SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1997 0-15586
GHS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1373960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2400 Research Boulevard, Suite 325, Rockville, Maryland 20850
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (301) 208-8998
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None Not Applicable
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K.
The aggregate market value of Registrant's Common Stock held by
non-affiliates was approximately $1,735,000 on March 16, 1997, based upon the
average of the bid and asked prices as reported on the OTC Bulletin Board.
The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding as of March 16, 1998, was 6,979,160.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits (to this Annual Report on Form 10K for the Registrant's
fiscal year ended December 31, 1997) are incorporated by reference as listed on
the index of exhibits in Part IV, ITEM 14.
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Part I
ITEM 1. BUSINESS
GHS, Inc. (the Company) provides management and financing services to the
health care industry. The Company provides these services primarily via its
subsidiary U.S. NeuroSurgical, Inc.(R) (USN). As used herein, unless the context
indicates otherwise, the term "Company", "Registrant" and "GHS, Inc." means GHS,
Inc. and its subsidiaries. The Company, a Delaware corporation, was formed in
December 1984 under the name "Global Health Systems, Inc." GHS, Inc. was given
its present name in October 1988, when it assigned substantially all of its
assets and liabilities to Global Health Systems, Inc., a Delaware corporation
formed in September 1988 to continue the business of the Company. The Company's
executive offices are located at 2400 Research Boulevard, Suite 325, Rockville,
Maryland 20850, and its telephone number is (301) 208-8998.
On July 15, 1997, the Company and Health Management Systems, Inc. (HMS),
consummated an agreement pursuant to which HMS acquired substantially all of the
assets of GHS' subsidiaries, Web Health, Inc., formerly Global Health Systems,
Inc. (Global) and Kachina Ventures, Inc., formerly GHS Management Services, Inc
(GHS Management). These subsidiaries provided computerized record-based
processing systems and services for managed care, public health and ambulatory
care facilities. As a result of such sale, the Company received gross proceeds
of $2,146,000 from such sale, including certain closing adjustments.
On December 5, 1997 the assets of Florida Specialty Networks, Ltd. a
company in which the Company owned a 20% interest were sold to CMSF, Inc., a
subsidiary of Magellan Health Services, Inc. As a result of the transaction, the
Company received approximately $2,330,000 net of expenses. In addition, the
Company retained an interest in an escrow fund and has the opportunity to earn
additional consideration upon the achievement of certain performance milestones.
U. S. NeuroSurgical, Inc.
USN of which the Company owns 100%, was organized in July, 1993 to own
and operate stereotactic radiosurgery centers, utilizing the Gamma Knife
technology. USN
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currently owns and operates two Gamma Knife centers, one on the premises of
Research Medical Center (RMC) in Kansas City, Missouri and one on the premises
of New York University Medical Center (NYU) in New York, New York. The Company,
through USN, intends to continue to explore opportunities to open additional
Gamma Knife Centers. USN's business strategy is to provide a mechanism whereby
hospitals, physicians, and patients can have access to Gamma Knife treatment
capability, a high capital cost item. USN provides the Gamma Knife to medical
facilities on a "cost per treatment" basis. USN owns the Gamma Knife units, and
is reimbursed by the facility where it is housed, based on utilization.
USN's principal target market is medical centers in major health care
catchment areas that have physicians experienced with and dedicated to the use
of the Gamma Knife. USN seeks cooperative ventures with these facilities. USN
believes that, as of December 31, 1997, there were approximately thirty-five
Gamma Knife treatment centers in the United States.
In July 1993, USN purchased its first Leksell Gamma Knife from Elekta
Instruments, Inc. (Elekta), for the purpose of installing it at RMC in Kansas
City, Missouri. USN paid approximately $3,000,000 for the Gamma Knife.
USN opened its first Gamma Knife Center on the premises of RMC in
September 1994. RMC is part of Health Midwest, a consortium of eleven hospitals
and numerous affiliates. USN formed a cooperative venture with RMC in September,
1993. Per an agreement with RMC, GHS sold 500,000 shares of its common stock (
the "Common Stock") for $500,000 to RMC to secure additional working capital in
order to enable USN to develop and construct a Gamma Knife Facility. USN
installed the Gamma Knife in the facility, where it is being utilized by
neurosurgeons credentialled by RMC. USN is reimbursed for use of the Gamma Knife
by RMC based on a percentage of the fees collected by RMC for Gamma Knife
procedures. Pursuant to a ground lease agreement, RMC leased to USN the land on
which to build the Gamma Knife facility.
USN opened its second treatment center in July 1997 on the campus of NYU
in New York, New York. Construction of the Gamma Knife suite was completed in
July.
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The Gamma Knife cost and the cost of the facility improvements totaled
approximately $4,700,000. In July the Company commenced its lease for the NYU
Gamma Knife. DVI Financial Services, Inc. (DVI) provided the capital lease
financing for the NYU facility. The term is six years with incremental payments
for the first year and fixed payments thereafter. The interest rate for such
capital lease is 12%. The Company has retained a marketing representative to
help introduce the technology to neurosurgeons in the New York tri-state region.
In March 1997, USN refinanced the lease on the RMC Gamma Knife. The lease
was provided by DVI. The effects of this transaction were to lower its interest
costs to 10.3 % per annum and provide proceeds to pay for the buildout of The
NYU Gamma Knife suite. USN also commenced loans with DVI for working capital of
$188,000 to finance the remainder of the buildout. The terms of these loans are
three years and they bear interest between 12% and 12.9% per annum.
Gamma Knife Technology
The Leksell Gamma Knife is a unique stereotactic radiosurgical device used
to treat brain tumors and other malformations of the brain without invasive
surgery. The Gamma Knife delivers a single, high dose of ionizing radiation
emanating from 201 cobalt-60 sources positioned about a hemispherical, precision
machined cavity. The lesion is first targeted with precision accuracy using
advanced imaging and three dimensional treatment planning techniques such as CT
Scans, MR Scans, conventional X-rays, or angiography. Each individual beam is
focused on a common target producing an intense concentration of radiation at
the target site, destroying the lesion while spreading the entry radiation dose
uniformly and harmlessly over the patient's skull . The mechanical precision at
the target site is +/- 0.1mm (1/10 of 1 millimeter). Because of the steep
fall-off in the radiation intensity surrounding the target, the lesion can be
destroyed, while sparing the surrounding tissue.
The procedure, performed in a single treatment, sharply reduces hospital
stay and eliminates post-surgical bleeding and infection. When compared with
conventional
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neurosurgery, Gamma Knife treatment is less expensive. However, not all patients
are candidates for radiosurgery since the decision to use the Gamma Knife
depends on the type, size, and location of the lesion.
Regulatory Environment
The levels of revenues and profitability of companies involved in the
health services industry, such as USN, may be affected by the continuing efforts
of governmental and third party payors to contain or reduce the costs of health
care through various means. Although the Company does not believe that the
business activities of USN will be materially affected by changes in the
regulatory environment, it is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effects healthcare reform may have
on USN's business, and no assurance can be given that any such reforms will not
have a material effect on USN.
In addition, the provision of medical services in the United States is
dependent on the availability of reimbursement to consumers from third party
payors, such as government and private insurance companies. Although, patients
are ultimately responsible for services rendered, the Company expects that the
majority of USN's revenues will be derived from reimbursements by third party
payors. Medicare has authorized reimbursement for Gamma Knife treatment. Over
the last several years, such third party payors are increasingly challenging the
cost effectiveness of medical products and services and taking other
cost-containment measures. Therefore, although treatment costs using the Gamma
Knife compare favorably to traditional invasive brain surgery, it is unclear how
this trend among third party payors and future regulatory reforms affecting
governmental reimbursement will affect procedures in the higher end of the cost
scale.
The Company is planning to establish future Gamma Knife centers.
Completion of future centers will require approvals and arrangements with
hospitals, health care organizations, or other third parties, including certain
regulatory authorities. The Food
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and Drug Administration has issued the requisite pre-market approval for the
Gamma Knife to be utilized by USN. In addition, many states require hospitals to
obtain a Certificate of Need (CON) before they can acquire a significant piece
of medical equipment. The Company plans to enter into future ventures in which
that "need" will be demonstrable, but it can have no assurance that Certificates
of Need will be granted in every case.
In addition, the Nuclear Regulatory Commission must issue a permit to USN
to permit loading the COBALT at each Gamma Knife site. While the Company
believes that it can obtain a NRC permit for each Gamma Knife machine, there is
no assurance that it will.
Liability Insurance
Although the Company does not directly provide medical services, it has
obtained professional medical liability insurance, and has general liability
insurance as well. The Company believes that its insurance is adequate for
providing treatment facilities and non-medical services although there can be no
assurance that the coverage limits of such insurance will be adequate or that
coverage will not be reduced or become unavailable in the future.
Competition
The health care industry, in general, is highly competitive and the
Company expects to have substantial competition from other independent
organizations, as well as from hospitals in establishing future Gamma Knife
centers. There are other companies that provide the Gamma Knife on a "cost per
treatment basis". In addition, larger hospitals may be expected to install Gamma
Knife technology as part of their regular inpatient services. Some of these
competitors have greater financial and other resources than the Company.
Principal competitive factors include quality and timeliness of test results,
ability to develop and maintain relationships with referring physicians,
facility location, convenience of scheduling and availability of patient
appointment times. The
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Company believes that cost containment measures will encourage hospitals to seek
companies that are providing the technology, instead of incurring the capital
cost of establishing their own Gamma Knife centers.
Gamma Knife Supply and Servicing
Currently the only company that manufactures, sells, and services the
Gamma Knife is Elekta Instruments, Inc., a subsidiary of AB Elekta of Stockholm,
Sweden. Any interruption in the supply or services from Elekta would adversely
affect USN's plans to open additional Gamma Knife treatment centers as well as
to maintain those centers in existence.
Gamma Knife Financing
The Company has secured capital lease financing from FSI for the first
Gamma Knife installation at the RMC site, and for its second Gamma Knife in New
York from DVI. The lease at RMC was refinanced in the spring of 1997 with DVI.
The Gamma Knife is an expensive piece of equipment presently costing
approximately $3,000,000. Therefore, the Company's development of new Gamma
Knife centers is dependent on its ability to secure favorable financing. The
Company believes that it will continue to be successful in obtaining financing
but can give no absolute assurance that it will.
New Technology/Possible Obsolescence
Gamma Knife technology may be subject to technological change.
Consequently, the Company will have to rely on the Gamma Knife's manufacturer,
Elekta, to introduce improvements or upgrades in order to keep pace with
technological change. Any such improvements or upgrades which the Company may be
required to introduce will require additional financing. In addition, newly
developed techniques and devices for performing brain surgery may render the
Gamma Knife less competitive or obsolete.
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Employees
GHS, Inc. has five full-time employees and one part-time employee. Of
these employees, three are engaged in sales and marketing, one technical, and
two in administration and office support.
ITEM 2. PROPERTIES
The Company's base facility, from which it conducts substantially all of
its operations, are located in Rockville, Maryland and occupy approximately
1,300 square feet. The rent is approximately $32,000 per year. USN occupies
approximately 1,600 square feet in its RMC facility. This facility is located on
the campus of RMC in Kansas City, Missouri. USN also occupies about 2,000 square
feet at the NYU Medical Center in New York, New York.
ITEM 3. LEGAL PROCEEDINGS
As described below under Item 13 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, the Company, USN and the Company's Chairman and President, Alan
Gold, are involved in certain legal proceedings in several actions filed in
federal and state court arising out of the events also described under Item 13.
A decision adverse to the Company in these cases could have a material adverse
effect on the Company's results of operations. Because such proceedings are in
their initial stages, the Company cannot currently predict the liklihood of a
favorable or unfavorable outcome or the time frame in which these cases will be
ultimately resolved. The Company intends to vigorously pursue its rights and
defend itself in such proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 23, 1997, the Company held its 1997 Annual Meeting of
Stockholders ( the "Annual Meeting" ). The matters voted upon at the Annual
Meeting and the votes cast for such matters were as follows:
1. The Company's stockholders elected Alan Gold, William F. Leimkuhler and
Charles H. Merriman, III to serve until the next Annual Meeting. Voting
for the nominees for director was as follows: Alan Gold: 4,641,065 FOR and
0 shares WITHHELD; William F. Leimkuhler: 4,641,265 shares FOR and 0
shares WITHHELD; and Charles H. Merriman: 4,641,065 shares FOR and 0
shares WITHHELD.
2. The Company stockholders approved the adoption of the Company's 1997 Stock
Option Plan. For the approval of the 1997 Stock Option Plan, the vote was
3,904,338 FOR ; 14,400 shares AGAINST and 100,575 shares ABSTAINING (and
621,952 broker non votes).
3. The Company's stockholders approved the appointment of Richard A. Eisner,
LLP, as the Company's auditor for the current fiscal year. For the
appointment of Richard A. Eisner, LLP as the Company's auditor, the vote
was 4,548,490 shares FOR ; 200 shares AGAINST ; and 92,575 shares
ABSTAINING.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock traded in the over-the-counter market, NASDAQ
symbol GHSI until January 30, 1997 and has traded since on the OTC Bulletin
Board. The range of high and low bid quotations as reported by NASDAQ System for
the two years ended December 31, 1997 are set forth below.
Period High Bid Low Bid
------ -------- -------
January 1 - March 31, 1996 $ .625 $ .50
April 1 - June 30, 1996 .625 .31
July 1 - September 30, 1996 .75 .375
October 1 - December 31, 1996 .56 .125
Period High Bid Low Bid
------ -------- -------
January 1 - March 31, 1997 $ .45 $ .19
April 1 - June 30, 1997 .50 .20
July 1 - September 30, 1997 .56 .44
October 1 - December 31, 1997 1.00 .25
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of March 31, 1998, there were approximately 150 holders of record of
the Company's Common Stock.
To date the Company declared no dividends on its Common Stock and does not
anticipate declaring dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below is the selected financial data pertaining to the financial
condition and operations of the Company for the years ended December 31, 1993
through 1997. The latest financial statements of the Company are included in
Item 14 in Part IV of this report. The information set forth should be read in
conjunction with such financial statements and the notes thereto.
Year Ended
December 31,
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenue $ 1,830 1,452 1,283 381 --
Income (loss) from continuing operations $ (11) 545 (40) (408) --
Basic and diluted income (loss) per
common share from continuing operations 0.07 (0.01) (0.06) --
Total assets $ 10,712 8,001 7,339 5,885 6,991
Long-term obligations $ 6,511 5,904 3,347 2,776 500
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes set forth elsewhere in this report.
General
In July 1997, the Company sold to HMS substantially all of the assets
related to the Company's business of providing computerized record-based
processing systems and services for managed care, public health and ambulatory
care facilities ( the "Systems Business" ). The Systems Business was operated
through two of the Company's subsidiaries, formerly known as Global Health
Systems, Inc. and GHS Management Services, Inc. As a result of the closing of
such transaction, GHS received approximately $2,146,000 million of gross
proceeds, which amount included certain closing adjustments.
In December 1997, the assets of FSN, a company in which GHS possessed a
20% interest, and several of its affiliates were sold to CMSF, Inc., a
subsidiary of Magellan Health Services, Inc. As a result of the closing of such
transaction, GHS received approximately $2,330,000 net of expenses. In addition,
GHS will retain an interest in an escrow fund established at closing and in
additional contingent consideration which may be earned in the future upon the
achievement of certain performance milestones. Subject to the occurrence of
certain future events, GHS could receive up to approximately $1.1 million from
such escrow fund and up to $5 million in such contingent consideration. There
can be no assurance that GHS will receive any amounts from such escrow fund or
contingent consideration.
The sale by the Company in 1997 of its System Business and its interest in
FSN resulted in the receipt by GHS of a total of approximately $4.5 million net
of expenses. GHS plans to use the proceeds to pursue strategic opportunities
that exist for the Company. GHS' remaining subsidiary, USN, will continue to
develop, own and operate Gamma Knife Centers.
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Results of Operations
1997 Compared to 1996
Patient revenue increased 26% to $1,830,000 in 1997 from $1,452,000 in
1996. The increase was due to two factors. The Gamma Knife at the RMC Gamma
Knife Center (Kansas City Center) continued to increase its patient treatments.
The other increase was due to the fact that USN opened its second center and the
first in New York City. This center commenced operations in the second half of
1997. Patient expenses increased 47% to $843,000 from $574,000 in 1996. The
increase was due to increased depreciation to the New York Gamma Knife and due
to the amortization for the New York improvements. Selling, general and
administrative expense (S,G & A) increased 40% to $585,000 in 1997 from $417,000
in 1996. The increase was due to increased insurance costs for the two Gamma
Knive's and legal fees related to the legal proceedings described in Items 3 and
13 hereof.
For the year ended 1997, income from operations was $402,000 as compared
to income from operations of $461,000 in 1996. There was a 60% increase in
interest expense to $485,000 in 1997 from $302,000 in 1996. The increase in
interest expense was expected due to the opening of the second Gamma Knife
Center at NYU in July 1997. Prior to the opening, interest on the progress
payments of the Gamma Knife and the demand loan for the leasehold improvements
at NYU had been capitalized. Interest capitalized was $178,000 for 1997 and
$249,000 for 1996. With the commencement of the NYU Gamma Knife Center, the
second equipment lease started replacing the progress payments, leasehold
improvements of $487,000 were financed over three years and the capitalized
interest cost began to be amortized over seven years. The Company earned $64,000
in interest income in 1997. The Company had an income tax benefit of $8,000 in
1997 as compared to an income tax benefit of $402,000 in 1996. As a result of
these transactions the Company has a loss from continuing operations of $11,000
in 1997 and income from continuing operations of $545,000 in 1996.
Income from discontinued operations was $2,083,000 in 1997 as compared to
a loss of $377,000 in 1996. This was due to the Company's sale of the Systems
Business which resulted in a gain of $1,311,000, net of income tax of $565,000,
and the sale of its interest in Florida Specialty Networks, Ltd (FSN) resulting
in a gain of $1,389,000, net of
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income tax of $916,000. In addition, the Company had a loss in 1997 from its 20%
equity of FSN of $97,000 as compared to net income of $136,000 in 1996. The
Company also participates in an earnout which could bring additional proceeds
from discontinued operations of as much as $6,000,000 over the next three years,
based upon the operations of the purchaser. There is no assurance that the
Company will receive any proceeds from the earnout or from an escrow fund also
established for such sale. For the year ended 1997 the Company had net income of
$2,072,000 as compared to net income of $168,000 in 1996.
1996 Compared to 1995
Revenues of the Company's subsidiary, USN, grew 13% to $1,452,000 in 1996
from $1,283,000 in 1995. The revenue growth reflects the increased acceptance of
the Kansas City Center and the community. Patient expenses associated with the
operation of the Kansas City Center were $574,000 for the year, down from
$670,000 in the prior year. S, G & A was $417,000 as compared to $176,000 in
1995. The Company had interest expense of $302,000 in 1996 compared to $500,000
in 1995. The decrease in interest was primarily due to the Company's
capitalization of $249,000 of interest pursuant to the NYU construction in 1996.
Management anticipated the utilization of a portion of the Company's net
operating loss carryforward due to the contract with HMS for the sale of the
assets of the two subsidiaries for $2,100,000 and therefore provided a deferred
tax benefit of $402,000. As a result of the capitalized interest costs and
deferred tax benefit the Company had income from continuing operations of
$545,000 in 1996 compared to a net loss of $40,000 in 1995. The Company had a
loss from dicontinued operations of $377,000 in 1996 as compared to $136,000 in
1995. This was due primarily to to the increase in costs and decline in revenue
of the Systems business. The Company had income in 1995 from its equity investee
of $136,000.
Liquidity and Capital Resources
The Company had a working capital ratio of 3.1 in 1997, as and compared to
.6 in 1996. For the year ended December 31, 1997, net cash used in operating
activities was $96,000 as compared to net cash provided of $735,000 in 1996.
Depreciation and
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amortization was $784,000 in 1997 as compared to $450,000 in the preceding year.
This increase was due to the NYU Gamma Knife beginning service as well as
increased amortization for the leasehold improvements. There was an increase of
$115,000 in accounts receivable and a decrease of $96,000 in accounts payable
from 1996. The Company also had cash used by discontinued operations of $703,000
in 1997 versus cash provided of $37,000 in 1996.
The Company had net cash provided by investing activities of $3,789,000 in
1997 as compared to net cash used in investing activities of $657,000 in 1996.
There was a decrease in cash held in escrow of $818,000 in 1997 versus an
increase of $880,000 in the previous year. Property and equipment purchases of
$1,102,000 in 1997 were for the NYU Gamma Knife. There was cash received of
$2,100,000 for the sale of its System Business, and $2,330,000 from the sale of
its investment in FSN.
There was net cash used in financing activities of $386,000 in 1997
compared to $117,000 in 1996. USN made lease repayments of $486,000 in 1997
versus $522,000 in 1996.
