to withhold or collect have been duly withheld or collected and, to the
extent required, have been paid to the proper Governmental Authority.
(b) As of the date hereof except as set forth in Section 3.15 of the
Disclosure Schedule, with respect to the Company or any Company Subsidiary, no
waivers of statutes of limitations have been given with respect to any Tax
returns and reports, which waivers are currently in effect, and no request for
any such waiver is currently pending. No requests for ruling or determination
letters or competent authority relief with respect to the Company or any Company
Subsidiary is pending with any taxing agency with respect to any Taxes. Section
3.15 of the Disclosure Schedule identifies all Tax returns of the Company or any
Company Subsidiary with respect to which an audit is in progress as of the date
hereof.
(c) Except as set forth on Section 3.15 of the Disclosure Schedule, no
material issues have been raised in writing (and are currently pending) by any
Governmental Authority in connection with any of the Tax returns and reports
referred to in Section 3.15(a), and all material deficiencies asserted or
assessments made as a result of any examination by a taxing authority of the Tax
returns and reports referred to in Section 3.15(a) have been paid in full.
(d) The Company has delivered to Parent true and complete copies of each of
the federal and state income Tax returns of the Company and Company
Subsidiaries, as well as tax depreciation and amortization schedules and
schedules of any tax carryforward items of the Company and Company Subsidiaries
set forth on Section 3.15 of the Disclosure Schedule.
(e) Except as set forth in Section 3.15 of the Disclosure Schedule, neither
the Company nor any Company Subsidiary has been a member of any affiliated group
(as defined in Section 1504(a) of the Code or as defined for applicable state,
local or foreign Tax purposes) that has filed or is required to file
consolidated or combined federal or state income Tax returns for any period.
(f) Except as set forth in Section 3.15 of the Disclosure Schedule, neither
the Company nor any Company Subsidiary has any liability for Taxes, whether
currently due or deferred, of any Person under Treasury Regulation Section
1.1502-6 (or any similar provision of state or local law). Except as set forth
in Section 3.15 of the Disclosure Schedule, there will be no tax sharing
agreement or tax indemnification agreement in effect on the Closing Date under
which the Company or any Company Subsidiary has liability for Taxes of any other
Person. All tax sharing agreements or tax indemnification agreements in effect
on the date hereof under which the Company or any Company Subsidiary has the
right to indemnification against any other Person for Taxes of the Company or
such Company Subsidiary shall remain in full force and effect on the Closing
Date.
(g) Neither the Company nor any Company Subsidiary will be required to
include any amount in its income or exclude any amount from its deductions in
any taxable period ending after the Closing Date by reason of a change in method
of accounting or use of the installment method of accounting in any period
ending on or prior to the Closing Date.
(h) Section 3.15(h) of the Disclosure Schedule sets forth each state and
locality with jurisdiction to impose any Tax on the property or business of the
Company and the Company Subsidiaries at any time prior to the Closing Date.
SECTION 3.16. CERTAIN CONTRACTS.
(a) Section 3.16 of the Disclosure Schedule lists the following agreements
or contracts, written or oral (collectively, with the Section 3.13 Leases and
the customer contracts with those customers referenced in Section 3.17, the
"Listed Contracts"), in effect as of the date of this Agreement to which the
Company or any Company Subsidiary is a party:
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(i) any commitment, contract or agreement (other than the Leases listed
on Section 3.13 of the Disclosure Schedule, the customer contracts listed on
Section 3.17 of the Disclosure Schedule and provider contracts), involving
aggregate payments by the Company or any Company Subsidiary for the six
months ended on the Balance Sheet Date of more than $500,000 and that is not
cancelable by the Company without liability within 60 days;
(ii) any lease of personal property involving any annual expense in
excess of $500,000 and not cancelable by the Company without liability
within 60 days;
(iii) any material joint venture agreement for a Company Active Entity;
(iv) any agreement with a hospital or provider, including a professional
corporation, involving payments by or to the Company or any Company
Subsidiary in the six months ended on the Balance Sheet Date in excess of
$2,500,000 and not cancelable by the Company without liability within 90
days;
(v) any note, loan, letter of credit, bond or contract relating to
indebtedness for borrowed money or capitalized leases, or other Contract in
respect of which the Company or any Company Subsidiaries are obligated in
any way after the date hereof to provide funds in respect of, or to
guarantee or assume, any debt, obligation or dividend of any Person, other
than intercompany indebtedness between the Company and a wholly-owned
Subsidiary;
(vi) any indemnity arrangement arising in connection with any sale or
disposition of assets for proceeds in excess of $1,000,000 wherein the
Company or any Company Subsidiary is the indemnitor;
(vii) any agreement containing covenants presently limiting, in any
material respect, the freedom of the Company, any Company Subsidiary or, to
the Company's Knowledge as of the date hereof, any Company Active Entity, to
compete with any person in any line of business or in any area or territory
(including exclusivity arrangements binding upon the Company or any Company
Subsidiary) or which contains a "most favored nations" provision or similar
provision affecting the pricing of customer contracts;
(viii) contracts for capital expenditures requiring payments by the
Company or any Company Subsidiary after the date hereof in excess of
$500,000 for any single project;
(ix) any "Administrative Services Only" contract relating to plans
(whether public or private) with more than 10,000 covered lives or any
risk-based customer contracts which provided in excess of $10 million in
annual revenue during fiscal year 1997; and
(x) any executory contracts of the Company or any Company Subsidiary for
the acquisition or disposition of assets or businesses for proceeds
individually in excess of $1,000,000.
(b) Except as set forth in Section 3.16(b) of the Disclosure Schedule,
neither the Company nor any Company Subsidiary is in material breach or
violation of, or material default under, any of the Listed Contracts. Except as
set forth on Section 3.16(b) of the Disclosure Schedule, each Listed Contract is
a valid agreement, arrangement or commitment of the Company or Company
Subsidiary which is a party thereto, enforceable against the Company or Company
Subsidiary in accordance with its terms and is a valid agreement, arrangement or
commitment of each other party thereto, enforceable against such party in
accordance with its terms, except in each case where enforceability may be
limited by bankruptcy, insolvency or other similar laws affecting creditors'
rights generally and the application of equitable principles or remedies.
