UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: June 30, 1998 Commission File Number: 1-8147
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MEDIQ Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 51-0219413
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
One MEDIQ Plaza, Pennsauken, New Jersey 08110
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 662-3200
--------------
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
--- ---
As of August 7, 1998, there were 1,000,000 shares of Common Stock, par value
$.01 per share, outstanding.
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1998
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations-
Three and Nine Months Ended June 30, 1998 and 1997
(Unaudited) 4
Condensed Consolidated Balance Sheets-
June 30, 1998 (Unaudited) and
September 30, 1997 5
Condensed Consolidated Statements of Cash Flows-
Nine Months Ended June 30, 1998 and 1997
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15-22
Item 3. Quantitative and Qualitative Disclosure about Market Risk. 22
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K. 24-25
2
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
3
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 33,706 $ 31,148 $ 103,700 $ 94,341
Sales 6,692 5,327 20,671 14,785
Other 2,543 3,150 7,549 8,548
--------- --------- --------- ---------
42,941 39,625 131,920 117,674
Costs and Expenses:
Cost of sales 5,455 4,261 16,725 12,020
Operating 14,415 11,263 42,864 33,491
Selling 3,912 3,152 11,469 9,722
General and administrative 5,186 5,803 14,534 15,837
Non-recurring merger costs 34,204 -- 34,567 --
Depreciation and amortization 15,064 7,365 31,650 22,096
--------- --------- --------- ---------
78,236 31,844 151,809 93,166
--------- --------- --------- ---------
Operating Income (Loss) (35,295) 7,781 (19,889) 24,508
Other (Charges) Credits:
Interest expense (7,098) (3,283) (14,333) (15,205)
Equity participation - repurchase of MEDIQ/PRN warrants -- -- -- (11,047)
Gain on sale and market appreciation of Cardinal Health stock -- -- -- 9,213
Gain on NutraMax note receivable -- 565 -- 1,760
Other - net 235 (302) 714 842
--------- --------- --------- ---------
Income (Loss) from Continuing Operations before
Income Taxes and Extraordinary Item (42,158) 4,761 (33,508) 10,071
Income Tax Expense (Benefit) (15,632) 2,200 (11,744) 8,644
--------- --------- --------- ---------
Income (Loss) before Discontinued operations and
Extraordinary Item (26,526) 2,561 (21,764) 1,427
Discontinued Operations (net of taxes) -- (1,092) -- 36,083
Extraordinary Item - EarLy Retirement of Debt (net of taxes) (4,098) (76) (4,098) (7,002)
--------- --------- --------- ---------
Net Income (Loss) (30,624) 1,393 (25,862) 30,508
Dividends on Preferred Stock (1,600) -- (1,600) --
--------- --------- --------- ---------
Net Income (Loss) Available for Common Shareholders $ (32,224) $ 1,393 $ (27,462) $ 30,508
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, Sept. 30,
1998 1997
---------- ----------
(Unaudited) (See Note)
Assets
<S> <C> <C>
Current Assets:
Cash $ 9,203 $ 3,639
Accounts receivable - net 52,315 39,686
Inventories 18,316 13,047
Deferred income taxes 3,202 6,967
Income taxes receivable -- 4,917
Other current assets 1,077 1,495
---------- ----------
Total Current Assets 84,113 69,751
Property, plant and equipment - net 112,706 113,589
Goodwill - net 89,570 57,056
Deferred financing fees 20,095 7,344
Other assets 12,250 9,812
---------- ----------
Total Assets $ 318,734 $ 257,552
========== ==========
Liabilities and Stockholders' Eguity (Deficiency)
Current Liabilities:
Accounts payable $ 16,260 $ 8,793
Accrued expenses 19,395 23,578
Current portion of Long-term debt 1,611 7,648
---------- ----------
Total Current Liabilities 37,266 40,019
Senior debt 275,419 128,131
Subordinated debt 200,055 10,055
Deferred income taxes and other Liabilities 11,913 30,744
Mandatorily Redeemable Preferred Stock:
Series A preferred stock 79,127 --
Series C preferred stock 30,355 --
Stockholders' Equity (Deficiency) (315,401) 48,603
---------- ----------
Total Liabilities and Stockholders' Equity (Deficiency) $ 318,734 $ 257,552
========== ==========
</TABLE>
Note: The balance sheet at September 30, 1997 has been condensed from the
audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (Loss) $ (25,862) $ 30,508
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Income from discontinued operations -- (36,083)
Gain on sale of Cardinal shares -- (9,213)
Equity participation - repurchase of MEDIQ/PRN warrants -- 11,047
Other - net 23,943 1,046
--------- ---------
Net cash used in operating activities (1,919) (2,695)
Cash Flows from Investing Activities:
Acquisitions (11,032) --
Proceeds from sale of discontinued operations -- 124,995
Purchase of equipment (17,909) (11,589)
Collections on note receivable 2,250 --
Repurchase of MEDIQ/PRN warrants -- (12,500)
Other 654 (2,448)
--------- ---------
Net cash provided by (used in) investing activities (26,037) 98,458
Cash Flows from Financing Activities:
Repurchase of common and preferred stock (377,416) --
Issuance of subordinated notes 190,000 --
Borrowings 151,499 214,000
Debt repayments (133,872) (302,228)
issuance of Series A preferred stock 78,235 --
Issuance of units 75,000 --
issuance of Series B preferred stock 30,000 --
Issuance of Series C preferred stock 30,000 --
Issuance of common stock 10,000 --
Deferred financing fees (20,056) (8,874)
Exercise of stock options 130 272
--------- ---------
Net cash provided by (used in) financing activities 33,520 (96,830)
--------- ---------
Increase (decrease) in cash 5,564 (1,067)
Cash:
Beginning balance 3,639 3,219
--------- ---------
Ending balance $ 9,203 $ 2,152
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 11,005 $ 16,760
========= =========
Income taxes paid (refunded) $ (2,788) $ 5,056
========= =========
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of CH MedicaL, Inc. with term loans $ (48,501) --
========= =========
Conversion of 7.25% subordinated debentures into common stock $ -- $ 6,251
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of June 30, 1998 and the condensed
consolidated statements of operations and cash flows for the nine months ended
June 30, 1998 and 1997 have been prepared by the Company, without audit. In the
opinion of management, all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at June 30, 1998 and for all periods presented have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's September 30, 1997 Annual Report on Form 10-K.
The results of operations for the period ended June 30, 1998 are not necessarily
indicative of the operating results for the full year.
Reclassification of Accounts - Certain reclassifications have been made to
conform prior year balances to the current year presentation.
Note B - Inventories
Inventories, which consist primarily of disposable products and repair parts for
rental equipment, are stated at the lower of cost (first-in, first-out method)
or market.
Note C - The Merger
On May 29, 1998, pursuant to the terms of an Agreement and Plan of Merger dated
January 14, 1998 and amended April 27, 1998 (the "Merger Agreement") between
MEDIQ Incorporated (the "Company") and MQ Acquisition Corporation ("MQ"), MQ was
merged into the Company (the "Merger") with the Company continuing as the
surviving corporation (the "Surviving Corporation"). MQ was a Delaware
corporation organized by Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS") and
certain other investors solely to effect the Merger. In the Merger, holders of
the Company's outstanding common stock, par value $1.00 per share, and preferred
stock, par value $.50 per share, immediately prior to the Merger received, in
exchange for each outstanding share of common stock or preferred stock (except
for shares held directly or indirectly by the Company or MQ, the Rolled Shares
(as defined below) and dissenting shares), $13.75 in cash and 0.075 of a share
of a newly created Series A 13% Cumulative Compounding Preferred Stock, par
value $.01 per share (the "Series A Preferred Stock"), of the Surviving
Corporation. The Series A Preferred Stock has a liquidation preference of $10.00
per share.
The aggregate consideration paid in connection with the Merger was approximately
$390.7 million, which amount includes $20.0 million of Series A Preferred Stock.
In addition, in connection with the Merger (i) certain controlling stockholders
of the Company (the "Rotko Entities") converted a portion of their preferred
equity (the "Rolled Shares") in the Company into 1,340,219 shares of Series B
13.25% Cumulative Compounding Perpetual Preferred Stock, par value $.01 per
share
7
<PAGE>
Note C - The Merger (Continued)
("Series B Preferred Stock") and 109,781 shares of Common Stock, par value $.01
per share ("Common Stock"), of the Surviving Corporation, (ii) Thomas E.
Carroll, Jay M. Kaplan and certain other persons selected by the Company and BRS
(the "Management Stockholders") invested approximately $4.2 million in common
and preferred equity of the Company, and (iii) BRS, certain entities and
individuals affiliated with BRS (together with BRS, the "BRS Entities") and
certain funds affiliated with Ferrer Freeman Thompson & Co. LLC and Galen
Partners III, L.P. (the "Co-Investors") purchased $109.5 million of common and
preferred equity of MQ (the "Equity Contribution"). The transaction has been
accounted for as a recapitalization.
In connection with the Merger, (i) the Company contributed certain of its assets
and liabilities (including the capital stock of all of the subsidiaries of the
Company other than MEDIQ/PRN Life Support Services, Inc. ("MEDIQ/PRN") to
MEDIQ/PRN (the "Reorganization"), (ii) MEDIQ/PRN entered into a new Senior
Secured Credit Facility (the "New Credit Facility") with a syndicate of banks
("Senior Lenders"), (iii) all indebtedness of the Company except approximately
$10.1 million of the Company's 7.5% exchangeable subordinated debentures due
2003 (the "Exchangeable Debentures") and $2.0 million of MEDIQ/PRN's capital
leases were repaid (the "Refinancing"), (iv) the Company sold 140,885 units
("Units"), consisting of one 13% Senior Discount Debenture due 2009 with a
principal amount at maturity of $1,000 ("Debentures") and one warrant to
purchase .6474 of a share of Common Stock ("Warrants"), for gross proceeds
aggregating $75.0 million in a Rule 144A private offering, and (v) MEDIQ/PRN
sold $190.0 million aggregate principal amount of 11% Senior Subordinated Notes
due 2008 (the "Notes") in the same Rule 144A private offering.
The authorized capital stock of the Surviving Corporation consists of (i) Common
Stock, (ii) Series A Preferred Stock, (iii) Series B Preferred Stock, and (iv)
Series C 13.5% Cumulative Compounding Preferred Stock, par value $.01 per share
("Series C Preferred Stock"). The BRS Entities and Co-Investors hold 829,219
shares of the Common Stock, 5,624,565 shares of the Series A Preferred Stock,
1,602,363 shares of the Series B Preferred Stock and 2,896,218 shares of the
Series C Preferred Stock; the Management Stockholders hold 61,000 shares of the
Common Stock, 201,551 shares of the Series A Preferred Stock, 57,417 shares of
the Series B Preferred Stock and 103,781 shares of the Series C Preferred Stock;
the Rotko Entities hold 109,781 shares of the Common Stock, 632,360 shares of
the Series A Preferred Stock and 1,340,219 shares of the Series B Preferred
Stock; and the stockholders of the Company prior to the Merger (other than the
Rotko Entities) hold 1,365,030 shares of the Series A Preferred Stock.
On January 15, 1998, a complaint, purporting to be a class action, was filed in
Delaware Chancery Court, naming the Company and each of its directors as
defendants and seeking to enjoin consummation of the Merger, or, in the
alternative, to recover compensatory damages. Plaintiff alleges generally that
the directors have breached fiduciary duties to stockholders. The Company
believes that the allegations in the complaint are completely without merit and
intends to vigorously defend this case. Based on the information currently
available, the Company believes that resolution of the claim will not have a
material adverse effect on the operations or financial condition of the Company.
Note D - Long-Term Debt
In order to finance a portion of the cash consideration paid pursuant to the
Merger, the Company entered into a $325.0 million New Credit Facility that
replaced its former credit facility.
8
<PAGE>
Note D - Long-Term Debt (Continued)
The New Credit Facility consists of three facilities: (i) an eight-year senior
secured $200.0 million term loan facility (the "Term Loan Facility"); (ii) a
six-year revolving credit facility not to exceed $50.0 million (the "Revolving
Credit Facility") and (iii) a six-year senior secured acquisition facility not
to exceed $75.0 million (the "Acquisition Facility"). Loans made under the Term
Loan Facility are referred to as "Term Loans", advances made under the Revolving
Credit Facility are referred to as "Revolving Loans" and loans made under the
Acquisition Facility are referred to as "Acquisition Loans".
Borrowings under the New Credit Facility bear interest at a floating rate based
upon, at MEDIQ/PRN's option, (i) the higher of the prime rate of Banque
Nationale de Paris, or the federal funds effective rate plus 0.5%, plus, in the
case of the Term Loans, a margin equal to 1.5%, and in the case of the Revolving
Loans and the Acquisition Loans, a margin equal to 1.0%, or (ii) the London
Interbank Offered Rate ("LIBOR") plus, in the case of the Term Loans, a margin
equal to 2.75%, and in the case of the Revolving Loans and Acquisition Loans, a
margin equal to 2.25%.
In addition, MEDIQ/PRN is required to pay commitment fees to the Senior Lenders
of 0.5% per year of the undrawn portion of the commitments in respect of the
facilities (subject to adjustment as set forth below). The New Credit Facility
contains provisions under which commitment fees and margins on interest rates
under the facilities will be adjusted in increments based on certain performance
goals.
The Term Loans amortize on a quarterly basis commencing September 30, 1999.
Principal amounts outstanding under the Revolving Credit Facility are due and
payable in full at maturity. Principal amounts outstanding under the Acquisition
Facility on November 30, 1999 will amortize on a quarterly basis. The Term
Loans, Revolving Loans and Acquisition Loans are subject to mandatory
prepayments and reductions in the event of certain extraordinary transactions or
issuances of debt and equity by MEDIQ/PRN or any Facility Guarantor (as defined
in the Credit Agreement). Such loans are required to be prepaid with 75% of the
Excess Cash Flow (as defined in the Credit Agreement) of MEDIQ/PRN or, if the
Company's ratio of funded debt to pro forma EBITDA for the preceding 12-month
period is less than 5.0 to 1.0, 50% of such Excess Cash Flow.
At June 30, 1998, pursuant to the terms of the New Credit Facility and/or the
Indentures for the Subordinated Notes and the Discount Debentures
("Indentures"), the availability under the Revolving Credit Facility and the
Acquisition Facility was limited to $25.9 million and $50.0 million,
respectively.
In July 1998, the Company terminated its existing interest rate hedging
contracts at a cost of approximately $600,000 which will be reflected as
interest expense in the Company's fourth quarter. In addition, the Company
entered into new interest rate hedging contracts. On a notional amount of $100.0
million, the Company fixed its LIBOR rate at 5.35% until July 2003 as long as
the three month LIBOR rate does not exceed 6.25%. The Company must pay the
actual LIBOR rate when LIBOR exceeds 6.25%. In order to mitigate its interest
rate exposure for LIBOR rates above 6.25%, the Company obtained zero-cost
collars with notional amounts aggregating $100.0 million with ceiling rates of
7.00% and a weighted-average floor rate of 5.03%.
The New Credit Facility contains representations and warranties, covenants,
events of default and other provisions customary for credit facilities of this
type. MEDIQ/PRN paid the Senior Lenders certain syndication and administration
fees, reimbursed certain expenses and provided certain indemnities, in each case
which are customary for credit facilities of this type.
9
<PAGE>
Note D - Long-Term Debt (Continued)
The Notes, in the aggregate principal amount of $190.0 million, are unsecured
senior subordinated obligations of MEDIQ/PRN and mature on June 1, 2008. The
Notes bear interest at the rate of 11% per year, payable semiannually to holders
of record at the close of business on the May 15 or November 15 immediately
preceding the interest payment date on June 1 and December 1 of each year,
commencing December 1, 1998.
Each Unit consists of a Debenture with a principal amount at maturity of $1,000
and one Warrant. Each Warrant entitles the holder thereof to purchase .6474
shares of Common Stock from the Company, as the Surviving Corporation of the
Merger, at an exercise price of $0.01 per share, subject to adjustment. The
Warrants will initially entitle the holders thereof to acquire, in the
aggregate, 91,209 shares of Common Stock. The Warrants have been valued at
$743,000 and are reflected as a component of Stockholders' Equity at June 30,
1998. The Debentures and the Warrants will not trade separately until the
commencement of an exchange offer or the effectiveness of a shelf registration
statement for the Debentures or such earlier date after July 28, 1998, as the
Initial Purchasers (as defined in the Indentures) may determine (the "Separation
Date").
The Debentures are unsecured senior obligations of the Company, limited to
$140.9 million aggregate principal amount at maturity, and will mature on June
1, 2009. No cash interest will accrue on the Debentures prior to June 1, 2003.
Cash interest will accrue on the Debentures at the rate of 13% per year from
June 1, 2003, or from the most recent date to which interest has been paid or
provided for, payable on June 1 and December 1 of each year, commencing December
1, 2003 to holders of record at the close of business on the May 15 or November
15 immediately preceding the interest payment date.
The interest rates on the Notes and Debentures are subject to increase in
certain circumstances if the Company does not file a registration statement
providing for a registered exchange offer for the Notes and the Debentures or if
the registration statement is not declared effective on a timely basis or if
certain other conditions are not satisfied. The Company filed such registration
statement providing for a registered exchange offer on July 13, 1998. Such
registration statement has not yet been declared effective by the Securities and
Exchange Commission.
The Warrants may be exercised at any time after the first anniversary of the
Issue Date (as defined in the Indentures); provided, however, that holders of
Warrants will be able to exercise their Warrants only if a shelf registration
statement relating to the Common Stock underlying the Warrants is effective or
the exercise of such Warrants is exempt from the registration requirements of
the Securities Act of 1933, and such securities are qualified for sale or exempt
from qualification under the applicable securities laws of the states or other
jurisdictions in which such holders reside. Unless earlier exercised, the
Warrants will expire on June 1, 2009. The Warrants will not trade separately
from the Debentures until the Separation Date.
On June 5, 1998, pursuant to the change of control provisions of the indenture
for the Company's Exchangeable Debentures, the Company made a tender offer to
repurchase the remaining outstanding balance of approximately $10.1 million. On
July 3, 1998, the Company redeemed $9.5 million of the Exchangeable Debentures
pursuant to its tender offer and received 623,595 shares of NutraMax common
stock from escrow. Pursuant to the terms of the Company's stock purchase
agreement with NutraMax, the Company returned the shares to NutraMax and
received a $5.6 million cash payment on its note receivable from NutraMax.
10
<PAGE>
Note E - Acquisitions
On May 29, 1998, the Company, through its wholly-owned subsidiary MEDIQ/PRN,
purchased specified assets and rights of CH Industries, Inc., certain direct and
indirect subsidiaries of CH Industries, Inc., including CH Medical, Inc. and
subsidiaries ("CH Medical"), and certain other parties (the "CH Medical
Business") for a purchase price of approximately $48.5 million in cash,
including related costs and expenses, and the assumption of certain specified
obligations related to the CH Medical Business (the "CH Medical Acquisition").
The Company financed the purchase price and related costs and expenses for the
CH Medical Acquisition with the proceeds from Term Loans under the New Credit
Facility (see Note D). CH Medical is a national sales, rental and service
corporation specializing in patient beds, overlays, mattress replacement
systems, pressure relieving pads and surfaces and other therapeutic support
services.
The acquisition has been accounted for by the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on the estimated fair values on May 29, 1998. The
excess of the purchase price over the estimated fair values of the net assets
acquired, $28.5 million, has been recorded as goodwill and is being amortized on
a straight line basis over twenty years. The final allocation of the purchase
price is contingent upon studies and valuations which have not yet been
completed. The Company is unable to predict whether any adjustments as a result
of the foregoing will have a material effect on the initial allocation of
purchase price.