In 1997, USN refinanced the capital lease on the Kansas City Gamma
Knife.There are two and one half years remaining on the lease. The purpose of
the refinance was to achieve a lower interest rate (10.3%) as well as to receive
proceeds of $625,000 to finance lease hold improvements at NYU. $525,000 was
used to pay the existing demand loan that was used as a deposit on the leasehold
improvements. The remaining lease term was extended for twelve months. USN has
two and a half years remaining on the capital lease for Kansas City that began
in September 1994. The annual payments are $828,000. The leases for the NYU
equipment and improvements have annual payments of $792,000 and $220,000,
respectively. As a result of all of the above, there was an increase of cash and
cash equivalents of $3,307,000 as compared to a decrease of $39,000 in 1996. As
of December 31, 1997 the Company had $3,466,000 in cash and cash equivalents as
compared to $159,000 in 1996. On a long term basis the Company expects that the
proceeds from the sale transactions of its Systems Business and its interest in
FSN will provide sufficient capital for at least the next 12 months. In
addition, such 12 month period may be extended to the extent the company
receives any amounts from the escrow fund or the contingent consideration
resulting from the FSN transaction. However, there
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can be no assurance that GHS will receive any amounts from such escrow fund or
contingent consideration. However, because the Company believes the level of
financial resources is a significant competitive factor in its industry, it may
choose at any time to raise additional capital through debt or equity financing
to strengthen its financial position, facilitate growth, and provide the Company
with additional flexibility to take advantage of business opportunities that may
arise.
Year 2000 Compliance
The Company relies significantly on computer technology throughout its
business to effectively carry out its day-to-day operations. As the millennium
approaches, the Company is assessing all of its computer systems to ensure that
they are "Year 2000" compliant. In this process the Company may replace or
upgrade certain systems which are not Year 2000 compliant, in order to meet its
internal needs and those of its customers. The Company expects its Year 2000
project to be completed on a timely basis. However, there can be no assurance
that the systems of other companies on which the Company may rely also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Company's systems. The cost to the Company of such
changes are difficult to estimate but are not expected to have a material
financial impact. Actual results could differ materially from the Company's
expectations due to unanticipated technological difficulties, vendor delays, and
vendor cost overruns.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are listed under Item 14
in this Annual Report of Form 10-K and attached hereto.
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ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Alan Gold 53 President & Chairman
William F. Leimkuhler 45 Director
Charles H. Merriman, III 63 Director
Alan Gold has served as President and a director since the Company's
formation. He was one of the founders of Global Health Systems, the predecessor
of the Company, serving as its President since its formation in July 1983. From
1981 to 1983 he served as Executive Vice-President of Libra Group, a company
located in Rockville, Maryland, engaged in health care automation, where he was
President of Global Health Foundation and Libra Research and Executive Vice
President of Libra Technology. From July 1997 through March 1998 Mr. Gold was an
employee of HMS.
William F. Leimkuhler has served as director of the Company since its
incorporation in 1984. Since January 1994, Mr. Leimkuhler has been the Vice
President of Allen & Company Incorporated, an investment banking firm. From 1984
to December, 1993, Mr. Leimkuhler was a partner with the law firm of Werbel &
Carnelutti, which has served as counsel to the Company on various matters since
the Company's formation.
Charles H. Merriman, III is Managing Director of the Investment Banking
and Corporate Finance Department of Scott & Stringfellow, an investment banking
firm where
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he has been employed since 1972. Mr. Merriman has extensive knowledge of the
Company's primary focus on healthcare and technology.
Each director is elected for a one year period ending on the date of the
next annual meeting of shareholders of the Company, and until his or her
successor is duly elected and qualified. Officers serve at the will of the Board
of Directors.
Section 16 (a) Beneficial Ownership Reporting Compliance
Based soley upon a review of the copies of the forms furnished to the
Company, or written representations from certain reporting persons, the Company
believes that during the year ended December 31, 1997, except as set forth
below, all filing requirements applicable to its officers and directors were
complied with by such individuals. Mr. Alan Gold, the Chairman and President of
the Company, inadvertently failed to timely report on Form 4 a grant of options
to purchase Common Stock, and Mr. Charles H. Merriman, III, a Director of the
Company, inadvertently failed to file a Form 3 upon becoming a director of the
Company and to timely report on Form 4 a grant of options to purchase Common
Stock.
ITEM 11 EXECUTIVE COMPENSATION
The information below sets forth the compensation for the year ended
December 31, 1997, for each executive officer of the Company:
Summary Compensation Table
Name and Annual Compensation Long Term Compensation
Principal Position Year Salary($) Options/ SARs
- ------------------ ---- --------- -------------
Alan Gold,
President & Director 1997 $115,000 100,000
1996 $150,000
1995 $150,000
18
<PAGE>
The Company and Mr. Gold are parties to an employment agreement giving
either the Company or Mr. Gold the option to terminate the agreement by giving
the other party 6 months written notice.
Stock Option Plan
Effective October 23, 1997 the Company adopted a 1997 Stock Option Plan ("the
Plan") for officers, directors, consultants and other key personnel of the
Company. This Plan replaces the 1986 Stock Option Plan which had expired.
Options outstanding from the 1986 Stock Option Plan are 166,500. The Plan
authorizes the granting of incentive stock options ("ISO) and non qualified
stock options to purchase up to 750,000 shares of the Company's common stock at
a price not less than 100% (110% in the case of ISO's granted a person who owns
stock possessing more than 10% of the voting power of the Company) of the fair
market value of the common stock on the date of grant and that no portion of the
option may be exercised beyond ten years from that date (five years in the case
of ISO's granted to 10% shareholder). During 1997 325,000 options were granted
and at December 31, 1997, 425,000 options were available for grants.
Options Granted During Fiscal Year Ended December 31, 1997
The following table sets forth certain information concerning options
granted during the fiscal year ended December 31, 1997 to Alan Gold.
Potential recallable
value at assumed
annual rates of stock
Individual Grants option term(1)
---------------------------------------------
Percent of
total
options/SARs
granted to Exercise or
Options employees in base price Expiration
Name Granted fiscal year ($/Sh) date 5% ($) 10% ($)
- ---- ------- ----------- ------ ---- ------ -------
Alan Gold 100,000 30.80% $1.00 12/31/07 $0 $0
(1) The 5% and 10% assumed annual rates of appreciation are mandated by
rules of the Securities and Exchange Commission and do not reflect
estimates or projections of future Common Stock prices. There can be no
assurance that the amounts reflected in this table will be achieved.
19
<PAGE>
Aggregate Unexercised Options & Option Values at December 31, 1997
The following table sets forth, as of December 31, 1997 the number of options
and the value of unexercised options held by Alan Gold.
Value of Unexercised In-The
Number of Unexercised Options Money Options at December
at December 31, 1997 (#) 31, 1997 ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Alan Gold 149,000 / 0 $37,250/ 0 (1)
(1) Based on average of closing bid and asked prices ($.25) of the
Company's common stock on December 31, 1997.
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 3, 1998 certain information
with respect to each beneficial owner of more than 5% of the Company's Common
Stock and each director and executive officer of the Company:
Number of Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned (1) Class
- ------------------- --------- -----
Alan Gold (2) 584,428 8.0%
1350 Piccard Drive
Rockville, MD 20850
William F. Leimkuhler (3) 100,000 1.4%
711 Fifth Avenue
New York, NY 10022
Charles H. Merriman III (4) 107,000 1.4%
C/O Scott & Stringfellow
PO Box 1575
Richmond, VA 23218
Stanley S. Shuman (5) 1,071,250 15.3%
711 Fifth Avenue
New York, NY 10022
Allen & Company Incorporated (6) 2,022,000 28.5%
711 Fifth Avenue
New York, NY 10022
Research Medical Center 500,000 7.2%
2316 East Meyer Blvd.
Kansas City, MO 64132
Charles Elsner 400,000 5.8%
c/o The Forschner Group Inc.
151 Long Hill Crossroads
Shelton, CT 96484
All Directors and Officers (7) 791,428 10.8%
as a group (three persons) (2) (3) (4)
- ----------------
(1) Unless otherwise indicated, all shares are beneficially owned and sole
voting and investment power is held by the person named above.
21
<PAGE>
(2) Includes 435,428 shares held jointly by Mr. Gold and his wife, Susan Gold,
as joint tenants with right of survivorship and 149,000 exercisable stock
options.
(3) Includes 100,000 exercisable stock options held by Mr. Leimkuhler.
(4) Includes 100,000 exercisable stock options held by Mr. Merriman.
(5) Includes 210,250 shares held in certain trusts for the benefit of Mr.
Shuman's children, of which shares Mr. Shuman disclaims beneficial
interest. Also includes warrants to purchase 20,000 shares of Common Stock
beneficially owned by Mr. Shuman.
(6) In addition to those shares beneficially owned by Allen & Company, certain
officers of Allen and their families, including Mr. Shuman, own 1,721,750
shares. Also includes warrants to purchase 120,000 shares of common stock.
22
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1993, pursuant to an agreement (the "USN Agreement") between the
Company and A. Hyman Kirshenbaum, M.D. ("Kirshenbaum") and Jerry Brown, Ph.D
("Brown") , the Company, among other things, granted an aggregate 20% interest
in USN to Brown and Kirshenbaum. In addition, following the execution of the USN
agreement, Kirshenbaum was appointed as an officer of USN and Brown was
appointed to the Company's Board of Directors and executed an employment
agreement with USN. Under the terms of the USN Agreement, the Company possessed
the right to repurchase for cash or Common Stock such 20% interest during each
of the third through sixth full fiscal years of the USN Agreement. The Company
exercised its right to repurchase the 20% interest in USN in September 1996 at a
value of $38,781.40 , which value was calculated by the Company in accordance
with the terms of the USN Agreement. Such valuation was disputed by Brown and
Kirshenbaum.
In June 1997, the Company instituted an action (the "Declaratory Action")
in the United States District Court of Maryland, Southern Division against
Kirshenbaum and Brown seeking a declaration from the Court that its repurchase
of Brown's and Kirshenbaum's 20% interest in USN for $38,781.40 was fair and
equitable. Because of the dispute between the Company and Brown and Kirshenbaum
on the valuation of their 20% in USN, the Company filed the Declaratory Action
to determine: (1) whether the Company's repurchase is proper; (2) whether the
valuation of Brown's and Kirshenbaum's 20% interest in USN is just and fair; (3)
whether Brown's and Kirshenbaum's valuation of their 20% interest in USN is
improper. If successful in this action, the Company will be entitled to purchase
Brown's and Kirshenbaum's 20% interest for $38,781.40 or 38,782 shares of Common
Stock. If unsuccessful, the Company may be required to purchase Brown's and
Kirshenbaum's interests in USN for approximately $584,497.
In response to the Declaratory Action, Brown and Kirshenbaum filed a
counterclaim and third party claim against the Company, USN and others,
including Alan Gold. The counterclaim against the Company and third party claim
against USN and the other parties is purportedly for violations of : (1) the
RICO statutes (18 U.S.C. ss1962(c) and (d)) ; (2) various causes of action for
fraud ; and (3) various causes of action for breach of contract. The RICO and
fraud counts seek damages of not less than $9 million per count and also seek
the imposition of treble damages for RICO and punitive
23
<PAGE>
damages for the fraud counts. The breach of contract counts range from $250,000
to $600,000. The claims of RICO and other paries to missappropriate a business
concept allegedly created by Brown and Kirshenbaum. The remainder of Brown's and
Kirshenbaum's claims are in the nature of a breach of contract between the
Company, USN and Brown and Kirshenbaum.
The Company feels strongly about its position in the Declaratory Action
and intends to vigorously pursue its claim in the Declaratory Action. However,
no evaluation of the likelihood of a favorable or unfavorable outcome can be
made at this time. In addition, the Company and USN intend to vigorously defend
Brown's and Kirshenbaum's counterclaim and third party claims.
In addition to the above-described federal court action, Brown has filed a
state court action in the District Court in and for Montgomery County, Maryland
against USN and other parties seeking breach of contract damages for lost
salary, unreimbursed expenses and for consequential damages and costs arising
out of what he claims to be an improper termination from USN. Brown seeks
approximately $381,000 for lost salary and $36,000 for unreimbursed expenses in
addition to the consquential damages and treble damages he seeks under his
various counts of his Complaint. USN has and continues to vigorously defend this
action. Because the case in in the initial pleading stages, no evaluation of the
likelihood of an unfavorable outcome can be made at this time.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Page No.
Financial Statements of the Company
Report of Independent Auditors F-1
Balance Sheet as of December 31, 1997 and 1996 F-2
Statements of Operations for the years ended
December 31, 1997, 1996, and 1995. F-3
Statement of Changes in Stockholders' Equity
for the period January 1, 1995 through
December 31, 1997 F-4
Statements of Cash Flows for the year ended
December 31, 1997, 1996, and 1995. F-5
Notes to Financial Statements F-6
Report of Independent Auditors with respect to
Supplementary Schedules S-1
Valuation and Qualifying Accounts S-2
All other schedules have been omitted as the conditions requiring
their filing are not present or the information required therein has been
included in the notes to the financial statements.
(b) Reports on Form 8-K
During the three months ended December 31, 1997, the Company filed a
report on Form 8-K on December 12, 1997 with the Securities and Exchange
Commission. This was to disclose the sale of the Company's interest in
Florida Specialty Networks, Ltd.
(c) Exhibits
3 Articles of Incorporation and By-laws
(a) Restated Certificate of Incorporation and by-laws of the Company
(incorporated by reference to exhibits 3.1 and 3.2 of the Company's
Registration Statement No. 33-4532-W on Form S-18)
(b) Certificate of Amendment dated June 18, 1987 (incorporated by
reference to exhibit 3(b) of the Company's 1987 Annual Report on
Form 10-K).
25
<PAGE>
(c) Certificate of Amendment dated November 17, 1989 (pursuant to
which the Company changed its name to GHS, Inc.) (incorporated by
reference to exhibit 3(c) of the Company's 1988 Annual Report on
Form 10-K).
10 Material Contracts
(a) Employment Agreement dated December 14, 1984 between the Company
and Alan Gold, as amended March 7, 1986 (incorporated by reference
to Exhibit 10.3 of the Company's Registration Statement No.
33-4532-W on form S-18).
(b) Gamma Knife Neuroradiosurgery Equipment Agreement dated August,
1993 between Research Medical Center and US NeuroSurgical
(incorporated by reference to Exhibit 10h to the Company's Quarterly
Report or Form 10-Q for the quarter ended September 30, 1993).
(c) Agreement for Issuance and Sale of Stock dated August, 1993
between Research Medical Center and GHS, Inc. (incorporated by
reference to Exhibit 10i to the Company's Quarterly Report or Form
10-Q for the quarter ended September 30, 1993).
(d) Ground Lease Agreement dated August, 1993 between Research
Medical Center and US NeuroSurgical (incorporated by reference to
Exhibit 10j to the Company's Quarterly Report or Form 10-Q for the
quarter ended September 30, 1993).
(e) LGK Agreement dated July 12, 1993 between Elekta Instruments,
Inc. and US NeuroSurgical (incorporated by reference to Exhibit 10k
to the Company's Quarterly Report or Form 10-Q for the quarter ended
September 30, 1993).
(f) Agreement dated July 23, 1993 between GHS, Inc., and A. Hyman
Kirshenbaum, M.D., and Jerry M. Brown, Ph.D., (incorporated by
reference to Exhibit 10n to the Company's Quarterly Report or Form
10-Q/A for the quarter ended September 31, 1993.)
(g) Agreement dated October 28, 1994 between U.S. NeuroSurgical,
Inc. and Financing for Science and Industry, Inc. (incorporated by
reference 10n to the Company's 1994 Annual Report on Form 10-K).
(h) Agreement dated December 29, 1993, between U.S. NeuroSurgical,
Inc. and Elekta Instruments, Inc. (incorporated by reference 10o to
the Company's 1994 Annual Report on Form 10-K).
26
<PAGE>
(i) Asset Purchase Agreement dated March 10, 1997 between Health
Management Systems, Inc. and GHS, Inc. (incorporated by reference
to 10p the Company's 1997 Annual Report on Form 10-K).
(j) Agreement dated August 1, 1996 between U. S. Neurosurgical, Inc
and DVI, Inc.
(k) 1997 Stock Option Plan
(m) Asset Purchase Agreement dated October 16, 1997 between Florida
Specialty Network, Ltd. and CMSF, Inc.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 6, 1998
GHS, Inc.
(Registrant)
By /s/ Alan Gold
------------------------------------------
Alan Gold
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
April 6, 1998 /s/ Alan Gold
--------------------------------------------
Alan Gold
President and Director
(Chief Executive, Financial Officer)
April 6, 1998 /s/ William F. Leimkuhler
--------------------------------------------
William F. Leimkuhler
Director
April 6, 1998 /s/ Charles H. Merriman III
--------------------------------------------
Charles H. Merriman III
Director
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
GHS, Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheets of GHS, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of GHS, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their consolidated cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
January 30, 1998
With respect to Note G[1]
March 5, 1998
F-1
<PAGE>
GHS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
-------------------------
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,466,000 $ 159,000
Certificates of deposit - at cost which
approximates market 400,000
Accounts receivable 209,000 94,000
Other current assets 51,000 64,000
Net current assets - discontinued operations 43,000 340,000
----------- -----------
Total current assets 4,169,000 657,000
----------- -----------
Property and equipment:
Gamma Knifes (net of accumulated depreciation of
$1,636,000 in 1997 and $967,000 in 1996) 4,830,000 1,933,000
Leasehold improvements (net of accumulated
amortization of $198,000 in 1997 and
$83,000 in 1996) 1,624,000 954,000
----------- -----------
Total property and equipment 6,454,000 2,887,000
----------- -----------
Progress payments - Gamma Knife 2,610,000
Deferred tax asset 463,000
Deposits 43,000
Cash held in escrow 89,000 907,000
Net long-term assets - discontinued operations 434,000
----------- -----------
89,000 4,457,000
----------- -----------
$10,712,000 $ 8,001,000
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 149,000 $ 245,000
Obligations under capital lease and loans
payable - current portion 1,195,000 711,000
Demand loan 525,000
----------- -----------
Total current liabilities 1,344,000 1,481,000
Deferred tax liability 450,000
Obligations under capital lease and loans
payable - net of current portion 4,217,000 3,923,000
Common stock - par value $.01; 500,000 shares
issued with put option 500,000 500,000
----------- -----------
6,511,000 5,904,000
----------- -----------
Commitments, litigation and other matters
STOCKHOLDERS' EQUITY
Preferred stock - 1,000,000 shares authorized;
none issued Common stock - par value $.01;
25,000,000 shares authorized; 6,479,160 issued
and outstanding in 1997 6,447,828 issued and
outstanding in 1996 65,000 65,000
Additional paid-in capital 3,114,000 3,082,000
Retained earnings 1,022,000 (1,050,000)
----------- -----------
Total stockholders' equity 4,201,000 2,097,000
----------- -----------
$10,712,000 $ 8,001,000
=========== ===========
- --------------------------------------------------------------------------------
See notes to financial statements
F-2
<PAGE>
GHS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Patient revenue $1,830,000 $1,452,000 $1,283,000
---------- ---------- ----------
Costs and expenses:
Patient expenses 843,000 574,000 670,000
Selling, general and administrative 585,000 417,000 176,000
---------- ---------- ----------
1,428,000 991,000 846,000
---------- ---------- ----------
Income from operations 402,000 461,000 437,000
---------- ---------- ----------
Interest expense (485,000) (302,000) (500,000)
Interest income 64,000 1,000
---------- ---------- ----------
(421,000) (302,000) (499,000)
---------- ---------- ----------
Income (loss) from continuing operations
before income tax provision (benefit)
and minority interest (19,000) 159,000 (62,000)
Income tax (benefit) (8,000) (402,000)
---------- ---------- ----------
Income (loss) from continuing operations
before minority interest (11,000) 561,000 (62,000)
Minority interest (16,000) 22,000
---------- ---------- ----------
Income (loss) from continuing operations (11,000) 545,000 (40,000)
---------- ---------- ----------
Discontinued operations:
Loss from operations of discontinued
subsidiaries less applicable income
tax (benefits) of ($225,000) in 1997,
($82,000) in 1996 and $0 in 1995 (520,000) (513,000) (136,000)
Equity in income (loss) of investee less
applicable income tax (benefit) of
($65,000) in 1997 and $21,000 in 1996 (97,000) 136,000
Gain on sale of equity investee less
applicable income tax of $916,000 in 1997 1,389,000
Gain on sale of assets of subsidiaries less
applicable income taxes of $565,000 1,311,000
---------- ---------- ----------
Income (loss) from discontinued operations 2,083,000 (377,000) (136,000)
---------- ---------- ----------
Net income (loss) $2,072,000 $ 168,000 $ (176,000)
========== ========== ==========
Basic and diluted income (loss) per share:
Continuing operations $ 0.00 $ 0.07 $ (0.01)
Discontinued operations 0.30 (0.05) (0.02)
---------- ---------- ----------
Net income (loss) $ 0.30 $ 0.02 $ (0.03)
========== ========== ==========
Weighted average common shares outstanding 6,967,786 6,947,828 6,947,828
========== ========== ==========
</TABLE>
See notes to financial statements
F-3
<PAGE>
GHS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock *
-------------------------
Number Additional Retained
of Paid-in Earnings
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1996 6,447,828 $ 65,000 $ 3,082,000 $(1,218,000) $ 1,929,000
Net income for the year ended
December 31, 1996 168,000 168,000
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1996 6,447,828 65,000 3,082,000 (1,050,000) 2,097,000
Issuance of common stock for
purchase of minority
interest 31,332 32,000 32,000
Net income for the year ended
December 31, 1997 2,072,000 2,072,000
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1997 6,479,160 $ 65,000 $ 3,114,000 $ 1,022,000 $ 4,201,000
=========== =========== =========== =========== ===========
</TABLE>
* Excluding shares with put option
See notes to financial statements
F-4
<PAGE>
GHS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ (11,000) $ 545,000 $ (40,000)
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 784,000 450,000 449,000
Deferred income tax (benefit) (402,000)
Other 32,000
Minority interest in net (loss) of
consolidated subsidiary 16,000 (22,000)
Changes in:
Accounts receivable - net (115,000) 104,000 (139,000)
Other current assets 13,000 26,000 (57,000)
Accounts payable and accrued expenses (96,000) (41,000) 138,000
Cash provided by continuing operations
Cash provided by (used in) discontinued
operations (703,000) 37,000 191,000
----------- ----------- -----------
Net cash (used in) provided by operating
activities (96,000) 735,000 520,000
----------- ----------- -----------
Cash flows from investing activities:
Property and equipment (1,102,000) (5,000)
Refundable deposits 43,000 290,000
(Increase) decrease in cash held in escrow 818,000 (880,000) (82,000)
Refunds on Gamma Knife 22,000
Proceeds from the sale of discontinued operation 2,100,000
Proceeds from the sale of equity investee 2,330,000
Purchase of certificates of deposit (400,000)
Cash used in discontinued operations (89,000) (78,000)
----------- ----------- -----------
Net cash provided by (used in) investing
activities 3,789,000 (657,000) (165,000)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of capital lease and loan obligations (486,000) (522,000) (430,000)
Cash received on refinancing of capital lease 100,000
Loan payable - officer (20,000) 20,000
Notes payable - other (100,000) 100,000
Loan payable - Gamma Knife 525,000
----------- ----------- -----------
Net cash used in financing activities (386,000) (117,000) (310,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 3,307,000 (39,000) 45,000
Cash and cash equivalents - beginning of period 159,000 198,000 153,000
----------- ----------- -----------
Cash and cash equivalents - end of period $ 3,466,000 $ 159,000 $ 198,000
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 485,000 $ 316,000 $ 510,000
Income taxes 290,000 13,000 3,000
Supplemental disclosures of noncash financing
activities:
Property acquired under capital lease obligations
and through loans payable 3,327,000
Issuance of common stock for services rendered 32,000 23,000
Increase (decrease) in progress payments and
related loans payable for Gamma Knife (2,610,000) 1,450,000 1,160,000
Refinancing of loans payable and capital lease
obligation with new capital lease obligation 2,172,000
Refinancing of progress payment obligation with
capital lease 3,139,000
Loans payable to finance property acquisitions 188,000
</TABLE>
See notes to financial statements
F-5
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
[1] Basis of preparation:
GHS, Inc. (the "Company") through its subsidiary, U.S. Neuro Surgical,
Inc. ("U.S. Neuro") owns and operates stereotactic radiosurgery centers,
utilizing the Gamma Knife technology. During 1995, the Company formed a
subsidiary, U.S. Neurosurgical Physics, Inc. ("USNP") to administer the
billing and collection of the Physicist's fee for operating the Gamma
Knife.