SECTION 3.17. CUSTOMERS. Section 3.17 of the Disclosure Schedule contains a
complete and accurate list, as of the date of this Agreement, of the 30 largest
customers (together with the commencement and expiration date of the contract
with each such customer) of the Company and the Company Subsidiaries taken as a
whole in terms of revenues during the nine months ended on June 30, 1997, and
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certain other customers showing the approximate total sales by the Company and
the Company Subsidiaries to each such customer during such period. As of the
date hereof, neither the Company nor any Company Subsidiary has been notified by
any such customer that it intends to terminate its contract with the Company or
any Company Subsidiary or not renew any such contract or received any threat
that such customer may terminate or not renew its contract.
SECTION 3.18. UNDISCLOSED LIABILITIES. Neither the Company nor any Company
Subsidiary nor, to the Company's Knowledge as of the date hereof, any Company
Active Entity has any material liability or obligation of any kind or nature
(fixed or contingent) that is required to be reflected on a balance sheet or in
the financial footnotes thereto in accordance with GAAP except those (i)
reflected, reserved against or disclosed in the Company Financial Statements,
(ii) disclosed in Section 3.18 of the Disclosure Schedule, (iii) incurred in the
ordinary course of business since the Balance Sheet Date, or (iv) that would not
have a Material Adverse Effect.
SECTION 3.19. TRANSACTIONS WITH AFFILIATES. Except as disclosed in Section
3.19 of the Disclosure Schedule, no Company Stockholder, or director or officer
of the Company listed in the definition of "Knowledge" in Section 1.01 or any
entity (other than the Company) in which any such Person owns any beneficial
interest (other than a publicly held corporation whose stock is traded on a
national securities exchange or in the over-the-counter market and less than 1%
of the stock of which is beneficially owned by all such Persons) (collectively,
"Section 3.19 Affiliates") has any interest in: (i) any contract, arrangement or
understanding with, or relating to, the business or operations of the Company or
any Company Subsidiary or, to the Company's Knowledge as of the date hereof, any
Company Active Entity; (ii) any loan, arrangement, understanding, agreement or
contract for or relating to indebtedness of the Company or any Company
Subsidiary or, to the Company's Knowledge as of the date hereof, any Company
Active Entity; or (iii) any property (real, personal or mixed), tangible or
intangible, used in the business or operations of the Company or any Company
Subsidiary or, to the Company's Knowledge as of the date hereof, any Company
Active Entity; excluding any such contract, arrangement, understanding or
agreement constituting an Employee Plan or Compensation Arrangement. Following
the Closing, except for obligations set forth herein, neither the Company nor
any Company Subsidiary nor, to the Company's Knowledge as of the date hereof,
any Company Active Entity will have any obligations of any kind to any Section
3.19 Affiliate except for (i) accrued salary for the pay period commencing
immediately prior to the Closing Date and (ii) the obligations set forth in
Section 3.19 of the Company Disclosure Schedule.
SECTION 3.20. INSURANCE. Section 3.20 of the Disclosure Schedule sets forth
a true and correct list of all material liability insurance policies which are
in force and under which the Company or any Company Subsidiary is a named
insured or beneficiary. All such policies are (i) binding and effective upon the
issuers thereof in accordance with their respective terms and (ii) based solely
on the past claims experience of the Company and each Company Subsidiary,
reasonably likely to adequately cover any loss contingencies of a type covered
by such policies relating to occurrences on or prior to the Balance Sheet Date,
subject to any applicable reserves, deductibles, copayments or self retention
amounts.
SECTION 3.21. BROKERS. Except for Morgan Stanley & Co. Incorporated and
Kohlberg Kravis Roberts & Co. (the fees and expenses of each of which shall be
paid in full by the Company, and the amount of which has been disclosed to
Parent) no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company.
SECTION 3.22. RESTRICTED CASH. As of the date hereof, except as set forth on
Section 3.22 of the Disclosure Schedule, there are no regulatory or contractual
restrictions on the ability of the Company and any Company Subsidiaries to
freely transfer their respective cash and cash equivalents.
SECTION 3.23. SEC DOCUMENTS. As of their respective filing dates, none of
the documents filed by the Company with the Securities and Exchange Commission
since October 1, 1996 pursuant to Section 15(d) of the Exchange Act contained
any untrue statement of a material fact or omitted to state a material
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fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading, except to the extent corrected by any document subsequently filed by
the Company with the Securities and Exchange Commission.
SECTION 3.24. ACCOUNTS RECEIVABLE. Except as set forth in Section 3.24 of
the Disclosure Schedule, the accounts receivable of the Company reflected on the
Balance Sheet arose from bona fide transactions in the ordinary course of
business, have been recorded on a GAAP basis and are not subject to any
counterclaims or setoffs (except for the amount of any applicable existing
reserves for counterclaims or setoffs) and are fully collectable, except for any
allowances for doubtful accounts reflected on the Balance Sheet. The amount of
allowance for doubtful accounts on a GAAP basis in the Balance Sheet was
calculated consistent with past practice and is adequate.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth on the Parent Disclosure Schedule, each of Parent and
Merger Sub represents and warrants to the Company as follows:
SECTION 4.01. INCORPORATION AND AUTHORITY OF PARENT AND MERGER SUB. Each of
Parent and Merger Sub is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware and has all necessary
corporate power and authority to enter into this Agreement, to carry out its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by each of Parent and Merger Sub,
the performance by each of Parent and Merger Sub of its obligations hereunder
and the consummation by each of Parent and Merger Sub of the transactions
contemplated hereby have been duly authorized by all requisite corporate action
on the part of each of Parent and Merger Sub. This Agreement has been duly
executed and delivered by each of Parent and Merger Sub, and (assuming due
authorization, execution and delivery by Company) constitutes a legal, valid and
binding obligation of each of Parent and Merger Sub enforceable against it in
accordance with its terms, subject to the effect of any applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors'
rights generally and to the effect of general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or at
law).
SECTION 4.02. NO CONFLICT. Assuming all consents, approvals, authorizations
and other actions described in Section 4.03 have been obtained and all filings
and notifications listed on Section 4.03 of the Parent Disclosure Schedule, have
been made, and except as may result from any facts or circumstances relating
solely to the Company, the execution, delivery and performance of this Agreement
by each of Parent and Merger Sub does not and will not: (a) violate or conflict
with the Certificate of Incorporation or Bylaws of Parent or Merger Sub; (b)
conflict with or violate any Law or Governmental Order applicable to Parent or
its Subsidiaries; or (c) result in any breach of, or constitute a default (or
event which with the giving of notice or lapse of time, or both, would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of any Encumbrance on
any of the assets or properties of Parent pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument relating to such assets or properties to which Parent or any of its
Subsidiaries is a party or by which any of such assets or properties is bound or
affected, except, in the case of clauses (b) and (c), as would not, individually
or in the aggregate, have a material adverse effect on the ability of Parent or
Merger Sub to consummate the transactions contemplated by this Agreement.