On June 26, 1998, the Company, through its wholly-owned subsidiary MEDIQ/PRN,
acquired certain assets of National Patient Care Systems, Inc. ("NPC") for $11.0
million in cash, including related costs and expenses and contingent
consideration of up to $2.8 million payable over the next two years if certain
revenue targets are achieved by NPC. NPC is a provider of air support therapy
rental equipment including frameless and framed integrated bed systems.
The acquisition has been accounted for by the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired based
on the estimated fair values on June 26, 1998. The excess of the purchase price
over the estimated fair values of the net assets acquired, $6.8 million, has
been recorded as goodwill and is being amortized on a straight-line basis over
twenty years. The final allocation of the purchase price is contingent upon
studies and valuations which have not yet been completed. The Company is unable
to predict whether any adjustments as a result of the foregoing will have a
material effect on the initial allocation of purchase price.
The operations of CH Medical and NPC are included in the Company's Condensed
Consolidated Statement of Operations from their respective effective dates of
acquisition. The following pro forma financial information presents the
consolidated results of operations of the Company as if the acquisitions had
occurred at the beginning of the respective periods. The unaudited pro forma
information is presented for comparative purposes only and does not necessarily
reflect the results of operations of the Company had the acquisitions been made
at the beginning of each fiscal year.
Nine Months Ended Fiscal Year Ended
June 30, 1998 September 30, 1997
----------------- ------------------
Revenues $158,012,000 $195,552,000
Loss before discontinued operations and
extraordinary items (26,106,000) (7,817,000)
Net income (Loss) (30,204,000) 19,087,000
11
<PAGE>
Note F - Redeemable Preferred Stock
At June 30, 1998, redeemable preferred stock consists of 15,000,000 authorized
shares, of which 10,000,000 shares have been designated as Series A Preferred
Stock and 5,000,000 shares have been designated as Series C Preferred Stock as
follows:
<TABLE>
<S> <C>
Series A, par value $.01 per share, stated value $10.00 per share,
7,823,504 shares issued and outstanding, with a liquidation value
of $78.2 million and accumulated dividends of $.9 million $ 79,127,000
Series C, par value $.01 per share, stated value $10.00 per share,
3,000,000 shares issued and outstanding with a liquidation value
of $30.0 million and accumulated dividends of $.4 million 30,355,000
------------
$109,482,000
============
</TABLE>
Subject to the legal availability of funds, the Company is required to redeem
its Series A Preferred Stock on December 31, 2011 at a redemption price equal to
$10.00 per share plus all accrued and unpaid dividends. The Company, at its
option, may redeem the Series A Preferred Stock at any time at the redemption
prices set forth below, plus an amount equal to full cumulative dividends:
Redemption Date Redemption Price Per Share
- --------------- --------------------------
On or before December 31, 1999 $ 11.00
On or after January 1, 2000, but
before January 1, 2002 $ 10.50
On or after January 1, 2002 $ 10.00
Subject to the legal availability of funds, the Company is required to redeem
its Series C Preferred Stock on December 31, 2012 at a redemption price equal to
$10.00 per share plus all accrued and unpaid dividends. The Company, at its
option, may redeem the Series C Preferred Stock at any time at an amount equal
to $10.00 per share plus all accrued and unpaid dividends after distributions
are made on the Series A Preferred Stock and the Series B Preferred Stock.
Accordingly, these preferred stocks subject to mandatory redemption have been
presented separately outside of permanent stockholders' equity in the
accompanying financial statements.
Except as required by Delaware law, the holders of the Series A Preferred Stock
and Series C Preferred Stock do not have any voting rights. The holders of the
Series A Preferred Stock and Series C Preferred Stock are entitled to receive
dividends from the Company on each share of Series A Preferred Stock and Series
C Preferred Stock at annual rates equal to $1.30 and $1.35 per share,
respectively. All dividends will be cumulative and compounding, whether or not
earned or declared, will accrue on a daily basis and will be payable
semi-annually in arrears. Dividends with respect to the Series A Preferred Stock
can only be paid to the extent funds are legally available therefor under
Delaware law. Dividends with respect to the Series C Preferred Stock can only be
paid to the extent funds are legally available therefor under Delaware law and
all distributions have been made on the Company's Series A and Series B
preferred stocks. The New Credit Facility and Indentures restrict the ability of
the Company to pay cash dividends.
Upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of all shares of Series A Preferred Stock and Series C
Preferred Stock then outstanding will be entitled to be paid out of the assets
of the Company available for distribution to its stockholders an amount equal to
$10.00 per share plus all accrued and unpaid dividends.
12
<PAGE>
Note G - Common Stock and Series B Preferred Stock
Common Stock - The Company has 30,000,000 authorized shares of common stock, par
value $.01 per share, with 1,000,000 shares issued and outstanding as of June
30, 1998. The holders of the Common Stock are entitled to one vote per share on
all matters submitted for action by the shareholders. Subject to the rights of
any holders of outstanding preferred stock of the Company, all shares of Common
Stock are entitled to share in dividends as the Board of Directors may declare
from time to time from legally available funds.
Series B Preferred Stock - Except as required by Delaware law, the holders of
the Series B Preferred Stock do not have any voting rights. The holders of the
Series B Preferred Stock are entitled to receive dividends from the Company on
each share of Series B Preferred Stock at an annual rate equal to $1.325 per
share. All dividends will be cumulative and compounding whether or not earned or
declared, will accrue on a daily basis and will be payable semi-annually in
arrears. Dividends with respect to the Series B Preferred Stock can only be paid
to the extent funds are legally available therefor under Delaware law and all
distributions have been made on the Company's Series A Preferred Stock. The New
Credit Facility and Indentures restrict the ability of the Company to pay cash
dividends.
Upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of all shares of Series B Preferred Stock then outstanding
will be entitled to be paid out of the assets of the Company available for
distribution to its stockholders an amount equal to $10.00 per share plus all
accrued and unpaid dividends after distributions are made on the Series A
Preferred Stock and before any distribution is made on any Series C Preferred
Stock. The Company is not required to redeem the shares of Series B Preferred
Stock. The Series B Preferred Stock has $.4 million of dividends accrued as
of June 30, 1998.
Note H - New Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income," which will result in disclosure of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company is not required to adopt this
standard until fiscal 1999. At this time, the Company has not determined the
impact the adoption of this standard will have on the Company's financial
statements.
The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company is not required to adopt this standard until fiscal 1999.
At this time, the Company has not determined the impact the adoption of this
standard will have on the Company's financial statements.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement, which improves
disclosure about pensions and other postretirement benefits, is effective for
fiscal years beginning after December 15, 1997, although earlier application is
permitted. The Company does not believe the adoption of this standard will have
a material impact on the Company's financial statements.
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Note H - New Accounting Pronouncements (Continued)
In July 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities,
is effective for fiscal years beginning after June 15, 1999, although earlier
application is permitted. At this time, the Company has not determined the
impact the adoption of this standard will have on the Company's financial
statements.
Note I - Subsequent Events
In July 1998, the Company reached a settlement with its former wholly-owned
subsidiary, MHM Services, Inc. ("MHM") which called for MHM to pay the Company
$3.0 million in cash in full satisfaction of all amounts due the Company. The
Company received the cash in July 1998 and will recognize the settlement in
other income in the fourth quarter of fiscal 1998. The total amount due from MHM
was fully reserved during fiscal years 1997 and 1996.
In July 1998, MEDIQ Mobile X-Ray Services, Inc., a subsidiary of the Company
whose assets were sold in November 1996, was notified that it is the subject of
an investigation by the Department of Justice and the Office of the Inspector
General of the Department of Health and Human Services. The Company has not yet
been informed as to the nature or scope of the investigation.
In May 1998, InnoServ Technologies, Inc. ("InnoServ") entered into a merger
agreement with GE Medical Systems, Inc. ("GEMS") by which GEMS agreed to acquire
InnoServ for approximately $16.0 million. No date has been scheduled for
closing. Pursuant to the terms of the Company's November 1997 stock purchase
agreement with InnoServ, under a change of control the Company is entitled to
receive a portion of the sales proceeds. However, the calculation of the amount
due to the Company is currently in dispute. Accordingly, the matter is in
arbitration pursuant to the terms of the stock purchase agreement. The Company
fully reserved its investment in InnoServ in fiscal 1997. The Company will
recognize a gain equal to the cash proceeds when they are received.
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Some of the information presented in this Form 10-Q constitutes forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. For additional information concerning
important factors which may cause the Company's actual results to differ
materially from expectations and underlying assumptions, please refer to the
reports filed by the Company with the Securities and Exchange Commission.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses the financial condition of the Company as of
June 30, 1998 and results of operations for the three and nine month periods
ended June 30, 1998 and 1997. This discussion should be read in conjunction with
the financial statements included elsewhere herein and the Management's
Discussion and Analysis and Financial Statement sections of the Company's Annual
Report on Form 10-K for the year ended September 30, 1997 to which the reader is
directed for additional information.
Seasonality
The Company's rental business is seasonal, with demand historically peaking
during periods of increased hospital patient census, which generally occur in
the winter months during the Company's second fiscal quarter.
Results of Operations
Third Quarter 1998 Compared with Third Quarter 1997
Revenues were $42.9 million for the third quarter of fiscal 1998, as compared to
$39.6 million in the prior year period, an increase of $3.3 million or 8%. This
revenue growth was attributable to an 8% increase in rental revenue and a 26%
increase in sales partially offset by a 19% decrease in other revenue. The
growth in rental revenue was achieved primarily through increased revenues from
the rental of therapeutic support systems as a result of the SpectraCair
acquisition in September 1997 and the CH Medical acquisition in May 1998 and
increased revenues from revenue share arrangements attributable to increased
volume with existing customers. These increases were partially offset by a $2.1
million or 7% decrease in the core rental business primarily as a result of a
shift from rental to purchase by one of the Company's significant home
healthcare customers beginning in May 1997. The increase in sales was primarily
attributable to sales of medical gases which the Company initiated in the fourth
quarter of fiscal 1997 and sales of disposable products, equipment, and
disposable products sold through revenue share arrangements as a result of
increased volume to existing customers. The decrease in other revenue was
primarily attributable to the discontinuance of logistics services provided to
SpectraCair as a result of its acquisition in September 1997, partially offset
by increased revenues from asset management projects.
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EBITDA is defined as income from continuing operations before interest, taxes,
depreciation, amortization and non-recurring merger costs. The Company's
definition of EBITDA may not be comparable to similarly titled measures reported
by other companies. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service indebtedness in the
medical equipment rental industry. However, EBITDA should not be considered as
an alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity.
EBITDA decreased $1.1 million, or 8%, to $14.0 million in the third quarter of
fiscal 1998 as compared to $15.1 million in the prior year period. The decrease
was primarily attributable to the aforementioned decrease in core rental revenue
and increased selling and operating expenses as the Company continued to invest
in sales and operational personnel to facilitate the growth of the MEDIQ/FST
(formerly SpectraCair) division, disposable sales and outsoucing activities.
EBITDA margins decreased to 32.5% from 38.2% in the prior year period which was
primarily attributable to the growth of sales of parts and disposables and the
Company's revenue share activities which have lower margins than the Company's
core rental business and the increase in selling and operating expenses.
The operating loss was $35.3 million as compared to operating income of $7.8
million for the third quarter of fiscal 1997. The decrease in operating income
was primarily attributable to non-recurring merger costs aggregating $34.2
million which included compensation expense of $19.0 million recorded upon the
exercise of options by employees, payment of special transaction bonuses to
certain current and former members of management of approximately $6.0 million
and the payment of a transaction fee of $6.0 million to BRS and a depreciation
reserve of $6.0 million to write-down certain rental equipment product lines to
net realizable value. Exclusive of the non-recurring merger costs and
depreciation reserve, operating income decreased $2.9 million to $4.9 million as
a result of increased depreciation associated with capital expenditures in
addition to the decrease in EBITDA described above.
Interest expense increased 116% to $7.1 million for the third quarter of fiscal
1998 primarily as a result of the substantial increase in debt incurred in
connection with the Merger and the CH Medical acquisition.
The Company's effective tax rates were disproportionate compared to the
statutory rate as a result of the nondeductibility of certain goodwill
amortization.
Nine Months Ended June 30, 1998 Compared with Nine Months Ended June 30, 1997
Revenues were $131.9 million for the nine months ended June 30, 1998, as
compared to $117.7 million in the prior year period, an increase of $14.2
million, or 12%. This revenue growth was attributable to a 10% increase in
rental revenue and a 40% increase in sales partially offset by a 12% decrease in
other revenue. The growth in rental revenue was achieved primarily through
revenues from the rental of therapeutic support systems as a result of the
SpectraCair acquisition in September 1997 and the CH Medical acquisition in May
1998. Rental revenue also increased as a result of revenue share arrangements,
the most significant of which commenced in January 1997. These increases were
partially offset by a 4% decrease in the core rental business primarily as a
result of a shift from rental to purchase by one of the Company's significant
home healthcare customers beginning in May 1997. Exclusive of revenues from such
customer, revenues from the core rental business were comparable to the prior
year. The increase in sales was attributable to sales of disposable products as
a result of increased volume to existing customers, revenue share arrangements,
and sales of medical gases which the Company initiated
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in the fourth quarter of fiscal 1997. The decrease in other revenue was
primarily attributable to the discontinuance of logistics services provided to
SpectraCair as a result of its acquisition in September 1997, partially offset
by increased revenues from asset management projects.
EBITDA was $46.3 million for the nine months ended June 30, 1998 and was
comparable with the prior year period. EBITDA margins decreased to 35.1% in the
current period from 39.6% in the comparable prior year period. The margin
decrease was attributable to the same factors that impacted the third quarter.
The operating loss was $19.9 million for the nine months ended June 30, 1998, as
compared to operating income of $24.5 million in the prior year period. The
decrease in operating income was primarily attributable to the non-recurring
merger costs and the depreciation reserve described above. Exclusive of the
non-recurring merger costs and the depreciation reserve, operating income
decreased $4.8 million to $20.7 million as a result of increased depreciation
associated with capital expenditures in the current and prior year in addition
to the decrease in EBITDA for the third quarter described above.
Interest expense decreased 6% to $14.3 million for the nine months ended June
30, 1998 primarily as a result of the substantial reduction of debt with the
proceeds from the sales of discontinued operations in the second quarter of
fiscal 1997 and reduced interest rates as a result of improved leverage in
accordance with the terms of the Company's former Credit Agreement, partially
offset by the substantial increase in debt incurred in connection with the
Merger and the CH Medical acquisition.
The Company's effective tax rates were disproportionate compared to the
statutory rate as a result of the nondeductibility of certain goodwill
amortization.
Recent Developments
The Merger - On May 29, 1998, pursuant to the terms of an Agreement and Plan of
Merger dated January 14, 1998 and amended April 27, 1998 (the "Merger
Agreement") between MEDIQ Incorporated (the "Company") and MQ Acquisition
Corporation ("MQ"), MQ was merged into the Company (the "Merger") with the
Company continuing as the surviving corporation (the "Surviving Corporation").
MQ was a Delaware corporation organized by Bruckmann, Rosser, Sherrill & Co.,
L.P. ("BRS") and certain other investors solely to effect the Merger. In the
Merger, holders of the Company's outstanding common stock, par value $1.00 per
share, and preferred stock, par value $.50 per share, immediately prior to the
Merger received, in exchange for each outstanding share of common stock or
preferred stock (except for shares held directly or indirectly by the Company or
MQ, the Rolled Shares (as defined below) and dissenting shares), $13.75 in cash
and 0.075 of a share of a newly created Series A 13% Cumulative Compounding
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), of
the Surviving Corporation. The Series A Preferred Stock has a liquidation
preference of $10.00 per share.
The aggregate consideration paid in connection with the Merger was approximately
$390.7 million, which amount includes $20.0 million of Series A Preferred Stock.
In addition, in connection with the Merger (i) certain controlling stockholders
of the Company (the "Rotko Entities") converted a portion of their preferred
equity (the "Rolled Shares") in the Company into 1,340,219 shares of Series B
13.25% Cumulative Compounding Perpetual Preferred Stock, par value $.01 per
share ("Series B Preferred Stock") and 109,781 shares of Common Stock, par value
$.01 per share ("Common Stock"), of the Surviving Corporation, (ii) Thomas E.
Carroll, Jay M. Kaplan and certain other persons selected by the Company and BRS
(the "Management Stockholders") invested approximately $4.2 million in common
and preferred equity of the Company, and (iii) BRS, certain entities and
individuals affiliated with BRS (together with BRS,
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the "BRS Entities") and certain funds affiliated with Ferrer Freeman Thompson &
Co. LLC and Galen Partners III, L.P. (the "Co-Investors") purchased $109.5
million of common and preferred equity of MQ (the "Equity Contribution"). The
transaction has been accounted for as a recapitalization.
In connection with the Merger, (i) the Company contributed certain of its assets
and liabilities (including the capital stock of all of the subsidiaries of the
Company other than MEDIQ/PRN Life Support Services, Inc. ("MEDIQ/PRN") to
MEDIQ/PRN (the "Reorganization"), (ii) MEDIQ/PRN entered into a new Senior
Secured Credit Facility (the "New Credit Facility") with a syndicate of
banks ("Senior Lenders"), (iii) all indebtedness of the Company except
approximately $10.1 million of the Company's 7.5% exchangeable subordinated
debentures due 2003 (the "Exchangeable Debentures") and $2.0 million of
MEDIQ/PRN's capital leases were repaid (the "Refinancing"), (iv) the Company
sold 140,885 units ("Units"), consisting of one 13% Senior Discount Debenture
due 2009 with a principal amount at maturity of $1,000 ("Debentures") and one
warrant to purchase .6474 of a share of Common Stock ("Warrants") for gross
proceeds aggregating $75.0 million in a Rule 144A private offering, and (v)
MEDIQ/PRN sold $190.0 million aggregate principal amount of 11% Senior
Subordinated Notes due 2008 (the "Notes") in the same Rule 144A private
offering.
The authorized capital stock of the Surviving Corporation consists of (i) Common
Stock, (ii) Series A Preferred Stock, (iii) Series B Preferred Stock, and (iv)
Series C 13.5% Cumulative Compounding Preferred Stock, par value $.01 per share
("Series C Preferred Stock"). The BRS Entities and Co-Investors hold 829,219
shares of the Common Stock, 5,624,565 shares of the Series A Preferred Stock,
1,602,363 shares of the Series B Preferred Stock and 2,896,218 shares of the
Series C Preferred Stock; the Management Stockholders hold 61,000 shares of the
Common Stock, 201,551 shares of the Series A Preferred Stock, 57,417 shares of
the Series B Preferred Stock and 103,781 shares of the Series C Preferred Stock;
the Rotko Entities hold 109,781 shares of the Common Stock, 632,360 shares of
the Series A Preferred Stock and 1,340,219 shares of the Series B Preferred
Stock; and the stockholders of the Company prior to the Merger (other than the
Rotko Entities) hold 1,365,030 shares of the Series A Preferred Stock.
On January 15, 1998, a complaint, purporting to be a class action, was filed in
Delaware Chancery Court, naming the Company and each of its directors as
defendants and seeking to enjoin consummation of the Merger, or, in the
alternative, to recover compensatory damages. Plaintiff alleges generally that
the directors have breached fiduciary duties to stockholders. The Company
believes that the allegations in the complaint are completely without merit and
intends to vigorously defend this case. Based on the information currently
available, the Company believes that resolution of the claim will not have a
material adverse effect on the operations or financial condition of the Company.