In July 1997 the Company sold substantially all the assets except accounts
receivable of two of its subsidiaries, Web Health Inc. (formerly Global
Health Systems, Inc.) and Kachina Ventures, Inc. (formerly GHS Management
Services, Inc.) to Health Management Systems, Inc. The sales price was
$2,100,000 subject to certain closing adjustments. These subsidiaries
develop, install and maintain computerized processing systems for managed
care, public health and ambulatory care facilities.
In December 1997 the Company sold its 20% investment in Florida Specialty
Network ("FSN"), a computerized processing systems provider which operates
in the United States to CMSF, Inc. ("Buyer") and Magellan Health Services,
Inc., parent of the Buyer. The Company received proceeds of approximately
$2,330,000 net of expenses and recorded a gain on sale of $2,143,000. In
addition, the Company has the opportunity to earn additional consideration
upon the achievement by FSN of certain performance milestones. Prior to
sale, the Company accounted for its investments in FSN on the equity
method.
The consolidated financial statements include the accounts of GHS, Inc.
and its wholly owned subsidiaries. The results of operations of Web
Health, Inc. and Kachina Ventures Inc. and the equity in the operating
results of FSN have been reported separately as discontinued operations.
In addition, the net assets of such entities have been segregated in the
accompanying balance sheets. In connection therewith, the 1996 and 1995
financial statements have been reclassified from amounts previously
reported (see Note I).
[2] Revenue recognition:
Patient revenue is recognized when the Gamma Knife procedure is rendered.
[3] Long-lived assets:
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 121 ("FAS 121"), "Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." FAS 121
requires that long lived assets to be held and used by an entity, be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Adoption of this statement had no impact in the Company's financial
position, results of operations, or liquidity.
[4] Depreciation and amortization:
The Gamma Knifes are being depreciated on the straight-line method over an
estimated useful life of 7 years. Leasehold improvements are being
amortized on the straight-line method over 7 to 20 years, the life of the
leases.
F-6
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5] Income (loss) per share:
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("Statement No. 128"). Statement No. 128
replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share is based on the weighted average number of
common shares outstanding and excludes any dilutive effects of options and
warrants. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all years have been presented to conform to the Statement No. 128
requirements.
Outstanding options and warrants were not included in the computation of
diluted earnings per share because to do so would have been antidilutive
for the years presented.
[6] Statement of cash flows:
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
[7] Estimates and assumptions:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
[8] Fair values of financial instruments:
The estimated fair value of financial instruments has been determined
based on available market information and appropriate valuation
methodologies. The carrying amounts of cash, certificates of deposit,
accounts receivable, other current assets and accounts payable approximate
fair value at December 31, 1997 and 1996 because of the short maturity of
these financial instruments. The estimated carrying value of the
obligations under capital leases and loans payable approximate fair value
because the interest rates on these instruments approximate the market
rates at December 31, 1997 and 1996. The fair value estimates were based
on information available to management as of December 31, 1997 and 1996.
[9] Stock-based compensation:
The Company accounts for employee stock option grants under Accounting
Principles Board Opinion No. 25 ("APB 25"). Under APB 25, when the
exercise price of employee stock options is greater than or equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recorded.
F-7
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE B - AGREEMENTS WITH RESEARCH MEDICAL CENTER ("RMC")
[1] Gamma Knife neuroradiosurgery equipment agreement:
U.S. Neuro entered into a neuroradiosurgery equipment agreement (the
"equipment agreement") with RMC for a period of 21 years which commenced
with the completion of the neuroradiosurgery facility (the "facility") in
September 1994. The equipment agreement, among other matters, requires
U.S. Neuro to provide (i) the use of the Gamma Knife equipment (the
"equipment") to RMC, (ii) the necessary technical personnel for the proper
operation of the equipment, (iii) sufficient supplies for the equipment,
(iv) the operation, maintenance and repair of the equipment, (v) all basic
hardware and software updates to the equipment and, (vi) an uptime
guarantee. In return, RMC pays U.S. Neuro 80% of RMC's fees for the use of
the equipment and the facility. The agreement also provides for U.S. Neuro
to establish for the benefit of RMC an escrow account funded with an
amount equal to one month average of the compensation payable to U.S.
Neuro. U.S. Neuro shall be the owner of and entitled to the income from
the escrow account so long as no event of default has occurred. As of
December 31, 1997, the escrow account had a balance of $85,000. The
equipment agreement terminates automatically upon termination of the
ground lease agreement (see Note B[2]) and may be terminated by mutual
agreement in the sixth year of the ground lease term.
[2] Ground lease agreement:
U.S. Neuro entered into a lease with RMC for the premises, defined as land
situated in Kansas City, Missouri together with the facility which was
constructed by the Company thereon. The lease term is for a period of 21
years commencing September 1994. Rental expense is $3,600 per annum. The
terms of the lease include escalation clauses for increases in certain
operating expenses and for payment of real estate taxes and utilities.
Title to all improvements upon the land vest in RMC.
NOTE C - AGREEMENT WITH NEW YORK UNIVERSITY ON BEHALF OF NEW YORK UNIVERSITY
MEDICAL CENTER ("NYU")
During November 1996 U.S. Neuro entered into a neuroradiosurgery equipment
agreement ("NYU agreement") with NYU for a period of 7 years ("the term") with
the option of NYU extending the term for successive three year periods or
purchasing the Gamma Knife equipment at an appraised market value price. U.S.
Neuro may negotiate the purchase price and upon failure of the parties to agree
may request the facility be closed. All costs associated with closing and
restoring the facility to its original condition will be the liability of U.S.
Neuro. The equipment agreement, among other matters, requires U.S. Neuro to
provide (i) the use of the Gamma Knife equipment to NYU (ii) training necessary
for the proper operation of the Gamma Knife Equipment (iii) sufficient supplies
for the equipment, (iv) the repair and maintenance of the equipment (v) all
basic hardware and software upgrades to the equipment and, (vi) an uptime
guarantee. In return, NYU will pay U.S. Neuro a scheduled fee based on the
number of patient procedures performed.
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE
U.S. Neuro acquired a Gamma Knife ("Knife 1") from Elekta Instruments ("Elekta")
for $2,900,000. The acquisition was financed by Financing for Science
International ("FFSI") under a 5 year capital lease bearing interest at
approximately 12.7% per annum. During September 1996, Finova Capital Corp.
("Finova") bought out FFSI and became the lessor. During March 1997 U.S. Neuro
refinanced this lease with DVI Financial Services, Inc. ("DVI") for $2,272,000
under a 39 month capital lease which bears interest at approximately 10.4%. In
connection with the refinancing, DVI paid to Finova $1,647,000 in settlement of
the lease obligations, the Company's demand loan of $525,000 payable to DVI was
repaid and DVI paid U.S. Neuro $100,000.
F-8
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
On December 6, 1994, U.S. Neuro entered into an additional agreement with Elekta
to acquire a second Gamma Knife ("Knife 2") for $2,900,000 for which it made a
deposit of $290,000 in 1994. The construction of the knife initially was
financed by FFSI through funding of progress payments made to Elekta, however,
during 1996 the Company refinanced the progress payments with DVI at which time
the Company's deposit was returned. In July 1997, upon completion of
construction, the progress payments were converted into a capital lease
obligation for $3,139,000. The lease payments provide for interest at the higher
of 12.0% or that rate adjusted for any increase in the thirty month Treasury
Note rate.
In addition, the Company entered into two (2) three year loans with DVI in the
amounts of $325,000 and $163,000 to finance the leasehold improvements required
to install the Gamma Knife at New York University Medical Center. The loans bear
interest at 12.0% - 12.9% per annum. The leases and loans payable are
collateralized by all the assets of GHS, Inc. and subsidiaries.
The obligations under the capital lease and loans payable are as follows:
December 31,
----------------------
1997 1996
---------- ----------
Capital leases - Gamma Knife $4,999,000 $1,724,000
Loans payable - leasehold
improvements 413,000 300,000
Progress payment obligation 2,610,000
---------- ----------
5,412,000 4,634,000
Less current portion 1,195,000 711,000
---------- ----------
$4,217,000 $3,923,000
========== ==========
Future lease payments on the equipment leases are as follows:
Capital Lease Loans Payable
Year Ending ------------------------ ------------------------
December 31, Knife 1 Knife 2 Leasehold 1 Leasehold 2 Total
- ---------------- ----------- ---------- ----------- ----------- ----------
1998 $ 827,000 $ 713,000 $156,000 $ 65,000 $1,761,000
1999 827,000 792,000 156,000 65,000 1,840,000
2000 482,000 792,000 32,000 1,306,000
2001 792,000 792,000
2002 792,000 792,000
2003 462,000 462,000
---------- ---------- -------- -------- ----------
2,136,000 4,343,000 312,000 162,000 6,953,000
Less: interest 270,000 1,210,000 38,000 23,000 1,541,000
---------- ---------- -------- -------- ----------
Present value of
net minimum
obligation $1,866,000 $3,133,000 $274,000 $139,000 $5,412,000
========== ========== ======== ======== ==========
During the year ended December 31, 1997 and 1996, the Company capitalized
interest cost amounting to approximately $177,000 and $249,000, respectively,
relating to the construction of the Gamma Knife project.
F-9
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE E - COMMON STOCK ISSUED WITH PUT OPTION
In a prior year the Company issued 500,000 shares of its common stock for $1.00
per share to RMC. If the fair market value ("FMV") of the shares is equal to or
less than $1.25 per share, RMC has the right to resell the shares to GHS, Inc.
at $1.00 per share. If the FMV exceeds $1.25, GHS, Inc. has the right of first
refusal to repurchase the shares at a price equal to 80% of the FMV
("Transaction Price"). If GHS, Inc. elects not to exercise its right of first
refusal and RMC is unable to obtain a buyer for the shares at the Transaction
Price, RMC has the right to resell the shares to GHS, Inc. at a purchase price
equal to the greater of $1.00 per share or the Transaction Price.
However, in no event shall the Company be required to purchase shares of stock
after the earlier of 2003 or such time as U.S. Neuro, Inc. no longer occupies
the RMC premises (see Note B[2]).
NOTE F - STOCKHOLDERS' EQUITY
[1] Stock options:
Effective October 23, 1997, the Company adopted a 1997 Stock Option Plan
(the "Plan") for officers, directors, consultants and other key personnel
of the Company. This plan replaces the 1986 Stock Option Plan which had
expired. Options outstanding from the 1986 Option Plan are 166,500. The
Plan authorizes the granting of incentive stock options ("ISO") and
nonqualified stock options to purchase up to 750,000 shares of the
Company's common stock at a price not less than 100% (110% in the case of
ISO's granted a person who owns stock possessing more than 10% of the
voting power of the Company) of the fair market value of the common stock
on the date of grant and that no portion of the option may be exercised
beyond ten years from that date (five years in the case of ISO's granted
to a 10% shareholder). During 1997, 325,000 options were granted (all of
which are immediately exercisable) and at December 31, 1997, 425,000
options were available for grants.
All options outstanding granted to employees of the Company shall
terminate immediately upon the termination of employment of the employee
by the Company or its subsidiaries or its parent.
Listed below is information as to options granted and exercisable.
<TABLE>
<CAPTION>
Period Ended Period Ended Period Ended
December 31, 1995 December 31, 1996 December 31, 1997 Weighted
------------------ ----------------- ------------------ Average
Average Average Average Remaining
Exercise Exercise Exercise Life
Shares Price Shares Price Shares Price In Years
------- -------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Options
outstanding at
beginning of
the year 430,000 $1.00 430,000 $1.00 360,000 $1.00 3.66
Granted 325,000 10.00
Cancelled (8,500)
Expired (70,000) (185,000)
------- ----- ------- ----- ------- ----- -----
Options
outstanding at
end of the
period 430,000 $1.00 360,000 $1.00 491,500 $1.00 8.67
======= ===== ======= ===== ======= ===== =====
Options
exercisable at
end of the year 364,875 $1.00 338,375 $1.00 491,500 $1.00
======= ===== ======= ===== ======= ===== =====
</TABLE>
No compensation expense relating to the stock option grants were recorded
in 1997 as the option exercise prices were greater than the fair market
value of the stock at date of grant. There were no options granted during
1996 and 1995.
F-10
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
[1] Stock options: (continued)
Pro forma information regarding net income and basic and diluted income
(loss) per share is required by FASB 123, and has been determined as if
the Company had accounted for its employee stock options under the fair
value method of that statement. The following pro forma information gives
effect to fair value for those options issued during 1997 and was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions: dividend yield 0%,
volatility of 60%, risk free interest rates of 6.09% and expected life of
10 years.
Loss from continuing operations:
As reported $ (11,000)
Pro forma (210,000)
Basic and diluted loss per share from
continuing operations:
As reported $.00
Pro forma (.03)
[2] Preferred stock:
The Company has authorized 1,000,000 shares of preferred stock, none of
which is issued. The rights and preferences of preferred stock are
established at the discretion of the Board of Directors upon issuance.
[3] Issuance of warrants:
On November 30, 1993, the Company granted warrants to a stockholder to
purchase 200,000 shares of the Company's common stock at a purchase price
of $1.00 per share, which equaled fair value at the date of grant. Such
warrants were granted as consideration for services rendered in connection
with a private placement of securities. The warrants contain registration
and certain anti-dilution rights and are exercisable through November 30,
1998.
NOTE G - COMMITMENTS AND OTHER MATTERS
[1] Lease agreement:
In March 5, 1998 the Company entered into a lease for office premises
which expires March 31, 2003. The terms of the lease include an escalation
clause beginning January 1, 1999 for payment of a pro rata share of
certain operating expenses.
F-11
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE G - COMMITMENTS AND OTHER MATTERS (CONTINUED)
[1] Lease agreement: (continued)
Minimum future obligations under the operating lease are as follows:
Year Ending
December 31,
------------
1998 $24,000
1999 32,000
2000 32,000
2001 32,000
2002 32,000
Thereafter 8,000
No rent was paid in connection with continuing operations during 1997,
1996 or 1995.
[2] Concentrations:
For the year ended December 31, 1997 the Company derived substantially all
its patient revenue from two hospitals, one of which accounted for 90% of
the Company's revenue. For the years ended December 31, 1996 and 1995 one
hospital accounted for all its patient revenue.
The Company is dependent on one manufacturer who sells, supplies and
services the Gamma Knife.
NOTE H - TAXES
The components of the income tax provision (benefit) applicable to continuing
operations is comprised of the following:
Year Ended
December 31,
-----------------------------
1997 1996 1995
--------- --------- -----
Current:
Federal $(112,000) $ 0 $ 0
State (2,000) 0 0
--------- --------- -----
(114,000) 0 0
--------- --------- -----
Deferred:
Federal 106,000 (353,000) 0
State 0 (49,000) 0
--------- --------- -----
106,000 (402,000) 0
--------- --------- -----
Income tax provision (benefit) $ (8,000) $(402,000) $ 0
========= ========= =====
F-12
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE H - TAXES (CONTINUED)
A reconciliation of the tax provision (benefit) calculated at the statutory
federal income tax rate with amounts reported in the statements of operations
applicable to continuing operations follows:
Year Ended
December 31,
------------------------------
1997 1996 1995
------- --------- --------
Income tax provision (benefit) at the
federal statutory rate $(6,000) $ 54,000 $(13,000)
State income tax provision (benefit),
net of federal taxes (2,000) 7,000 (2,000)
Change in valuation allowance (463,000) 15,000
Other
------- --------- --------
Income tax provision (benefit) $(8,000) $(402,000) $ 0
======= ========= ========
Items which give rise to deferred tax assets and liabilities are as follows:
December 31,
----------------------------------
1997 1996 1995
--------- ---------- ---------
Net operating loss carryforward $1,013,000 $ 730,000
Allowance for doubtful accounts 64,000 6,000
Unbilled accounts receivable 77,000
Excess of tax depreciation over book
depreciation $(450,000) (344,000) (195,000)
Valuation allowance (270,000) (618,000)
--------- ---------- ---------
Deferred tax asset (liability) - net $(450,000) $ 463,000 $ 0
========= ========= =========
The valuation allowance decreased by $270,000 in 1997 and $348,000 in 1996. The
1997 decrease was reflected as a tax benefit in discontinued operations. The
1996 decrease was reflected as a tax benefit of $463,000 in continuing
operations. The $115,000 net difference was related to the net operating loss
attributable to discontinued operations. The valuation allowance increased by
$77,000 in 1995 of which $15,000 was related to continuing operations and
$62,000 was related to discontinued operations.
NOTE I - DISCONTINUED OPERATIONS
On July 15, 1997, the Company sold substantially all the assets of two of its
subsidiaries, Web Health Inc. (formerly Global Health Systems, Inc.) and Kachina
Ventures, Inc. (formerly GHS Management Services, Inc.) to Health Management
Systems, Inc.
In addition, in December 1997 the Company sold its 20% investment in FSN to
CMSF, Inc.
F-13
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE I - DISCONTINUED OPERATIONS (CONTINUED)
The components of the net assets of discontinued operations included in the
consolidated balance sheets are as follows:
Year Ended
December 31,
------------------
1997 1996
------- --------
Current assets:
Accounts receivable $43,000 $900,000
Unbilled accounts receivable 31,000
Other current assets 22,000
Less current liabilities
Accounts payable and accrued expenses (600,000)
Obligations under capital lease - equipment (13,000)
------- --------
Net current assets $43,000 $340,000
======= ========
Long-term assets:
Furniture and equipment $ $ 77,000
Software development costs 180,000
Other assets 198,000
Long-term liabilities:
Obligations under capital lease - equipment (21,000)
------- --------
Net long-term assets $ $434,000
======= ========
The condensed statement of loss from discontinued operations attributable to
subsidiaries whose net assets were sold is presented below.