SECTION 4.03. CONSENTS AND APPROVALS. No consent, approval, authorization,
license, order or permit of, or declaration, filing or registration with, or
notification to, any Governmental Authority or third party is required to be
made or obtained by Parent or any of its Subsidiaries in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby,
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except (a) as set forth on Section 4.03 of the Parent Disclosure Schedule, (b)
applicable requirements, if any of the DGCL, the Exchange Act, state securities
or blue sky laws and the HSR Act, (c) where failure to obtain such consent,
approval, authorization or action, or to make such filing or notification, would
not prevent or delay, Parent or Merger Sub from performing any of its material
obligations under this Agreement (including obtaining the financing contemplated
in the Commitment Letter), and (d) as may be necessary as a result of any facts
or circumstances relating solely to the Company.
SECTION 4.04. ABSENCE OF LITIGATION. As of the date of this Agreement (a)
there are no Actions pending against Parent or any of its Subsidiaries or any of
the assets or properties of Parent or any of its Subsidiaries that, individually
or in the aggregate, would prevent Parent from consummating the transactions
contemplated hereby and (b) Parent, its Subsidiaries and their respective assets
and properties are not subject to any order, judgment, injunction, decree,
stipulation or determination entered by or with any Governmental Authority that
would prevent Parent from consummating the transactions contemplated hereby.
SECTION 4.05. FINANCING. Parent has provided to the Company true and
complete copies of the commitment letter for the benefit of Parent (the
"Commitment Letter") relating to the Merger and the transactions contemplated
thereby. The financing outlined in the Commitment Letter is sufficient, assuming
funding of such amounts, to make the payments required under Article II with
respect to all outstanding shares of Common Stock and Company Options, to repay
the Bank Debt and the Senior Subordinated Notes and to pay all fees and expenses
to be paid by Parent in connection with the transactions contemplated hereby.
SECTION 4.06. OTHER TRANSACTIONS. Set forth on Section 4.06 of the Parent
Disclosure Schedule is a description of each executory contract, agreement,
commitment or other arrangement of Parent or any of its Subsidiaries to acquire
(by merger, consolidation or acquisition of stock or assets) any corporation,
partnership or other business organization or division thereof (other than as
contemplated by the Merger) which is in the business of providing managed
behavioral health care services within the United States, including managed
mental health programs, substance abuse programs and employee assistance
programs, for consideration in excess of $10,000,000.
SECTION 4.07. BROKERS. Except for Chase Securities Inc. and Smith Barney
Inc. (the fees and expenses of which shall be paid in full by Parent), no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of Parent or its
Affiliates.
ARTICLE V.
ADDITIONAL AGREEMENTS
SECTION 5.01. CONDUCT OF BUSINESS PRIOR TO THE CLOSING.
(a) Unless Parent otherwise agrees in writing and except as expressly
contemplated by this Agreement, between the date of this Agreement and the
Closing Date, the Company will, and will cause each Company Subsidiary to, and
will use reasonable efforts to cause each Company Active Entity with respect to
which the Company or any Company Subsidiary has a representative on the board of
directors or other managing body to, (i) conduct its business and operations
only in the ordinary course consistent with past practice; (ii) use commercially
reasonable best efforts, subject to the limitations set forth herein, to
preserve the current relationships of the Company and the Company Subsidiaries
with their respective customers, suppliers, distributors, officers and other key
employees and other Persons with which the Company and the Company Subsidiaries
have significant business relationships; (iii) use reasonable efforts to
maintain its assets and properties in good repair condition in all material
respects, normal wear and tear excepted; (iv) maintain its books, accounts and
records in the usual, regular and ordinary manner, on a GAAP basis consistently
applied; (v) keep in full force and effect insurance and bonds comparable in
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amount and scope of coverage to that currently maintained; (vi) deliver to
Parent, within fifteen (15) Business Days after the end of each calendar month,
an unaudited, consolidated balance sheet, statement of operations, statement of
stockholders' equity and cash flow statement for the Company for such month just
ended prepared on a GAAP basis, schedules showing the results of operations and
variances in revenue for each of the items set forth therein and within 45 days
after the end of each fiscal quarter, an unaudited, condensed balance sheet,
statement of operations, statement of stockholders' equity and cash flow
statement for the Company for such fiscal quarter just ended; and (vii) notify
Parent of any material Action commenced by or against the Company or any Company
Subsidiary or any Actions commenced or threatened which relate to the
transactions contemplated by this Agreement.