CH Medical Acquisition - On May 29, 1998, the Company, through its wholly-owned
subsidiary MEDIQ/PRN, purchased specified assets and rights of CH Industries,
Inc., certain direct and indirect subsidiaries of CH Industries, Inc., including
CH Medical, Inc. and subsidiaries ("CH Medical"), and certain other parties (the
"CH Medical Business") for a purchase price of approximately $48.5 million in
cash, including related costs and expenses, and the assumption of certain
specified obligations related to the CH Medical Business (the "CH Medical
Acquisition"). The Company financed the purchase price and related costs and
expenses for the CH Medical Acquisition with the proceeds from Term Loans under
the New Credit Facility.
NPC Acquisition - On June 26, 1998, the Company, through its wholly-owned
subsidiary MEDIQ/PRN, acquired certain assets of National Patient Care Systems,
Inc. ("NPC") for $11.0 million in cash, including related costs and expenses and
contingent consideration of up to $2.8 million payable over the next two years
if certain revenue targets are achieved by NPC.
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Year 2000 Compliance - The Company's internal business information systems have
been analyzed for Year 2000 compliance and are Year 2000 compliant. The Company
utilizes third-party network equipment and software products, which may or may
not be Year 2000 compliant. While delays in the implementation of the Year 2000
solutions or failure of any critical technology components to operate properly
in the Year 2000 could adversely affect the Company's operations, at this time,
the Company believes that resolution of the Year 2000 issue will not require
material additional costs and will not have a material adverse effect on the
Company's results of operations.
New Accounting Pronouncement - The Financial Accounting Standards Board has
issued SFAS No. 130, "Reporting Comprehensive Income," which will result in
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. The Company
is not required to adopt this standard until fiscal 1999. At this time, the
Company has not determined the impact the adoption of this standard will have on
the Company's financial statements.
The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company is not required to adopt this standard until fiscal 1999.
At this time, the Company has not determined the impact the adoption of this
standard will have on the Company's financial statements.
February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement, which improves
disclosure about pensions and other postretirement benefits, is effective for
fiscal years beginning after December 15, 1997, although earlier application is
permitted. The Company does not believe the adoption of this standard will have
a material impact on the Company's financial statements.
In July 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities,
is effective for fiscal years beginning after June 15, 1999, although earlier
application is permitted. At this time, the Company has not determined the
impact the adoption of this standard will have on the Company's financial
statements.
Liquidity and Capital Resources
Cash used in operating activities was $1.9 million in the nine months ended June
30, 1998, as compared to $2.7 million in the prior year period. The increase was
primarily attributable to improved cash flows from operations and decreased
working capital requirements.
Net cash used in investing activities was $26.0 million, and principally
consisted of capital expenditures for equipment and the acquisition of NPC.
Net cash provided by financing activities was $33.5 million and consisted
primarily of proceeds from the issuance of $190.0 million of Notes, borrowings
under the New Credit Facility of $151.5 million, the issuance of Series A,
Series B and Series C Preferred Stock of $138.2 million
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and the issuance of units for gross proceeds of $75.0 million partially offset
by the repurchase of the Company's common and preferred stock of $377.4 million,
the repayment of the Company's former Credit Facility of $133.9 million and
deferred financing fees of $20.1 million.
The Company's principal capital requirements are to fund working capital needs,
meet required debt payments, fund capital expenditures and complete planned
maintenance and expansion. Management anticipates that MEDIQ/PRN's operating
cash flow, together with available borrowings under the New Credit Facility,
will be sufficient to meet its working capital, capital expenditure and debt
service requirements on its debt obligations for the foreseeable future.
In order to finance a portion of the cash consideration paid pursuant to the
Merger, the Company entered into a $325.0 million New Credit Facility that
replaced its former credit facility.
The New Credit Facility consists of three facilities: (i) an eight-year senior
secured $200.0 million term loan facility (the "Term Loan Facility"); (ii) a
six-year revolving credit facility not to exceed $50.0 million (the "Revolving
Credit Facility") and (iii) a six-year senior secured acquisition facility not
to exceed $75.0 million (the "Acquisition Facility"). Loans made under the Term
Loan Facility are referred to herein as "Term Loans", advances made under the
Revolving Credit Facility are referred to herein as "Revolving Loans" and loans
made under the Acquisition Facility are referred to herein as "Acquisition
Loans".
Borrowings under the New Credit Facility bear interest at a floating rate based
upon, at MEDIQ/PRN's option, (i) the higher of the prime rate of Banque
Nationale de Paris, or the federal funds effective rate plus 0.5%, plus, in the
case of the Term Loans, a margin equal to 1.5%, and in the case of the Revolving
Loans and the Acquisition Loans, a margin equal to 1.0%, or (ii) the London
Interbank Offered Rate ("LIBOR") plus, in the case of the Term Loans, a margin
equal to 2.75%, and in the case of the Revolving Loans and Acquisition Loans, a
margin equal to 2.25%.
In addition, MEDIQ/PRN is required to pay commitment fees to the Senior Lenders
equal to 0.5% per year of the undrawn portion of the commitments in respect of
the facilities (subject to adjustment as set forth below). The New Credit
Facility contains provisions under which commitment fees and margins on interest
rates under the facilities will be adjusted in increments based on certain
performance goals.
The Term Loans amortize on a quarterly basis commencing September 30, 1999.
Principal amounts outstanding under the Revolving Credit Facility are due and
payable in full at maturity. Principal amounts outstanding under the Acquisition
Facility on November 30, 1999 will amortize on a quarterly basis. The Term
Loans, Revolving Loans and Acquisition Loans are subject to mandatory
prepayments and reductions in the event of certain extraordinary transactions or
issuances of debt and equity by MEDIQ/PRN or any Facility Guarantor (as defined
in the Credit Agreement). Such loans are required to be prepaid with 75% of the
Excess Cash Flow (as defined in the Credit Agreement) of MEDIQ/PRN or, if the
Company's ratio of funded debt to pro forma EBITDA for the preceding 12-month
period is less than 5.0 to 1.0, 50% of such Excess Cash Flow.
At June 30, 1998, pursuant to the terms of the New Credit Facility and/or the
Indentures for the Subordinated Notes and the Discount Debentures
("Indentures"), the availability under the Revolving Credit Facility and the
Acquisition Facility was limited to $25.9 million and $50.0 million,
respectively.
In July 1998, the Company terminated its existing interest rate hedging
contracts at a cost of approximately $600,000 which will be reflected as
interest expense in the Company's fourth
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quarter. In addition, the Company entered into new interest rate hedging
contracts. On a notional amount of $100.0 million, the Company fixed its LIBOR
rate at 5.35% until July 2003 as long as the three month LIBOR rate does not
exceed 6.25%. The Company must pay the actual LIBOR rate when LIBOR exceeds
6.25%. In order to mitigate its interest rate exposure for LIBOR rates above
6.25%, the Company obtained zero-cost collars with notional amounts aggregating
$100.0 million with ceiling rates of 7.00% and a weighted-average floor rate of
5.03%.
The New Credit Facility contains representations and warranties, covenants,
events of default and other provisions customary for credit facilities of this
type. MEDIQ/PRN paid the Senior Lenders certain syndication and administration
fees, reimbursed certain expenses and provided certain indemnities, in each case
which are customary for credit facilities of this type.
The Notes in the aggregate principal amount of $190.0 million, are unsecured
senior subordinated obligations of MEDIQ/PRN and mature on June 1, 2008. The
Notes bear interest at the rate of 11% per year, payable semiannually to holders
of record at the close of business on the May 15 or November 15 immediately
preceding the interest payment date on June 1 and December 1 of each year,
commencing December 1, 1998.
Each Unit consists of a Debenture with a principal amount at maturity of $1,000
and one Warrant. Each Warrant entitles the holder thereof to purchase .6474
shares of Common Stock from the Company, as the Surviving Corporation of the
Merger, at an exercise price of $0.01 per share, subject to adjustment. The
Warrants will initially entitle the holders thereof to acquire, in the
aggregate, 91,209 shares of Common Stock. The Warrants have been valued at
$743,000 and are reflected as a component of Stockholders' Equity at June 30,
1998. The Debentures and the Warrants will not trade separately until the
commencement of an exchange offer or the effectiveness of a shelf registration
statement for the Debentures or such earlier date after July 28, 1998, as the
Initial Purchasers (as defined in the Indentures) may determine (the "Separation
Date").
The Debentures are unsecured senior obligations of the Company, limited to
$140.9 million aggregate principal amount at maturity, and will mature on June
1, 2009. No cash interest will accrue on the Debentures prior to June 1, 2003.
Cash interest will accrue on the Debentures at the rate of 13% per year from
June 1, 2003, or from the most recent date to which interest has been paid or
provided for, payable on June 1 and December 1 of each year, commencing December
1, 2003 to holders of record at the close of business on the May 15 or November
15 immediately preceding the interest payment date.
The interest rates on the Notes and Debentures are subject to increase in
certain circumstances if the Company does not file a registration statement
providing for a registered exchange offer for the Notes and the Debentures or if
the registration statement is not declared effective on a timely basis or if
certain other conditions are not satisfied. The Company filed such registration
statement providing for a registered exchange offer on July 13, 1998. Such
registration statement has not yet been declared effective by the Securities and
Exchange Commission.
The Warrants may be exercised at any time after the first anniversary of the
Issue Date (as defined in the Indentures); provided, however, that holders of
Warrants will be able to exercise their Warrants only if a shelf registration
statement relating to the Common Stock underlying the Warrants is effective or
the exercise of such Warrants is exempt from the registration requirements of
the Securities Act, and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states or other
jurisdictions in which such holders reside. Unless earlier exercised, the
Warrants will expire on June 1, 2009. The Warrants will not trade separately
from the Debentures until the Separation Date.
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On June 5, 1998, pursuant to the change of control provisions of the indenture
for the Company's Exchangeable Debentures, the Company made a tender offer to
repurchase the remaining outstanding balance of approximately $10.1 million. On
July 3, 1998, the Company redeemed $9.5 million of the Exchangeable Debentures
pursuant to its tender offer and received 621,830 shares of NutraMax common
stock from escrow. Pursuant to the terms of the Company's stock purchase
agreement with NutraMax, the Company returned the shares to NutraMax and
received a $5.6 million cash payment on its note receivable from NutraMax.
The New Credit Facility and the Indentures include significant operating and
financial restrictions, such as limits on the Company's ability to incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
make investments and capital expenditures and pay dividends. The Company has
substantial consolidated indebtedness. In addition, the Company expects to incur
additional indebtedness in connection with its post-Merger strategy of pursuing
strategic acquisitions and expanding through internal growth. Such high leverage
has important consequences for the Company, including the following: (a) the
Company's ability to obtain additional financing for such acquisitions, working
capital, capital expenditures or other purposes may be impaired or any such
financing may not be on terms favorable to the Company; (b) interest expense may
reduce the funds that would otherwise be available to the Company for its
operations and future business opportunities; (c) a substantial decrease in net
operating cash flows or an increase in expenses of the Company could make it
difficult for the Company to meet its debt service requirements or pay dividends
or force it to modify its operations; (d) substantial leverage may place the
Company at a competitive disadvantage and may make it more vulnerable to a
downturn in its business or the economy generally (e) certain of such
indebtedness of the Company is at variable rates of interest, which causes the
Company to be vulnerable to increases in interest rates; (f) certain of such
indebtedness is secured by substantially all the assets of the Company and its
subsidiaries, possibly reducing its ability to obtain additional financing; and
(g) the Company may be hindered in its ability to adjust rapidly to changing
market conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In connection with the Merger, all of the Company's outstanding debt with the
exception of the Exchangeable Debentures and capital leases were repaid. A
comparison of the effects of material changes in interest rates from September
30, 1997 to June 30, 1998 is not meaningful. The Company's Debentures and Notes
bear interest at 13% and 11%, respectively. Loans under the Company's New Credit
Facility bear interest at variable rates that fluctuate with prime or LIBOR
subject to the Company's interest rate hedging agreements. Accordingly, the
Company does not believe it is exposed to significant market risk at this time.
22
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1998
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In February 1997, the Company was sued in the Superior Court of New Jersey
by its former wholly-owned subsidiary, MHM Services, Inc. ("MHM"). The suit
challenged the validity of a note receivable in the original principal
amount of $11,500,000 (the "MHM Note") that the Company and MHM entered
into in connection with the spin-off of MHM to the Company's shareholders
in August 1993. In addition, beginning in February 1997, MHM stopped making
the required monthly installments on the MHM Note and, therefore, the
Company gave notice to MHM of its default on the MHM Note and declared all
sums outstanding under the MHM Note to be immediately due and payable. In
September 1997, as a result of continued deterioration in MHM's financial
condition, the Company recorded a reserve for the remaining carrying value
of the MHM Note, which had been partially reserved in 1996, and the
aggregate accrued interest on the MHM Note. In October 1997, the Company
filed a motion for summary judgment against MHM. In November 1997, the
Court granted summary judgment in favor of the Company and against MHM on
all counts. Specifically, the Court ruled that the MHM Note was valid and
enforceable. The Court also rejected MHM's request for a stay pending
appeal. On April 17, 1998, the Court entered a Final Damages Order in favor
of the Company in the approximate amount of $11,800,000. In July 1998, the
Company reached a settlement with MHM which called for MHM to pay the
Company $3.0 million in cash in full satisfaction of all amounts due the
Company. The Company received the cash in July 1998 and will recognize the
settlement in other income in the fourth quarter of fiscal 1998.
In July 1998, MEDIQ Mobile X-Ray Services, Inc., a subsidiary of the
Company, whose assets were sold in November 1996, was notified that it is
the subject of an investigation by the Department of Justice and the Office
of the Inspector General of the Department of Health and Human Services.
The Company has not yet been informed as to the nature or scope of the
investigation.
In May 1998, InnoServ Technologies, Inc. ("InnoServ") entered into a merger
agreement with GE Medical Systems, Inc. ("GEMS") by which GEMS agreed to
acquire InnoServ for approximately $16.0 million. No date has been
scheduled for closing. Pursuant to the terms of the Company's November 1997
stock purchase agreement with InnoServ, under a change of control the
Company is entitled to receive a portion of the sales proceeds. However,
the calculation of the amount due to the Company is currently in dispute.
Accordingly, the matter is in arbitration pursuant to the terms of the
stock purchase agreement. The Company fully reserved its investment in
InnoServ in fiscal 1997. The Company will recognize a gain equal to the
cash proceeds when they are received.
23
<PAGE>
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As noted in Part I of this Form 10-Q, in connection with the Merger (i)
each share of common stock, par value $1.00 per share, and Series A
preferred stock, par value $.50 per share, of the Company outstanding
immediately prior to the Merger was exchanged for (a) $13.75 in cash and
(b) .075 of a share of Series A Preferred Stock, (ii) the Rotko Entities
converted a portion of their preferred equity in the Company into Series B
Preferred Stock and Common Stock, (iii) on or about May 29, 1998 the
Management Stockholders purchased approximately $4.2 million in common and
preferred equity of the Company pursuant to a private placement under
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder, (iv) on May 29, 1998 the Company sold 140,885 Units for gross
proceeds aggregating $75.0 million in a Rule 144A private offering and (v)
on May 29, 1998 MEDIQ/PRN sold $190.0 million aggregate principal amount of
Notes in the same Rule 144A private offering. Information concerning the
Merger, the securities and the sale of such securities has been previously
reported by the Company, in addition, the information with respect thereto
contained in Part I of this Form 10-Q is hereby incorporated by reference
herein.
The Units and the Notes were sold to Credit Suisse First Boston,
NationsBanc Montgomery Securities LLC and Banque Nationale de Paris (the
"Initial Purchasers"). The aggregate discount to the Initial Purchasers in
respect of the Units were $2,625,004 and the aggregate discount to the
Initial Purchasers in respect of the Notes was $5,700,000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS
A Special Meeting of Stockholders of the Company was held on May 27, 1998.
Stockholders of the Company overwhelmingly approved the merger of the
Company with MQ Acquisition Corporation, a company formed by Bruckmann,
Rosser, Sherrill & Co., L.P. The following is a presentation of the voting
results from the May 27, 1998 Special Stockholders' Meeting: FOR -
64,628,091; AGAINST - 22,425 and ABSTAIN - 26,172.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 4 - NPC Purchase Agreement
Exhibit 27 - Financial Data Schedule appears on page 27.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the
quarter ended June 30, 1998.
Date of Earliest Event Requiring Report: April 28, 1998.
Date of Filing: April 28, 1998
Items Reported: Items 5 and 7
Subject: Acquisition of CH Medical, Inc. by MEDIQ/PRN
Life Support Services, Inc., a wholly-owned
subsidiary of the Company.
24
<PAGE>
Date of Earliest Event Requiring Report: April 24, 1998
Date of Filing: May 20, 1998
Items Reported: Items 5 and 7
Subject: Proforma financial information and audited and
unaudited financial statements of CH Medical,
Inc.
Date of Earliest Event Requiring Report: May 22, 1998
Date of Filing: May 22, 1998
Items Reported: Items 5 and 7
Subject: Sale of Units by MEDIQ Incorporated and
Subordinated
Notes by MEDIQ/PRN Life Support Services, Inc.
Date of Earliest Event Requiring Report: May 29, 1998
Date of Filing: June 15, 1998
Items Reported: Items 1 and 7
Subject: Change of Control
25
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1998
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDIQ Incorporated
------------------
(Registrant)
August 14, 1998
- ---------------
(Date) /s/ Jay M. Kaplan
-----------------------------
Jay M. Kaplan
Senior Vice President Finance
and Chief Financial Officer
26
===============================================================================
ASSET PURCHASE AGREEMENT
Between
MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
As Buyer
and
NATIONAL PATIENT CARE SYSTEMS, INC.