Year Ended
December 31,
1997 1996 1995
Revenue $1,202,000 $2,780,000 $3,162,000
Costs and expenses 1,947,000 3,375,000 3,298,000
---------- ---------- ----------
Loss from operations before income tax
(benefit) (745,000) (595,000) (136,000)
--------- ---------- ----------
Income tax (benefit):
Current (70,000)
Deferred (155,000) (82,000) 0
--------- ---------- ----------
(225,000) (82,000) 0
--------- ---------- ----------
Loss from discontinued operations $(520,000) $ (513,000) $ (136,000)
========= ========== ==========
F-14
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE J - PURCHASE OF MINORITY INTEREST AND RELATED LITIGATION
In 1993, pursuant to an agreement (the "USN Agreement") between the Company and
A. Hyman Kirshenbaum, M.D. ("Kirshenbaum") and Jerry Brown, Ph.D ("Brown"), the
Company, among other things, granted an aggregate 20% interest in USN to Brown
and Kirshenbaum. In addition, following the execution of the USN Agreement,
Kirshenbaum was appointed as an officer of USN and Brown was appointed to the
Company's Board of Directors and executed an employment agreement with USN.
Under the terms of the USN Agreement, the Company possessed the right to
repurchase for cash or common stock such 20% interest during each of the third
through sixth full fiscal years of the USN Agreement. The Company exercised its
right to repurchase the 20% interest in USN in September 1996 at a value of
$38,781.40, which value was calculated by the Company in accordance with the
terms of the USN Agreement and in 1997 the Company paid the purchase price
through the issuance of shares of common stock valued at $31,332 plus offsetting
a receivable of $7,450 from Brown against the purchase price. Such valuation was
disputed by Brown and Kirshenbaum.
In June 1997, the Company instituted an action (the "Declaratory Action") in the
United States District Court of Maryland, Southern Division against Kirshenbaum
and Brown seeking a declaration from the Court that its repurchase of Brown's
and Kirshenbaum's 20% interest in USN for $38,781.40 was fair and equitable.
Because of the dispute between the Company and Brown and Kirshenbaum on the
valuation of their 20% in USN, the Company filed the Declaratory Action to
determine: (1) whether the Company's repurchase is proper; (2) whether the
valuation of Brown's and Kirshenbaum's 20% interest in USN is just and fair; and
(3) whether Brown's and Kirshenbaum's valuation of their 20% interest in USN is
improper. If successful in this action, the Company will be entitled to purchase
Brown's and Kirshenbaum's 20% interest for $38,781.40. If unsuccessful, and
Brown's and Kirshenbaum's valuation is determined to be correct, the Company may
be required to purchase Brown's and Kirshenbaum's interests in USN for
approximately $584,497.
In response to the Declaratory Action, Brown and Kirshenbaum filed a
counterclaim and third party claim against the Company, USN and others. The
counterclaim against the Company and third party claim against USN and the other
parties is purportedly for violations of: (1) the RICO statutes; (2) various
causes of action for fraud; and (3) various causes of action for breach of
contract. The RICO and fraud counts seek damages of not less than $9 million per
count and also seek the imposition of treble damages for RICO and punitive
damages for the fraud counts. The breach of contract counts range from $250,000
to $600,000. The claims of RICO and fraud arise out of an alleged conspiracy
between the Company and other parties to misappropriate a business concept
allegedly created by Brown and Kirshenbaum. The remainder of Brown's and
Kirschenbaum's claims are in the nature of a breach of contract between the
Company, USN and Brown and Kirshenbaum.
The Company intends to vigorously pursue its claim in the Declaratory Action.
However, no evaluation of the likelihood of a favorable or unfavorable outcome
can be made at this time. In addition, the Company and USN intend to vigorously
defend Brown's and Kirshenbaum's counterclaim and third party claims.
In addition to the above-described federal court action, Brown has filed a state
court action in the District Court in and for Montgomery County, Maryland
against USN and other parties seeking breach of contract damages for lost
salary, unreimbursed expenses and for consequential damages and costs arising
out of what he claims to be an improper termination from USN. Brown seeks
approximately $381,000 for lost salary and $36,000 for unreimbursed expenses in
addition to the consequential damages and treble damages he seeks under his
various counts of his compliant. USN has and continues to vigorously defend this
action. Because the case is in the initial pleading stages, no evaluation of the
likelihood of an unfavorable outcome can be made at this time.
F-15
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE K - EMPLOYEES 401K PLAN
During 1997 the Company established a 401(k) plan covering substantially all its
employees which includes employer participation in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan allows
participants to make pretax contributions and the Company may, at its
discretion, match certain percentages of the employee contribution. All amounts
contributed to the plan are deposited into a trust fund administered by
independent trustees. The Company's discretionary matching 401(k) contributions
for 1997 were $2,200.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY SCHEDULES
Board of Directors and Stockholders
GHS, Inc.
Rockville, Maryland
The audits referred to in our report dated January 30, 1998 includes Schedule
II. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Richard A. Eisner & Company, LLP
New York, New York
January 30, 1998
S-1
<PAGE>
GHS, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
Column C
Column B Additions
Balance (1) Column E
at Balance
beginning Charged to Column D at
Column A of costs and Deductions - end of
Description period expenses describe (B) period
- ---------------------------- ---------- ---------- ------------ --------
Allowance for doubtful
accounts:
1997 $164,000 $164,000(A) $ 0
======== ========
1996 $ 14,000 $150,000 $164,000
======== ======== ========
1995 $ 14,000 $ 14,000
======== ========
Reserve for inventory
obsolescence:
1997 $ 0 $ 0
======== ========
1996 $ 15,000 $ 15,000(B) $ 0
======== ========
1995 $ 15,000 $ 15,000
======== ========
(A) 1997 - Bad debt write-off
(B) 1996 - Liquidation of obsolete inventory
Amounts shown above relate to discontinued operations.
See notes to financial statements
S-2
DVI FINANCIAL SERVICES INC.
MASTER EQUIPMENT LEASE
("Master Lease")
LESSOR: LEASE NO. 000134
DVI FINANCIAL SERVICES INC. DATE: August 1, 1996
500 Hyde Park
Doylestown, PA 18901
Telephone (215) 345-6600
LESSEE: U.S. NeuroSurgical, Inc. EQUIPMENT ADDRESS:
BILLING ADDRESS: New York University Medical Center
1350 Piccard Drive 550 1st. Avenue
Suite 360 New York, NY. 10016
Rockville, MD. 20850
- --------------------------------------------------------------------------------
TERMS AND CONDITIONS
1. LEASE.
Lessor leases to Lessee, and Lessee hires from Lessor, all of the tangible
personal property (with all present and future accessories, additions, upgrades,
attachments, repairs and replacement parts, collectively called "Equipment")
described in each equipment schedule executed from time to time pursuant to this
Master Lease ("Equipment Schedule"). Each Equipment Schedule shall (a) be on
Lessor's form, (b) incorporate all of the terms of this Master Lease, and (c)
contain additional terms as Lessor and Lessee agree.
2. TERM.
(a) The term of this Master Lease shall begin on the date set forth above
and shall continue in effect so long as any Equipment Schedule remains in
effect.
(b) The lease term for each Equipment Schedule shall begin on the date of
shipment to Lessee of the Equipment (or any part thereof) described in such
Equipment Schedule or such later date as Lessor may designate in writing (the
"Commencement Date"), and shall continue thereafter for the term set forth in
such Equipment Schedule. On the Commencement Date, Lessee shall execute and
deliver to Lessor a Delivery and Acceptance Certificate, in a form to be
specified by Lessor, which confirms the Commencement Date.
(c) THIS LEASE AND THE LEASE TERM FOR EACH EQUIPMENT SCHEDULE ARE NOT
CANCELABLE BY LESSEE.
3. RENT AND PAYMENT.
Lessee shall pay Lessor, as rental for the Equipment during each month of
the term of any Equipment Schedule, the monthly rent set forth in such Equipment
Schedule, to ether with any and all monthly rent payable pursuant to Section
8(a) hereof in connection with any accessions, additions, upgrades with
attendant maintenance contracts, and improvements to any of the Equipment, which
shall be payable in advance without notice or demand on the dates set forth in
such Equipment Schedule. Lessee agrees to pay interim rent in an amount equal to
the pro rata periodic monthly rent from the Commencement Date to the first
regular monthly periodic rent payment date. Thereafter, the regular periodic
rent shall be due on the first day of each succeeding period commencing with the
first day of the month following the Commencement D ate as set forth on the
Equipment Schedule. Lessee shall pay the monthly rent and all other money due
under this Master Lease or any Equipment Schedule by check or wire transfer so
as to constitute immediately available funds at Lessor's address set forth above
or at such other place as Lessor shall designate in writing, or if to an
assignee of Lessor, at such place as such assignee shall designate in writing,
and Lessee shall make such payments free and clear of all claims, demands or
setoffs against Lessor or such assignee. Whenever any payment (of rent or
otherwise) is not made within ten (10) business days from the date due
hereunder, Lessee shall pay Lessor a late charge of five percent (5%) of any
payment not paid when due, plus the lesser of eighteen percent (18%) interest
per year or the highest lawful rates on such payment until received, or such
lesser maximum amount as is permitted by applicable law. In addition, Lessor at
its option may require at any time that Lessee make all payments due hereunder
or under any Equipment Schedule by certified check or by wire transfer.
4. REQUEST FOR EQUIPMENT.
Lessee requests Lessor to order the Equipment described in any Equipment
Schedule executed by Lessee from the supplier named in such Equipment Schedule,
to arrange for delivery to Lessee at Lessee's expense, and to pay for the
Equipment as provided in such Equipment Schedule. Lessee acknowledges and agrees
that: (a) Lessee has independently selected the supplier and the Equipment, and
that Lessor will rely on specifications provided by Lessee in ordering the
Equipment; (b) Lessee shall be responsible for all costs and expenses relating
to the selection, shipment, delivery, assembly, installation, testing,
adjusting, servicing, operation and acceptance of the Equipment; (c) unless the
Equipment Schedule otherwise provides, Lessor's payment to the supplier will
occur only after Lessee has confirmed (on Lessor's Delivery and Acceptance
Certificate) satisfactory delivery, assembly, installation, inspection and
acceptance of the Equipment; (d) Lessor shall have no responsibility for any
delay, failure or refusal on the part of any supplier to accept or fill Lessor's
order; (e) upon Lessee's acceptance of Equipment, Lessee shall execute Lessor's
Delivery and Acceptance Certificate; (f) Lessor has the option to terminate any
Equipment Schedule and all obligations to Lessee under such Equipment Schedule,
and to recover from Lessee any deposit paid by Lessor to the supplier, if the
Equipment described in such Equipment Schedule has not been delivered,
assembled, installed and accepted by Lessee within 60 days from the date that
Lessor orders the Equipment; (9) no supplier is Lessor's agent, or authorized to
bind Lessor or waive or alter any provision of this Master Lease or any
Equipment Schedule; and (h) if Lessee cancels this Master Lease after execution
of such but prior to the Lessee's execution of the Delivery and Acceptance
Certificate, Lessor may withhold and keep any deposits or funds paid by Lessee
to Lessor.
5. EQUIPMENT SELECTION; DISCLAIMER OF WARRANTIES; WAIVERS.
(a) Lessee acknowledges, represents and warrants that Lessee has made the
selection of Equipment based on Lessee's own judgment, and expressly disclaims
any reliance upon statements made by Lessor or Lessor's agents, employees or
salespersons.
(b) LESSOR MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO
THE CAPACITY, CONDITION, DESIGN, DURABILITY, MATERIAL, MERCHANTABILITY,
PERFORMANCE, QUALITY, SUITABILITY. WORKMANSHIP OR VALUE OF THE EQUIPMENT OR ITS
FITNESS FOR ANY PARTICULAR PURPOSE OR THAT THE EQUIPMENT WILL SATISFY THE
REQUIREMENTS OF ANY LAW, RULE, REGULATION, SPECIFICATION OR CONTRACT, OR ANY
OTHER REPRESENTATION OR WARRANTY OF ANY KIND OR NATURE WHATSOEVER WITH RESPECT
TO THE EQUIPMENT OR ANY ASSOCIATED ITEM OR ANY ASPECT THEREOF. AS TO THE LESSOR,
LESSEE LEASES THE EQUIPMENT "AS IS".
(c) Lessee acknowledges that (i) Lessor is neither the manufacturer of the
Equipment nor a manufacturer's agent, supplier or dealer, and has no familiarity
with the Equipment; and (ii) Lessor shall have no obligation to assemble,
install, test, adjust or service the Equipment.
(d) Lessor shall not be liable, to Lessee or otherwise, to any extent
whatsoever, for the selection, quality, condition, merchantability, suitability,
fitness, operation or performance of the Equipment. Without limiting the
generality of the foregoing, Lessor shall not be liable, to Lessee or otherwise,
for any liability, claim, loss, damage or expense of any kind or nature
(including strict negligent liability in tort) caused, directly or indirectly,
by the Equipment or any inadequacy thereof for any purpose, or any deficiency or
defect therein, or the use or maintenance thereof, or any repairs, servicing or
adjustments thereto; or any delay in providing or failure to provide any part
thereof, or any interruption or loss of service thereof, or any loss of
business, or any damage whatsoever and howsoever caused.
(e) REGARDLESS OF CAUSE, LESSEE WILL NOT ASSERT ANY CLAIM WHATSOEVER
AGAINST LESSOR FOR LOSS OF ANTICIPATORY PROFITS OR ANY OTHER INDIRECT, SPECIAL
OR CONSEQUENTIAL DAMAGES. IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT EACH AND
EVERY PROVISION OF THIS AGREEMENT WHICH PROVIDES FOR A LIMITATION OF LIABILITY
DISCLAIMER OF WARRANTIES OR EXCLUSION OF DAMAGES, IS INTENDED BY THE PARTIES TO
BE SEVERABLE FROM ANY OTHER PROVISION AND IS A SEPARABLE AND INDEPENDENT ELEMENT
OF RISK ALLOCATION AND IS INTENDED TO BE ENFORCED AS SUCH.
(f) If the Equipment fails to comply with any representation or warranty
made by the supplier or manufacturer thereof, or is defective or improperly
assembled or installed or otherwise unsatisfactory for any reason, Lessee shall
make claim on account thereof against the supplier or manufacturer thereof, and
Lessee shall nevertheless pay all rent and perform all other obligations under
this Master Lease and all Equipment Schedules without asserting any claim
against Lessor. Lessor hereby assigns to Lessee, without recourse and solely for
the purpose of prosecuting such a claim, all rights that Lessor may have against
the supplier and manufacturer of Equipment for breach of warranty or other
representations with respect to the Equipment; provided, however, that this
assignment shall not preclude Lessor, in its sole discretion, from asserting and
prosecuting such a claim. Lessee shall indemnify and hold Lessor harmless from
and against any and all claims, costs, expenses, damages, losses and liabilities
incurred or suffered by Lessor as a result or incident to any such action by
Lessee for breach of warranty or other representations with respect to the
Equipment.
(g) Lessor makes no representation or warranty as to the treatment of this
Master Lease or any Equipment Schedule for tax or accounting purposes or
otherwise.
(h) Lessee hereby waives its rights and remedies under Pennsylvania
Commercial Code Section 10508 through 10522 with respect to Lessee's right to
cancel any Equipment Schedule, reject any of the Equipment, recover damages or
any other rights and remedies provided thereunder in connection with any default
by Lessor or any other circumstances therein provided.
6. TITLE AND ASSIGNMENT.
(a) Nothing contained in this Master Lease, or in any Equipment Schedule,
shall give or convey to Lessee any right, title or interest in or to the
Equipment, or any additions, upgrades, accessions, or improvements thereto,
except as a Lessee as set
<PAGE>
forth in this Master Lease and such Equipment Schedule, and Lessee represents
and agrees that Lessee [illegible] hold the Equipment subject and subordinate to
the rights of the owner thereof. The Equipment is and at all times shall remain
the property of Lessor (or Lessor's successor in interest), and except as
expressly set forth in this Master Lease or any Equipment Schedule, Lessee shall
have no right, title, equity or interest in the Equipment and no right or option
to purchase or otherwise acquire title to or ownership of the Equipment. Lessee
shall, at Lessee's sole cost and expense: (i) defend and protect the ownership
of, title to, and interest in the Equipment of Lessor, Lessor's successors in
interest, and any assignee or secured party, against all parties claiming
against or through Lessee; (ii) keep the Equipment free and clear from any legal
process, liens, claims, demands and encumbrances (except those incurred by
Lessor); and (iii) give Lessor prompt written notice of any legal process,
liens, claims, demands and encumbrances made by any party (except Lessor) with
respect to the Equipment. Lessee shall, and Lessor may on behalf of Lessee, at
Lessee's expense, execute and file such financing statements, applications for
registration and other documentation as Lessor shall require for the purpose of
protecting or perfecting the interest of Lessor, or any assignee, transferee or
secured party, in the Equipment.
(b) Lessee shall, at Lessee's expense, affix to the Equipment such labels,
signs or other devices as Lessor may supply to identify Lessor as the owner and
Lessor of the Equipment. Lessee authorizes Lessor to insert in any Equipment
Schedule and in any financing statement or other documents the serial numbers
and other identification data of the Equipment when determined by Lessor. The
Equipment is and at all times shall remain personal property regardless of any
attachment or affixation of the Equipment to any real property or improvements
thereon.
(c) LESSEE SHALL NOT, WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, (ii) ASSIGN
THIS MASTER LEASE OR ANY EQUIPMENT SCHEDULE OR ANY INTEREST HEREIN OR THEREIN,
(ii) ENTER INTO ANY SUBLEASE, LOAN OR SIMILAR ARRANGEMENT WITH RESPECT TO THE
EQUIPMENT, OR (iii) TRANSFER, ASSIGN, CONVEY, ENCUMBER, PLEDGE OR OTHERWISE
DISPOSE OF ANY EQUIPMENT OR ANY INTEREST THEREIN; AND ANY ATTEMPT BY LESSEE TO
DO ANY OF THE FOREGOING WITHOUT LESSOR'S PRIOR WRITTEN CONSENT SHALL BE VOID.
(d) Lessee shall keep, maintain and use the Equipment only at the place
designated on the Equipment Schedule, and shall not move the Equipment to any
other location without the Lessor's prior written consent.
(e) This Master Lease and any rights of Lessor hereunder and under any
Equipment Schedule shall be assignable by Lessor without notice to or the
consent of Lessee. Lessee acknowledges and understands that the terms and
conditions of each Equipment Schedule have been fixed by Lessor in anticipation
of Lessor's ability to sell and assign its interest or grant a security interest
under each Equipment Schedule and the Equipment listed therein in whole or in
part to a security assignee (the "Secured Party") for the purpose of either
assigning: (i) Lessee's obligation to pay rent pursuant to such Equipment
Schedule (Lessor having transferred the right to receive such rent to the
Secured Party), or (ii) securing a loan to Lessor. Lessor may also sell and
assign its rights as owner and lessor of the Equipment under any Equipment
Schedule to an assignee (the "Assignee") which may be represented by a bank or a
trust company acting as a trustee (the "Owner Trustee") for the Assignee. After
such assignments the term Lessor shall mean, as the case may be, such Assignee
or Owner Trustee and any Secured Party (collectively "Lessor Transferee").
Lessee acknowledges and agrees that:
(1) Any such Lessor Transferee shall have and be entitled to exercise any and
all discretion, rights and powers of Lessor hereunder or under any
Equipment Schedule, but such Lessor Transferee shall not be obligated to
perform any of Lessor's obligations hereunder or under any Equipment
Schedule; provided, however, that such Lessor Transferee shall not disturb
Lessee's quiet and peaceful possession of the Equipment and use thereof
for its intended purpose during the terms hereof so long as Lessee is not
in default of any provision hereof and such Lessor Transferee continues to
timely receive all amounts of rent payable under such Equipment Schedule;
(2) Lessee will pay all rent and any and all other amounts payable by Lessee
under any Equipment Schedule to such Lessor Transferee, notwithstanding
and Lessee hereby waives any defense or claim of whatever nature, whether
by reason of breach of such Equipment Schedule or otherwise, which Lessee
may or might now or hereafter have as against Lessor or any prior Lessor
Transferee (Lessee reserving its right to have recourse directly against
Lessor on account of any such defense or claim); and
(3) Subject to and without impairment of Lessee's leasehold rights in and to
the Equipment, Lessee holds the Equipment for such Lessor Transferee to
the extent of such Lessor Transferee's rights therein.
7. NET LEASE, TAXES AND FEES.
(a) Lessor and Lessee acknowledge and agree that each Equipment Schedule
constitutes a net lease and that Lessee's obligation to pay all rent and any
and all amounts payable by Lessee under any Equipment Schedule shall be absolute
and unconditional, and shall not be subject to any abatement, reduction, setoff,
defense, counterclaim, interruption, deferment or recoupment for any reason
whatsoever; and that such payments shall be and continue to be payable in all
events.