(b) Except as expressly provided in this Agreement or Section 5.01(b) of the
Disclosure Schedule, between the date of this Agreement and the Closing Date,
the Company will not, and shall cause the Company Subsidiaries not to, and will
use reasonable efforts, consistent with their fiduciary duties, to cause its
Company Active Entities not to, do any of the following without the prior
written consent of Parent:
(i) create any Encumbrance of any kind on any properties or assets
(whether tangible or intangible) of the Company or any Company Subsidiary,
other than (A) Permitted Encumbrances, (B) Encumbrances that will be
released at or prior to the Closing and (C) Encumbrances on assets having a
value not exceeding $250,000 in the aggregate;
(ii) except for transactions among the Company and Company Subsidiaries,
sell, assign, transfer, lease or otherwise dispose of or agree to sell,
assign, transfer, lease or otherwise dispose of any of the assets of the
Company or any Company Subsidiary having a value individually of more than
$500,000 or $1,000,000 in the aggregate;
(iii) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof or equity or other interest therein, other than in
connection with the transactions set forth in Section 5.01(b) of the
Disclosure Schedule and except for transactions with an individual fair
market value of less than $500,000 or $1,000,000 in the aggregate;
(iv) (A) increase the rate of compensation payable or to become payable
to any of its employees or agents, other than normal increases in the
ordinary course of business consistent with past practice to Persons
receiving cash compensation of less than $100,000 per annum; (B) pay or
provide for any bonus, profit sharing, deferred compensation, pension,
retirement or other similar payment or arrangement to or in respect of any
such employee or agent except to the extent the Company or the Company
Subsidiaries are, on the date hereof, contractually obligated to do so or
required to do so by Law ; and (C) enter into any new, or amend in any
material respect any existing employment, severance, or consulting
agreement, sales agency or other Contract with respect to the performance of
personal services, except (x) any such new agreement providing for cash
compensation of less than $100,000 per annum entered into in the ordinary
course of business, which such new agreements shall not provide for cash
compensation of more than $500,000 per annum in the aggregate; and (y) any
individuals hired on an at-will basis to replace current employees or to
service customer contracts which commence after the date hereof;
(v) change any method of accounting or accounting practice used by the
Company or any Company Subsidiary, other than such changes required by
changes in GAAP;
(vi) issue or sell any shares of the capital stock of, or other equity
interests in, the Company or any Company Subsidiary, or securities
convertible into or exchangeable for such shares or equity interests, or
issue or grant of any options, warrants, calls, subscription rights or other
rights of any kind to acquire additional shares of such capital stock, such
other equity interests, or such securities; except
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the issuance of Common Stock upon exercise of Company Options outstanding on
the date hereof or pursuant to other rights set forth on Section 3.03 of the
Disclosure Schedule;
(vii) amend the Company's or any Company Subsidiary's Certificate of
Incorporation or By laws or equivalent organizational documents;
(viii) take any action which would materially interfere with the
consummation of the transactions contemplated hereby, or make such
consummation more difficult or materially delay the consummation of such
transactions;
(ix) incur, guarantee or assume any indebtedness for borrowed money or
assume any reimbursement obligations relating to any letters of credit,
including borrowings under revolving credit agreements in existence on the
date hereof, including any renewals or extensions thereof, to finance
ordinary course working capital needs, provided that the amount of such
indebtedness outstanding at any time shall not exceed $15,000,000 in the
aggregate in excess of the amount outstanding as of the date hereof
(provided, however, that this limitation shall not restrict the Company and
its Subsidiaries from incurring indebtedness in order to pay the fees and
expenses relating to the transactions contemplated hereby, including the
fees and expenses referenced in Section 3.21);
(x) declare, set aside or pay any dividend or distribution or capital
return in respect of any shares of Common Stock, or redeem, purchase or
acquire any shares of Common Stock or other equity interests in the Company,
any Company Subsidiary or any Company Active Entity;
(xi) make any loans or advances to any Person, except for (x) travel
advances or for other routine business expenses incurred in the ordinary
course of business; (y) loans or advances made in connection with obtaining
or commencing new customer contracts not to exceed $1,000,000 outstanding at
any time in the aggregate; and (z) loans or advances made in the ordinary
course of business not to exceed $100,000 outstanding at any time in the
aggregate;
(xii) settle or compromise any Action for any amount in excess of
$250,000 or which involves a commitment that may have a Material Adverse
Effect;
(xiii) (A) enter into any new customer contract, excluding any customer
contract entered into in the ordinary course of business consistent with
past practices (and in the case of risk contracts, consistent with
reasonable and customary underwriting practices), provided such contract
does not have estimated annual revenues in excess of $10,000,000; provided,
further that the prohibition applicable to contracts in excess of
$10,000,000 shall not be applicable if the Company has received a written
opinion of the Company's outside legal counsel that such prohibition would
be reasonably likely to violate applicable Law (which opinion will be made
available to Parent); or (B) make any material amendment or modification to
those customer contracts which are Listed Contracts;
(xiv) make capital expenditures in excess of $500,000 individually or
$2,300,000 in the aggregate per month during the first three months
following the date hereof and $1,800,000 in the aggregate during each month
thereafter;
(xv) enter into any contract or agreement which would have been required
to be listed on Section 3.16 of the Disclosure Schedule as a result of
clauses (iii), (iv), (vi), (vii) or (x) of Section 3.16 had such contract or
agreement been entered into prior to the date hereof or make any material
amendments or modifications to the Listed Contracts that are set forth on
Section 3.16 of the Disclosure Schedule as a result of such clauses;
(xvi) enter into any new contract or agreement with a Section 3.19
Affiliate; or
(xvii) agree to take any of the actions specified in this Section 5.01(b).
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SECTION 5.02. PARENT ACTION PRIOR TO THE CLOSING.
(a) Between the date of this Agreement and the Closing Date, Parent shall
not, and shall cause its Subsidiaries not to, (a) take any action which would
materially interfere with the consummation of the transactions contemplated
hereby, or make such consummation more difficult or materially delay the
consummation of such transactions, or (b) except as set forth on Section 5.02 of
the Disclosure Schedule, solicit, initiate or continue any discussions or
negotiations with, or encourage or respond to any inquiries or proposals by, or
participate in any negotiations with or enter into any agreement or commitment
with, or provide or request any information from, or otherwise cooperate in any
way with, any Person, other than the Company and its officers, directors,
employees, agents and representatives, concerning any acquisition of assets,
contracts, securities, businesses or other property (whether by merger,
consolidation or otherwise) with an aggregate fair market value in excess of
$10,000,000 that relate to the business of providing managed behavioral health
care services in the United States, including managed mental health programs,
substance abuse programs and employee assistance programs.
(b) Parent shall notify the Company of any material Action commenced by or
against Parent or any Subsidiary thereof or any Actions commenced or threatened
which relate to the transactions contemplated by this Agreement.
(c) Parent shall use its best efforts to obtain the financing contemplated
by the Commitment Letter as promptly as practicable, including, without
limitation: (i) negotiating and executing definitive agreements for the
financing contemplated by the Commitment Letter; (ii) consummating the Green
Springs Transactions (as defined in the Commitment Letter); (iii) repurchasing
the necessary percentage of the 11-1/4% Senior Subordinated Notes of Parent and
the Senior Subordinated Notes, and amending the terms thereof upon the terms set
forth on Section 5.02(c) of the Parent Disclosure Schedule; and (iv) not taking,
or failing to take, any action that would result in any of the conditions to the
funding of such financing not being satisfied.