As Seller
and
MR. GLENN EDWARDS
and
MS. CYNTHIA POWERS
Dated as of June 26, 1998
===============================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I SALE AND PURCHASE OF ASSETS...............................................................1
1.1 Purchased Assets to be Transferred.....................................................1
1.2 Excluded Assets........................................................................3
1.3 Delivery...............................................................................3
ARTICLE II CONSIDERATION............................................................................4
2.1 Purchase Price.........................................................................4
2.2 Obligations and Liabilities to be Assumed..............................................5
2.3 Excluded Liabilities...................................................................5
2.4 Employees..............................................................................6
ARTICLE III CLOSING.................................................................................7
3.1 Closing................................................................................7
3.2 Deliveries by Seller at the Closing....................................................7
3.3 Deliveries by Buyer at the Closing.....................................................8
3.4 Deliveries by Selling Shareholders at the Closing......................................9
ARTICLE IV TERMINATION..............................................................................9
4.1 Termination............................................................................9
4.2 Effect of Termination.................................................................10
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER AND SELLING SHAREHOLDERS........................10
5.1 Incorporation; Authority..............................................................10
5.2 Due Authorization; Binding Agreement..................................................10
5.3 No Violation or Conflict..............................................................11
5.4 Title to Assets.......................................................................11
5.5 Taxes.................................................................................11
5.6 Licenses..............................................................................12
5.7 Intellectual Property Rights..........................................................12
5.8 Litigation............................................................................13
5.9 Financial Statements..................................................................13
5.10 Labor Matters........................................................................13
5.11 Compliance with Laws.................................................................14
5.12 Employee Benefit Plans...............................................................17
5.13 Insurance............................................................................18
5.14 Consents and Approvals...............................................................19
5.15 Contracts; Compliance................................................................19
5.16 Real Property........................................................................19
5.17 Inventory and Equipment..............................................................19
5.18 Condition of Purchased Assets........................................................20
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
5.19 No Undisclosed Liabilities...........................................................20
5.20 Business Locations...................................................................20
5.21 Billing; Gratuitous Payments.........................................................20
5.22 Fraud and Abuse......................................................................21
5.23 Reimbursement Matters................................................................21
5.24 Medicare/Medicaid Participation......................................................22
5.25 Ownership............................................................................22
5.26 Absence of Changes...................................................................22
5.27 Compensation Arrangements............................................................23
5.28 Disclosure...........................................................................23
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER.................................................23
6.1 Incorporation; Authority..............................................................23
6.2 Due Authorization; Binding Agreement..................................................24
ARTICLE VII COVENANTS..............................................................................24
7.1 Covenants of Seller and Selling Shareholders Pending Closing..........................24
7.2 Covenants of Buyer Pending Closing....................................................25
7.3 Full Access and Due Diligence Investigation...........................................25
7.4 Post-Closing Covenants................................................................26
7.5 Confidential Information..............................................................27
7.6 Condemnation..........................................................................28
7.7 Use of Name...........................................................................28
7.8 Release and Waiver....................................................................28
7.9 Third-Party Payments..................................................................28
7.10 Books and Records....................................................................28
7.11 May 31, 1998 Financial Statements....................................................28
7.12 Third Party Provider Agreements......................................................29
ARTICLE VIII CONDITIONS............................................................................29
8.1 Conditions Precedent to Obligations of Buyer..........................................29
8.2 Conditions Precedent to Obligations of Seller.........................................31
ARTICLE IX MISCELLANEOUS...........................................................................31
9.1 Binding Effect........................................................................31
9.2 Notices...............................................................................32
9.3 Entire Agreement, Amendments, Etc.....................................................32
9.4 Nature and Survival of Representations................................................33
9.5 Risk of Loss or Damage; Insurance.....................................................33
9.6 Waiver................................................................................33
9.7 Governing Law.........................................................................33
9.8 Expenses..............................................................................33
9.9 Headings..............................................................................34
9.10 Counterparts.........................................................................34
9.11 Severability.........................................................................34
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
9.12 Time is of the Essence...............................................................34
9.13 Brokers or Finders...................................................................34
9.14 Indemnification by Seller and Selling Shareholders...................................34
9.15 Indemnification by Buyer.............................................................36
9.16 Procedure for Indemnification........................................................36
9.17 Equitable Relief.....................................................................37
9.18 Bulk Transfers.......................................................................37
9.19 Third Party Beneficiaries............................................................37
9.20 Jurisdiction and Process.............................................................38
9.21 Interpretation.......................................................................38
</TABLE>
- iii -
<PAGE>
SCHEDULES
Schedule 1.1.1 Rental and Sales Inventory
Schedule 1.1.2 Other Inventory
Schedule 1.1.3 Hardware and Software
Schedule 1.1.4 Vehicles
Schedule 1.1.6 Contracts of the Business
Schedule 1.1.6.1 Assumed Contracts
Schedule 1.1.7 Intellectual Property Rights
Schedule 1.1.8 Warranty Rights
Schedule 1.1.9 Licenses
Schedule 1.1.11 Consents
Schedule 1.2.2 Real Estate
Schedule 1.3 Procedures for Transfer of Purchased Assets
Schedule 2.4.1 Assumed Liabilities
Schedule 5.2 Shareholder and Board Approval
Schedule 5.3 Violations or Conflicts
Schedule 5.4 Title
Schedule 5.6 License Exceptions
Schedule 5.8 Litigation
Schedule 5.10 Labor Matters
Schedule 5.11 Environmental Matters
Schedule 5.12.1 Benefit Plans
Schedule 5.12.3 Exceptions
Schedule 5.13 Insurance
Schedule 5.14 Consents and Approvals
Schedule 5.15 Contracts; Compliance
Schedule 5.16 Real Property
Schedule 5.19 Undisclosed Liabilities
Schedule 5.20 Business Locations
Schedule 5.21 Billing Matters
Schedule 5.22 Fraud and Abuse
Schedule 5.23 Reimbursement
Schedule 5.24 Medicare/Medicaid Approvals
Schedule 5.26 Absence of Changes
Schedule 5.27 Compensation
Schedule 7.4.3 Allocation of Purchase Price
Schedule 7.9 Allocation of Third-Party Payments
- iv -
<PAGE>
EXHIBITS
Exhibit A Escrow Agreement
Exhibit B Supply Agreement
Exhibit C Bill of Sale
Exhibit D Certificate of Officer of Seller
Exhibit E-1 Sublease Agreement
Exhibit E-2 License Agreement
Exhibit F Opinion of Seller's Counsel
Exhibit G Certificate of Officer of Buyer
Exhibit H Opinion of Buyer's Counsel
Exhibit I Non-Competition and Confidentiality Agreement for Glenn Edwards
Exhibit J Non-Competition and Confidentiality Agreement for Cynthia Powers
- v -
<PAGE>
ASSET PURCHASE AGREEMENT
This Agreement, dated as of June 26, 1998 (the "Agreement"), is entered
into among Mediq/PRN Life Support Services, Inc., a Delaware corporation
("Buyer"), National Patient Care Systems, Inc., a Delaware corporation
("Seller"), and Glenn Edwards ("Mr. Edwards") and Cynthia Powers ("Ms. Powers").
Mr. Edwards and Ms. Powers are sometimes individually referred to herein as a
"Selling Shareholder" and collectively referred to herein as the "Selling
Shareholders".
P R E A M B L E:
WHEREAS, Selling Shareholders own all of the issued and outstanding
capital stock of Seller;
WHEREAS, Seller is engaged, inter alia, in the business of renting,
leasing and selling therapeutic support surfaces (the "Business"), provided,
however, that the Business shall not include selling, renting and leasing
aesthetic treatment equipment, the sale of support surfaces to dealers that
service the home care market or the development or marketing of disease
management programs (the "Retained Businesses"); and
WHEREAS, Buyer desires to buy, through the payment of cash and the
assumption of certain liabilities of Seller, and Seller desires to sell certain
assets and property owned by Seller upon the terms and conditions hereinafter
set forth;
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants contained in this Agreement and intending to be legally bound hereby,
agree as follows:
ARTICLE I
SALE AND PURCHASE OF ASSETS
1.1 Purchased Assets to be Transferred. Subject to the terms and
conditions of this Agreement, Seller hereby agrees to sell, assign, convey,
transfer and deliver to Buyer at the Closing (as defined in Section 3.1), and
Buyer hereby agrees to purchase from Seller at the Closing, all of the Seller's
right, title and interest in and to all of the assets owned or used by Seller in
connection with or relating to the Business, whether tangible or intangible,
whether real or personal and wherever located (other than the Excluded Assets as
defined in Section 1.2) (the "Purchased Assets"), free and clear of all
mortgages, pledges, liens, claims, restrictions, encumbrances and security
interests of any kind or nature, except as otherwise described in Schedule 5.4
(the "Permitted Exceptions"), including without limitation, the following:
1.1.1 Rental and Sales Inventory. All of Seller's equipment held for
sale, lease or rental in connection with the Business, including, without
limitation, the equipment
<PAGE>
described in Schedule 1.1.1 (which shall include the beds sold under the
trademark Skytron (the "Skytron Beds")).
1.1.2 Other Inventory. All of Seller's inventory, materials,
supplies, spare parts, biomedical tools and all other tools used in connection
with the equipment described in Section 1.1.1 or otherwise used in the Business,
including, without limitation, those described in Schedule 1.1.2.
1.1.3 Equipment. All of Seller's computer hardware and software,
printers and other data processing equipment used, useful or held for use in
third-party billing of the Business, including, without limitation, those
described in Schedule 1.1.3.
1.1.4 Vehicles. All vehicles as described in Schedule 1.1.4.
1.1.5 Intentionally Omitted.
1.1.6 Contracts and Leases. (i) All of the Seller's right, title and
interest in and to the contracts and leases for personal property relating to
the Business to which Seller is a party, all of which are identified (and
designated as a personal property lease or other contract) in Schedule 1.1.6 and
Schedule 5.4 (the "Contracts"), in each case solely to the extent that (a) all
rights thereto are assignable by Seller and any consents required in connection
therewith have been obtained by Seller (provided that Buyer may elect to
purchase contracts with respect to which consents have not been obtained) and
(b) Buyer in its sole discretion elects to assume such contracts or leases
(collectively, the "Assumed Contracts"). Schedule 1.1.6.1 is a list of the
Assumed Contracts.
(ii) With respect to any such contract or lease with respect
to which any required consent to assignment has not been obtained, after the
Closing the parties shall cooperate with each other upon written request, (a) in
endeavoring to obtain the requisite third party consent(s) to the assignment
thereof to Buyer, without either party being obligated, however, to make any
payment to such third party which is not otherwise due in order to obtain such
consent, unless, Buyer shall make such payment or agree to reimburse Seller for
such payment, and (b) if any such requisite consent cannot be obtained, in
endeavoring to obtain for Buyer an arrangement designed to provide for Buyer the
benefits and obligations thereof in some other manner.
1.1.7 Intellectual Property. All Seller's right, title and interest
in and to all trademarks, tradenames, service marks, copyrights, proprietary
information (including, without limitation, such information for nurses),
patents and any other forms of intellectual property (whether or not registered)
and all applications and registrations therefor which are owned or used by
Seller in the Business, including, but not limited to, those described in
Schedule 1.1.7 (with the Marks, the "Intellectual Property Rights"), and the
exclusive right to use the name "National Patient Care Systems, Inc." and any
variants or derivations thereof, including but not limited to those listed on
Schedule 1.1.7 (the "Marks"), together with all goodwill
- 2 -
<PAGE>
pertaining thereto; provided, however, that all right title and interest in and
to the mark "Support the Healing Process" shall be retained by Seller.
1.1.8 Warranty Rights. All rights of Seller, if any, relating to or
arising out of manufacturers' and vendors' express or implied warranties with
respect to any of the Purchased Assets, and all causes of action arising
therefrom, including, without limitation, those described in Schedule 1.1.8.
1.1.9 Licenses. All Seller's right, title and interest in and to the
Licenses, as defined in Section 5.6, including but not limited to those
specified in Schedule 1.1.9.
1.1.10 Goodwill. All of the goodwill and going concern value of
Seller relating to the Business.
1.1.11 Consents. All Seller's right, title and interest in and to
consents, licenses, permits, certifications, and approvals granted by any
non-governmental third party, including but not limited to those listed in
Schedule 1.1.11 (collectively, the "Consents").
1.2 Excluded Assets. The Excluded Assets shall not be conveyed
hereunder. The "Excluded Assets" means:
1.2.1 any rights of Seller under any agreement to which Seller is a
party which is not an Assumed Contract;
1.2.2 all real estate identified on Schedule 1.2.2, together with
the building, building improvements and structures erected thereon;
1.2.3 any Licenses or Consents that are not transferable;
1.2.4 any cash of Seller collected prior to Closing with respect to
revenues that have been earned by the Business through the Closing Date;
1.2.5 any accounts receivable;
1.2.6 any assets solely related to (i) the business of aesthetic
treatment equipment; (ii) the sale (but not the rent or leasing) of support
surfaces to dealers that service the home care market and (iii) disease
management programs and the inventory associated therewith; and
1.2.7 all rights of Seller under the real property leases including,
but not limited to, the real property leases set forth in Schedule 5.16.
1.3 Delivery. Simultaneously with the Closing, Seller shall deliver to
Buyer physical possession of all the Purchased Assets according to the
procedures set forth in Schedule 1.3.
- 3 -
<PAGE>
ARTICLE II
CONSIDERATION
2.1 Purchase Price. The purchase price payable to Seller in
consideration of the transfer to Buyer of the Purchased Assets and the
non-compete arrangements contemplated hereby shall be the cash portion (the
"Cash Portion") calculated as follows: (a) Buyer shall pay to Seller an amount
equal to Ten Million Seven Hundred Seventy-Eight Thousand One Hundred Fourteen
Dollars ($10,778,114) reduced by the escrow amount of One Million Dollars
($1,000,000) described in Section 2.1(b) hereof; (b) Buyer shall pay to Chase
Manhattan Trust, as Escrow Agent, One Million Dollars ($1,000,000) pursuant to
the terms of an Escrow Agreement substantially in the form of Exhibit A hereto,
to be entered into by Buyer and Seller; (c) Buyer shall pay to Seller one third
(1/3) of the amount equal to 1.44 times the annualized rental revenue for the
Confirmed Caring Healthcare Customers listed on Schedule 2.1(c) based on such
rental revenue for the six (6) month period ending April 30, 1999; provided,
however, that the amount paid to Seller pursuant to this subsection (c) shall
not exceed One Million Three Hundred Ninety-Four Thousand Nine Hundred Seventy
Dollars ($1,394,970); and (d) Buyer shall pay to Seller one third (1/3) of the
amount equal to 1.44 times the annualized rental revenue for the Confirmed
Caring Healthcare Customers listed on Schedule 2.1(d) based on such rental
revenue for the six (6) month period ending April 30, 2000; provided, however,
that the amount paid to Seller pursuant to this subsection (d) shall not exceed
One Million Three Hundred Ninety-Four Thousand Nine Hundred Seventy Dollars
($1,394,970). In addition to the Cash Portion of the purchase price set forth
above, Buyer shall assume certain liabilities of Seller in accordance with
Section 2.2 hereof (the assumption of the liabilities together with the Cash
Portion is hereinafter referred to as the "Purchase Price").
2.1.1 Delivery of Purchase Price. The Purchase Price shall be paid
by wire transfer, bank, cashier's or certified check as follows:
(a) The payments referred to in subsections (a) and (b) of
Section 2.1 shall be paid on the Closing Date to the Seller or Escrow Agent, as
applicable, and are hereinafter referred to collectively as the "Closing Cash
Payment."
(b) No later than forty-five (45) days after the first
anniversary of the Closing Date, Buyer shall deliver to Seller a statement
setting forth the calculation of the Purchase Price to be paid pursuant to
Section 2.1(c) together with such payment. If Seller provides to Buyer written
notice within fifteen (15) days of delivery of such statement of any
disagreement it has regarding Buyer's calculation, then the parties shall meet
to negotiate in good faith to resolve any disagreement to their mutual
satisfaction.
(c) No later than forty-five (45) days after the second
anniversary of the Closing Date, Buyer shall deliver to Seller a statement
setting forth the calculation of the Purchase Price to be paid pursuant to
Section 2.1(d) together with such payment. If Seller provides to Buyer written
notice within fifteen (15) days of delivery of such
- 4 -
<PAGE>
statement, then the parties shall meet to negotiate in good faith to resolve any
disagreement to their mutual satisfaction.
2.1.2 No later than fifteen (15) days from the date hereof, Seller
shall deliver to Buyer a report of revenue activity relating to the Business for
the period June 27, 1998 through June 30, 1998. Seller agrees that all payments
made by customers attributable to the revenue generated during such period shall
be remitted to Buyer within two (2) business days following the receipt by
Seller thereof.
2.2 Obligations and Liabilities to be Assumed. Buyer shall not assume or
be liable for any claim, liability or obligation of Seller, whether known or
unknown, fixed or contingent, accrued or unaccrued, except for the liabilities
specifically assumed by Buyer under this Section 2.2. At the Closing, as defined
in Section 3.1, Buyer shall assume only the obligations or liabilities arising
under each Assumed Contract set forth on Schedule 1.1.6.1, but only to the
extent such obligations or liabilities arise after the Closing Date, as defined
in Section 3.1, and only to the extent such obligations or liabilities are not
attributed to or associated with any breach of or default under such Assumed
Contract on or prior to the Closing Date or the breach of any representation or
warranty made hereunder by Seller or by a Selling Shareholder. Effective as of
the Closing, Buyer shall assume and be responsible for the payment of all
accrued vacation owed by Seller to the Transferred Employees (as defined in
Section 2.4) but only in the amount set forth in Schedule 2.4.1. Except with
respect to the Assumed Liabilities, as defined below, Buyer does not hereby and
shall not assume or in any way undertake to pay, perform, satisfy or discharge
any liabilities or obligations of Seller, and Seller agrees to pay and satisfy
when due any such liabilities and obligations not assumed by Buyer, including
the Excluded Liabilities (as defined in Section 2.3). The obligations and
liabilities to be assumed by Buyer pursuant to this Section 2.2 are hereinafter
sometimes referred to as the "Assumed Liabilities."
2.3 Excluded Liabilities. The Buyer shall assume only the Assumed
Liabilities and all other liabilities and obligations of the Seller (the
"Excluded Liabilities") shall be retained by Seller. Without limiting the
foregoing, Seller acknowledges that the following liabilities and obligations
(the "Excluded Liabilities") shall not be assumed by Buyer and shall be paid by
Seller: (i) transactions of Seller occurring after the Closing or obligations of
Seller incurred or arising after the Closing, (ii) liabilities or obligations of
Seller arising out of or in connection with the Retained Businesses or the
Excluded Assets, (iii) any obligations of Seller for expenses, taxes or fees
incident to or arising out of the negotiation, preparation, approval or
authorization of this Agreement or the consummation of the transactions
contemplated hereby, including, without limitation, all attorneys' fees and all
brokers or finders fees or commissions payable by Seller, (iv) any obligation of
Seller under or arising out of this Agreement, (v) liabilities against which
Seller is insured or otherwise indemnified or which would have been covered by
insurance (or indemnification) but for a claim by the insurer (or the
indemnitor) that the insured (or the indemnitees) had breached its obligations
under the policy of insurance (or the contract of indemnity) or had committed
fraud in the insurance application, (vi) any liability or obligation of Seller
to any past or present subsidiary or affiliate, (vii) any liabilities or
obligations, the existence of which constitute a breach of the representations,
warranties or
- 5 -
<PAGE>
covenants of Seller contained in this Agreement, (viii) any liability or
obligation arising out of or related to Seller's or the Business's failure to
comply with all applicable laws, regulations, orders, judgments, decrees (or the
failure so to comply of any affiliate of Seller) with respect to the Business,
or the policies of any third party payor on or prior to the Closing Date,
including, but not limited to, any such violation or failure (or alleged
violation or failure) under ss.ss.1320a-7, 1320a-7a, 1320a-7b or 139nn of Title
42 of the United States Code or the regulations promulgated thereunder, or
similar state or local statutes or regulations, applicable statutes, regulations
or ethical codes governing professional conduct, (ix) liabilities and
obligations (whether fixed or contingent) with respect to employment,
termination of employment, compensation or employee benefits of any nature
(including, but not limited to the benefits to be provided under the Benefit
Plans, as defined in Section 5.12) owed to any employee or former employee of
Seller (or the beneficiary of any employee or former employee) that arises out
of or relates to the employment relationship between Seller and any such
employee or former employee or the termination of such relationship, (x) any
obligations or liabilities of Seller to indemnify its officers, directors,
employees or agents, (xi) any liability, direct, indirect or contingent, for
federal, state or local taxes, or interest or penalties thereon, imposed on
Seller by reason of, or in connection with, the transactions contemplated by
this Agreement, (xii) all federal, state, local, foreign and other governmental
taxes imposed on Seller, including any tax of any other corporation which tax is
assessed against Seller by virtue of its status, prior to the Closing Date, as a
member of any consolidated group of which such other corporation was also a
member, (xiii) any liability or obligation under or related to the litigation
described in Schedule 5.8, as well as any judgment, decision, appeal, remedy or
settlement relating thereto or (xiv) any Environmental Liabilities, as defined
below.