(b) Lessee shall, at Lessee's sole cost and expense and in addition to the
rent due under any Equipment Schedule, promptly pay all taxes, assessments,
license fees, permit fees, registration fees, fines, interest, penalties and all
other governmental charges (including without limitation income, gross receipts,
sales, use, excise, personal property, ad valorem, stamp, documentary and other
taxes), whether levied, assessed or imposed on Lessee, Lessor, the Equipment or
otherwise, relating to the Equipment or the delivery, leasing, operations,
ownership, possession, purchase, registration, rental, sales or use thereof
during the term of any Equipment Schedule, or the interest of Lessee in the
Equipment or under any Equipment Schedule, or the rental or other payments
thereunder or earnings arising therefrom (excepting only taxes on Lessor's net
income). Lessee shall file all returns required in connection therewith and
shall promptly furnish copies to Lessor. Lessee shall reimburse Lessor for any
such taxes paid by Lessor within ten (10) days of receipt of Lessor's invoice
therefor. Any applicable sales tax will be paid to the manufacturer,
manufacturer's agent, supplier, dealer or appropriate taxing agency by Lessor.
Where applicable, Lessee acknowledges that such tax may have been included in
calculating lease payments.
8. CARE, USE, MAINTENANCE AND REPAIR, AND INSPECTION BY LESSOR.
(a) Lessee shall, at Lessee's sole expense, at all times during the term
of each Equipment Schedule and until return of the Equipment to Lessor, (i)
maintain the Equipment in good operating order, repair, condition, appearance
and protect the Equipment from deterioration, and provide all accessories,
upgrades, repairs, replacement parts and service required therefor; (ii) enter
into and maintain a maintenance contract with the manufacturer of the Equipment
or, with the prior written consent of Lessor, with such other party as shall be
acceptable to Lessor, and shall provide Lessor with a copy of such contract and
all supplements thereto; (iii) use the Equipment in a careful, proper and lawful
manner in accordance with standards, specifications or instructions issued by
the manufacturer, and provide necessary site preparation, supplies, energy and
personnel; (iv) comply with all the laws, ordinances, rules, regulations and
other requirements relating to the installation, possession, use or maintenance
of the Equipment, including the requirements of any applicable insurance policy
or warranty; (v) obtain and comply with the requirements of all permits,
licenses and agreements relating to the installation, possession, use or
maintenance of the Equipment; and (vi) purchase, or permit Lessor to purchase,
any and all additions, improvements, upgrades (as and when any upgrades may
become available) and maintenance contracts associated with such upgrades, or
accessions to any of the Equipment which Lessor may permit or require Lessee to
acquire or which Lessor may, at its option, elect to acquire, with the cost of
any and all such additions, improvements, upgrades, maintenance contracts or
accessions to be treated as additional original equipment cost with respect to
the applicable items of Equipment and which additional cost shall be amortized
as additional rental payments by increasing the monthly rental amount payable
under Section 3 hereof by the amount corresponding to the amount which would be
payable as monthly rent hereunder as if such additional cost constituted a
portion of the original equipment cost of the applicable Equipment for Equipment
to be leased under the applicable Equipment Schedule for a term equal to the
remaining lease term of the applicable Equipment Schedule.
(b) Unless Lessor otherwise consents in writing, Lessee shall not: (i)
part with possession of or control over the Equipment; (ii) permit any party
other than Lessee and Lessee's qualified employees to operate the Equipment;
(iii) permit any nonqualified party to repair or service the Equipment; (iv)
permit the Equipment to be used for personal, family, household or agricultural
purposes; or (v) make any additions, alterations or improvements to the
Equipment other than as required or permitted by the terms of this Master Lease.
All repairs, replacement parts, alterations, additions, improvements, upgrades
and accessions to any of the Equipment, whether or not any of the foregoing was
authorized, required, financed or purchased by Lessor, shall become the property
of Lessor.
(c) Upon the request of Lessor; Lessee shall at reasonable times during
business hours make the Equipment available to Lessor for inspection at the
place where it is normally located and shall make Lessee's log and maintenance
records pertaining to the Equipment available to Lessor for inspection.
9. LESSEE'S REPRESENTATIONS AND WARRANTIES.
Lessee hereby represents, warrants and agrees that, with respect to this
Master Lease and each Equipment Schedule:
(a) The execution, delivery and performance thereof by Lessee have been
duly authorized by all necessary corporate or partnership action.
(b) Each individual executing such was duly authorized to do so.
(c) This Master Lease and each Equipment Schedule constitute legal, valid
and binding agreements of Lessee enforceable in accordance with their terms.
(d) The Equipment is personal property and when subjected to use by Lessee
will not become fixtures under applicable law.
(e) During the lease term, Lessee shall deliver and shall cause all
obligors, guarantors and parties whose contracts with Lessee are used as
additional collateral under this Master Lease to deliver to Lessor audited or
reviewed financial statements for each of such party's most recent fiscal years
ended, tax returns and unaudited financial statements certified by such party
for the most recent quarter ended, consisting of at least a balance sheet,
income statements and statements of changes in financial position, and any other
information requested by Lessor from time to time, prepared in accordance with
generally accepted accounting principles.
(f) Lessee shall provide any and all monthly operating statistics or data
and shall use its best efforts to obtain from any party benefitting from the use
of the Equipment through services provided by the Lessee any and all operating
statistics, data, or information requested by Lessor from time to time.
(g) The execution, delivery and performance of this Master Lease and each
Equipment Schedule will not violate any law or
<PAGE>
regulation applicable to Lessee, or cause default under any Agreement to which
Lessee is a party or is [illegible].
10. DELIVERY AND RETURN OF EQUIPMENT.
Lessee hereby assumes the full expense of transportation and in-transit
insurance to Lessee's premises and installation thereat of the Equipment. Upon
termination (by expiration or otherwise) of each Equipment Schedule, Lessee
shall, pursuant to Lessor's instructions and at Lessee's expense (including
without limitation expenses of transportation and in-transit insurance), return
the Equipment to Lessor in the same operating order, repair, condition, and
appearance as when received, less normal depreciation and wear and tear. Lessee
shall have the Equipment deinstalled and removed from its location only by the
manufacturer of the Equipment or by such other party as shall have been
previously approved in writing by Lessor. The manufacturer or such other
preapproved party shall certify in writing to Lessor at the time of such
deinstallation that the Equipment includes all appropriate or required upgrades
and that it is in good working order. Lessee shall transport the Equipment by
means and return the Equipment to Lessor at such address all as shall be
directed by Lessor. Lessee shall bear all costs of deinstallation, removal and
return of the Equipment, including all costs as may be incurred by Lessee or
Lessor to acquire the upgrades required under the terms of this Master Lease, to
service and repair the Equipment and to otherwise put the Equipment in the
condition required under this Section 10.
11. INSURANCE.
During the term hereof and until return of the Equipment to Lessor, Lessee
shall, at Lessee's expense: (i) maintain insurance covering damage, destruction,
loss or theft of the Equipment from any cause whatsoever for not less than an
amount equal to the greater of the replacement value or the amount calculated
pursuant to clause (vi) of Section 15(b) hereof; (ii) maintain public liability
(including liability with respect to the use of the Equipment), professional
liability insurance (covering Lessee and its employees and any and all other
parties as may have possession of or as may operate any of the Equipment), and
property damage insurance in an amount satisfactory to Lessor; (iii) maintain,
if applicable as determined in the sole discretion of Lessor, business
interruption and automobile insurance (where the Equipment constitutes mobile
magnetic resonance imaging equipment or other mobile equipment); and (iv)
promptly notify Lessor of any actual or alleged damage, destruction, liability,
loss or theft relating to the Equipment or the use or operation thereof. All
insurance shall be in form, substance and amount satisfactory to Lessor and/or
Lessor's Transferee, shall contain a lender's form endorsement with waiver of
breach of warranty clause (form 438-BFU or its equivalent), and shall be issued
by insurers acceptable to Lessor, and shall name Lessor or any Lessor Transferee
as loss payee with respect to all policies of property insurance and as an
additional insured with respect to all other policies of insurance. Lessee shall
obtain endorsements to all such policies of insurance which shall provide that
any amendment or cancellation of any such policy shall not be effective unless
Lessor shall have been given thirty (30) days' prior written notice of any such
intended amendment or cancellation. Self-insurance is unacceptable unless Lessor
shall so provide upon its prior written consent. Lessee shall deliver to Lessor
originals or certified copies of such policies, certificates of coverage
thereunder and loss payee, additional insured, and notice of amendment or
cancellation endorsements. In addition, as collateral security for Lessee's
obligations hereunder and under the Equipment Schedules, Lessee hereby assigns,
transfers and conveys to Lessor all of Lessee's right, title and interest in and
to all of the foregoing policies of insurance and the insurance coverage
provided thereunder and Lessee shall deliver and cause each insurer under each
of such policies of insurance to deliver to Lessor assignments of such policies
and coverage which assignments shall be in form and substance satisfactory to
Lessor.
12. RISK OF LOSS.
During the term of each Equipment Schedule, and until return of the
Equipment to Lessor, Lessee shall bear all risk of damage, destruction, loss or
theft of the Equipment from any cause whatsoever. No damage, destruction, loss
or theft of the Equipment or delay in payment or deficiency or absence of
insurance proceeds, and no unavailability or delay in obtaining supplies, parts
or service for the Equipment or failure of the Equipment to function for any
cause whatsoever, and no change in laws or regulations governing or restricting
the use of the Equipment (including the future enactment of any laws or
regulations prohibiting the use of the Equipment), shall release Lessee of the
obligation to pay rent or any other obligation hereunder. Upon the occurrence of
any reparable damage, Lessee shall promptly make such repairs and restore the
Equipment to good repair, condition and working order. Upon the occurrence of
any irreparable damage, destruction or loss of the Equipment, Lessee shall, at
Lessor's option: (i) replace the Equipment with like equipment in good repair,
condition and working order with documentation creating clear title thereto in
Lessor; or (ii) pay Lessor the amounts required under Section 15 of this Master
Lease to the same extent as though a default had occurred hereunder. Subject to
such conditions as Lessor may require, any insurance proceeds paid to Lessor as
a result of any damage, destruction, loss or theft of the Equipment shall be
applied to Lessee's obligations hereunder, provided that if the Equipment is not
repaired or replaced as provided above, such insurance proceeds shall be applied
first to Lessor's expected residual interest in the Equipment. Lessor shall have
no obligation to collect or pursue any claim arising from any damage,
destruction, loss or theft of the Equipment, including any claim under any
applicable insurance policy.
13. INDEMNITY.
Lessee shall, at Lessee's sole cost and expense, indemnify, hold harmless
and defend Lessor and its agents, employees, officers and directors, and its
successors in interest, from and against any and all claims, actions, suits,
proceedings, costs, expenses, damages and liabilities, including attorney's
fees, arising out of, connected [illegilble], resulting from or relating to the
Equipment or the condition, delivery, leasing, location, maintenance,
manufacture, operation, ownership, possession, purchase, repair, repossession,
return, sale, selection, service or use thereof, including without limitation:
(i) claims involving latent or other defects (whether or not discoverable by
Lessee or Lessor), (ii) claims for trademark, patent or copyright infringement,
and (iii) claims for injury or death to persons or damage to property or loss of
business or anticipatory profits, whether resulting from acts or omissions of
Lessee or Lessor or otherwise. Lessee shall give Lessor prompt written notice of
any claim or liability covered by this section. The indemnities under this
section shall survive the satisfaction of all other obligations of Lessee herein
and the termination of this Master Lease or any Equipment Schedule.
14. SECURITY DEPOSIT.
For the purpose of securing all of Lessee's obligations under this Master
Lease and each Equipment Schedule, Lessee grants Lessor a security interest in
any security deposit described in any Equipment Schedule. Any such security
deposit may be commingled with other funds and shall be held without interest to
Lessee. Upon default under this Master Lease or any Equipment Schedule, Lessor
may, but shall not be obligated to, apply any such security deposit to any
obligation of Lessee under this Master Lease or any Equipment Schedule, in which
event Lessee shall promptly restore the amount thereof on demand. Upon
compliance by Lessee with all terms of this Master Lease and each Equipment
Schedule Lessor shall, at the end of the term of each Equipment Schedule and the
return of the Equipment to Lessor as provided herein, refund to Lessee the
balance of any security deposit pertaining to such Equipment Schedule.
15. DEFAULT AND REMEDIES.
(a) The occurrences of any one or more of the following events ("Events of
Default") shall constitute a default under this Master Lease and any Equipment
Schedule: (i) Lessee's failure to pay rent or any other amount required under an
Equipment Schedule when due; (ii) Lessee's failure to perform any other
obligation or observe any other term of this Master Lease or any Equipment
Schedule; (iii) any representation or warranty made to Lessor by Lessee or by
any guarantor proves to have been false in any material respect when made; (iv)
Lessee or any guarantor suffers a material adverse change in its financial
condition; (v) an event of default shall have occurred under and be continuing
under any other agreement involving the borrowing of money by Lessee or any
guarantor; (vi) levy, seizure or attachment of any Equipment; (vii) commencement
of proceedings under any bankruptcy, arrangement, reorganization or insolvency
law by or against, or appointment of a receiver or liquidator for any property
Lessee or any guarantor; (viii) any failure by Lessee, or any direct or indirect
subsidiary or affiliate of Lessee, or any direct or indirect owner or party
controlling, directly or indirectly, Lessee or any direct or indirect subsidiary
or affiliate of Lessee, to perform any obligation under any agreement between
Lessee or any such subsidiary, affiliate, owner or controlling party, on the one
hand, and Lessor, any Lessor Transferee, or any direct or indirect subsidiary or
affiliate of Lessor or any Lessor Transferee, on the other hand, which agreement
shall include, without limitation, any master lease, any equipment schedule, any
promissory note or other debt obligation of Lessee to Lessor; (ix) assignment
for the benefit of creditors or bulk transfer of assets by, or insolvency,
cessation of business, termination of existence, death or dissolution of, Lessee
or any guarantor; or (x) Lessee is prohibited from repurchasing any Limited
Partnership units without Lessor's prior written consent . As used in this
Master Lease, the term "guarantor" shall include any guarantor of this Master
Lease or any Equipment Schedule, and any owner of any property given as security
for Lessee's obligations hereunder or thereunder.
(b) Upon the occurrence of any one or more Events of Default, Lessor may
exercise any one or more of the following remedies without demand or notice to
Lessee and without terminating or otherwise affecting Lessee's obligations
hereunder: (i) declare the entire balance of rent for the remaining term of this
Lease to be immediately due and payable; (ii) require Lessee to assemble the
Equipment and make it available to Lessor at a place designated by Lessor; (iii)
take and hold possession of the Equipment and render the Equipment unusable, and
for this purpose enter and remove the Equipment from any premises where the same
may be located without liability to Lessor for any damage caused thereby; (iv)
sell or lease the Equipment or any part thereof at public or private sale for
cash, on credit or otherwise, with or without representations or warranties, and
upon such terms as shall be acceptable to Lessor; (v) use and occupy the
premises of Lessee for the purpose of taking, holding, reconditioning,
displaying, selling or leasing the Equipment, without cost to Lessor or
liability to Lessor; (vi) demand, sue for and recover from Lessee the sum of (A)
all rent and other amounts due hereunder, plus, as liquidated damages for loss
of a bargain and not as a penalty, and in lieu of any further payments of rent
for the Equipment, an amount equal to Lessor's Return for such Equipment
("Lessor's Return" shall mean, if the applicable Equipment Schedule provides for
Stipulated Loss Values, the applicable Stipulated Loss Value, and, otherwise,
the present value, discounted at five percent (5%), of all unpaid rent payments
to become due during the remaining lease term; (B) all late charges provided in
this Master Lease or any Equipment Schedule; (C) all expenses, including
attorney's fees, of Lessor or any Lessor Transferee incurred in enforcing any of
their rights under this Master Lease or any Equipment Schedule, including the
taking, holding, reconditioning, preparing for sale or lease, and, selling or
leasing of the Equipment; (D) all other expenses, including attorney's fees,
incurred by Lessor or any Lessor Transferee incurred in enforcing any of their
rights under this Master Lease or any Equipment Schedule and including any and
all damages to real property arising from the removal of any of the Equipment,
and in the event any party holding an interest in any real property upon which
any of the Equipment is located shall
<PAGE>
demand a security deposit in connection with any such removal, Lessee shall
deliver and provide such deposit; (E) any actual or anticipated loss in tax
benefits to Lessor (as determined by Lessor) resulting from the default or
Lessor's repossession or disposition of the Equipment; and (F) any other amounts
payable by Lessee to Lessor under this Master Lease or any Equipment Schedule or
damages suffered by Lessor not otherwise compensated herein including, without
limitation, damages arising from Lessee's failure to maintain the Equipment as
provided herein. Any sale or lease of the Equipment by Lessor after default
shall be free and clear of any interest of Lessee.
(c) The rights and remedies of Lessor hereunder are in addition to all
other rights and remedies provided by law. All of Lessor's rights and remedies
are cumulative and not exclusive, and may be exercised separately or
concurrently and in such order and manner as Lessor may determine. The exercise
of any one remedy shall not be deemed to be an election of such remedy or to
preclude the exercise of any other remedy. No default by Lessee or action by
Lessor shall result in a termination of this Master Lease or any Equipment
Schedule unless Lessor so notifies Lessee in writing, and no termination of this
Master Lease or any Equipment Schedule shall release or impair any of Lessee's
obligations hereunder or thereunder.
16. PURCHASE OPTION
Notwithstanding anything to the contrary in the Master Lease and Equipment
Schedule, Lessor and Lessee hereby agree, provided no default has occurred and
is continuing under the Master Lease, at the end of the Equipment Schedule term,
Lessor will sell all, but not part of, the Equipment listed on the Equipment
Schedule AS IS, WHERE IS and transfer title to Lessee for the consideration of
One Dollar (1.00) and will execute such documentation as necessary to effect
such transfer of title to the extent title was conveyed to Lessor. Any
instrument of transfer shall contain the following: THE EQUIPMENT TRANSFERRED
HEREBY IS TRANSFERRED "AS IS" AND "WHERE IS". THE SELLER MAKES NO EXPRESS OR
IMPLIED WARRANTIES OR REPRESENTATIONS OF ANY KIND WHATSOEVER IN REGARD TO SUCH
EQUIPMENT. THE SELLER HEREBY DISCLAIMS ANY AND ALL REPRESENTATIONS AND
WARRANTIES IN REGARD TO SUCH EQUIPMENT, INCLUDING, WITHOUT LIMITATION, THOSE OF
MERCHANTABILITY OR FITNESS FOR USE OR FITNESS FOR ANY PARTICULAR USE, OR OF
QUALITY, DESIGN, CONDITION, CAPACITY, SUITABILITY OR PERFORMANCE.
17. COSTS AND EXPENSES.
Lessee shall pay to Lessor, on demand, all costs and expenses incurred by
Lessor in connection with the execution, delivery, administration and
enforcement of this Master Lease, any Equipment Schedule, the transactions
contemplated hereby and thereby, and any costs and expenses related hereto or
thereto, including without limitation filing fees, registration fees, attorney's
fees and other out-of-pocket expenses.
18. PERFORMANCE BY LESSOR.
If Lessee shall fail to perform any obligation under this Master Lease or
any Equipment Schedule, Lessor shall have the right, but shall not be obligated,
with or without prior notice to Lessee, to perform the same (or, in the case of
Lessee's failure to maintain insurance, Lessor may obtain insurance protecting
the interest of Lessor only), and the costs thereof, together with interest at
the lesser of eighteen percent (18%) per year of the highest lawful rate, shall
be immediately payable by Lessee as additional rent for the Equipment.
19. FURTHER ASSURANCES.
Lessee shall, at its sole cost and expense, execute and deliver such
financial statements, certificates of title and other related documents and take
such action as Lessor or any Lessor Transferee may from time to time request
for the purpose of continuing and assuring the rights intended to be created by
this Lease or any Equipment Schedule, including without limitation, any
redocumentation of errors and omissions of this Master Lease and any Equipment
Schedule required by any Lessor Transferee or other successor to any interest of
Lessor.
20. NOTICES.
All notices, demands, requests and other communications under this Master
Lease and any Equipment Schedule: (a) shall be in writing; (b) shall be
delivered personally or by first class mail addressed to the party at its
respective address set forth herein or such other address as such party may
designate from time to time in writing; and (c) shall be effective when
personally delivered or deposited in the United States mail, duly addressed with
postage prepaid.