SECTION 5.03. ACCESS TO INFORMATION. Subject to the terms of the
Confidentiality Agreement, from the date of this Agreement until the Closing,
upon reasonable notice, the Company shall, and shall cause the officers,
employees, auditors and agents of the Company and each Company Subsidiary, to,
(i) afford the officers, employees and authorized agents and representatives of
Parent reasonable access, during normal business hours, to the offices,
properties, books and records of the Company and the Company Subsidiaries and
furnish Parent or its representatives copies of such documents and other
information as reasonably requested, including communications with any
Governmental Authority, and (ii) furnish to the officers, employees and
authorized agents and representatives of Parent such additional financial and
operating data and other information regarding the assets, properties, goodwill
and business of the Company and the Company Subsidiaries as Parent may from time
to time reasonably request in order to assist Parent in fulfilling its
obligations under this Agreement and to facilitate the consummation of the
transactions contemplated hereby, including such information as may be
reasonably requested by Parent in connection with obtaining the financing under
the Commitment Letter; provided, however, that (x) Parent shall not unreasonably
interfere with any of the businesses or operations of the Company, or any
Company Subsidiaries, and (y) the Company and each Company Subsidiary shall not
be obligated to provide information which, based upon the written advice of
Company counsel, would reasonably be likely violate applicable Law.
SECTION 5.04. CONFIDENTIALITY. The terms of the Confidentiality Agreement
are hereby incorporated herein by reference and shall continue in full force and
effect until the Closing, at which time such Confidentiality Agreement and the
obligations of the Parties hereto under this Section 5.04 shall terminate.
SECTION 5.05. EFFORTS; REGULATORY AND OTHER AUTHORIZATIONS; CONSENTS.
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(a) Each party hereto shall use its best efforts to (i) take, or cause to be
taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to promptly
consummate and make effective the transactions contemplated by this Agreement
(including, in the case of Parent, obtaining the financing necessary to
consummate the transactions contemplated hereby), (ii) obtain all
authorizations, consents, orders and approvals of, and give all notices to and
make all filings with, all Governmental Authorities and other third parties that
may be or become necessary for its execution and delivery of, and the
performance of its obligations pursuant to, this Agreement including, without
limitation, those consents set forth in the Disclosure Schedule, (iii) lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties hereto to consummate the transactions contemplated
hereby, and (iv) fulfill all conditions to this Agreement. Each party will
cooperate fully with the other party in promptly seeking to obtain all such
authorizations, consents, orders and approvals, giving such notices, and making
such filings. In connection with obtaining such consents from third parties,
neither party shall be required to make payments, commence litigation or agree
to modifications of the terms of any agreements with such third parties (other
than payments and modifications which individually, and in the aggregate, would
not have a Material Adverse Effect), and (except for modifications which
individually, and in the aggregate, would not have a Material Adverse Effect) no
such modification shall be made to any contract of the Company or any Company
Subsidiary without the consent of Parent, which consent shall not be
unreasonably withheld. The parties hereto agree not to take any action that will
have the effect of unreasonably delaying, impairing or impeding the receipt of
any required authorizations, consents, orders or approvals. The Company shall
cooperate with Parent in connection with effecting a tender offer for the Senior
Subordinated Notes.
(b) In furtherance and not in limitation of the foregoing, each party hereto
agrees to make an appropriate filing of a Notification and Report Form pursuant
to the HSR Act with respect to the transactions contemplated hereby within ten
Business Days of the date hereof and to supply promptly any additional
information and documentary material that may be requested pursuant to the HSR
Act and cooperate in connection with any filing under applicable Antitrust Laws
and in connection with resolving any investigation or other inquiry concerning
the transactions contemplated by this Agreement commenced by any of the Federal
Trade Commission, the Antitrust Division of the Department of Justice or state
attorneys general. In addition, Parent shall use its best efforts to resolve
such objections, if any, as may be asserted with respect to the transactions
contemplated hereby under any antitrust or trade regulatory laws of any
Governmental Authority ("Antitrust Laws"). It is further agreed that in
connection with resolving such objections, Parent, the Company and their
respective Affiliates, as determined by Parent, will, not withstanding any
provision of this Agreement, if necessary, divest or hold separate (i) customer
contracts ("Disposed Contracts") which in the aggregate represent annual gross
revenues in an amount (the "Annual Gross Revenue Amount") not to exceed
$45,000,000, as determined below, and (ii) any interest of Parent, the Company
or their respective Affiliates in the TennCare Partners Program implemented by
the State of Tennessee, including without limitation any interest in the
behavioral health organizations participating in the TennCare Partners Program
or in the customer contract held by such behavioral health organization. Annual
Gross Revenue Amounts shall, (x) exclude gross revenues with respect to
contracts referred to in clause (ii) above and with respect to Disposed
Contracts for which Parent, the Company or the relevant Affiliate shall have
received a notice of nonrenewal or termination from the customer prior to the
date of receipt of objections, (y) with respect to Disposed Contracts that have
been in force for at least twelve months, be the product of the gross revenues
generated during the immediately preceding twelve-month period multiplied by
Parent's, the Company's or the relevant Affiliate's direct or indirect
percentage interest in such contract, and (z) with respect to Disposed Contracts
that have been in force for less than twelve months, be the product of the gross
revenues generated during the time the contract has been in force annualized,
multiplied by Parent's, the Company's or the relevant Affiliate's direct or
indirect percentage interest in such contract. To the extent the Annual Gross
Revenue Amount for Disposed Contracts does not exceed $25,000,000 (the
"Threshold Amount"), no adjustment will be made to the Aggregate Cash
Consideration. To the extent the Annual Gross
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Revenue Amount for Disposed Contracts exceeds the Threshold Amount (such excess,
the "Excess Amount", which shall in no event be greater than $20,000,000), the
Aggregate Cash Consideration shall be reduced by an amount equal to (A) .8
multiplied by the Excess Amount, less (B) an amount equal to (a) the fraction
equal to the Excess Amount, divided by the Annual Gross Revenue Amount,
multiplied by (b) an amount equal to the proceeds received in connection with
the divestiture or other transfer of the Disposed Contracts. In no event shall
Parent or the Company be required to breach any customer contract in connection
with this provision. If any suit is instituted challenging any of the
transactions contemplated hereby as violative of any Antitrust Law, Parent and
the Company shall each cooperate to contest and resist any such action or
proceeding, and to have vacated, lifted, reversed or overturned any decree,
judgment, injunction or other order (whether temporary, preliminary or
permanent) that is in effect and that restricts, prevents or prohibits
consummation of the transactions contemplated by this Agreement, including,
without limitation, by pursuing all reasonable avenues of administrative and
judicial appeal.