2.4 Employees.
2.4.1 Schedule 2.4.1 identifies all active employees of Seller as of
the date of this Agreement by name, location, title or function, date of hire
and social security number. Seller shall update Schedule 2.4.1 as of the day
prior to Closing and shall include on the updated Schedule 2.4.1 each employees'
accrued but unused vacation and the amount owed to each employee in respect
thereof. Seller acknowledges and agrees that Buyer has no obligation to employ
any current or former employee of Seller following the Closing and is not
assuming any liability, cost or expense with respect thereto. In furtherance and
not in limitation of the foregoing, Seller understands and agrees that Buyer may
decide in its sole and absolute discretion to employ certain employees of Seller
following the Closing with such benefits (including vacation, pension, insurance
and severance benefits) as Buyer may adopt from time to time in its sole and
absolute discretion and no such act of Buyer shall be construed as an assumption
by Buyer of any of obligations of Seller in connection with any employee,
whether incurred before or after the Closing Date, other than as set forth in
Section 2.2. Any employee of Seller who receives and accepts an offer of
employment from Buyer shall be hereinafter referred to as a "Transferred
Employee."
2.4.2 In the event that Buyer shall desire to hire any of Seller's
employees, Seller agrees to use its best efforts to assist Buyer in hiring such
employee.
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2.4.3 For purposes of eligibility and vesting in any employee
benefit plan of the Buyer for which a Transferred Employee otherwise becomes
eligible, such Transferred Employee shall be given credit under such plan for
all service prior to the Closing with Seller. Nothing contained in this
Agreement shall confer upon any Transferred Employee any right with respect to
employment by Buyer, nor shall anything herein interfere with the right of
Buyer, following any employment of any Transferred Employee, to terminate the
employment of any such Transferred Employee at any time, with or without cause,
or restrict Buyer in the exercise of its independent business judgment in
modifying any of the terms and conditions of the employment of any such
Transferred Employee.
ARTICLE III
CLOSING
3.1 Closing. The completion of the purchase and sale of the Purchased
Assets (the "Closing") shall take place at the offices of Dechert Price &
Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street, Philadelphia, PA at 3:00
p.m. on Friday, June 26, 1998, or on such other date, time or place as may be
mutually agreed to in writing by the parties (the "Closing Date"). The
transactions hereunder shall be effective as of 11:59 p.m., on the Closing Date
or such other time and date as the parties may mutually agree.
3.2 Deliveries by Seller at the Closing.
At the Closing, Seller shall deliver or cause to be delivered to Buyer
the following:
3.2.1 The Supply Agreement, executed by Seller, substantially in the
form of Exhibit B hereto.
3.2.2 Such documents of transfer and assignment required to transfer
title to the Purchased Assets to Buyer duly executed by Seller, including
without limitation:
(i) A Bill of Sale and Assignment substantially in the form of
Exhibit C hereto;
(ii) An assignment of all transferable or assignable licenses,
permits and warranties relating to the Purchased Assets and of any trademarks,
trade names, patents and the like, duly executed and in recordable form;
(iii) A non-competition agreement with Fran Hackett for a
period of two (2) years on the terms and conditions satisfactory to Buyer; and
(iv) Such other instruments of conveyance as shall, in the
reasonable opinion of Buyer and its counsel, be necessary to vest in Buyer good,
valid and marketable title to the Purchased Assets in accordance with Section
5.4.
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3.2.3 A copy of the Certificate of Incorporation of Seller, as
amended to the Closing Date, certified by its Secretary and the Secretary of
State of the State of Delaware and including an amendment changing the name of
Seller to a name unrelated to "National Patient Care Systems, Inc."
3.2.4 Long form tax and corporate good standing certificate from the
Secretary of State of the State of Delaware, dated no earlier than five (5) days
prior to the Closing Date.
3.2.5 An officer's certificate, substantially in the form as set
forth in Exhibit D, certifying as to the satisfaction of the conditions set
forth in Sections 8.1.1 and 8.1.2.
3.2.6 A Sublease Agreement and a License Agreement executed by
Seller and Buyer in respect of the real property leased by Seller at the South
Hackensack, New Jersey facility, each attached substantially in the form of
Exhibits E-1 and E-2 hereto and evidence satisfactory to Buyer and Buyer's
counsel of the landlord's consent to such Agreements.
3.2.7 The opinion of Stern Berenbroick, L.L.C., dated the Closing
Date in form and substance satisfactory to Buyer, to the effects set forth in
Exhibit F and with respect to such other matters as Buyer may reasonably
request.
3.2.8 State tax clearance certificates from the City of New York and
each state in which Seller does business, sufficient to establish that Buyer
shall have no obligation to withhold any consideration payable to Seller
hereunder. If Seller has not obtained the state tax clearance certificates
required pursuant to this Section 3.2.8 prior to the Closing Date, Buyer at its
sole election may waive the obtaining of such certificates as a condition to
Closing; provided, however, that in the event Buyer waives such condition to
Closing, Buyer and Seller agree to hold in escrow such amount as the parties may
agree to prior to the Closing Date and pursuant to the terms of an Escrow
Agreement, substantially in the form of Exhibit A hereto to be entered into by
Buyer and Seller.
3.3 Deliveries by Buyer at the Closing.
At the Closing, Buyer shall deliver or cause to be delivered to Seller
the following:
3.3.1 the Closing Cash Payment pursuant to Section 2.1.
3.3.2 the Supply Agreement executed by Buyer, substantially in the
form of Exhibit B hereto.
3.3.3 Certified resolutions of the Board of Directors of Buyer
authorizing the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein.
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3.3.4 Such documents required for the assumption of obligations in
accordance with Section 2.2, duly executed by Buyer.
3.3.5 A list of the Contracts that Buyer elects to include within
the Assumed Contracts.
3.3.6 A Sublease Agreement and a License Agreement executed by Buyer
and Seller in respect of the real property leased by Seller at the South
Hackensack, New Jersey facility, each attached substantially in the form of
Exhibits E-1 and E-2 hereto.
3.3.7 An officer's certificate, substantially in the form as set
forth in Exhibit G, certifying as to the satisfaction of the conditions set
forth in Sections 8.2.1 and 8.2.2.
3.3.8 The opinion of Dechert Price & Rhoads, dated the Closing Date
in form and substance satisfactory to Seller to the effect set forth in Exhibit
H and with respect to such other matters as Seller may reasonably request.
3.4 Deliveries by Selling Shareholders at the Closing. At the Closing
the Selling Shareholders shall deliver or cause to be delivered to the Buyer
following:
3.4.1 Glenn Edwards shall deliver a Non-Competition and
Confidentiality Agreement, executed by him, substantially in the form of
Exhibit I.
3.4.2 Cynthia Powers shall deliver a Non-Competition and
Confidentiality Agreement, executed by her, substantially in the form of
Exhibit J.
ARTICLE IV
TERMINATION
4.1 Termination. This Agreement may be terminated only as follows and in
each case only by written notice:
4.1.1 at any time by mutual written consent of Seller and Buyer;
4.1.2 by either party, if the Closing shall not have occurred by
September 1, 1998;
4.1.3 by Seller on the one hand or Buyer on the other, if the other
party shall be in breach of any covenant, undertaking or restriction contained
herein in any material respect and such breach has not been cured within 10 days
after the giving of written notice to the breaching party of such breach; or
4.1.4 by Buyer at any time, if Buyer notifies Seller that its due
diligence investigation is unsatisfactory pursuant to and in accordance with the
terms of Section 7.3.2.
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4.2 Effect of Termination. In the event of termination of this Agreement
by either Buyer or Seller, in accordance with the applicable provisions above,
this Agreement shall forthwith terminate upon notice thereof duly given in
accordance with the provisions hereof, and there shall be no liability of any
nature on the part of either Buyer or Seller (or their respective officers or
directors) to the other, except for liabilities arising from a breach of this
Agreement prior to such termination; provided, however, that Buyer shall have no
liability of any nature if it terminates this Agreement pursuant to Section
4.1.3; provided, further that this Section 4.2 in no way limits the obligations
of the parties set forth in Sections 9.14, 9.15, 9.16 and 9.17 hereof, which
obligations shall survive the termination. If this Agreement is terminated as
provided herein, Buyer shall, and shall cause its representatives to, either
destroy or redeliver all documents, work papers and other materials of Seller
relating to the transactions contemplated hereby intended by Seller to be
confidential and marked as confidential (other than information which is in or
becomes part of the public domain by publication or otherwise or which has
heretofore been or is hereafter filed or available as public information with
any governmental authority), whether so obtained before or after the execution
hereof, to Seller, and such confidential information received by Buyer shall be
kept confidential, except as required by law.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER AND SELLING SHAREHOLDERS
Seller and each Selling Shareholder hereby, jointly and severally,
represent and warrant to Buyer as follows:
5.1 Incorporation; Authority. Seller (i) is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation, (ii) is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the nature of its
business requires such qualification and (iii) has the requisite power and
authority to execute, deliver and perform this Agreement and all other
agreements and instruments required to be executed by Seller in connection with
or pursuant hereto.
5.2 Due Authorization; Binding Agreement. (i) The execution and delivery
by Seller of this Agreement and all other agreements and instruments required to
be executed by Seller in connection with or pursuant hereto and the performance
by Seller of its obligations hereunder and thereunder have been duly authorized
by all necessary corporate action on the part of Seller (including shareholder
approval). Attached hereto as Schedule 5.2 are a copy of the resolutions duly
adopted by the shareholders and board of directors of Seller authorizing the
execution, delivery and performance of this Agreement and all other agreements
and instruments required to be executed by Seller in connection with or pursuant
hereto. This Agreement and all other agreements and instruments required to be
executed by Seller in connection with or pursuant hereto constitute the legal,
valid and binding obligations and acts of Seller enforceable in accordance with
the respective terms thereof, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights
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and remedies generally and to general principles of equity (regardless of
whether enforcement is sought in a proceeding at law or equity).
(ii) This Agreement has been duly executed and delivered by
the Selling Shareholders, and, this Agreement and all other agreements and
instruments required to be executed by any Selling Shareholder in connection
herewith or pursuant hereto constitutes the legal, valid and binding obligations
of each such Selling Shareholder, enforceable in accordance with their terms.
5.3 No Violation or Conflict. The execution, delivery and performance of
this Agreement by Seller and by each Selling Shareholder does not, and the
consummation of the transactions contemplated by this Agreement will not, (a)
contravene any provision of the charter or bylaws of Seller, or (b) except as
disclosed on Schedule 5.3, violate, conflict with or result in a breach of any
provisions of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the
cancellation or unilateral modification or amendment of, or accelerate the
performance required by, or result in a right of termination or acceleration
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement, or other instrument or
obligation to which Seller or any Selling Shareholder is a party or to which
Seller or any Selling Shareholder or the properties or assets of any one of them
may be subject, or any judgment, ruling, order, writ, injunction, decree,
determination of any court, governmental agency, commission, board, statute,
rule or regulation applicable to Seller or any Selling Shareholder or the
properties or assets of any one of them, (c) result in the creation of any lien,
security interest, charge, claim, restriction or encumbrance upon any of the
properties, assets, or capital stock of Seller or the properties or assets of
either Selling Shareholder, or (d) result in the maturation or acceleration of
any liability or obligation of Seller (or give others the right to cause such
maturation or acceleration) or (e) result in the termination of or loss of any
right (or give others the right to cause such a termination or loss) under any
contract to which Seller is a party or by which it or any of its assets may be
bound.
5.4 Title to Assets. Except as described in Schedule 5.4 (the "Permitted
Exceptions"), Seller has and, upon the sale contemplated hereby, Buyer will be
vested with, good and marketable title to the Purchased Assets, free and clear
of any and all mortgages, pledges, liens, claims, restrictions, encumbrances or
security interests of any kind or nature.
5.5 Taxes. Seller has (i) filed all federal, state and local income,
payroll, withholding, excise, sales, use, personal property, use and occupancy,
business and other tax returns or reports (all the foregoing taxes, including
interest and penalties thereon and including estimated taxes, hereinafter
collectively called "Taxes") which are due on or before the Closing Date; (ii)
paid all Taxes which are shown to have become due pursuant to such returns and
(iii) paid all other Taxes for which a notice of assessment or demand for
payment has been received and payment is due on or before the Closing Date
except for such Taxes that are being disputed in good faith and for which
adequate reserves are being maintained. All Tax returns have been prepared in
accordance with applicable laws and requirements and are true and correct. All
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Taxes for periods beginning after November 30, 1997 are adequately provided for
on the books of Seller. Seller has filed all information returns or reports,
that are required to be filed and has reported all information required to be
included in such returns or reports with reasonable accuracy. All deficiencies
resulting from tax audits of Seller have been paid or are adequately provided
for in the Financial Statements. No income tax return of Seller is currently
under examination by any taxing authority. Seller has not (i) executed a waiver
or consent extending any statute of limitation for federal income or other Tax
liability which remains outstanding, or (ii) entered into a closing agreement
with any taxing authority or applied for a Tax ruling that will have continuing
effect with respect to the Purchased Assets following the Closing. Seller has
not received notice from a taxing authority in a jurisdiction in which Seller
does not file Tax returns asserting that Seller is or may be subject to Tax in
that jurisdiction.
5.6 Licenses. Seller currently holds all licenses, permits,
certifications, approvals, and other governmental and regulatory authorizations
required under all laws, rules and regulations applicable to or affecting the
Business or the Purchased Assets (collectively, the "Licenses") and is in
compliance with all terms and conditions thereof. All Licenses of Seller are
listed in Schedule 1.1.9 and, except as described on Schedule 5.6, are
transferable to Buyer and are in full force and effect and are not currently
subject to any show cause order or adverse governmental or regulatory action.
Seller has made timely applications for renewal of all Licenses which must be
filed on or before Closing to maintain such Licenses in full force and effect.
Seller has no reason to believe that such renewals will not be issued in the
ordinary course or will require payment. Before and after Closing, Seller shall
use its best efforts to assist Buyer in obtaining any required license,
including furnishing Buyer such necessary information and reasonable assistance
as Buyer may request in connection with its preparation of necessary filings,
submissions or applications to any governmental agency in connection with the
transactions contemplated hereby.
5.7 Intellectual Property Rights.
(i) Schedule 1.1.7 is a complete and accurate list of (i) all
Intellectual Property Rights registered in the name of Seller or used or
proposed to be used by Seller, and all applications therefor, (ii) all licenses
and other agreements relating thereto, and (iii) all written agreements relating
to technology, know-how and processes which Seller is licensed or authorized to
use by others or which Seller has licensed or authorized for use by others.
Seller owns, and has the right to transfer and assign to Buyer at the Closing,
all right, title and interest to the Intellectual Property Rights and all
licenses thereto described on Schedule 1.1.7, free and clear of all liens.
Seller does not infringe upon or otherwise act adversely to, and has not
infringed or acted adversely to, any patent, trademark, trade name, brand name,
service mark, service name, copyright or trade secret owned by any other person
or persons, and there is no claim or action by any person pending or threatened
with respect thereto; no other person infringes or has infringed upon or acts or
has acted adversely to any rights of Seller in and to the Intellectual Property
Rights; and there is no claim or demand of any person pertaining to, or any
proceeding pending or threatened with respect to, the exclusive rights of Seller
in the Intellectual Property Rights or the validity of the registrations
described on Schedule 1.1.7. The
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consummation of the transactions contemplated hereby will not cause any
revocation, forfeiture, reduction or other change in the rights of Buyer, as
assignee and transferee of Seller, to the Intellectual Property Rights or any
license thereto.
(ii) Seller owns or licenses all computer software programs or
other electronic data transmission, storage or computation programs listed on
Schedule 5.7 (collectively, the "Software"). No other such programs are used by
Seller to operate the Business. There are no material malfunctions or design
failures with respect to the Software and related items of systems hardware. The
Software is capable of accurately processing, managing and manipulating
date/time data from, into, and between the twentieth and twenty-first centuries,
and the years 1999, 2000 and leap year calculations, including, without
limitation, date/time data recognition, calculations which involve same century
and multi-century formulas and date values, and date/time-related user interface
functionalities and data fields which reflect the century. The billing and other
information generated by the Software is accurate and the related hardware is
accurate and the Software and such hardware are adequate for the Seller's
conduct of the Business as of the Closing Date.
5.8 Litigation. Except as described on Schedule 5.8, there is no action,
order, writ, injunction or decree outstanding or claim, suit, litigation,
proceeding, arbitral action or investigation (collectively "Proceedings")
pending or, to the knowledge of Seller, threatened against, relating to or
affecting (i) Seller or either Selling Shareholder, (ii) the Purchased Assets or
the Business or (iii) the transactions contemplated by this Agreement, at law or
in equity, by or before any court or governmental department, agency or
instrumentality and there is no basis for any such Proceedings. Seller is not in
default with respect to any judgment, order, writ, injunction or decree of any
court or governmental agency, and there are no unsatisfied judgments against
Seller, the Business or any of its assets.
5.9 Financial Statements. The books of account and related records of
Seller present in reasonable detail its assets, liabilities and transactions.
Seller has heretofore delivered to Buyer the following financial statements
(collectively, the "Financial Statements") of Seller: statements of income for
the fiscal years ending November 30, 1996 and 1997, the related balance sheets
as at November 30, 1996 and 1997, statements of cash flows for the periods then
ended, a statement of income for the three-month period ending February 28,
1998, and a balance sheet as at February 28, 1998 (the aforementioned balance
sheet as at February 28, 1998 is referred to herein as the "February 28, 1998
Balance Sheet," and the balance sheet as at November 30, 1997 is referred to as
the "Balance Sheet"). The Financial Statements are correct and complete and were
prepared in accordance with the books and records of Seller in conformity with
generally accepted accounting principles, consistently applied, and present
fairly the financial position and the results of operations and cash flow of
Seller for the periods covered thereby. The Financial Statements for the fiscal
years ended November 30, 1996 and 1997 have been certified by Smolin, Lupin &
Co., P.A., independent certified public accountants for Seller.
5.10 Labor Matters. The relations of Seller with its employees are good.
Schedule 5.10 lists the names of all employees of Seller who during the
twelve-month period
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prior to the date hereof either ceased being employed by Seller or notified
Seller of their intent to cease employment with Seller. Except as disclosed on
Schedule 5.10, (i) no employee of Seller is represented by any union or other
labor organization; (ii) there is no unfair labor practice complaint against
Seller pending or threatened before the National Labor Relations Board; (iii)
there is no labor strike, dispute, slow down or stoppage actually pending or, to
the best knowledge of Seller, threatened against or involving Seller; (iv) no
grievance which might have an adverse affect on the Business is pending; (v) no
private agreement restricts Seller from relocating, closing or terminating any
of its operations or facilities; (vi) Seller has not in the past three years
experienced any work stoppage or other labor difficulty or committed any unfair
labor practice; and (vii) there are no union organizational drives in progress
and there has been no formal or informal request to Seller for collective
bargaining or for any employee election from any labor organization or the
National Labor Relations Board or any other governmental agency, state or
federal, with jurisdiction over labor-management relations with respect to an
employee of Seller. Seller is in material compliance with all applicable laws
respecting employment practices, terms and conditions of employment and wages
and hours.
5.11 Compliance with Laws. Seller has complied with, and is not in
violation of, all statutes, rules, regulations and orders, federal state and
municipal (including without limitation, Environmental Laws, as defined below)
in connection with its business, the Purchased Assets or properties owned,
operated or leased by Seller, including the requirements of any third party
payor or any governmental agency or authority ("Laws"). Without limiting the
generality of the foregoing:
5.11.1 No notice, citation, summons or order has been issued, no
complaint has been filed, no penalty has been assessed and no investigation or
review is pending or threatened by any governmental or other entity with respect
to any alleged violation by Seller of any Law (including, without limitation,
any Environmental Law), or with respect to any generation, treatment, storage,
recycling, transportation or disposal, Release, as defined below, or Management,
as defined below, of any Hazardous Substances, as defined below, except as
described on Schedule 5.11 . Seller has not treated, stored for more than 90
days, recycled or disposed of any hazardous, toxic or polluting substances on
any property now or previously owned or leased by Seller, nor has anyone else
treated, stored for more than 90 days, recycled or disposed of any hazardous,
toxic or polluting substances on any property now or previously owned or leased
by Seller. Seller has complied with each and is not in violation of any federal,
state or local law, regulation, permit, provision or ordinance relating to the
generation, storage, transportation, treatment or disposal of hazardous, toxic
or polluting substances, has obtained and adhered to all necessary permits and
other approvals necessary to store, dispose, and otherwise handle hazardous,
toxic and polluting substances, and has reported, to the extent required by
federal, state and local law, all past and present sites where hazardous, toxic
or polluting substances, if any, have been treated, stored or disposed. Seller
has not transported any hazardous, toxic or polluting substances or arranged for
the transportation of such substances to any location which is the subject of
federal, state or local enforcement actions or other investigations which may
lead to claims against Seller or Buyer for clean-up costs, remedial work,
damages to natural resources or for personal injury claims.