21. LAW GOVERNING - JURISDICTION, WAIVER OF JURY TRIAL.
LESSEE WARRANTS, REPRESENTS AND AGREES THAT: (a) THIS MASTER LEASE AND ANY
EQUIPMENT SCHEDULE HAVE BEEN MADE AND ENTERED INTO AS PENNSYLVANIA TRANSACTIONS;
(b) THIS MASTER LEASE AND ANY EQUIPMENT SCHEDULE SHALL BE CONSTRUED,
INTERPRETED, GOVERNED AND ENFORCED UNDER AND IN ACCORDANCE WITH THE SUBSTANTIVE
LAWS (WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS) OF PENNSYLVANIA; (c)
JURISDICTION TO HEAR AND DECIDE ANY CASE OR CONTROVERSY ARISING OUT OF, OR TO
ENFORCE OR CONSTRUE, THIS MASTER LEASE OR ANY EQUIPMENT SCHEDULE, SHALL
EXCLUSIVELY RESIDE AND VEST IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN
DISTRICT OF PENNSYLVANIA, OR IF THAT COURT DOES NOT HAVE JURISDICTION, THEN IN
THE COURT OF COMMON PLEAS OF THE COMMONWEALTH OF PENNSYLVANIA FOR THE COUNTY OF
BUCKS; AND (d) THIS SECTION 21 MAY BE ENFORCED BY INJUNCTION, SPECIFIC
PERFORMANCE OR ANY OTHER EXTRAORDINARY OR EQUITABLE REMEDY. LESSOR AND LESSEE
HEREBY WAIVE THE RIGHT TO TRIAL BY JURY OF ANY MATTERS ARISING OUT OF THIS LEASE
OR THE CONDUCT OF THE RELATIONSHIP BETWEEN LESSOR AND LESSEE.
22. MISCELLANEOUS.
This Master Lease, any Equipment Schedule, and any other documents
executed herewith or therewith constitute the entire agreement with respect to
the subject matter hereof. No oral agreement, representation or warranty shall
be binding. Any provision of this Master Lease which is invalid or unenforceable
under applicable law shall not affect the remaining provisions hereof, and to
this end the provisions hereof are declared to be severable. Section headings
are for convenience of reference only, and shall not affect the interpretation
hereof. If more than one Lessee is named herein, the liability of each shall be
joint and several. Where appropriate and the context permits, the singular shall
include the plural and vice versa. Upon assignment of this Master Lease or any
Equipment Schedule or Equipment (or any part hereof or thereof or any interest
herein or therein) by Lessor, the term "Lessor" shall include the Assignee.
Lessee waives notice and acceptance of this Master Lease and any Equipment
Schedule by Lessor. Time is of the essence of this Master Lease and any
Equipment Schedule.
23. WAIVER AND AMENDMENT.
No waiver or amendment of this Master Lease or any Equipment Schedule, or
any provision hereof or thereof, shall be effective unless in writing signed by
Lessor. No delay or failure to exercise any right, power or remedy accruing to
Lessor upon any default of Lessee shall impair any such right, power or remedy,
nor shall it be construed as a waiver of any such default, or an acquiescence
therein, or in any similar default thereafter occurring, nor shall any waiver of
any single default be deemed a waiver of any other default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of Lessor must be in writing and shall be effective only
to the extent specifically set forth therein.
LESSEE INITIAL H.S.
---------
THIS MASTER LEASE, AND ANY EQUIPMENT SCHEDULE, ARE SUBJECT TO THE TERMS AND
CONDITIONS SET FORTH HEREIN
LESSEE ACKNOWLEDGES RECEIPT OF A COPY OF THIS MASTER LEASE
THIS MASTER LEASE, AND ANY EQUIPMENT SCHEDULE, SHALL BECOME EFFECTIVE ONLY
UPON WRITTEN ACCEPTANCE BY LESSOR
LESSOR: LESSEE:
DVI FINANCIAL SERVICES INC. U.S. NEUROSURGICAL, INC.
By: /s/ Joseph F. Malott By: /s/ H. Grunfeld
------------------------------------ ------------------------------------
Name: Joseph F. Malott Name: Howard Grunfeld
---------------------------------- ----------------------------------
Title: Director Credit/Documentation Title: Controller
--------------------------------- ---------------------------------
[illegible] security interest in an Equipment Schedule may be created through
the transfer or possession of any counterpart of the original Equipment Schedule
other than that Equipment Schedule marked "Secured Party's Original" and a
certified copy of the Master Agreement.
<PAGE>
EQUIPMENT SCHEDULE NO. 001
TO
MASTER EQUIPMENT LEASE NO. 0001342
("Master Lease")
LESSOR: DVI Financial Services Inc.
LESSEE: U.S. NeuroSurgical, Inc.
DATE OF MASTER LEASE: August 1, 1996
DATE OF EQUIPMENT SCHEDULE: August 1, 1996
LEASE TERM: 72
COMMENCEMENT DATE:
RENT COMMENCEMENT DATE:
MONTHLY RENT: 1 - 4 @ $29,000.00
5 - 8 @ $36,630.00
9 - 72 @ $60,945.00
In the event there is an increase in the thirty (30) month Treasury Note rate
from the rate quoted in the proposal/commitment letter to the rate in effect on
the date the Schedule funds, then Lessor reserves the right to adjust the
Monthly Rent set forth in the Schedule by increasing the Monthly Rent by that
same rate of increase.
SALES/USE TAX: TO BE ADDED TO THE MONTHLY RENT
ADVANCE PAYMENTS: N/A
EQUIPMENT:
ONE (1) LEKSELL GAMMA UNIT, TOGETHER WITH ALL PARTS, ACCESSORIES, ATTACHMENTS,
ACCESSIONS, ADDITIONS, REPLACEMENTS, AND SUBSTITUTIONS, THERETO AND THEREFOR.
EQUIPMENT LOCATION: New York University Medical Center
550 1st Avenue
New York, NY 10016
MASTER LEASE:
This Equipment Schedule is issued pursuant to the Master Lease. All of the
terms, conditions representations and warranties of the Master Lease are hereby
incorporated by reference herein and made a part hereof as if they were
expressly set forth in this Equipment Schedule and this Equipment Schedule
constitutes a separate lease with respect to the Equipment described herein. The
parties hereby reaffirm all of the terms, conditions, representations and
warranties of the Master Lease except as modified herein, by their execution and
delivery of this Equipment Schedule.
<PAGE>
If this Equipment Schedule contains a Stipulated Loss Value Rider, attached
hereto as Rider "A" and incorporated herein by this reference, then the
Stipulated Loss Value of each item of Equipment (to be determined as of the
rental payment date which has most recently occurred as of the date of
determination) shall be the percentage of the original purchase price of the
item or the dollar amount, as applicable, set forth in the Rider opposite the
applicable rental payment. If a percentage of the purchase price of the
Equipment is to be used to calculate the Stipulated Loss Value, the original
purchase price of the Equipment subject to this Schedule, including all
applicable taxes, freight, transportation, assembly, installation and other
charges, is $2,900,000.00.
DVI Financial Services Inc.
(Lessor)
By:
----------------------------------
Title:
-------------------------------
- -------------------------------------
(Print Name)
U.S. NeuroSurgical, Inc.
(Lessee)
By: /s/ Howard Grunfeld
----------------------------------
Title: Controller
-------------------------------
Howard Grunfeld
- -------------------------------------
(Print Name)
<PAGE>
EQUIPMENT SCHEDULE NO. 002
TO
MASTER EQUIPMENT LEASE NO. 0001342
("Master Lease")
LESSOR: DVI Financial Services Inc.
LESSEE: U.S. NeuroSurgical, inc.
DATE OF MASTER LEASE: August 1, 1996
DATE OF EQUIPMENT SCHEDULE: October 18,1996
LEASE TERM: 36
COMMENCEMENT DATE:
RENT COMMENCEMENT DATE:
MONTHLY RENT: 1 - 4 @ $3,000.00
5 - 8 @ $6,000.00
9 - 36 @ $12,035.60
In the event there is an increase in the thirty (30) month Treasury Note rate
from the rate quoted in the proposal/commitment letter to the rate in effect on
the date the Schedule funds, then Lessor reserves the right to adjust the
Monthly Rent set forth in the Schedule by increasing the Monthly Rent by that
same rate of increase.
SALES/USE TAX: TO BE ADDED TO THE MONTHLY RENT
ADVANCE PAYMENTS: N/A
EQUIPMENT:
REFER TO THE ATTACHED EXHIBIT "A" WHICH BY THIS REFERENCE IS MADE A PART HEREOF,
TOGETHER WITH ALL PARTS, ACCESSORIES, ATTACHMENTS, ACCESSIONS, ADDITIONS,
REPLACEMENTS, AND SUBSTITUTIONS, THERETO AND THEREFOR.
EQUIPMENT LOCATION: New York University Medical Center
550 1st Avenue
New York, NY 10016
MASTER LEASE:
This Equipment Schedule is issued pursuant to the Master Lease. All of the
terms, conditions representations and warranties of the Master Lease are hereby
incorporated by reference herein and made a part hereof as if they were
expressly set forth in this Equipment Schedule and this Equipment Schedule
constitutes a separate lease with respect to the Equipment described herein. The
parties hereby reaffirm all of the terms, conditions, representations and
warranties of the Master Lease except as
<PAGE>
modified herein, by their execution and delivery of this Equipment Schedule.
If this Equipment Schedule contains a Stipulated Loss Value Rider, attached
hereto as Rider "A" and incorporated herein by this reference, then the
Stipulated Loss Value of each item of Equipment (to be determined as of the
rental payment date which has most recently occurred as of the date of
determination) shall be the percentage of the original purchase price of the
item or the dollar amount, as applicable, set forth in the Rider opposite the
applicable rental payment. If a percentage of the purchase price of the
Equipment is to be used to calculate the Stipulated Loss Value, the original
purchase price of the Equipment subject to this Schedule, including all
applicable taxes, freight, transportation, assembly, installation and other
charges, is $300,000.00
DVI Financial Services Inc.
(Lessor)
By:
----------------------------------
Title:
-------------------------------
- -------------------------------------
(Print Name)
U.S. NeuroSurgical, Inc.
(Lessee)
By: /s/ Howard Grunfeld
----------------------------------
Title: Controller
-------------------------------
Howard Grunfeld
- -------------------------------------
(Print Name)
<PAGE>
EXHIBIT "A"
GENERAL CONDITIONS, DEMOLITION, CUT & PATCH WORK, WATERPROOFING, CONCRETE,
BENTONITE, MISCELLANEOUS IRON, CARPENTRY, WOODWORK, FIRESTOPPING, H.M., ACCESS
DOORS, AUTO DEVICE, FINISH HARDWARE, GLASS & GLAZING, DRYWALL, CERAMIC TILE,
ACOUSTIC TREATMENT, FLOORING, CARPETING, PAINTING, CUBICAL CURTAIN TRACK, CORNER
GUARDS, WALL & BUMPER RAILS, TOILET ACCESSORIES, FIRE EXTINGUISHER & CAB, GAMMA
KNIFE DR. SHIELD, PLUMBING, SPRINKLER, HVAC, ELECTRIC, ARCHITECT, CONSTRUCTION
MANAGEMENT, INFRASTRUCTURE IMPROVEMENTS, AND ANY LEASEHOLD IMPROVEMENTS,
TOGETHER WITH ALL PARTS, ACCESSORIES, ATTACHMENTS, ACCESSIONS, ADDITIONS,
REPLACEMENTS, AND SUBSTITUTIONS THERETO AND THEREFOR.
<PAGE>
EQUIPMENT SCHEDULE NO. 3
TO
MASTER EQUIPMENT LEASE NO. 0001342
("Master Lease")
LESSOR: DVI Financial Services Inc.
LESSEE: U.S. NeuroSurgical, Inc.
DATE OF MASTER LEASE: August 1, 1996
DATE OF EQUIPMENT SCHEDULE: June 18, 1997
LEASE TERM: Thirty-Six (36) Months
COMMENCEMENT DATE:
RENT COMMENCEMENT DATE:
MONTHLY RENT: $4,982.15
In the event there is an increase in the thirty (30) month Treasury Note rate
from the rate quoted in the proposal/commitment letter to the rate in effect on
the date the Schedule funds, then Lessor reserves the right to adjust the
Monthly Rent set forth in the Schedule by increasing the Monthly Rent by that
same rate of increase.
SALES/USE TAX: To Be Added To The Monthly Rent
ADVANCE PAYMENTS: N/A
EQUIPMENT: Various Leasehold Improvements to the
New York University site, together with
all parts, accessories, attachments
accessions, additions, replacements and
substitutions incorporated therein or
affixed or attached thereto.
EQUIPMENT LOCATION: New York University Medical Center
550 1st Avenue
New York, NY 19016
MASTER LEASE:
This Equipment Schedule is issued pursuant to the Master Lease. All of the
terms, conditions representations and warranties of the Master Lease are hereby
incorporated by reference herein
<PAGE>
and made a part hereof as if they were expressly set forth in this Equipment
Schedule and this Equipment Schedule constitutes a separate lease with respect
to the Equipment described herein. The parties hereby reaffirm all of the terms,
conditions, representations and warranties of the Master Lease except as
modified herein, by their execution and delivery of this Equipment Schedule.
If this Equipment Schedule contains a Stipulated Loss Value Rider, attached
hereto as Rider "A" and incorporated herein by this reference, then the
Stipulated Loss Value of each item of Equipment (to be determined as of the
rental payment date which has most recently occurred as of the date of
determination) shall be the percentage of the original purchase price of the
item or the dollar amount, as applicable, set forth in the Rider opposite the
applicable rental payment. If a percentage of the purchase price of the
Equipment is to be used to calculate the Stipulated Loss Value, the original
purchase price of the Equipment subject to this Schedule, including all
applicable taxes, freight, transportation, assembly, installation and other
charges, is $150,000.00
DVI Financial Services Inc.
(Lessor)
By:
----------------------------------
Title:
-------------------------------
- -------------------------------------
(Print Name)
U.S. NeuroSurgical, Inc.
(Lessee)
By: /s/ Howard Grunfeld
----------------------------------
Title: Controller
-------------------------------
Howard Grunfeld
- -------------------------------------
(Print Name)
GHS, INC.
1997 STOCK OPTION PLAN
<PAGE>
GHS, INC.
1997 STOCK OPTION PLAN
1. Purpose. The purpose of this Plan is to strengthen GHS, Inc. by
providing an incentive to its employees, consultants and directors, encouraging
them to devote their abilities to the success of the Company. It is intended
that this purpose be achieved by extending to employees, consultants and
directors of the Company or any subsidiary an added long-term incentive for high
levels of performance and exceptional efforts through the grant of options to
purchase shares of the Company's common stock under this GHS, Inc. 1997 Stock
Option Plan.
2. Definitions. For purposes of the Plan:
2.1. "Agreement" means the written agreement between the
Company and an Optionee evidencing the grant of an Option and setting forth the
terms and conditions thereof.
2.2. "Board" means the Board of Directors of the Company.
2.3. "Cause" means with respect to an Eligible Employee,
including an Eligible Employee who is a director of the Company, (i) the
voluntary termination of employment by such Eligible Employee, (ii) intentional
failure to perform, or habitual neglect of, reasonably assigned duties, (iii)
dishonesty or willful misconduct in the performance of an Optionee's duties,
(iv) an Optionee's engaging in a transaction in connection with the performance
of such Optionee's duties to the Company or any of its Subsidiaries thereof
which transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit to the Optionee, (v)
willful violation of any law, rule or regulation in connection with the
performance of an Optionee's duties, (vi) willful violation of any policy
adopted by the Company relating to the performance or behavior of employees or
(vii) acts of carelessness or misconduct which have in the reasonable judgment
of the Company's Board of Directors, an adverse effect on the Company.
2.4. "Change in Capitalization" means any increase or
reduction in the number of Shares, or any change (including, but not limited to,
a change in value) in the Shares or exchange of Shares for a different number or
kind of shares or other securities of the Company, by reason of a
reclassification, recapitalization, merger, consolidation, reorganization,
spin-off, split-up, issuance of warrants or rights or debentures, stock
dividend, stock split or reverse stock split, cash dividend, property dividend,
combination or exchange of shares, repurchase of shares, public offering,
private placement, change in corporate structure or otherwise.
2.5. "Code" means the Internal Revenue Code of 1986, as
amended.
2.6. "Company" means GHS, Inc.
<PAGE>
2.7. "Consultant Option" means an Option granted to a
consultant pursuant to Section 7.
2.8. "Director Option" means an Option granted to a
Nonemployee Director pursuant to Section 5.
2.9. "Disability" means a physical or mental infirmity which
impairs the Optionee's ability to perform substantially his or her duties for a
period of sixty (60) consecutive days.
2.10. "Eligible Employee" means any officer or other employee
of the Company or a Subsidiary who is designated by the Board as eligible to
receive Options subject to the conditions set forth herein.
2.11. "Employee Options" means an Option granted to an
Eligible Employee pursuant to Section 6.
2.12. "Exchange Act" means the Securities Exchange Act of
1934, as amended.
2.13. "Fair Market Value" on any date means, as long as the
Shares are quoted on the OTC Bulletin Board or similar over-the-counter means,
the closing bid price on the OTC Bulletin Board, and if the Shares are not so
quoted, the average of the high and low sales prices of the Shares on such date
on the principal national securities exchange on which such Shares are listed or
admitted to trading, or if such Shares are not so listed or admitted to trading,
the arithmetic mean of the per Share closing bid price and per Share closing
asked price on such date as quoted on the National Association of Securities
Dealers Automated Quotation System or such other market in which such prices are
regularly quoted, or, if there have been no published bid or asked quotations
with respect to Shares on such date, the Fair Market Value shall be the value
established by the Board in good faith and in accordance with Section 422 of the
Code.
2.14. "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Board as an
Incentive Stock Option.
2.15. "Nonqualified Stock Option" means an Option which is not
an Incentive Stock Option.
2.16. "Nonemployee Director" means a director of the Company
who is not a full-time employee of the Company or any Subsidiary.
2.17. "Option" means an Employee Option, a Director Option, a
Consultant Option or any or all of them.
2
<PAGE>
2.18. "Optionee" means a person to whom an Option has been
granted under the Plan.
2.19. "Parent" means any corporation which is a parent
corporation (within the meaning of Section 424(e) of the Code) with respect to
the Company.
2.20. "Plan" means the GHS, Inc. 1997 Stock Option Plan.
2.21. "Shares" means the common stock, par value $.01 per
share, of the Company.
2.22. "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect to
the Company.
2.23. "Successor Corporation" means a corporation, or a parent
or subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a) of the
Code applies.
2.24. "Ten-Percent Stockholder" means an Eligible Employee or
other eligible Plan participant, who, at the time an Incentive Stock Option is
to be granted to him or her, owns (within the meaning of Section 422(b)(6) of
the Code) stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company, or of a Parent or a
Subsidiary.
3. Administration.
3.1. The Plan shall be administered by the Board which shall
hold meetings at such times as may be necessary for the proper administration of
the Plan. The Board shall keep minutes of its meetings. A quorum shall consist
of not less than a majority of the Board and a majority of a quorum may
authorize any action. Any decision or determination reduced to writing and
signed by a majority of all of the members of the Board shall be as fully
effective as if made by a majority vote at a meeting duly called and held. No
member of the Board shall be liable for any action, failure to act,
determination or interpretation made in good faith with respect to this Plan or
any transaction hereunder, except for liability arising from his or her own
willful misfeasance, fraud or bad faith. The Company hereby agrees to indemnify
each member of the Board for all costs and expenses and, to the extent permitted
by applicable law, any liability incurred in connection with defending against,
responding to, negotiation for the settlement of or otherwise dealing with any
claim, cause of action or dispute of any kind arising in connection with any
action or failure to act in administering this Plan or in authorizing or denying
authorization to any transaction hereunder.
3.2. Subject to the express terms and conditions set forth
herein, the Board shall have the power from time to time to determine those
Optionees to whom Options shall be granted under the Plan and the number of
Incentive Stock Options and/or Nonqualified Stock Options to be
3
<PAGE>
granted to such Optionee and to prescribe the terms and conditions (which need
not be identical) of each Option, including the purchase price per Share subject
to each Option, and make any amendment or modification to any Agreement
consistent with the terms of the Plan.
3.3. Subject to the express terms and conditions set forth
herein, the Board shall have the power from time to time:
(a) to construe and interpret the Plan and the Options
granted thereunder and to establish, amend and revoke rules and regulations for
the administration of the Plan, including, but not limited to, correcting any
defect or supplying any omission, or reconciling any inconsistency in the Plan
or in any Agreement, in the manner and to the extent it shall deem necessary or
advisable to make the Plan fully effective, and all decisions and determinations
by the Board in the exercise of this power shall be final, binding and
conclusive upon the Company, its Subsidiaries, the Optionees and all other
persons having any interest therein;
(b) to determine the duration and purposes for leaves of
absence which may be granted to an Optionee on an individual basis without
constituting a termination of employment or service for purposes of the Plan;
(c) to exercise its discretion with respect to the
powers and rights granted to it as set forth in the Plan;
(d) generally, to exercise such powers and to perform
such acts as are deemed necessary or advisable to promote the best interests of
the Company with respect to the Plan.
3.4 Notwithstanding anything to the contrary contained herein,
the Board may designate a committee which shall have and may exercise all the
powers and authority of the Board in administering this Plan. Any action
specified herein to be taken by the Board, shall, if a committee is formed to
administer the Plan, be satisfied by the action of the committee.
4. Stock Subject to Plan.
4.1. The maximum number of Shares that may be made the subject
of Options granted under the Plan is 750,000 Shares (or the number and kind of
shares of stock or other securities to which such Shares are adjusted upon a
Change in Capitalization pursuant to Section 9) and the Company shall reserve
for the purposes of the Plan, out of its authorized but unissued Shares or out
of Shares held in the Company's treasury, or partly out of each, such number of
Shares as shall be determined by the Board.