(c) Either party hereto shall promptly inform the other of any material
communication from the Federal Trade Commission, the Department of Justice or
any other Governmental Authority regarding any of the transactions contemplated
hereby. If either party or any Affiliate thereof receives a request for
additional information or documentary material from any such Governmental
Authority with respect to the transactions contemplated hereby, then such party
will endeavor in good faith to make, or cause to be made, as soon as reasonably
practicable and after consultation with the other party, an appropriate response
in substantial compliance with such request. The Company and Parent will consult
and cooperate with one another, and will consider in good faith the views of one
another in connection with any analyses, appearances, presentations, memoranda,
briefs, and other similar items and proposals made or submitted by or on behalf
of any party hereto in connection with proceedings under or relating to any
proceedings with any Governmental Authority. Parent will consult with the
Company in advance and provide the Company with the opportunity to participate
in any discussion in respect of any understanding, undertaking, or agreement
which Parent proposes to make or enter into with the Federal Trade Commission,
the Department of Justice or any other Governmental Authority in connection with
the transactions contemplated hereby.
SECTION 5.06. FURTHER ACTION. Subject to the terms and conditions herein
provided, each of the parties hereto covenants and agrees to use its best
efforts to deliver or cause to be delivered such documents and other papers and
to take or cause to be taken such further actions as may be necessary, proper or
advisable under applicable Laws to consummate and make effective the
transactions contemplated hereby.
SECTION 5.07. NO SOLICITATION. From the date hereof through the Closing or
the earlier termination of this Agreement in accordance with its terms, each of
the Company, its Subsidiaries and Affiliates and their respective officers,
directors, employees, agents and representatives shall not, directly or
indirectly, enter into, solicit, initiate or continue any discussions or
negotiations with, or encourage or respond to any inquiries or proposals by, or
participate in any negotiations with, or provide any information to, or
otherwise cooperate in any other way with, any corporation, partnership, person
or other entity or group, other than Parent and its officers, directors,
employee, agents and representatives, concerning any sale of the Company or all
or a substantial portion of its assets, the Business or any merger,
consolidation, liquidation, dissolution or similar transaction involving the
Company or any of its Subsidiaries. The Company will promptly notify Parent if
after the date hereof, it (or any Company Subsidiary) receives any such inquiry
or proposal or offer to discuss or negotiate any such transaction
SECTION 5.08. NOTIFICATION OF CERTAIN MATTERS. Each of the Company and
Parent shall give prompt written notice to the other party of the occurrence, or
non-occurrence, of any events the occurrence, or non-occurrence of which would
cause either (i) a representation or warranty contained in this Agreement to be
untrue or inaccurate in any material respect at any time from the date hereof to
the Effective Time, or (ii) any of the conditions set forth in Article VII to be
unsatisfied in any material respect at any time from the date hereof to the
Effective Time; provided that the parties hereto need not give notice with
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respect to events that are reported in the financial or general interest
newspapers that do not specifically relate to the Company or Parent and their
respective businesses. Nothing in this Section 5.08 shall affect any
representation or warranty made by the parties herein.
SECTION 5.09. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
(a) From and after the Effective Time, Parent agrees that it will, and will
cause the Company to, indemnify and hold harmless each present and former
director and officer (the "Indemnified Parties"), against any costs or expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities or amounts paid in settlement incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the fullest extent that the
Company would have been permitted under Delaware law and its Certificate of
Incorporation or bylaws in effect on the date hereof to indemnify such
Indemnified Party (and Parent and the Company shall also advance expenses as
incurred to the fullest extent permitted under applicable Law, provided the
Indemnified Party to whom expenses are advanced provides an undertaking to repay
such advances if it is ultimately determined that such Indemnified Party is not
entitled to indemnification).
(b) For a period of six years after the Effective Time, Parent shall
maintain or shall cause the Company to maintain (to the extent available in the
market) in effect a directors' and officers' liability insurance policy covering
those persons who are currently covered by the Company's directors' and
officers' liability insurance policy (copies of which have been heretofore
delivered by the Company to Parent) with coverage in amount and scope at least
as favorable as the Company's existing coverage; provided that in no event shall
Parent or the Company be required to expend in the aggregate in excess of
200% of the annual premium currently paid by the Company for such coverage; and
if such premium would at any time exceed 200% of the such amount, then Parent or
the Company shall maintain insurance policies which provide the maximum and best
coverage available at an annual premium equal to 200% of such amount.
(c) The provisions of this Section 5.09 are intended to be in addition to
the rights otherwise available to the current officers and directors of the
Company by Law, charter, bylaw or agreement, and shall operate for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and their representatives.
SECTION 5.10. REPAYMENT OF BANK DEBT AND SENIOR SUBORDINATED NOTES. Parent
agrees to cause the Company to, and provide the Company with sufficient funds
to, (i) at the Effective Time repay all amounts outstanding under that certain
Credit Agreement, as amended, among the Company, various lending institutions
and The Chase Manhattan Bank, N.A. dated as of October 6, 1995 (the "Bank Debt")
in the manner required by such agreement, and (ii) perform the Company's
obligations set forth in Section 4.15 (Change of Control) of that certain
Indenture dated as of November 22, 1995 between the Company and Marine Midland
Bank, as Trustee with respect to the Company's $100,000,000 11-1/2% Senior
Subordinated Notes (the "Senior Subordinated Notes").
ARTICLE VI.
EMPLOYEE MATTERS
Section 6.01. EMPLOYEE BENEFITS.
(a) Parent shall or shall cause the Company to maintain in effect employee
benefit plans and arrangements which provide benefits which have a value which
is substantially comparable, in the aggregate, to the benefits provided by the
benefit plans and arrangements of the Company and Company Subsidiaries
immediately prior to the Effective Time (not taking into account the value of
any benefits
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under any such plans or arrangements which are equity based) for a period of one
year after the Effective Time.
(b) For purposes of determining eligibility to participate, vesting,
entitlement to benefits and in all other respects where length of service is
relevant under any employee benefit plan or arrangement of Parent or the Company
(including for severance but not for pension benefit accruals to the extent not
permitted by Law), employees of the Company or any Company Subsidiaries employed
as of the Effective Time shall receive service credit for service with the
Company or any Company Subsidiaries to the same extent such service was credited
under the benefit plans and arrangements of the Company and Company Subsidiaries
immediately prior to the Effective Time.
SECTION 6.02. SEVERANCE ARRANGEMENTS.