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5.11.2 Seller has not received from any governmental authority or
other person or entity any request for information, notice of claim, complaint,
order, assessment, demand or other notification that it is, may be or will be
potentially responsible with respect to any investigation, clean-up or other
response to or damages arising from or related to the presence, Release or
threat of Release of Hazardous Substances at any property (whether now or
formerly owned, operated or leased by the Seller or off-site) or any other
claim, complaint, order, assessment, demand or notice relating to the violation
of any Environmental Law; and neither Seller nor the Selling Shareholders know
of any basis for any such requests, claims, complaints, orders, assessments,
demands or notices.
5.11.3 No Hazardous Substances (except for routine office and
janitorial supplies and chemicals customarily used in the Business) have been
Managed or Released by Seller, or for which Seller is or may be responsible in
connection with the Business, the Purchased Assets or at any property now or
formerly owned, operated or leased by Seller in connection with the Business
and, after reasonable investigation, Seller knows of no other facts or
circumstances related to environmental matters concerning the Business, any
property now or formerly owned, operated or leased by the Seller in connection
with the operation of the Business or the Purchased Assets, that could lead to
any future environmental responsibilities, liabilities or expenses of or claims
against the Seller, the Business or the Buyer that could have a material adverse
effect on the business, assets, financial condition or results of operations (a
"Material Adverse Effect") of the Buyer or of the Business.
5.11.4 Except as set forth in Schedule 5.11, to the Seller's
knowledge, no properties or facilities owned, operated or leased by the Seller
in connection with the Business or the Purchased Assets contain (i) underground
tanks, active or abandoned, or (ii) asbestos-containing materials or structural
asbestos, which is damaged, friable, or could become friable or which, in its
present condition, could pose a risk of harm to employees or the general public,
or (iii) polychlorinated biphenyls ("PCBs") or PCB-contaminated electrical
equipment, or (iv) equipment which contains ozone depleting substances. Except
as set forth on Schedule 5.11, none of the foregoing is required to be upgraded,
retrofitted or replaced by the Business with the next 5 years pursuant to
Environmental Laws.
5.11.5 The Seller has provided Buyer copies of all inspections,
studies, audits, tests, reviews, or other analysis in its or the Selling
Shareholder's possession or control conducted in relation to the Business, the
Purchased Assets or any property owned, leased or operated by the Seller in
connection with the conduct of the Business or the Purchased Assets.
5.11.6 The transaction contemplated pursuant to this Agreement does
not require compliance with the New Jersey Industrial Site Recovery Act ("ISRA")
and the Seller's standard industrial code ("SIC Code") is 5047.
5.11.7 Definitions.
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(i) "Environmental Laws" means all applicable federal, state
and local laws, regulations, rules, codes, orders, ordinances, licenses,
notices, or consent or settlement agreements relating to pollution or protection
of human health or the environment including, laws, regulations, rules, orders,
codes, ordinances, notices, and agreements as adopted or issued as of the date
of this Agreement relating to the Management or Release or threatened Release of
Hazardous Substances into the environment (including without limitation ambient
air, surface water, ground water, land surface or subsurface strata).
(ii) "Hazardous Substance" means any hazardous or toxic
substance, material or waste, pollutant or contaminant including petroleum
products, asbestos, PCBs and radioactive materials.
(iii) "Management" or "Managed" means the generation,
possession, manufacture, processing, distribution, use, treatment, storage,
disposal, transport, recycling or handling of Hazardous Substances.
(iv) "Release" means any spill, leak, discharge, disposal,
pumping, pouring, emitting, emptying, injecting, leaching, dumping or allowing
to escape of any Hazardous Substance.
5.11.8 Seller has not violated in any material respect or received a
notice or charge asserting any violation in any material respect of any Law,
regulation or terms of participation with respect to Medicare or Medicaid, or
any federal, state or local Law governing, implementing, or relating to any
state or local program for governmental payment (directly or by reimbursement)
of any amounts due or to become due to Seller on account of services provided or
to be provided by Seller, directly or indirectly, to any person.
(i) Seller has not (nor has any Selling Shareholder nor any
affiliate on behalf of Seller):
(a) offered, made or agreed to make any contribution, payment,
or gift of funds or property to any governmental official, employee, or agent
where either the contribution, payment or gift or purpose thereof was illegal
under any Law.
(b) established or maintained or agreed to establish or
maintain any unrecorded fund or material asset for any purpose, or made any
false entries on any books or records for any reason; or
(c) offered, made or agreed to make any contribution, or
reimbursed any political gift or contribution made by any other person, to any
candidate for federal, state, local, or foreign public office where such
contribution or reimbursement or the purpose thereof was illegal under any
applicable Law.
(ii) Seller has filed in a timely manner all reports,
documents, and other materials that are or were required to be filed (and the
information contained therein
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was correct and complete in all respects) under all applicable Laws, including
Section 1877 of the Social Security Act, except to the extent that
non-compliance with any such Law could not, individually or in the aggregate,
have a Material Adverse Effect on the Seller.
(iii) Seller has possession of all material records and
documents with respect to its business that are or were required to be retained
under all applicable laws.
5.12 Employee Benefit Plans.
5.12.1 Set forth on Schedule 5.12.1 is a true and complete list of
each (i) "employee benefit plan," as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including any
"multiemployer plan" as defined in Section 3(37) of ERISA), (ii) all other
pension, retirement, supplemental retirement, deferred compensation, excess
benefit, profit sharing, bonus, incentive, stock purchase, stock ownership,
stock option, stock appreciation right, severance, salary continuation,
termination, change-of-control, health, life, disability, group insurance,
vacation, holiday and fringe benefit plan, program, contract, or arrangement
maintained, contributed to, or required to be contributed to, by Seller or any
ERISA Affiliate (as defined below) for the benefit of any employee, former
employee, director or officer of Seller or under which Seller or any ERISA
Affiliate has any liability with respect to any employee, former employee,
director or officer of Seller (the "Benefit Plans"). The term "ERISA Affiliate"
shall mean (i) any corporation included with Seller in a controlled group of
corporations within the meaning of Section 414(b) of the Internal Revenue Code,
as amended (the "Code"); (ii) any trade or business (whether or not
incorporated) which is under common control with Seller within the meaning of
Section 414(c) of the Code; (iii) any member of an affiliated service group of
which Seller is a member within the meaning of Section 414(m) of the Code; or
(iv) any other person or entity treated as an affiliate of Seller under Section
414(o) of the Code.
5.12.2 As applicable with respect to each Benefit Plan, Seller has
delivered to Buyer, true and complete copies of (i) each Benefit Plan, including
all amendments thereto, and in the case of an unwritten Benefit Plan, a written
description thereof, (ii) all trust documents, investment management contracts,
custodial agreements and insurance contracts relating thereto, (iii) the current
summary plan description and each summary of material modifications thereto,
(iv) the three most recent annual reports (Form 5500 and all schedules thereto)
filed with the Internal Revenue Service ("IRS"), (v) the most recent IRS
determination letter and each currently pending application to the IRS for a
determination letter, (vi) the three most recent summary annual reports,
actuarial reports, financial statements and trustee reports, and (vii) all
records, notices and filings concerning IRS or Department of Labor audits or
investigations, "prohibited transactions" within the meaning of Section 406 of
ERISA or Section 4975 of the Code and "reportable events" within the meaning of
Section 4043 of ERISA.
5.12.3 Except as otherwise disclosed with particularity on Schedule
5.12.3:
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(i) The Seller and each ERISA Affiliate are in compliance in
all respects with the provisions of ERISA and the Code applicable to the Benefit
Plans. Each Benefit Plan has been maintained, operated and administered in
compliance in all respects with its terms and any related documents or
agreements and the applicable provisions of ERISA and the Code.
(ii) The Benefit Plans which are "employee pension benefit
plans" within the meaning of Section 3(2) of ERISA and which are intended to
meet the qualification requirements of Section 401(a) of the Code now meet, and
at all times since their inception have met the requirements for such
qualification, and the related trusts are now, and at all times since their
inception have been, exempt from taxation under Section 501(a) of the Code.
(iii) No Benefit Plan is now or at any time has been subject
to Part 3, Subtitle B of Title I of ERISA or Title IV of ERISA. No Benefit Plan
is now or at any time has been a multiemployer plan as defined in Section 3(37)
of ERISA.
(iv) There are no pending audits or investigations by any
governmental agency involving the Benefit Plans, and no threatened or pending
claims (except for individual claims for benefits payable in the normal
operation of the Benefit Plans), suits or proceedings involving any Benefit
Plan, any fiduciary thereof or service provider thereto, nor is there any
reasonable basis for any such claim, suit or proceeding.
(v) Neither Seller, any ERISA Affiliate, nor to the best
knowledge of Seller, any fiduciary, trustee or administrator of any Benefit
Plan, has engaged in or, in connection with the transactions contemplated by
this Agreement, will engage in any transaction with respect to any Benefit Plan
which would subject any such Benefit Plan, Seller, any ERISA Affiliate or Buyer
to a tax, penalty or liability for a "prohibited transaction" under Section 406
of ERISA or Section 4975 of the Code. None of the assets of any Benefit Plan is
invested in any property constituting "employer real property" or an "employer
security" within the meaning of Section 407 of ERISA.
(vi) With respect to each Benefit Plan that is a "group health
plan" within the meaning of Section 607 of ERISA and that is subject to Section
4980B of the Code, the Seller and each ERISA Affiliate comply in all respects
with the continuation coverage requirements of the Code and ERISA.
5.13 Insurance. Schedule 5.13 contains a complete and accurate list of
all policies or binders of fire, liability, title, worker's compensation,
environmental and other forms of insurance (showing as to each policy or binder
the carrier, policy number, coverage limit, expiration date, annual premium and
a general description of the type of coverage provided) maintained by Seller on
its business, properties or employees. All such policies are outstanding and in
full force and effect. The coverages provided by such policies are reasonable,
in both scope and amount, in light of the risks attendant to Seller's business,
properties or employees and are comparable to coverages customarily maintained
by companies in similar lines of businesses
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and such insurance is sufficient in the aggregate to cover all reasonably
foreseeable damage to and liabilities or contingencies relating to the conduct
by such business and affairs. There is no default with respect to any provision
contained in any such policy, nor has there been any failure to give any notice
or present any claim under any such policy in a timely fashion or in the manner
or detail required by the policy.
5.14 Consents and Approvals. No consent, approval or authorization of,
or declaration, filing or registration with, any governmental or regulatory
authority, or any third person or entity, is required to be made or obtained by
Seller or the Selling Shareholders in connection with the execution, delivery or
performance of this Agreement and the consummation of the transactions
contemplated hereby, other than those set forth in Schedule 5.14.
5.15 Contracts; Compliance. Except as set forth on Schedule 5.15, Seller
is not a party to any material lease, contract or commitment of any kind with
respect to the Business, oral or written, formal or informal. All leases,
contracts and other commitments to which Seller is a party or by which Seller is
bound are in full force and effect; all parties to such leases, contracts and
other commitments have complied with the provisions thereof; no such party is in
default under any of the terms thereof; and no event has occurred that with the
passage of time or the giving of notice or both would constitute a default by
any party under any provision thereof.
5.16 Real Property. Schedule 5.16 sets forth a correct list and summary
descriptions of all real properties owned or leased by Seller; all structures
and other improvements on such properties are within the lot lines and do not
encroach on the properties of any other person and the use and operation of all
such properties conform to all applicable building, zoning, safety,
environmental and other laws, ordinances, regulations, codes, permits, licenses
and certificates and all restrictions and conditions affecting title. Seller has
not received any written or oral notice or order by any governmental or other
public authority, any insurance company which has issued a policy with respect
to any of such properties or any board of fire underwriters or other body
exercising similar functions which (i) relates to violations of building,
safety, fire or other ordinances or regulations, (ii) claims any defect or
deficiency with respect to any of such properties or (iii) requests the
performance of any repairs, alterations or other work to or in any of such
properties or in the streets bounding the same. There is no pending
condemnation, expropriation, eminent domain or similar proceeding affecting all
or any portion of any of such properties and, to the best knowledge of Seller,
no such proceeding is contemplated.
5.17 Inventory and Equipment. The inventory of materials and supplies
set forth in Schedule 1.1.2 is in good condition, suitable for its intended use
and is valued at the lower of cost or market, the cost thereof being determined
on a first-in, first-out basis. All of the equipment (including rental
equipment) of Seller set forth in Schedules 1.1.1 and 1.1.3 is valued at its
acquisition cost less accumulated depreciation calculated under the three to
seven year straight-line method, except as disclosed in the Financial
Statements. Except as set forth in Schedule 1.1.1, Schedule 1.1.2 or Schedule
1.1.3, as the case may be, all such inventories and
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equipment consist of items of a quality and quantity usable, saleable, leasable
or rentable in the ordinary course of Seller's business within a reasonable
period of time and at normal profit margins, and all such inventories and
equipment can be expected to be consumed, sold, leased or rented in the ordinary
course of business within a reasonable period of time. Except as set forth in
Schedule 1.1.1, Schedule 1.1.2 or Schedule 1.1.3, as the case may be, none of
the inventory or equipment of Seller is obsolete or slow moving, and any
obsolete or slow moving inventory has been written off or reserved against in
the Financial Statements.
5.18 Condition of Purchased Assets. The Purchased Assets are in good
operating condition and repair, free from any defect and are suitable for the
purposes for which they are used in the Business. The Purchased Assets
constitute all rights, properties and assets of Seller that are necessary to
operate the Business as currently operated.
5.19 No Undisclosed Liabilities. Seller has no liability or obligation
of any nature, whether due or to become due, absolute, contingent or otherwise,
including liabilities for or in respect of federal, state and local taxes and
any interest or penalties relating thereto, except (i) liabilities fully
reflected in or reserved against on the Balance Sheet or notes thereto, (ii)
liabilities that have arisen after the Balance Sheet in the ordinary course and
fully reflected as liabilities on Seller's books of account, none of which,
individually or in the aggregate, has been materially adverse and (iii)
liabilities set forth in Schedule 5.19.
5.20 Business Locations. Set forth on Schedule 5.20 is a list of each
location (specifying state and country) (i) where Seller has a place of business
and (ii) where Seller owns, leases or stores real and personal property. Also
set forth on Schedule 5.20 is a list of each name under which Seller has ever
conducted its business.
5.21 Billing; Gratuitous Payments.
5.21.1 Billing. Except as set forth in Schedule 5.21, all billing by
the Seller to third party payors, including, but not limited to, the federal
Medicare program, state Medicaid programs and private insurance companies has
been true and correct in all material respects and in compliance in all material
respects with all applicable Legal Requirements and the policies of such third
party payors.
5.21.2 Absence of Certain Business Practices. Neither Seller, nor
any officer, employee or agent of Seller, nor any Selling Shareholder, nor any
other person acting on behalf of any of them, has, within the past five years
given any remuneration, gift, keepsake, or similar benefit to any patient,
referral source, provider, customer, supplier or governmental employee which
could reasonably be expected to subject Seller to any damage or penalty in any
civil, criminal or governmental litigation or proceeding, were any such
litigation or proceeding to be commenced; and either
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(i) if not given in the past, would have adversely affected,
in any material respect, the earnings or business of Seller taken as a whole, as
reflected in the Financial Statements; or
(ii) if not continued in the future, could reasonably be
expected to adversely affect, in any material respect, the assets, operations or
prospects of Seller.
5.22 Fraud and Abuse. Except as set forth in Schedule 5.22, neither
Seller or the Selling Shareholders nor any person or entity providing
professional or other services for Seller is currently, or in the past five (5)
years has, engaged in any activities which are prohibited, or are cause for
criminal or civil penalties or mandatory or permissive exclusion from Medicare
or Medicaid, under Sections 1320a-7, 1320a-7a, 1320a-7B or 395nn of Title 42 of
the United States Code or the regulations promulgated thereunder, or similar
state or local statutes or regulations, or which are prohibited by applicable
statutes, regulations, or ethical codes governing professional conduct,
including, but not limited to, the following:
(i) knowingly and willfully making or causing to be made a
false statement or representation of a material fact in any application for any
benefit or payment;
(ii) knowingly or willfully making or causing to be made any
false statement or representation of a material fact for use in determining
rights to any benefit or payment;
(iii) 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 of another, with the intent to fraudulently
secure such benefit or payment;
(iv) knowingly and willfully 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 pay or receive such
remuneration: (1) in return for referring an individual to a person for the
furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part by Medicare or Medicaid; or (2) in
return for purchasing, leasing or ordering or arranging for, or recommending,
purchasing, leasing or ordering any good, facility, service or item for which
payment may be made in whole or in part by Medicare or Medicaid; or
(v) referring any patients to a person or entity with which
either Seller or either of the Selling Shareholders has a financial relationship
that is prohibited by applicable law.
5.23 Reimbursement Matters. Except as disclosed on Schedule 5.23, in the
past three years (a) Seller has not and, to the Seller's knowledge, no nursing
home, hospital or other health care provider with respect to which Seller
provides services has received any written notice of denial or recoupment from
the Medicare or Medicaid programs, or any other third party reimbursement source
(inclusive of managed care organizations) with respect to products or services
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provided by Seller; (b) to the Seller's knowledge, there is no basis for the
assertion after the Closing of any such denial or recoupment claim and (c)
neither Seller nor, to Seller's knowledge, any nursing home, hospital or other
health care provider with respect to which Seller provides services has received
written notice of any denial of claims for payment from any Medicare or Medicaid
program or any other third party reimbursement source (inclusive of managed care
organizations) of any pending or threatened investigations or surveys
specifically with respect to, or arising out of, products or services provided
by Seller, and to Seller's knowledge, no such investigation or survey is
pending, threatened or imminent. Seller has fully and accurately disclosed to
the appropriate intermediaries and carriers all material billing and business
practices with respect to Medicare and Medicaid reimbursement with respect to
the Business to the extent necessary for Seller to comply with applicable law.
Seller has complied with all material requirements imposed by any such
intermediary or carrier with respect to such billing. Seller has billed the
applicable intermediaries and/or carriers for the services rendered by Seller in
material compliance with all applicable Medicare and Medicaid laws, and Seller
is not aware of any non-compliance by it with any state licensing or corporate
practice of medicine law that would cause such billing or business practices to
not be in material compliance with any of such Medicare or Medicaid laws. Seller
has not received any notice from any regulatory authority or intermediary that
indicates that Buyer could not continue to bill intermediaries in substantially
the same manner and structure as Seller is billing on the date hereof.