4.2. Whenever any outstanding Option or portion thereof
expires, is canceled or is otherwise terminated for any reason, the Shares
allocable to the canceled or otherwise terminated Option or portion thereof may
again be the subject of Options granted hereunder.
4
<PAGE>
5. Option Grants for Nonemployee Directors.
5.1. Authority of Board. Subject to the provisions of the
Plan, the Board shall have full and final authority to select those Nonemployee
Directors who will receive Director Options, the terms and conditions of which
shall be set forth in an Agreement.
5.2. Purchase Price. The purchase price or the manner in which
the purchase price is to be determined for Shares under each Director Option
shall be determined by the Board and set forth in the Agreement evidencing the
Option, provided that the purchase price per Share under each Director Option
shall be not less than the Fair Market Value of a Share on the date the Director
Option is granted.
5.3. Duration. Director Options shall be for a term to be
designated by the Board and set forth in the Agreement evidencing the Option.
5.4. Vesting. Each Director Option shall, commencing not
earlier than the date of its grant, become exercisable in such installments
(which need not be equal or may be one installment) and at such times as may be
designated by the Board and set forth in the Agreement evidencing the Option. To
the extent not exercised, installments shall accumulate and be exercisable, in
whole or part, at any time after becoming exercisable, to not later than the
date the Director Option expires. The Board may accelerate the exercisability of
any Option or portion thereof at any time.
6. Option Grants for Eligible Employees.
6.1. Authority of Board. Subject to the provisions of the
Plan, the Board shall have full and final authority to select those Eligible
Employees who will receive Employee Options, the terms and conditions of which
shall be set forth in an Agreement; provided, however, that no Eligible Employee
shall receive an Incentive Stock Option unless he is an employee of the Company,
a Parent or a Subsidiary at the time the Incentive Stock Option is granted.
6.2. Purchase Price. The purchase price or the manner in which
the purchase price is to be determined for Shares under each Employee Option
shall be determined by the Board and set forth in the Agreement evidencing the
Option, provided that the purchase price per Share under each Employee Option
shall be (i) except as provided in clause (ii) of this Section 6.2, not less
than the Fair Market Value of a Share on the date the Employee Option is
granted; and (ii) with respect to any Incentive Stock Option granted to a Ten
Percent Stockholder, not less than 110% of the Fair Market Value of a Share on
the date the Option is granted.
6.3. Duration. Employee Options granted hereunder shall be for
such term as the Board shall determine, provided that no Employee Option shall
be exercisable after the expiration of ten (10) years from the date it is
granted (five (5) years in the case of an Incentive Stock Option granted to a
Ten-Percent Stockholder). The Board may, subsequent to the granting of any
Employee
5
<PAGE>
Option, extend the term thereof but in no event shall the term as so extended
exceed the maximum term provided for in the preceding sentence.
6.4. Vesting. Each Employee Option shall, commencing not
earlier then the date of its grant, become exercisable in such installments
(which need not be equal or may be in one installment) and at such times as may
be designated by the Board and set forth in the Agreement evidencing the Option.
To the extent not otherwise provided by the Board, Employee Options shall be
exercisable in three (3) equal installments each equal to one-third of the
entire Option granted, the first of which shall become exercisable on the first
anniversary of the date of the grant of the Employee Option, the second
installment of which shall become exercisable on the second anniversary of the
date of grant of the Employee Option, and the final installment of which shall
become exercisable on the third anniversary of the date of grant. To the extent
not exercised, installments shall accumulate and be exercisable, in whole or
part, at any time after becoming exercisable, to not later than the date the
Employee Option expires. The Board may accelerate the exercisability of any
Option or portion thereof at any time.
7. Option Grants for Consultants.
7.1. Authority of Board. Subject to the provisions of the
Plan, the Board shall have full and final authority to select those consultants
to the Company or a Subsidiary who will receive Consultant Options, the terms
and conditions of which shall be set forth in an Agreement. An employee or
officer of the Company shall not be deemed a consultant.
7.2. Purchase Price. The purchase price or the manner in which
the purchase price is to be determined for Shares under each Consultant Option
shall be determined by the Board and set forth in the Agreement evidencing the
Option, provided that the purchase price per Share under each Consultant Option
shall be not less than the Fair Market Value of a Share on the date the
Consultant Option is granted.
7.3. Duration. Consultant Options granted hereunder shall be
for such term as the Board shall determine, provided that no Consultant Option
shall be exercisable after the expiration of ten (10) years from the date it is
granted. The Board may, subsequent to the granting of any Consultant Option,
extend the term thereof but in no event shall the term as so extended exceed the
maximum term provided for in the preceding sentence.
7.4. Vesting. Each Consultant Option shall, commencing not
earlier then the date of its grant, become exercisable in such installments
(which need not be equal or may be in one installment) and at such times as may
be designated by the Board and set forth in the Agreement evidencing the Option.
To the extent not otherwise provided by the Board, Consultant Options shall be
exercisable in three (3) equal installments each equal to one-third of the
entire Option granted, the first of which shall become exercisable on the first
anniversary of the date of grant of the Consultant Options, the second
installment of which shall become exercisable on the second anniversary of the
date of grant, and the final installment of which shall become exercisable on
the third anniversary of the
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date of grant. To the extent not exercised, installments shall accumulate and be
exercisable, in whole or part, at any time after becoming exercisable, to not
later than the date the Consultant Option expires. The Board may accelerate the
exercisability of any Option or portion thereof at any time.
8. Terms and Conditions Applicable to All Options
8.1. Non-transferability. No Option granted hereunder shall be
transferable by the Optionee to whom granted otherwise than by will or the laws
of descent and distribution, and an Option may be exercised during the lifetime
of such Optionee only by the Optionee or his or her guardian or legal
representative. The terms of each Option shall be final, binding and conclusive
upon the beneficiaries, executors, administrators, heirs and successors of the
Optionee.
8.2. Method of Exercise. The exercise of an Option shall be
made only by a written notice delivered in person or by mail to the Secretary of
the Company at the Company's principal executive office, specifying the number
of Shares to be purchased and accompanied by payment therefor and otherwise in
accordance with the Agreement pursuant to which the Option was granted. The
purchase price for any Shares purchased pursuant to the exercise of an Option
shall be paid in full upon such exercise, as determined by the Board in its
discretion, by any one or a combination of the following: (i) cash, (ii)
transferring Shares to the Company upon such terms and conditions as determined
by the Board; or (iii) as otherwise determined by the Board. At the Optionee's
request and subject to the consent of the Board, Shares to be acquired upon the
exercise of a portion of an Option will be applied automatically to pay the
purchase price in connection with the exercise of additional portions of the
Option then being exercised. The written notice pursuant to this Section 8.2 may
also provide instructions from the Optionee to the Company that upon receipt of
the purchase price in cash from the Optionee's broker or dealer, designated as
such on the written notice, in payment for any Shares purchased pursuant to the
exercise of an Option, the Company shall issue such Shares directly to the
designated broker or dealer. Any Shares transferred to the Company as payment of
the purchase price under an Option shall be valued at their Fair Market Value on
the day preceding the date of exercise of such Option. If requested by the
Board, the Optionee shall deliver the Agreement evidencing the Option to the
Secretary of the Company who shall endorse thereon a notation of such exercise
and return such Agreement to the Optionee. No fractional shares (or cash in lieu
thereof) shall be issued upon exercise of an Option and the number of Shares
that may be purchased upon exercise shall be rounded to the nearest number of
whole Shares.
8.3. Rights of Optionees. No Optionee shall be deemed for any
purpose to be the owner of any Shares subject to any Option unless and until (i)
the Option shall have been exercised pursuant to the terms thereof, (ii) the
Company shall have issued and delivered the Shares to the Optionee and (iii) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company. Thereupon, the Optionee shall have full voting, dividend and
other ownership rights with respect to such Shares.
8.4. Termination of Employment or Services. Unless otherwise
provided in the Agreement evidencing the Option, an Option (other than an Option
granted to a consultant or a
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Nonemployee Director) shall terminate upon an Optionee's termination of
employment (or similar arrangement) with the Company and its Subsidiaries as
follows:
(a) in the event the Optionee's employment terminates as
a result of Disability, the Optionee may at any time within three (3) months
after such event exercise the Option or portion thereof that was exercisable on
the date of such termination;
(b) if an Optionee's employment terminates for Cause,
the Option shall terminate immediately and no rights thereunder may be
exercised;
(c) if an Optionee's employment terminates without
Cause, the Optionee may at any time within one (1) month after such event
exercise the Option or portion thereof that was exercisable on the date of such
termination; and
(d) if an Optionee dies while an employee of the Company
or any Subsidiary or within six (6) months after termination as a result of
Disability as described in clause (a) of this Section 8.4, the Option may be
exercised at any time within six (6) months after the Optionee's death by the
person or persons to whom such rights under the Option shall pass by will or by
the laws of descent and distribution; provided, however, that an Option may be
exercised to the extent, and only to the extent, that the Option or portion
thereof was exercisable on the date of death or earlier termination.
Notwithstanding the foregoing, in no event may any Option be
exercised by anyone after the expiration of the term of the Option.
8.5. Termination of Nonemployee Director Options and
Consultant Options. Nonemployee Director Options and Consultant Options granted
to Nonemployee Directors and consultants to the Company or a Subsidiary shall
terminate under such circumstances as are provided in the Agreement evidencing
the Option, and if not expressly specified, as of the close of business on the
last day of the term of the Option, but in no event may such an Option be
exercised by anyone after the expiration of the term of the Option.
8.6. Modification or Substitution. The Board may, in its
discretion, modify outstanding Options or accept the surrender of outstanding
Options (to the extent not exercised) and grant new Options in substitution for
them. Notwithstanding the foregoing, no modification of an Option shall
adversely alter or impair any rights or obligations under the Option without the
Optionee's consent.
9. Adjustment Upon Changes in Capitalization.
9.1. Subject to Section 10, in the event of a Change in
Capitalization, the Board shall conclusively determine the appropriate
adjustments, if any, to the maximum number or class of Shares or other stock or
securities with respect to which Options may be granted under the
8
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Plan, the number and class of Shares or other stock or securities which are
subject to outstanding Options granted under the Plan, and the purchase price
therefor, if applicable.
9.2. Any such adjustment in the Shares or other stock or
securities subject to outstanding Incentive Stock Options (including any
adjustments in the purchase price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and only
to the extent otherwise permitted by Sections 422 and 424 of the Code.
9.3. If, by reason of a Change in Capitalization, an Optionee
shall be entitled to exercise an Option with respect to new, additional or
different shares of stock or securities, such new, additional or different
shares shall thereupon be subject to all of the conditions which were applicable
to the Shares subject to the Option, as the case may be, prior to such Change in
Capitalization.
10. Effect of Certain Transactions.
In the event of (i) the liquidation or dissolution of the
Company or (ii) a merger or consolidation of the Company (a "Transaction"), the
Plan and the Options issued hereunder shall continue in effect in accordance
with their respective terms and each Optionee shall be entitled to receive in
respect of each Share subject to any outstanding Options, as the case may be,
upon exercise of any Option, the same number and kind of stock, securities,
cash, property, or other consideration that each holder of a Share was entitled
to receive in the Transaction in respect of a Share. In the event that, after a
Transaction, there occurs any change of a type described in Section 2.4 hereof
with respect to the shares of the surviving or resulting corporation, then
adjustments similar to, and subject to the same conditions as, those in Section
9 hereof shall be made by the Board.
11. Termination and Amendment of the Program.
11.1. The Plan shall terminate on the day preceding the tenth
anniversary of the date of its adoption by the Board and no Option may be
granted thereafter. The Board may sooner terminate or amend the Plan at any time
and from time to time; provided, however, that to the extent necessary under
Section 16(b) of the Exchange Act and the rules and regulations promulgated
thereunder or other applicable law, no amendment shall be effective unless
approved by the stockholders of the Company in accordance with applicable law
and regulations at an annual or special meeting held within twelve (12) months
after the date of adoption of such amendment.
11.2. Except as provided in Sections 9 and 10 hereof, rights
and obligations under any Option granted before any amendment or termination of
the Plan shall not be adversely altered or impaired by such amendment or
termination, except with the consent of the Optionee, nor shall any amendment or
termination deprive any Optionee of any Shares which he may have acquired
through or as a result of the Plan.
12. Non-Exclusivity of the Plan. The adoption of the Plan by the
Board shall not be construed as amending, modifying or rescinding any previously
approved incentive arrangement or
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as creating any limitations on the power of the Board to adopt such other
incentive arrangements as it may deem desirable, including, without limitation,
the granting of stock options otherwise than under the Plan, and such
arrangements may be either applicable generally or only in specific cases.
13. Limitation of Liability. As illustrative of the limitations of
liability of the Company, but not intended to be exhaustive thereof, nothing in
the Plan shall be construed to:
(i) give any person any right to be granted an Option other
than at the sole discretion of the Board;
(ii) give any person any rights whatsoever with respect to
Shares except as specifically provided in the Plan;
(iii) limit in any way the right of the Company to terminate
the employment of any person at any time; or
(iv) be evidence of any agreement or understanding, expressed
or implied, that the Company will employ any person at any particular rate of
compensation or for any particular period of time.
14. Regulations and Other Approvals; Governing Law.
14.1. This Plan and the rights of all persons claiming
hereunder shall be construed and determined in accordance with the laws of the
State of Delaware.
14.2. The obligation of the Company to sell or deliver Shares
with respect to Options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Board.
14.3. The Plan is intended to comply with Rule 16b-3
promulgated under the Exchange Act and the Board shall interpret and administer
the provisions of the Plan or any Agreement in a manner consistent therewith.
Any provisions inconsistent with such Rule shall be inoperative and shall not
affect the validity of the Plan.
14.4. The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Employees granted Incentive Stock Options
the tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.
14.5. Each Option is subject to the requirement that, if at
any time the Board determines, in its discretion, that the listing, registration
or qualification of Shares issuable pursuant to the Plan is required by any
securities exchange or under any state or federal law, or the consent or
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<PAGE>
approval of any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the grant of an Option or the issuance of
Shares, no Options shall be granted or payment made or Shares issued, in whole
or in part, unless listing, registration, qualification, consent or approval has
been effected or obtained free of any conditions, or as otherwise determined to
be acceptable to the Board.
14.6. Notwithstanding anything contained in the Plan to the
contrary, in the event that the disposition of Shares acquired pursuant to the
Plan is not covered by a then current registration statement under the
Securities Act of 1933, as amended, and is not otherwise exempt from such
registration, such Shares shall be restricted against transfer to the extent
required by the Securities Act of 1933, as amended, and Rule 144 or other
regulations thereunder. The Board may require any individual receiving Shares
pursuant to the Plan, as a condition precedent to receipt of such Shares upon
exercise of an Option, to represent and warrant to the Company in writing that
the Shares acquired by such individual are acquired without a view to any
distribution thereof and will not be sold or transferred other than pursuant to
an effective registration thereof under said act or pursuant to a exemption
applicable under the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder. The certificates evidencing any of such
Shares shall be appropriately amended to reflect their status as restricted
securities as aforesaid.
15. Miscellaneous.
15.1. Multiple Agreements. The terms of each Option may differ
from other Options granted under the Plan at the same time, or at some other
time. The Board may also grant more than one Option to a given Eligible Employee
during the term of the Plan, either in addition to, or in substitution for, one
or more Options previously granted to that Eligible Employee.
15.2. Withholding of Taxes. (a) The Company shall have the
right to deduct from any distribution of cash to any Optionee, an amount equal
to the federal, state and local income taxes and other amounts as may be
required by law to be withheld (the "Withholding Taxes") with respect to any
Option. If an Optionee is entitled to receive Shares upon exercise of an Option,
the Optionee shall pay the Withholding Taxes to the Company prior to the
issuance of such Shares. In satisfaction of the Withholding Taxes, the Optionee
may make a written election (the "Tax Election"), which may be accepted or
rejected in the discretion of the Board, to have withheld a portion of the
Shares issuable to him or her upon exercise of the Option having an aggregate
Fair Market Value, on the date preceding the date of exercise, equal to the
Withholding Taxes, provided that in respect of an Optionee who may be subject to
liability under Section 16(b) of the Exchange Act either (i) (A) the Optionee
makes the Tax Election at least six (6) months after the date the Option was
granted, (B) the Option is exercised during the ten day period beginning on the
third business day and ending on the twelfth business day following the release
for publication of the Company's quarterly or annual statements of earnings (a
"Window Period") and (C) the Tax Election is made during the Window Period in
which the Option is exercised or prior to such Window Period and subsequent to
the immediately preceding Window Period or (ii) (A) the Tax Election is made at
least six months prior to the date the Option is exercised and (B) the Tax
election is irrevocable with respect to the exercise of
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<PAGE>
all Options which are exercised prior to the expiration of six months following
an election to revoke the Tax Election. Notwithstanding the foregoing, the Board
may, by the adoption of rules or otherwise, (i) modify the provisions in the
preceding sentence or impose such other restrictions or limitations on Tax
Elections as may be necessary to ensure that the Tax Elections will be exempt
transactions under Section 16(b) of the Exchange Act, and (ii) permit Tax
Elections to be made at such other times and subject to such other conditions as
the Board determines will constitute exempt transactions under Section 16(b) of
the Exchange Act.
(b) If an Optionee makes a disposition, within the
meaning of Section 424(c) of the Code and regulations promulgated thereunder, of
any Share or Shares issued to such Optionee pursuant to the exercise of an
Incentive Stock Option within the two-year period commencing on the day after
the date of transfer of such Share or Shares to the Optionee pursuant to such
exercise, the Optionee shall, within ten (10) days of such disposition, notify
the Company thereof, by delivery of written notice to the Company at its
principal executive office, and immediately deliver to the Company the amount of
Withholding Taxes.
15.3. Designation of Beneficiary. Each Optionee may designate
a person or persons to receive in the event of his or her death, any Option or
any amount payable pursuant thereto, to which he or she would then be entitled.
Such designation will be made upon forms supplied by and delivered to the
Company and may be revoked in writing. If an Optionee fails effectively to
designate a beneficiary, then his or her estate will be deemed to be the
beneficiary.
16. Effective Date. The effective date of the Plan shall be the date
of its adoption by the Board, subject only to the approval by the affirmative
votes of the holders of a majority of the securities of the Company present, or
represented, and entitled to vote at a meeting of stockholders duly held in
accordance with the applicable laws of the State of Delaware within twelve (12)
months of such adoption.
12
ASSET PURCHASE AGREEMENT
AMONG
CMSF, INC., AS THE BUYER,
AND
ALLIED HEALTH GROUP, INC.,
GUT MANAGEMENT, INC.,
SKY MANAGEMENT CO.,
FLORIDA SPECIALTY NETWORK, LTD.,
SURGICAL ASSOCIATES OF SOUTH FLORIDA, INC.,
SURGINET, INC., AS SELLERS,
AND
JACOB NUDEL, M.D., DAVID RUSSIN, M.D. AND LAWRENCE SCHIMMEL, M.D.
AND
MAGELLAN HEALTH SERVICES, INC., AS PARENT
Dated as of October 16, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
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SECTION 1. DEFINITIONS.
Section 1.1 Definitions
Section 1.2 Principles of Construction
SECTION 2. PURCHASE AND SALE OF THE PURCHASED PROPERTY
Section 2.1 Transfer of Assets
Section 2.2 Sale at Closing Date
Section 2.3 Subsequent Documentation
Section 2.4 Assumption of Liabilities
Section 2.5 Excluded Liabilities
Section 2.6 Breach of Representations
Section 2.7 Right of Enforcement
SECTION 3. PURCHASE PRICE: EARN-OUT
Section 3.1 Purchase Price
Section 3.2 Working Capital Adjustment
Section 3.3 Earn-Out
Section 3.4 Payment of Adjustment and
Earn-Out: Distribution of Escrow
Section 3.5 Prorations and Other
Adjustments.
SECTION 4. CLOSING.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE SELLERS
AND THE EXECUTIVE SHAREHOLDERS
Section 5.1 Organization: Oualification
to Do Business: Subsidiaries
Section 5.2 Authorization and Validity of
Agreement
Section 5.3 No Conflict or Violation
Section 5.4 Consents and Approvals
Section 5.5 Financial Statements and
Projections
Section 5.6 Absence of Certain Changes or
Events
Section 5.7 Tax Matters
<PAGE>
PAGE
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Section 5.8 Absence of Undisclosed Liabilities
Section 5.9 Accounts Receivable: Banking
Section 5.10 Real Property: Leases
Section 5.11 Equipment and Machinery
Section 5.12 Intellectual Property: Intangible Assets
Section 5.13 Licenses and Permits
Section 5.14 Litigation
Section 5.15 Professional Liability Claims
Section 5.16 Contracts
Section 5.17 Employee Plans and Benefits:
Employees and Independent Contractors
Section 5.18 Insurance
Section 5.19 Compliance with Law
Section 5.20 Change in Ownership
Section 5.21 Files and Records
Section 5.22 Related Party Transactions
Section 5.23 Sufficiency of and Title to Assets
Section 5.24 Accuracy of Information
Section 5.25 Brokers
Section 5.26 Disclosure
Section 5.27 Survival
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE
BUYER AND PARENT
Section 6.1 Corporate Organization
Section 6.2 Authorization and Validity of Agreement
Section 6.3 No Conflict or Violation
Section 6.4 Consents and Approvals
Section 6.5 Litigation
Section 6.6 Financing
Section 6.7 Brokers
Section 6.8 Accuracy of Representations and Warranties
Section 6.9 Survival
SECTION 7 COVENANTS.