Parent shall require the Company to (i) honor the terms of the severance
agreement included in the Non-Competition Agreements entered into between the
Company and each of Messrs. Waxman, Halper, Lenahan and Budnick as of the date
hereof; (ii) honor the terms of the severance agreements entered into prior to
the date hereof with the employees of the Company and the Company Subsidiaries
identified in Section 3.14(i) of the Disclosure Schedule; and (iii) subject to
the approval by the Company's stockholders under Code Section 280G(b)(5)(A)(ii),
maintain the Company severance policy, to be adopted as of the Effective Time,
the terms of which are set forth in Section 3.14(a) of the Disclosure Schedule.
ARTICLE VII.
CONDITIONS TO CLOSING
SECTION 7.01. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of
the Company to consummate the transactions contemplated by this Agreement shall
be subject to the fulfillment or waiver, at or prior to the Closing, of each of
the following conditions:
(a) REPRESENTATIONS AND WARRANTIES; COVENANTS. (i) The representations
and warranties of Parent and Merger Sub contained in this Agreement shall be
true and correct as of the Closing, with the same force and effect as if
made as of the Closing (or, in the case of representations and warranties of
Parent and Merger Sub which address matters only as of a particular date, as
of such date), except where the failure to be so true and correct would not
have a material adverse effect on the ability of Parent and Merger Sub to
perform its obligations hereunder; (ii) the covenants and agreements
contained in this Agreement to be complied with by Parent and Merger Sub at
or prior to the Closing, shall have been complied with in all material
respects; and (iii) the Company shall have received a certificate of Parent
as to the matters set forth in clauses (i) and (ii) above signed by a duly
authorized officer of Parent;
(b) NO ORDER. No Governmental Authority shall have enacted, issued,
promulgated, enforced or entered any Governmental Order which is in effect
and has the effect of making the transactions contemplated by this Agreement
illegal or otherwise prohibiting consummation of such transactions:
provided, however, that the provisions of this Section 7.01(b) shall not
apply if the Company has directly or indirectly solicited or encouraged any
such action;
(c) HSR ACT. The applicable waiting period under the HSR Act shall have
expired or been terminated; and
(d) APPROVALS. All consents and approvals of Governmental Authorities
necessary for consummation of the transactions contemplated hereby shall
have been obtained.
SECTION 7.02. CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB. The
obligations of Parent and Merger Sub to consummate the transactions contemplated
by this Agreement shall be subject to the fulfillment or waiver, at or prior to
the Closing, of each of the following conditions:
29
<PAGE>
(a) REPRESENTATIONS AND WARRANTIES; COVENANTS. (i) The representations
and warranties of the Company contained in this Agreement shall be true and
correct as of the Closing, with the same force and effect as if made as of
the Closing (or, in the case of representations and warranties of the
Company which address matters only as of a particular date, as of such
date), except where the failure to be so true and correct would not have a
Material Adverse Effect; (ii) the covenants and agreements contained in this
Agreement to be complied with by the Company at or prior to the Closing
shall have been complied with in all material respects; and (iii) Parent
shall have received a certificate of the Company as to the matters set forth
in clauses (i) and (ii) above signed by a duly authorized officer of the
Company;
(b) NO ORDER. No Governmental Authority shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, injunction
or other Governmental Order which is in effect and has the effect of making
the transactions contemplated by this Agreement illegal or otherwise
prohibiting consummation of such transactions; provided, however, that the
provisions of this Section 7.02(b) shall not apply if Parent or Merger Sub
has directly or indirectly solicited or encouraged any such action;
(c) HSR ACT. The applicable waiting period under the HSR Act shall have
expired or been terminated;
(d) MATERIAL ADVERSE EFFECT. Since the date of this Agreement there has
not been any Material Adverse Effect;
(e) APPROVALS. All consents and approvals of Governmental Authorities
necessary for consummation of the transactions contemplated hereby shall
have been obtained;
(f) COMMITMENT LETTER. Parent and/or Merger Sub shall have obtained the
financing set forth in the Commitment Letter on the terms set forth in such
Commitment Letter or other terms reasonably acceptable to Parent, and such
financing shall have been funded on such terms; provided, however, that this
condition shall be deemed satisfied if the financing shall not have been
obtained or funded directly or primarily due to the nonconsummation of the
"Green Springs Transactions" (as defined in the Commitment Letter);
(g) TERMINATION OF CERTAIN AGREEMENTS. Each of the agreements listed in
Exhibit 7.02(g) shall have been terminated without cost or liability to the
Company, Parent or Merger Sub, and shall be of no further force or legal
effect;
(h) STOCKHOLDER SUPPORT AGREEMENTS. Each of the Company Stockholders
shall be in compliance with the Stockholder Support Agreement as of the
Closing;
(i) LOAN REPAYMENTS. The loans made by the Company to certain of its
officers in connection with their purchase of Common Stock shall be repaid
in full at the Effective Time either by delivery of funds or offset against
the total Cash Consideration due such officers pursuant to this Agreement;
(j) GOVERNMENTAL ACTIONS. There shall not be any pending litigation or
administrative proceeding brought by a Governmental Authority against Parent
or the Company relative to the Merger that would reasonably likely result in
a material adverse effect on the operations, business, financial conditions
or results of operations of Parent and the Company and their respective
Subsidiaries, taken as a whole; and
(k) RESIGNATIONS. Prior to the Effective Time, each member of the Board
of Directors of the Company immediately prior to the Effective Time shall
have executed letters of resignation which shall become effective as of the
Effective Time.
30
<PAGE>
ARTICLE VIII.
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. TERMINATION. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Closing:
(a) by the mutual written consent of the Company and Parent;
(b) by either the Company or Parent, if any Governmental Authority with
jurisdiction over such matters shall have issued a Governmental Order
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and unappealable;
provided, however, that the provisions of this Section 8.01(b) shall not be
available to any party unless such party shall have used best efforts
(consistent with the terms hereof) to oppose any such Governmental Order or
to have such Governmental Order vacated or made inapplicable to the
transactions contemplated by this Agreement;
(c) by Parent, if the Closing shall not have occurred prior to the date
five months after the date of this Agreement; provided, however, that Parent
shall not have the right to terminate this Agreement under this Section
8.01(c) if Parent's failure to fulfill any obligation under this Agreement
shall have been the cause of, or shall have resulted in, the failure of the
Closing to occur prior to the applicable date; or
(d) by the Company, if the Closing shall not have occurred prior to the
date five months after the date of this Agreement; provided, however, that
the Company shall not have the right to terminate this Agreement under this
Section 8.01(d) if the Company's failure to fulfill any obligation under
this Agreement shall have been the cause of, or shall have resulted in, the
failure of the Closing to occur prior to the applicable date.