5.24 Medicare/Medicaid Participation. All services provided by Seller
for which Seller directly or indirectly receives payment under the Medicare or
Medicaid programs are, to the extent required by law, certified for
participation or enrollment in all Medicare and Medicaid programs, have a
current and valid provider contract with the Medicare and Medicaid programs or
other third party reimbursement source (inclusive of managed care
organizations), are in compliance with the conditions of participation of such
programs, and, to the extent required by law, have received all approvals or
qualifications necessary for reimbursement, except for such certifications,
contracts, compliances, approvals and qualifications which are set forth on
Schedule 5.24 and which, individually or in the aggregate, would not have a
material adverse effect on Seller's earnings or business. Seller has delivered
to Buyer true and complete copies of all Medicare and Medicaid survey and
inspection reports by the applicable licensing authority or payor for any period
after November 30, 1992 for each location of Seller for which there is a
Medicare or Medicaid provider number.
5.25 Ownership. The Selling Shareholders are the legal and beneficial
owners of all of the issued and outstanding capital stock of Seller.
5.26 Absence of Changes. Except as described on Schedule 5.26, Seller
has operated its business only in the ordinary and regular course in all
material respects and consistent with historical practice since November 30,
1997. Since November 30, 1997, there has not been: (i) any material and adverse
damage, destruction or loss, whether or not covered by insurance, to the
Purchased Assets; (ii) any organized labor negotiations, strike or work stoppage
affecting Seller or any threat of the foregoing; (iii) any termination or waiver
of any rights of material value to Seller's business; (iv) any change in the
accounting methods or practices
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followed by Seller; (v) any sale, transfer or other disposition of any assets of
the Seller, other than in the ordinary course of business, (vi) any adverse
change or any threat of any adverse change in the Seller's relations with any of
Seller's suppliers, clients or customers; (vii) any transaction, agreement or
event outside the ordinary course of business of the Seller; or (viii) any
commitment, obligation or understanding to do any of the foregoing.
5.27 Compensation Arrangements. Schedule 5.27 sets forth the following
information: (a) the names and current annual salary, including any bonus, if
applicable, and the benefits of all present officers and employees of Seller
whose current annual salary, including any promised, expected or customary
bonus, equals or exceeds $10,000, together with a statement of the full amount
of all remuneration (including benefits) paid by Seller to each such person and
to any director of Seller, during the year ended November 30, 1997; (b) all
consulting or employment agreements or other agreements with respect to
individual consultants or employees, oral or written, and still in effect to
which Seller is a party, none of which agreements will be assigned to, or
assumed by, Buyer at Closing; and (c) a true and correct list of all outstanding
note payables to shareholders of Seller, employees of Seller or other
individuals. Except as disclosed on Schedule 5.27, since November 30, 1997,
there has been no change in the policies of Seller regarding compensation to
Seller's employees or independent contractors or in such compensation.
5.28 Disclosure. No representation or warranty by Seller in this
Agreement or pursuant hereto, and no exhibit, document, statement, certificate
or schedule furnished or to be furnished to Buyer pursuant hereto, or in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of a material fact, or omits or will omit to state a
material fact necessary to make the statements or facts contained herein or
therein not misleading or necessary to provide Buyer with proper information as
to Seller and the Purchased Assets. There is no fact or condition known to
Seller or any Selling Shareholder, which has not been disclosed to Buyer in the
Schedules to this Agreement or otherwise in writing, that had or has, or so far
as Seller or any Selling Shareholder can reasonably foresee will have a material
adverse effect on Seller, the business, financial condition, results of
operations or prospects of Seller, the Purchased Assets or the ability of Seller
or any Selling Shareholder of Seller to perform its or his obligations under
this Agreement.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
6.1 Incorporation; Authority. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite corporate power and authority to execute, deliver and
perform this Agreement and all other agreements and instruments required to be
executed by Buyer in connection with or pursuant hereto.
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6.2 Due Authorization; Binding Agreement. The execution and delivery by
Buyer of this Agreement and all other agreements and instruments required to be
executed by Buyer in connection with or pursuant hereto and the performance by
Buyer of its obligations hereunder and thereunder have been duly authorized by
all necessary corporate action on the part of Buyer. This Agreement and all
other agreements or instruments required to be executed by Buyer in connection
with or pursuant hereto constitute the legal, valid and binding obligation and
act of Buyer enforceable in accordance with the respective terms thereof,
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or equity).
ARTICLE VII
COVENANTS
7.1 Covenants of Seller and Selling Shareholders Pending Closing. Seller
and each Selling Shareholder jointly and severally covenants and agrees with
Buyer that:
7.1.1 From and after the date hereof and until the earlier of the
Closing or the termination of this Agreement pursuant to Section 4.1 hereof,
Seller and each Selling Shareholder with respect to the Business (i) shall use
its or his best efforts to fulfill or satisfy, or cause to be fulfilled or
satisfied, all of the conditions precedent to Buyer's obligation to consummate
and complete the purchase provided for herein, and to take all other steps and
to do all other things reasonably required to consummate this Agreement in
accordance with its terms, (ii) shall not interfere with the performance by
Buyer of its obligations under this Agreement, (iii) shall not mortgage, pledge,
assign, sell or otherwise transfer any of the Purchased Assets, (iv) and will
comply with all laws, rules and regulations applicable to Seller's business or
assets, (v) shall conduct the business, operations, activities and practices of
Seller in the usual and ordinary course, consistent with its past practices and
in accordance with the transactions contemplated hereby, (vi) shall preserve the
business organization of Seller intact, keep available to itself and to Buyer
the present services of Seller's employees, and preserve for itself and Buyer
the goodwill of Seller's suppliers, students and others with whom Seller has
business relationships, (vii) shall maintain Seller's tangible property in the
same condition as it now exists, ordinary wear and tear excepted, (viii) shall
maintain Seller's insurance policies listed on Schedule 5.13 in full force and
effect (or renew any such policies which expire), (ix) shall maintain in full
force and effect all agreements, authorizations, licenses, and other approvals
necessary for its operations, (x) shall not without the prior written consent of
Buyer enter into any contract or commitment the performance of which may extend
beyond the Closing, (xi) shall not sell, transfer, lease or otherwise dispose of
any of its assets other than sales of inventory in the ordinary course of
business and consistent with past practice, (xii) shall not fail to pay when due
all taxes, assessments, governmental charges or levies imposed upon it or its
income, profits or assets or otherwise required to be paid by it, or fail to pay
when due any liability or charge which, if unpaid, might become a lien or charge
upon any of its assets, (xiii) shall not make or authorize the making of any
capital expenditure in excess of $25,000, (xiv) shall not incur any debt or
other obligation for money borrowed, (xv) shall not incur any
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obligation or liability, absolute or contingent except in the ordinary course of
business and consistent with past practice, and in any event not in excess of
$25,000, (xv) shall not increase the compensation paid to or enter into any
contract with any employees of Seller, (xvi) shall promptly notify Buyer of any
notice from any governmental or regulatory agency or authority in connection
with the transactions contemplated by this Agreement, any fact or circumstance
of which Seller has knowledge that would make any representation or warranty set
forth herein untrue or inaccurate as of the Closing Date or as of the date of
this Agreement, or any planned or threatened labor dispute, organization
efforts, strike or collective work stoppage affecting the employees of Seller,
(xvii) shall not waive or permit the loss of any substantial right, (xviii)
shall use its or his best efforts to obtain any necessary third-party consents
to the purchase by Buyer of the Assumed Contracts and (xix) shall promptly
inform Buyer if Seller or the Selling Shareholders are in breach of any covenant
hereunder, or if any material adverse event shall have occurred with respect to
the Business or the Purchased Assets.
7.1.2 Fran Hackett shall enter into a non-competition agreement with
the Buyer for a period of two (2) years on the terms and conditions satisfactory
to the Buyer.
7.2 Covenants of Buyer Pending Closing. Buyer covenants and agrees with
Seller that from and after the date hereof and until the earlier of the Closing
or the termination of this Agreement pursuant to Section 4.1 hereof, Buyer (i)
shall use its best efforts to fulfill or satisfy, or cause to be fulfilled or
satisfied, all of the conditions precedent to Seller's obligations to consummate
and complete the sale provided herein and to take all other steps and do all
other things reasonably required to consummate this Agreement in accordance with
its terms, and (ii) shall not interfere with the performance by Seller or the
Selling Shareholders of its or their obligations under this Agreement.
7.3 Full Access and Due Diligence Investigation.
7.3.1 From and after the date hereof until the Closing Date, Seller
shall afford to all representatives of Buyer, free and full access during normal
business hours to the employees, accountants, assets, properties, books,
financial statements, work papers and records of Seller in order that Buyer may
have full opportunity to make investigations of Seller, the Business, the
Purchased Assets, and affairs of Seller, and Seller shall furnish or cause to be
furnished to Buyer and its representatives all such information about Seller,
the Business and the Purchased Assets as Buyer shall reasonably request;
provided, that such investigation shall not unreasonably interfere with the
operations of the Business or Seller.
7.3.2 Buyer and its counsel, accountants and other representatives
shall have the right to conduct and complete a due diligence investigation of
Seller, the Business, the Purchased Assets and the business prospects thereof,
the type and quantity of the Assumed Liabilities hereunder, Seller's financial
condition and ability to convey title to the Purchased Assets and the accuracy
and completeness of the information and materials furnished to Buyer by Seller
or its representatives. Buyer shall have the right to make surveys, draft plans
and conduct such environmental studies, audits and tests on the real property
owned or leased by Seller as are,
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in the sole discretion of Buyer, necessary or desirable ("Tests"). Buyer shall
have no liability with respect to any remediation, correction or clean-up of any
condition of such real property disclosed by such Tests. In the event that the
results of such due diligence investigation are not satisfactory to Buyer, in
its sole and absolute discretion, Buyer shall have the right to terminate this
Agreement before the Closing Date by written notice to Seller stating that the
results of such due diligence investigation are unsatisfactory to Buyer in
Buyer's sole and absolute discretion. Buyer shall be required to disclose the
basis for any such termination.
7.4 Post-Closing Covenants.
7.4.1 Further Assurances. From time to time after the Closing, (i)
Seller (for as long as it continues its corporate existence) and each Selling
Shareholder will use reasonable efforts to execute and deliver such instruments
of conveyance, sale or assignment as Buyer may reasonably request, to more
effectively vest, confirm or evidence Buyer's title to or rights in any of the
Purchased Assets and to otherwise carry out the purpose and intent of this
Agreement and to obtain all required consents and approvals specified in 8.2.5
not obtained as of the Closing, and (ii) Buyer will execute and deliver such
instruments as Seller may reasonably request to more effectively assure the
assumption by Buyer of the obligations and liabilities of Seller to be assumed
by Buyer pursuant to this Agreement and to otherwise carry out the purpose and
intent of this Agreement.
7.4.2 Mutual Cooperation. The parties shall use reasonable efforts
to cooperate fully with each other and with their respective counsel and
accountants in connection with any steps required to be taken, including
specific assistance by Seller during the establishment of the general ledger
system for the Business, provided that nothing in this Section 7.4.2, including,
without limitation, the following sentence, shall require Seller to continue in
its employ any person no longer needed for its operations or to continue its
corporate existence beyond the Closing Date. By way of further cooperation,
Seller will use reasonable efforts for as long as it continues its corporate
existence to (i) make its remaining employees available for consultation, and
(ii) permit access to other third parties reasonably requested for verification
of any information obtained by Buyer regarding the operations of Seller.
7.4.3 Allocation of Purchase Price. Buyer, and Seller and each
Selling Shareholder agrees that the Purchase Price shall be allocated among the
Purchased Assets in accordance with the allocation set forth in Schedule 7.4.3
hereto. Buyer, Seller and each Selling Shareholder agree that each will report
the federal, state and local income and other tax consequences of the purchase
and sale contemplated hereby in a manner consistent with such allocation and
will not take any position inconsistent therewith upon examination of any tax
return, in any refund claim, in any litigation, or otherwise.
7.4.4 Other Proposals. Each Selling Shareholder, Seller and its
officers and directors, and each of their financial advisors, counsel, and other
agents will not, directly or indirectly, encourage, solicit, initiate or enter
into any agreement with respect to, or participate in any way in discussions or
negotiations with, or provide any confidential
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information to, any person other than Buyer and its agents concerning any
merger, sale of all or substantially all of the assets of Seller, sale of any
shares of capital stock of Seller or any similar transaction involving Seller
(an "Acquisition Proposal"). As long as this Agreement remains in effect, Seller
and each Selling Shareholder will promptly communicate to Buyer (i) the identity
of any person from which they receive any request for information, any inquiry,
or any proposal to initial discussions or negotiations with respect to any
Acquisition Proposal, and (ii) the terms of any such request for information,
inquiry or proposal.
7.4.5 Non-Compete. (i) Seller and the Selling Shareholders agree
with Buyer that for a period of five (5) years after the Closing neither Seller
nor any of its affiliates shall, directly or indirectly, (a) engage or become
interested in, as an employee, manager, consultant, owner, partner, through
stock ownership (other than a less-than-2% interest in a corporation having
securities which are listed for trading on a national securities exchange), or
by the investment of capital or lending of money or property to any person,
enterprise, partnership, association, corporation, limited liability company,
joint venture or other entity which is directly or indirectly engaged in the
business of selling, renting or leasing or otherwise providing therapeutic
support surfaces anywhere in the United States, provided, however that this
Section 7.4.5 shall not restrict the Sellers conduct of the Retained Businesses
(b) induce or attempt to induce any customer to cease doing business with the
Buyer or any of its affiliates, or take any action which would reasonably be
expected to reduce, damage or interfere with the relationship between any
customer and the Buyer or such affiliate, (c) use for their own benefit or
disclose the name and/or requirements of any such customer to any other person
or persons, natural or corporate, except as such disclosure is required by any
Law, or (d) solicit or hire any of the employees or consultants of Buyer
(including without limitation, employees of Seller hired by Buyer) or any of its
affiliates.
(ii) In the event that either this Section 7.4.5 or Section
7.5 shall be determined by any court of competent jurisdiction to be
unenforceable by reason of its extending for too great a period of time or over
too great a geographic area or range of activities, it shall be interpreted to
extend only over the maximum period of time, geographic area or range of
activities as to which it may be enforceable.
(iii) Seller recognizes and acknowledges that in the event of
its failure to comply with any of the covenants contained in this Section 7.4.5
or Section 7.5, it may be impossible to measure in money the damages to Buyer
and that in the event of such failure, Buyer may not have an adequate remedy at
law. It is therefore agreed that Buyer, in addition to any other rights or
remedies which it may have, shall be entitled to immediate injunctive relief
(without the requirement of any bond) to enforce such covenants, and that if any
action or proceeding is brought in equity to enforce the same, Seller will not
urge, as a defense, that there is an adequate remedy at law.
7.5 Confidential Information. Seller and the Selling Shareholders
acknowledge that after the Closing, Buyer could be irreparably damaged if
Seller, the Selling Shareholders or any of Seller's affiliates' confidential
knowledge of the operations of the
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Business or the Purchased Assets were disclosed to or utilized on behalf of any
person, firm, corporation or other business entity other than Buyer or its
affiliates, and Seller and the Selling Shareholders covenant and agree that they
will not, following the Closing, without the prior written consent of Buyer,
disclose (or permit to be disclosed) or use in any way any such confidential
information, unless (i) compelled to disclose such confidential information by
judicial or administrative process or, in the opinion of their counsel, by other
requirements of law, or (ii) such confidential information is generally
available to the public through no fault of Seller or the Selling Shareholders.
7.6 Condemnation. Any taking or condemnation for any public or
quasi-public purpose or use by any competent authority in appropriate
proceedings or by any right of eminent domain of all or any part of the real
property owned or leased by Seller between the date of this Agreement and the
time of the Closing shall, at Buyer's sole option, cause a termination of this
Agreement. The election to terminate provided for hereby must be exercised by
Buyer (or will be deemed to have been waived) by written notice to Seller to
that effect, which notice shall be given by Buyer on or before the fifteenth
(15th) business day following Buyer's receipt of written notice of the
condemnation from Seller.
7.7 Use of Name. Seller and Selling Shareholders, jointly and severally,
agree that they shall not from and after the Closing Date use or grant any right
to any individual, corporation, partnership or other entity or any other person
to use, or otherwise consent to the use of, any name or mark that is similar to
the Marks.
7.8 Release and Waiver. Seller and Selling Shareholders hereby waive and
release Buyer and the Business from any and all Damages (including without
limitation legal expenses), whether known or unknown, foreseen or unforeseen,
which exist or which may arise in the future under common or statutory law,
including CERCLA or any other statutes now or hereafter in effect.
7.9 Third-Party Payments. As funds are received by either Buyer or
Seller from third-party payors in respect of the Business, such funds shall be
allocated to the Buyer or the Seller in accordance with the procedures set forth
in Schedule 7.9 hereto.
7.10 Books and Records. Seller shall provide to Buyer, upon Buyer's
reasonable request, a copy of Seller's records related to or used in connection
with the operation of the Business or pertaining to the Purchased Assets,
including, without limitation, customer records and lists; billing records;
employment records; equipment maintenance and repair records; quality assurance
records; and all documents filed by Seller with any state, federal or local
government authority. If Seller cannot provide a copy of any documents
reasonably requested by Buyer, then Seller shall afford to Buyer and all
representatives of Buyer full and free access during normal business hours to
such books and records.
7.11 May 31, 1998 Financial Statements. No later than July 31, 1998,
Seller shall deliver to Buyer a copy of the balance sheet of Seller at May 31,
1998 and May 31, 1997
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and the related statements of income and cash flows for the six month periods
then ended (the "May Statements"). The May Statements will be correct and
complete, will be prepared in accordance with the books and records of Seller in
conformity with generally accepted accounting principles, consistently applied,
and will present fairly the financial position and the results of operations and
cash flow of Seller for the period covered thereby.
7.12 Third Party Provider Agreements. Seller shall use its best efforts
to have all third party provider agreements (including any third party provider
numbers) related to the Business that Buyer requests assigned to the Buyer
effective as of the Closing Date. If any such provider agreement is not
assignable, Seller will use its best efforts to aid Buyer in obtaining
substitute agreements and provider numbers.
ARTICLE VIII
CONDITIONS
8.1 Conditions Precedent to Obligations of Buyer. The obligation of
Buyer to complete the purchase of Purchased Assets as provided for herein is
subject to the fulfillment or satisfaction on or before the Closing Date of each
of the conditions set forth below, any of which may be waived by Buyer in
writing.