SECTION 8.02. EFFECT OF TERMINATION. In the event of termination of this
Agreement and abandonment of the Merger as provided in Section 8.01, this
Agreement shall forthwith become void and there shall be no liability on the
part of any party hereto except (a) as set forth in Section 5.04 and Section
9.02 and (b) that nothing herein shall relieve either party from liability for
any willful breach hereof.
SECTION 8.03. WAIVER. At any time prior to the Closing, either party hereto
may (a) extend the time for the performance of any of the obligations or other
acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto, or (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid only if
set forth in an instrument in writing signed by the party to be bound thereby.
ARTICLE IX.
GENERAL PROVISIONS
SECTION 9.01. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. None of the representations, warranties and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for the agreements contained in Article II,
Section 5.09, Section 5.10, Article VI and Article IX and any other agreement
which contemplates performance after the Effective Time.
SECTION 9.02. EXPENSES. All costs and expenses, including, without
limitation, fees and disbursements of counsel, financial advisors and
accountants, incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such costs and
expenses, whether or not the Closing shall have occurred.
31
<PAGE>
SECTION 9.03. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the following addresses (or at such other address for a
party as shall be specified in a notice given in accordance with this Section
9.03):
(a) if to the Company:
Merit Behavioral Care Corporation
One Maynard Drive
Park Ridge, New Jersey 07656
Telecopier: (201) 391-2411
Attention: Chairman and Chief Executive Officer
with copies to:
Latham & Watkins
75 Willow Road
Menlo Park, California 94002
Telecopier: (650) 463-2600
Attention: Peter F. Kerman
(b) if to Parent or Merger Sub:
Magellan Health Services, Inc.
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Telecopier: (404) 814-2720
Attention: Chief Executive Officer and President
with a copy to:
Dow, Lohnes & Albertson, PLLC
One Ravinia Drive
Suite 1600
Atlanta, Georgia 30346
Telecopier: (770) 901-8800
Attention: J. Eric Dahlgren
SECTION 9.04. PUBLIC ANNOUNCEMENTS. Unless otherwise required by applicable
Law or stock exchange requirements, no party to this Agreement shall make any
public announcements in respect of this Agreement or the transactions
contemplated hereby or otherwise communicate with any news media without the
prior written consent of the other party (which consent shall not be
unreasonably withheld). If a public statement is required to be made pursuant to
the foregoing sentence, the parties shall consult with each other, to the extent
reasonably practicable, in advance as to the contents and timing thereof.
SECTION 9.05. HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 9.06. SEVERABILITY. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
32
<PAGE>
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that the
transactions contemplated hereby be consummated as originally contemplated to
the greatest extent possible.
SECTION 9.07. ENTIRE AGREEMENT. This Agreement (including the Disclosure
Schedule hereto) and the Confidentiality Agreement constitute the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and undertakings, both written and oral, among
the Company, Parent and Merger Sub with respect to the subject matter hereof and
except as otherwise expressly provided herein.
SECTION 9.08. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
SECTION 9.09. NO THIRD PARTY BENEFICIARIES. Except as specifically provided
in Section 5.09 (and solely with respect to parties indemnified thereunder),
this Agreement is for the sole benefit of the parties hereto and their permitted
assigns and nothing herein, express or implied, is intended to or shall confer
upon any other person or entity any legal or equitable right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement.
SECTION 9.10. WAIVERS AND AMENDMENTS. This Agreement may be amended or
modified, and the terms and conditions hereof may be waived, only by a written
instrument signed by the parties hereto or, in the case of a waiver, by the
party waiving compliance. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party of any right, power or privilege hereunder,
nor any single or partial exercise of any other right, power or privilege
hereunder, preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder. The rights and remedies herein
provided are cumulative and are not exclusive of any rights or remedies which
any party may otherwise have at Law or in equity.
SECTION 9.11. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement
required to be performed prior to the Closing was not performed in accordance
with the terms hereof and that, prior to the Closing, the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at Law or in equity.
SECTION 9.12. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York applicable to
contracts executed in and to be performed in that State. All actions and
proceedings arising out of or relating to this Agreement shall be heard and
determined in a New York state or federal court sitting in the City of New York,
and the parties hereto hereby irrevocable submit to the exclusive jurisdiction
of such courts in any such action or proceeding and irrevocably waive the
defense of an inconvenient forum to the maintenance of any such action or
proceeding.
SECTION 9.13. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original, but all of which taken
together shall constitute one and the same agreement.
33
<PAGE>
IN WITNESS WHEREOF, the Company, Parent and Merger Sub have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
MERIT BEHAVIORAL CARE CORPORATION
BY: ALBERT S. WAXMAN__________________
NAME: ALBERT S. WAXMAN________________
TITLE: CHAIRMAN & CEO_________________
MAGELLAN HEALTH SERVICES, INC.
BY: CRAIG MCKNIGHT____________________
NAME: CRAIG MCKNIGHT__________________
TITLE: EXECUTIVE VICE PRESIDENT &
CFO___________________________________
MBC MERGER CORPORATION
BY: CRAIG MCKNIGHT____________________
NAME: CRAIG MCKNIGHT__________________
TITLE: EXECUTIVE VICE PRESIDENT &
CFO___________________________________
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOUND ON PAGES 1, 2, AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 170,459,000
<SECURITIES> 0
<RECEIVABLES> 140,219,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 345,116,000
<PP&E> 159,103,000
<DEPRECIATION> 41,169,000
<TOTAL-ASSETS> 897,114,000
<CURRENT-LIABILITIES> 233,693,000
<BONDS> 391,550,000
0
0
<COMMON> 8,387,000
<OTHER-SE> 143,475,000
<TOTAL-LIABILITY-AND-EQUITY> 897,114,000
<SALES> 216,097,000
<TOTAL-REVENUES> 216,097,000
<CGS> 0
<TOTAL-COSTS> 175,621,000
<OTHER-EXPENSES> 14,498,000
<LOSS-PROVISION> 1,070,000
<INTEREST-EXPENSE> 7,401,000
<INCOME-PRETAX> 17,507,000
<INCOME-TAX> 7,003,000
<INCOME-CONTINUING> 7,628,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,628,000
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