8.1.1 All representations and warranties of Seller and the Selling
Shareholders contained in this Agreement shall be true and correct in all
respects as of the Closing, with the same force and effect as if the same had
been made on and as of the Closing Date (except to the extent such
representations and warranties speak as of a particular date), and Buyer shall
have received a certificate signed by an officer of Seller and each of the
Selling Shareholders, substantially in the form as set forth in Exhibit D, to
such effect;
8.1.2 Seller and each of the Selling Shareholders shall have
performed in all material respects all of the obligations, covenants and
agreements contained in this Agreement to be performed by Seller and the Selling
Shareholders on or before the Closing Date, and Buyer shall have received a
certificate signed by an officer of Seller and each of the Selling Shareholders,
substantially in the form as set forth in Exhibit D, to such effect;
8.1.3 All instruments and documents required on Seller's and each
Selling Shareholder's part to effectuate and consummate the transactions
contemplated hereby shall be delivered to Buyer and shall be in form and
substance satisfactory to Buyer and its counsel;
8.1.4 Buyer shall have received a certificate of the President of
Seller certifying as to a summary of (i) Seller's inventory as of the last day
of the month for the month immediately preceding the month in which the Closing
occurs and (ii) the amount and an aging of each of Seller's accounts payable and
accrued expenses as of the close of business on the tenth day prior to the
Closing Date (or such later date, if available);
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8.1.5 No order of any court or administrative agency shall be in
effect which restrains or prohibits the transactions contemplated hereby or
which would limit or adversely affect Buyer's ownership or control of the
Business and there shall not have been threatened, nor shall there by pending,
any action or proceeding by or before any court or governmental agency or other
regulatory or administrative agency or commission, (i) challenging any of the
transactions contemplated by this Agreement or seeking monetary relief by reason
of the consummation of such transactions, (ii) which materially impairs Buyer's
ability to own the Purchased Assets, or (iii) which might have a material
adverse effect on the business, prospects or condition (financial or otherwise)
of Seller;
8.1.6 There shall have been no event which has had, or may result
in, a material adverse change in the conditions, operations or prospects of the
Business, or the Purchased Assets taken as a whole, since the date hereof;
8.1.7 Seller shall have delivered to Buyer the documents specified
in Section 3.2 except as otherwise provided in Section 3.2.8;
8.1.8 (i) The consents, licenses, permits, certifications, and
approvals to do business granted by, or authorizations of, registrations,
declarations or filing with, courts, administrative agencies or commissions and
other governmental authorities or instrumentalities, domestic or foreign, and of
any other accrediting agency (including, but not limited to Medicare and
Medicaid provider and/or supplier numbers) ("Regulatory Approvals") required to
properly operate the Business and permit the billing and collection of payment
for all fees and services rendered in those states shall have been obtained or
the Buyer shall be satisfied in its reasonable discretion that such Regulatory
Approvals will be obtained without material conditions within 30 days following
the Closing Date; provided, however, that for each state for which Regulatory
Approvals have not been obtained on or prior to the Closing, the Buyer shall be
satisfied in its reasonable discretion that it shall lawfully be able to
continue to operate the Business in such state and that upon receipt of such
Regulatory Approvals, it will be lawfully permitted to bill and collect payment
for all services rendered by Buyer on and after the Closing Date.
(ii) The Seller shall have delivered to Buyer all of the
material authorizations, consents and approvals specified in Section 5.6.
8.1.9 The investigation conducted by Buyer or its representatives
pursuant to Section 7.3 shall be satisfactory to Buyer in its sole and absolute
discretion;
8.1.10 Any necessary third party consents for the purchase by Buyer
of Contracts that individually or in the aggregate are material to the Business
shall have been obtained.
8.1.11 Any Consents that individually or in the aggregate are
material to the Business shall have been obtained.
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8.1.12 The statement of income for the fiscal year ending November
30, 1997 delivered to Buyer by Seller pursuant to Section 5.9 shall show
revenues of at least $11,788,000 for such fiscal year.
8.2 Conditions Precedent to Obligations of Seller. The obligations of
Seller to complete the sale of Purchased Assets as provided for herein are
subject to the fulfillment or satisfaction on or before the Closing Date of each
of the conditions set forth below, any of which may be waived by Seller in
writing.
8.2.1 All representations and warranties of Buyer contained in this
Agreement shall be true and correct in all respects as of the Closing, with the
same force and effect as if the same had been made on and as of the Closing Date
(except to the extent such representations and warranties speak of a particular
date), and Seller shall have received a certificate signed by an Officer of
Buyer, substantially in the form as set forth in Exhibit H, to such effect;
8.2.2 Buyer shall have performed in all material respects all of the
obligations, covenants and agreements contained in this Agreement to be
performed by Buyer on or before the Closing Date, and Seller shall have received
a certificate signed by an Officer of Buyer, substantially in the form as set
forth in Exhibit H, to such effect;
8.2.3 All instruments and documents required on Buyer's part to
effectuate and consummate the transactions contemplated hereby shall be
delivered by Buyer and shall be in form and substance reasonably satisfactory to
Seller and its counsel;
8.2.4 No order of any court or administrative agency shall be in
effect which restrains or prohibits the transactions contemplated hereby and
there shall not have been threatened, nor shall there be pending, any action or
proceeding by or before any court or governmental agency or other regulatory or
administrative agency or commission, challenging any of the transactions
contemplated by this Agreement or seeking monetary relief by reason of the
consummation of such transactions;
8.2.5 All consents and approvals of all governmental departments,
agencies or other regulatory bodies to the transactions contemplated hereby
shall have been obtained; and
ARTICLE IX
MISCELLANEOUS
9.1 Binding Effect. All terms and provisions of this Agreement shall be
binding upon and shall inure to the benefit of and be enforceable by the parties
hereto and their respective successors and permitted assigns. Neither this
Agreement, nor the obligations of any party hereunder, shall be assignable or
transferable by any such party without the prior written consent of all parties
hereto.
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9.2 Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be given or made by personal delivery,
by a nationally recognized courier service for overnight delivery or by
registered or certified mail, postage prepaid, return receipt requested,
addressed
if to Buyer, at:
MEDIQ Incorporated
One Mediq Plaza
Pennsauken, NJ 08110
Attention: Thomas E. Carroll, President
Alan Einhorn, General Counsel
with a copy to:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attention: Henry N. Nassau, Esquire
if to Seller or to any Selling Shareholder, at:
199 Stavola Place
Maywood, New Jersey 07607
Attention: Glenn Edwards
with a copy to:
Stern Berenbroick, L.L.C.
One Mack Centre Drive
Mack Centre II
Paramus, NJ 07652
Attention: John J. Stern, Esquire
or at such other place as the party to whom such notice of communication is to
be addressed may have designated to the other parties by notice conforming to
this Section 9.2. Notices shall be deemed effective and received (i) on the
actual receipt in the case of hand delivery, (ii) on the next business day after
deposit in the case of notices by nationally recognized overnight courier
services, or (iii) on the third business day after the date of mailing in the
manner set forth herein. As used herein, notice to a party shall include
concurrent notice to that party's counsel as set forth herein.
9.3 Entire Agreement, Amendments, Etc. This Agreement and the documents
referred to herein and to be delivered pursuant hereto constitute the entire
agreement between the parties pertaining to the subject matter hereof, and
supersede all prior and
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contemporaneous agreements, understandings, negotiations and discussions of the
parties, whether oral or written; and there are no warranties, representations
or other agreements between the parties in connection with the subject matter
hereof, except as specifically set forth herein or therein. No amendment,
supplement, modification, waiver or termination of this Agreement shall be
binding unless executed in writing by the party to be bound thereby. No waiver
of any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provision of this Agreement, whether or not similar, nor
shall such waiver constitute a continuing waiver unless otherwise expressly
provided. Notwithstanding any agreement with or obligation to any organization,
authority, entity or person not a party to this Agreement to the contrary, Buyer
does not assume any liability, responsibility or obligation for any of Seller's
liabilities or obligations except the Assumed Liabilities, and nothing in any
such agreement or evidence of such obligation with a third party should be
construed to be such an assumption on the part of Buyer.
9.4 Nature and Survival of Representations. The representations,
warranties, covenants and agreements of Buyer, Seller and the Selling
Shareholders contained in this Agreement, and all statements contained in this
Agreement or any Exhibit or Schedule hereto or any certificate, financial
statement or report or other document delivered pursuant to this Agreement or in
connection with the transactions contemplated hereby, shall be deemed to
constitute representations, warranties, covenants and agreements of the
respective party delivering the same. All such representations, warranties,
covenants and agreements shall survive the Closing hereunder subject to Sections
9.15, 9.16 and 9.17 hereof.
9.5 Risk of Loss or Damage; Insurance. It is understood and agreed that
all right, title and interest in and to the Purchased Assets and all risk of
loss or damage thereto shall not pass from Seller to Buyer unless and until the
Closing occurs. In the event of a casualty or condemnation in respect of the
Purchased Assets, Buyer shall have the right, at its sole option, to elect to
either terminate this Agreement or to accept the insurance proceeds in respect
of such casualty or condemnation and proceed to close otherwise in accordance
with the terms and conditions of this Agreement. Seller agrees to maintain the
insurance currently carried with respect to the Purchased Assets until the
Closing.
9.6 Waiver. No waiver shall be deemed to have been made by any party of
any of its rights hereunder unless the same shall be in writing and shall be
signed by the waiving party. Such a waiver, if any, shall be a waiver only in
respect to the specific instance involved and shall in no way impair the rights
of the waiving party or the obligations of any other party in any other respect
at any other time.
9.7 Governing Law. This Agreement shall be construed and interpreted
according to the substantive laws of the State of New Jersey without giving
effect to the principles of conflicts of law thereof.
9.8 Expenses. Each of the parties shall pay its own expenses in
connection with the drafting and negotiation of this Agreement.
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9.9 Headings. The headings of the articles and sections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part hereof.
9.10 Counterparts. This Agreement may be executed by the parties in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
9.11 Severability. In the event that any one or more terms or provisions
hereof shall be held void or unenforceable by any court or arbitrator, all
remaining terms and provisions hereof shall remain in full force and effect,
unless the deletion of those provisions held void or unenforceable would result
in a change which would frustrate a material intention of the parties hereto.
9.12 Time is of the Essence. Seller, each Selling Shareholder and Buyer
agree that time is of the essence in connection with the implementation and
performance by the parties of all terms, conditions and obligations of this
Agreement.
9.13 Brokers or Finders. Seller and each Selling Shareholder hereby
agrees to pay any broker's or finder's fee or any similar commission or fee in
connection with any of the transactions contemplated by this Agreement.
9.14 Indemnification by Seller and Selling Shareholders.
9.14.1 Extent of Indemnity. Seller and each Selling Shareholder
hereby jointly and severally indemnify, defend and hold harmless Buyer and its
affiliates and their respective officers and directors from and against:
(i) any loss, liability, claim, obligation, damage or
deficiency, directly or indirectly, arising out of or resulting from any
misrepresentation or, breach of warranty or nonfulfillment of any agreement on
the part of Seller or any Selling Shareholder contained in this Agreement or in
any statement or certificate furnished or to be furnished to Buyer pursuant
hereto or in connection with the transactions contemplated hereby;
(ii) except for Assumed Liabilities, any and all liabilities
of, relating to or arising in connection with Seller or the Business of any
nature, whether due or to become due, whether accrued, absolute, contingent or
otherwise, existing on the Closing Date or arising out of any transactions
entered into, or any state of facts existing, prior to such date, and any and
all liabilities of, relating to or arising in connection with the Retained
Business;
(iii) any loss, liability, claim, obligation, damage or
deficiency arising out of or resulting from the litigation or threatened
litigation described on Schedule 5.8;
(iv) any loss, liability, claim, obligation, damage or
deficiency arising out of or resulting from any claim asserted with respect to
Excluded Liabilities;
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(v) any loss, liability, claim, obligation, damage or
deficiency arising out of or resulting from any Environmental Liabilities.
"Environmental Liabilities" means any and all Damages, as defined below, whether
known or unknown, foreseen or unforeseen, contingent or otherwise, or fixed or
absolute to the extent they arise out of or relate to any of the following
events or conditions first occurring on or before the Closing: (a)
environmental conditions, including without limitation the presence,
manufacture, packaging, labeling, processing, distribution, use, generation,
treatment, storage, disposal, transport, handling, Management, of or exposure to
Hazardous Substances, at, on, in or under any Property now or previously owned,
operated or leased by Seller or in the conduct of the Business (including but
not limited to any environmental conditions, whether on- or off-site) or in
connection with the Purchased Assets or Excluded Assets or the conduct of the
Business; or (b) violations of or compliance with any Environmental Law; or (c)
the Release or threat of Release of Hazardous Substances (i) at or from any
property now or previously owned, operated or leased by Seller or in the conduct
of the Business, whether into the air, soil, ground or surface waters on or
off-site or (ii) arising from or relating to the off-site transportation,
storage, treatment, recycling, disposal or Release of Hazardous Substances
generated, used, Managed, or handled by or on behalf of Seller or in connection
with the Purchased Assets or the Excluded Assets or the conduct of the Business;
or (d) any of the matters referred to or otherwise identified in Schedule 5.11;
and
(vi) any actions, judgments, costs and expenses (including
reasonable attorneys' fees and all other expenses incurred in investigating,
preparing or defending any litigation or proceeding, commenced or threatened)
incident to any of the foregoing or the enforcement of this Section 9.14.
For purposes of this Agreement, the aggregate amount of such
losses, liabilities, claims, fines, penalties, obligations, damages,
deficiencies, costs (including costs of reporting, investigation, remediation or
other response action), expenses, and fees shall be hereinafter referred to as
"Damage" or "Damages."
9.14.2 Time Limit on Certain Indemnification Claims. No action or
claim for Damages resulting from breaches of the representations and warranties
of Seller or Selling Shareholder shall be brought or made after the expiration
of a three-year period from the Closing Date, except that such time limitation
shall not apply to (i) claims for misrepresentations or breaches of warranty
relating to Section 5.5 (relating to Taxes), which may be asserted until 60 days
after the running of the applicable statute of limitations with respect to the
taxable period to which the particular claims relates, (ii) claims for
misrepresentations or breaches of warranty relating to Section 5.4 (relating to
title to any Purchased Asset), or to Section 5.11 (relating to compliance with
Laws), to Section 5.12 (relating to employee benefit plans), or to Section 5.22
(relating to fraud and abuse) which may be asserted until the date on which the
statute of limitations applicable to such matters expires or (iii) any claims
which have been the subject of a written notice from Buyer to Seller prior to
the expiration of such three-year period, which notice specifies in reasonable
detail the nature of the claim.
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9.14.3 Certain Matters Excluded. Notwithstanding anything to the
contrary in this Section 9.14, no limitation or condition of liability provided
in this Section 9.14 shall apply to the breach of any of the representations and
warranties contained herein if such representation or warranty was made with
actual knowledge that it contained an untrue statement of a material fact or
omitted to state a material fact necessary to make the statements or facts
contained therein not misleading.
9.14.4 Setoff. Promptly after incurring any loss pursuant to this
Section 9.14, Buyer may, at its sole discretion, set off the amount of any such
loss described herein against moneys otherwise due Seller or the Selling
Shareholders under this or any other agreement between or among such parties.
9.15 Indemnification by Buyer. Buyer hereby indemnifies, defends and
holds harmless Seller and its affiliates and their respective officers and
directors and the Selling Shareholders from and against:
9.15.1 any loss, liability, claim, obligation, damage or deficiency
arising out of or resulting from any misrepresentation, breach of warranty or
nonfulfillment of any agreement on the part of Buyer contained in this Agreement
or in any statement or certificate furnished or to be furnished to Seller in
connection with the transactions contemplated hereby;
9.15.2 any loss, liability, claim, obligation, damage or deficiency
resulting from or arising out of the failure by Buyer to pay or discharge, or
cause to be paid or discharged, any of the Assumed Liabilities; and
9.15.3 any actions, judgments, costs and expenses (including
reasonable attorneys' fees and all other expenses incurred in investigating,
preparing or defending any litigation or proceeding, commenced or threatened)
incident to any of the foregoing or the enforcement of this Section 9.15.
9.16 Procedure for Indemnification.
9.16.1 The provisions of this Section 9.16 shall govern any claim
for indemnification by Buyer, pursuant to Section 9.14, or by Seller, pursuant
to Section 9.15 (each such party an "Indemnitee") against the party or parties
agreeing to provide indemnification hereunder (the "Indemnitor").
9.16.2 The Indemnitee shall promptly give notice hereunder to the
Indemnitor, after obtaining notice of any claim as to which recovery may be
sought against the Indemnitor because of the indemnity in Sections 9.14 or 9.15,
and, if such indemnity shall arise from the claim of a third party, the
Indemnitee shall consent to the Indemnitor assuming the defense of any such
claim; provided that the Indemnitee shall not be required to permit the
Indemnitor to assume the defense of any third party claim (x) which, if not
first paid, discharged or otherwise complied with, would result in a material
interruption or cessation of the conduct of the business of the Indemnitee, or
(y) if the Indemnitee, reasonably concludes that there may be a
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conflict of interest between the Indemnitor, on the one hand, and the
Indemnitee, on the other hand, in the conduct of the defense of such action.
Failure by the Indemnitor to notify the Indemnitee of its election to defend any
such claim or action within 14 days of the date of notice from the Indemnitee
shall be deemed to constitute its consent to the Indemnitee's assumption of such
defense, which defense shall be reimbursed in accordance with Section 9.16.3. If
the Indemnitor assumes the defense of such claim or litigation resulting
therefrom, the obligations of the Indemnitor hereunder as to such claim shall
include taking all steps necessary in the defense or settlement of such claim or
litigation resulting therefrom including the retention of counsel, which counsel
must be to the Indemnitee's reasonable satisfaction, and holding the Indemnitee
harmless from and against any and all Damage resulting from, arising out of, or
incurred with respect to any settlement approved by the Indemnitor or any
judgment in connection with such claim or litigation resulting therefrom. The
Indemnitor shall not, in the defense of such claim or litigation, (i) consent to
the entry of any judgment (other than a judgment of dismissal on the merits
without costs) except with the written consent of the Indemnitee, which consent
shall not be unreasonably withheld or (ii) enter into any settlement (except
with the written consent of the Indemnitee, which consent shall not be
unreasonably withheld), unless the Indemnitee is released and held harmless from
and against any and all Damages resulting from, arising out of or incurred with
respect to such judgment or settlement.
9.16.3 If the Indemnitor shall not assume the defense of any such
claim by a third party or litigation resulting therefrom, the Indemnitee may
defend against such claim or litigation in such manner as it deems appropriate,
and the Indemnitee may settle such claim or litigation on such terms as it may
deem appropriate and the Indemnitor shall promptly reimburse the Indemnitee for
the amount of such settlement and for all Damages incurred by the Indemnitee in
connection with the defense against or settlement of such claim or litigation.
9.17 Equitable Relief. The parties hereto agree that, in the event of
any breach of the terms and conditions of this Agreement, Buyer's remedies at
law will be inadequate and, in such event, Buyer shall be entitled to commence
an action for preliminary and permanent injunctive relief and other equitable
relief in any court of competent jurisdiction, without the necessity of proving
actual damages or posting a bond or other security, in addition to all other
remedies available at law or equity.
9.18 Bulk Transfers. If Buyer requests, Seller will comply with any
applicable bulk transfer laws. If Buyer does not so request, Buyer and Seller
each hereby waives compliance with any applicable bulk transfer laws in
connection with the sale of the Purchased Assets hereunder and Seller hereby
agrees to indemnify Buyer against and hold Buyer harmless from any and all
damages and liabilities (including reasonable attorneys' fees) relating to or
resulting from such non-compliance.
9.19 Third Party Beneficiaries. This Agreement is for the sole benefit
of the parties hereto and their permitted assigns and nothing herein expressed
or implied shall give or be construed to give to any person or entity, other
than the parties hereto and such assigns, any legal or equitable rights
hereunder.
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9.20 Jurisdiction and Process. Buyer, Seller and the Selling
Shareholders each irrevocably submits to the exclusive jurisdiction of the
Superior Court of New Jersey, for the purposes of any suit, action or other
proceeding arising out of this Agreement or any transaction contemplated hereby.
9.21 Interpretation. 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. The parties acknowledge and agree that: (i)
each party and its counsel have reviewed the terms and provisions of this
Agreement and have contributed to its revision, (ii) the normal rule of
construction, to the effect that any ambiguities are resolved against the
drafting party, shall not be employed in the interpretation of it, and (iii) the
terms and provisions of this Agreement shall be constructed fairly as to all
parties hereto and not in favor of or against any party, regardless of which
party was generally responsible for the preparation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first written above.
MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
By: /s/ Alan S. Einhorn
-------------------------------------------
Alan S. Einhorn
Vice President and General Counsel
NATIONAL PATIENT CARE SYSTEMS, INC.
By: /s/ Cynthia Powers
-------------------------------------------
Cynthia Powers
President
/s/ Glenn Edwards
------------------------------------------
Glenn Edwards
/s/ Cynthia Powers
-------------------------------------------
Cynthia Powers
- 38 -
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