Section 7.1 Information and Certain Tax Matters
Section 7.2 Conduct of the Businesses
Section 7.3 Tax Reporting and Allocation of Consideration
Section 7.4 Supplemental Schedules
Section 7.5 Transferred Persons
Section 7.6 Consents and Approvals
Section 7.7 Negotiations
Section 7.8 Further Assurances
<PAGE>
Section 7.9 Covenant Not to Compete
Section 7.10 Non-Solicitation of Employees
Section 7.11 Assignment of Contracts
and Warranties
Section 7.12 Notice of Breach
Section 7.13 Bulk Sales Compliance
Section 7.14 Conduct of the Businesses after
Closing
Section 7.15 Meetings of the Board of
Directors of Buyer
Section 7.16 Information Technologies Budget
Section 7.17 Indemnification for Certain Liabilities
Section 7.18 Refinancing of Existing Bank Loan
SECTION 8. CONDITIONS TO OBLIGATIONS OF BUYER
Section 8.1 Representations and Warranties
Section 8.2 Performance of Seller's
and Shareholders' Obligations
Section 8.3 Consents and Approvals
Section 8.4 No Violation of Orders
Section 8.5 No Material Adverse Change
Section 8.6 Due Diligence with Respect to Third Party Payors
Section 8.7 Consents under Key Contracts
Section 8.8 Farrell Consulting Arrangement
Section 8.9 Employment Agreement with Dr. Jones
Section 8.10 Financial Statements and Projections
Section 8.11 Opinion of Counsel
Section 8.12 Other Closing Documents
Section 8.13 Legal Matters
Section 8.14 TPA and UR Licenses
SECTION 9 CONDITIONS TO OBLIGATIONS OF THE SELLERS
Section 9.1 Representations and Warranties of the Buyer
Section 9.2 Performance of the Buyer's Obligations
Section 9.3 Consents and Approvals
Section 9.4 No Violation of Orders
Section 9.5 Opinion of Counsel
Section 9.6 Other Closing Documents
Section 9.7 Legal Matters
SECTION 10. TERMINATION AND ABANDONMENT
Section 10.1 Methods of Termination: Upset
Section 10.2 Procedure Upon Termination
SECTION 11. INDEMNIFICATION.
<PAGE>
Section 11.1 Indemnification by the Sellers
and the Executive Shareholders
Section 11.2 Procedures for Indemnification by the Sellers
Section 11.3 The Buyer's Right of Set-Off
Section 11.4 Indemnification by the Buyer and Parent
Section 11.5 Procedures for Indemnification
by the Buyer and Parent
Section 11.6 The Sellers' and Executive Shareholders'
Right of Set-Off
Section 11.7 Purchase Price Adjustment
SECTION 12. MISCELLANEOUS.
Section 12.1 Successors and Assigns:
Restrictions on Assignment and
Transfer of Purchase Price
Section 12.2 Governing Law. Jurisdiction
Section 12.3 Expenses
Section 12.4 Joint and Several Obligations
Section 12.5 Severability
Section 12.6 Notices
Section 12.7 Amendments: Waivers
Section 12.8 Public Announcements
Section 12.9 Entire Agreement
Section 12.10 Parties in Interest
Section 12.11 Scheduled Disclosures
Section 12.12 Section and Paragraph Headings
Section 12.13 Counterparts
Section 12.14 Post-Closing Survival
Section 12.15 Confidentiality
Section 12.16 Litigation
Section 12.17 Specific Performance
Section 12.18 Retention of Independent Accounting Firms
Section 12.19 Limited Obligations of Parent
EXHIBITS
A Form of Assumption Agreement
B Form of Escrow Agreement
C Form of Opinion of Broad and Cassel
D Form of Opinion of Dow, Lohnes & Albertson, PLLC
<PAGE>
SCHEDULES
1.1(k) Best Knowledge and Knowledge
1.1(yyy) Permitted Encumbrances
1.1(hhhh) Excluded Assets
1.1(1111) Shareholders
2.4(a) Certain Excluded Contracts
2.4(b) Certain Payables
5.1(a) Equity Interests
5.1(b) Partnership Interests
5.3 Conflicts or Violations
5.4 Consents, Waivers, Authorizations and
Approvals for Sellers
5.5 Financial Statements
5.6(a) Material Changes or Events
5.6(b) Exceptions to Section 5.6(b)
5.6(b)(13) Certain Encumbrances
5.6(c) Exceptions to Section 5.6(c)
5.7(b) Tax Matter Exceptions
5.7(c) Tax Jurisdictions
5.9(b) Bank Accounts
5.10(a) Owned Real Property
5.10(b) Leased Real Property
5.10(c) Amendments to Leases; Defaults
5.10(d) Subleases; Restrictive Covenants
5.11 Equipment and Machinery
5.12(a) Intellectual Property
5.12(b) Intangible Assets
5.13(a) Licenses, Permits and Governmental Approvals
5.14 Litigation
5.15(a) Professional Liability Claims
5.16(a) Contracts
5.16(c) Material Compliance with Contracts
5.16(d) Restrictions on Assignment
5.16(e) Co-Contractants; Change of Control Payments
5.16(f) Capitation Fees
5.16(h)(i) Non-Competition Provisions (Payors)
5.16(h)(ii) Non-Competition Provisions (Network Physicians, Consultants)
5.16(i) Significant Terminations
5.17(a) Plans and Compensation Arrangements
5.17(d) Determination Letters; Material Liability
5.17(e)(i) Network Physicians
5.17(e)(ii) Consultants
5.17(e)(iii) Employees
5.18(a) Insurance
<PAGE>
5.18(b) Insurance for Third Parties
5.19 Compliance with Law
5.22 Related Party Transactions
6.3 Conflicts
6.4 Consents, Waivers, Authorizations and Approvals for Buyer
7.2 Conduct of Business
7.3(b) Allocation
7.5(a) Employees to be Engaged by the Buyer
8.7 Key Contracts
<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of October 16, 1997, among CMSF,
Inc.,a Florida corporation(the "Buyer"), Allied Health Group, Inc., a Florida
corporation ("AHG"), Gut Management, Inc., a Florida corporation ("Gut"), Sky
Management Co., a Florida corporation ("Sky"), Florida Specialty Network, Ltd.,
a Florida limited partnership ("FSN"), Surgical Associates of South Florida,
Inc., a Florida corporation ("SASF"), Surginet, Inc., a Florida corporation
("Surginet" and, together with AHG, Gut, Sky, FSN and SASF, the "Sellers"), and
Jacob Nudel, M.D., David Russin, M.D. and Lawrence Schimmel, M.D. (each, in his
individual capacity, an "Executive Shareholder", and collectively, the
"Executive Shareholders"), and Magellan Health Services, Inc., a Delaware
corporation, the ultimate corporate parent of the Buyer ("Parent"),
W I T NE S S E T H:
WHEREAS, AHG is engaged in the business of managing physician
networks and providing administrative tasks relating thereto under a variety of
administrative services and managed care network agreements;
WHEREAS, Sky, SASF, Surginet and Gut are each engaged in the
business of providing surgical specialty networks which, in the case of Gut, is
specialized in gastroenterology, and certain related administrative tasks under
a variety of managed care agreements;
WHEREAS, FSN is engaged in performing various administrative and
data processing tasks for certain of the foregoing Sellers as well as to various
health maintenance organizations and managed care physician networks; and
WHEREAS, the Buyer desires to purchase the businesses of the Sellers
by purchasing all the assets relating to all the business activities and
operations of each Seller, including the activities described above (each, a
"Business," and collectively, taking into account the Business of each Seller,
the "Businesses") from the Sellers, and the Sellers desire to sell such
Businesses and assets to the Buyer, in each case upon the terms and subject to
the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the respective
covenants and agreements hereinafter contained, the parties hereby agree:
SECTION 1. DEFINITIONS.
Section 1.1 Definitions. Unless the context otherwise requires, as
used in this Agreement, the following terms shall have the following meanings
(terms defined in the singular to have the same meanings when used in the plural
and vice versa):
(a) "Accounts Receivable" shall mean all accounts and notes
receivable, claims, debtor obligations and other rights to receive payments from
third parties of each Seller relating
<PAGE>
to its Business, existing on the Closing Date.
(b) "Accountants" shall have the meaning set forth in Section
3.3(a).
(c) "Affiliates" shall mean any individual, corporation,
partnership, joint venture, association, trust or unincorporated organization
that controls, is controlled by or is under common control with a Person and
"control" of a Person (including, with correlative meaning, the terms "control
by" and "under common control with") means the power to direct or cause the
direction of the management, policies or affairs of the controlled Person,
whether through ownership of securities or partnership or other ownership
interests, by contract or otherwise, provided, however, that in the case of any
Seller, the term "Affiliates" shall also include each other Seller, and each
Shareholder of such Seller.
(d) "Agreement" shall mean this Asset Purchase Agreement, as it may
be amended, modified or supplemented from time to time in accordance with its
terms.
(e) "Allocation" shall have the meaning set forth in Section 7.3(b).
(f) "Applicable Percentage" shall mean the percentage of the Closing
Cash Installment of the Purchase Price being paid to each Seller at Closing in
relation to the other Sellers as set forth in a schedule to be provided by the
Sellers to the Buyer at least 5 Business Days prior to the Closing Date.
(g) "Asset Acquisition Statement" shall have the meaning set forth
in Section 7.3(b).
(h) "Assumed Liabilities" shall mean the liabilities and obligations
of the Sellers expressly assumed by the Buyer pursuant to Section 2.4 and no
others.
(i) "Audited Financial Statements" shall mean, collectively, (i) for
each of Gut, Sky, and SASF, the audited balance sheets as of December 31, 1994,
1995 and 1996 and the related statements of operations and retained earnings,
and cash flows for the years then ended; (ii) the audited balance sheets of FSN
as of December 31, 1994, 1995 and 1996 and the related statements of operations,
partners' equity, and cash flows for the years then ended; (iii) the audited
balance sheets of AHG as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows from inception
(May 15, 1995) to December 31, 1996; (iv) the audited balance sheets of Surginet
as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity and cash flows from inception (April 12, 1995) to December
31, 1996; and (v) collectively, for the Sellers taken as a whole, the audited
combined balance sheets as of December 31, 1994, 1995 and 1996, and the related
combined statements of operations, owners' equity and cash flows for the years
then ended.
(j) "Best Efforts" means that the obligated party is required to
make a diligent and good faith effort to accomplish the applicable objective.
Such obligation, however, does not require a material expenditure of funds or
the incurrence of a material liability on the part of the
<PAGE>
obligated party, nor does it require that the obligated party act in a manner
that would be contrary to normal commercial practices in order to accomplish the
objective. The failure to accomplish a given objective is no indication that the
obligated party did not in fact utilize its Best Efforts in attempting to
accomplish the objective.
(k) "Best Knowledge" or "best knowledge"' when used with respect to:
(i) a Seller shall mean the collective knowledge of the persons identified on
Schedule 1.1(k), as well as all of the officers, directors and the Executive
Shareholders of such Seller, including the knowledge any such Person has or
could reasonably be expected to have after due inquiry, and (ii) an Executive
Shareholder shall mean the knowledge of such Executive Shareholder, including
the knowledge such Executive Shareholder has or could reasonably be expected to
have after due inquiry. For purposes of this definition, "due inquiry" shall
mean reasonable inquiry of those Persons who are, in the judgment of such
Person, likely to have knowledge of the facts which are the subject of the
inquiry.
(l) l recitals hereto.
"Business" shall have the meaning set forth in the
(m) "Business Day" shall mean days other than Saturdays, Sundays and
other legal holidays or days on which the principal office of First Union
National Bank of North Carolina is closed.
(n) "Buyer" shall have the meaning set forth in the introductory
paragraph hereto.
(o) "Buyer Indemnitees" shall have the meaning set forth in Section
11.
(p) "Buyer's Event of Breach" shall have the meaning set forth in
Section 11.4.
(q) "Cash and Cash Equivalents" shall mean the amount of cash on
hand and cash in any bank account or brokerage account of each of the Sellers,
including any securities with maturities of less than 90 days.
(r) "Change of Control Payment" shall have the meaning set forth in
Section 5.16(e).
(s) "Closing" shall have the meaning set forth in Sec
(t) "Closing Cash Installment" shall have the meaning set forth in
Section 3.1.
Section 4.
(u) "Closing Date" shall have the meaning set forth in as amended.
<PAGE>
(v) "Code" shall mean the Internal Revenue Code of 1986,
(w) "Compensation Arrangements" shall have the meaning set forth in
Section 5.17(a).
(x) "Consultants" means all consultants, agents and independent
contractors providing consulting services, including marketing, promotion,
software development, administrative services and related services, engaged by
any Seller in connection with its Business, each of whom has been identified
pursuant to Section 5.17(e) and Schedule 5.17(e)(ii).
(y) "Contracts" shall mean, collectively, the Third Party Payor
Agreements, Leases, Purchase Orders and Other Contracts all of which are listed
on Schedule 5.16(a) hereto, and no others. The term Contracts shall not include
any of the Excluded Contracts regardless of whether such Excluded Contracts are
also listed on Schedule 5.16(a).
(z) "December 31, 1996 Combined Balance Sheet" shall mean the
audited combined balance sheet of the Sellers at December 31, 1996, which is
included in the Financial Statements.
(act) "Earn-Out Period" shall have the meaning set forth in Section
3.3(a).
3.3(a).
in Section 3.3(b).
(x) "EBITDA" shall have the meaning set forth in Section
(bb) "EBITDA Statement" shall have the meaning set forth
(cc) "Employees" means the employees of each Seller who are employed
in connection with its Business (excluding temporary, leased and contract
personnel), each of whom as of ten Business Days prior to the date of this
Agreement has been identified pursuant to Section 5.17(e) and Schedule
5.17(e)(iii).
(dd) "Encumbrance" shall mean any encumbrance or lien of any
character whatsoever, including, any option, right to purchase, right to
convert, mortgage, charge, claim, pledge, conditional sales contract, judgment
lien, material man's lien, mechanic's lien or security interest.
(ee) "Engagement Notice" shall have the meaning set forth in Section
7.5(a).
(ff) "Environmental Law" means the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. ss.ss. 9601 et
seq.; the Resource Conservation and Recovery Act (RCRA), 42 U.S.C. ss.ss. 6901
et seq.; the Federal Water Pollution
<PAGE>
Control Act, 33 U.S.C. ss.ss. 1251 et seq.; the Clean Air Act, 42 U.S.C. ss.ss.
7401 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ss.ss. 1801
et seq.; the Toxic Substances Control Act, 15 U.S.C., ss.ss. 2601-2629; the Safe
Drinking Water Act, 42 U.S.C. ss.ss.300f-300j; and any state and local laws and
ordinances that regulate in any way hazardous materials or wastes and the
regulations implementing such statutes.
(gg) "Equipment and Machinery" shall mean (i) the equipment,
computer hardware, machinery, furniture, fixtures and improvements, spare parts,
supplies and vehicles owned or leased by each Seller with respect to the
operations of its Business on the Closing Date (including all such items as set
forth on the June 30, 1997 Combined Balance Sheet), (ii) the replacements for
any of the foregoing owned or leased by such Seller, (iii) the warranties,
service and maintenance documents, bills of sale, assignments and licenses (to
the extent assignable) received from manufacturers and sellers of the aforesaid
items and (iv) any related claims, credits, rights of recovery and set-off with
respect thereto.
(hh) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
(ii) "ERISA Affiliate" shall have the meaning set forth in Section
5.17(a).
(jj) "Escrow Agent" shall have the meaning set forth in Section
3.1(b).
(kk) "Escrow Agreement" shall mean the Escrow Agreement by and among
the Buyer, the Sellers, and the Escrow Agent, substantially in the form attached
hereto as Exhibit B.
(ll) "Escrow Deposit" shall have the meaning set forth in Section
3.1(b).
(mm) "Excluded Contracts" shall have the meaning set forth in
Section 2.4(a).
(nn) "Excluded Liabilities" shall have the meaning set forth in
Section 2.5.
(oo) "Excluded Employee Obligations" has the meaning set forth in
Section 2.5(d).
(pp) "Farrell Consulting Agreement" shall mean that certain
agreement, made as of June 1, 1996, by and among FSN, Inc., FSN, AHG, and each
of the Farrell Parties.
(qq) "Farrell Parties" shall mean, collectively, Morgan Chase
Company, a Missouri corporation, and Joseph Farrell and Stephen Wulf.
(rr) "Files and Records" shall mean all files, books and records,
whether in hard copy or magnetic or optical format, of each Business or the
Purchased Property, including the following types of files, books and records
relating to such Business: patient and supplier files, commitments, reports of
examination, correspondence or internal memoranda regarding Contracts or other
Purchased Property, equipment maintenance records, equipment warranty
information
<PAGE>
and all files relating to Employees or independent contractors of such Business
employed or engaged by the Buyer, including Form I-9's, credit records, and
other similar documents and records used and/or useful in connection with such
Business, and correspondence with Governmental Authorities relating to the
operation of such Business and related files and records of each Seller, in each
case, whether created prior to or following the Closing.
(ss) "Financial Statements" shall mean, collectively, (i) the
Audited Financial Statements, (ii) the Management Prepared Financial Statements,
and (iii) the Projections, each as defined herein. ~
(tt) "FSN, Inc." shall have the meaning set forth in Section 5.1(a).
(uu) "FSN Limited Partnership Agreement" shall have the meaning set
forth in Section 5.1(b).
(w) "GAAP" shall mean generally accepted accounting principles as
in effect from time to time.
(ww) "Governmental Authority" shall mean any agency, division,
department, regulatory body, subdivision, commission, board, bureau, court,
audit group, procuring office or other instrumentality of the government of the
United States, any state or local government, or any foreign national or local
government, any subdivision thereof, including the employees, officers,
representatives or agents thereof, as well as any arbitrator.
(xx) "Hazardous Materials" shall have the meaning set forth in
Section 5.19(f).
(yy) "IAF EBITDA Statement" shall have the meaning set forth in
Section 3.3(b).
(zz) "IBNR" shall have the meaning set forth in Section 5.5(b).
(aaa) "Independent Accounting Firm" shall have the meaning set forth
in Section 3.3(a).
(bbb) "Information Technologies Budget" shall have the meaning set
forth in Section 7.16.
(ccc) "Initial Purchase Price" shall have the meaning set forth in
Section 3.1.
(ddd) "Intangible Assets" shall mean all intangible personal
property rights, including the proceeds of any insurance policies and all claims
on the part of each Seller for recoupment, reimbursement and coverage under any
insurance policies, in each case in connection with its Business and all
goodwill of each Seller relating to its Business, and including those items
listed in Schedule 5.12(b).
(eee) "Intellectual Property" shall mean all letters patent, patent
qualifications,
<PAGE>
patent applications, trademarks, trademark applications, service marks, service
mark applications, trade names, brands, trade dress, logos, designs, private
labels, copyrights, know-how, trade secrets and licenses, including software,
computer network systems, claims processing procedures and other rights relating
to the administration of Third Party Payor Agreements or otherwise relating to
the Businesses, and rights with respect to the foregoing that each Seller holds
or possesses the rights to use relating to the Purchased Property or the
operations of its Business, including those items listed in Schedule 5.12(a)
hereto. Without limiting the generality of the foregoing, the name "Allied
Health Group" falls within the foregoing definition.
(fff) "Inventory" means all (i) inventoriable supplies held by each
Seller on the Closing Date (including all such items as set forth on the June
30, 1997 Combined Balance Sheet) for use in the operations of its Business, (ii)
any supplies delivered to each Seller's Business after the Closing Date which
such Seller has agreed to purchase in the ordinary course of business consistent
with past practices and (iii) any warranties received from each Seller's
suppliers with respect to such inventory (to the extent assignable) and related
claims, credits, rights of recovery and set-off with respect thereto.
(ggg) "June 30, 1997 Combined Balance Sheet" shall mean the
unaudited combined balance sheet of the Sellers at June 30, 1997, which is
included in the Financial Statements.
(hhh) "Key Contracts" shall have the meaning set forth in Section
8.7.
(iii) "Knowledge" or "knowledge" when used with respect to: (i) a
Seller shall mean the collective actual knowledge of the persons identified on
Schedule 1.1(k), as well as all of the other officers, directors and the
Executive Shareholders of such Seller; and (ii) an Executive Shareholder shall
mean the actual knowledge of such Executive Shareholder.
(jjj) "Leased Real Property" shall have the meaning set forth in
Section 5.10(b).
(kkk) "Leases" shall have the meaning set forth in Section 5.10(b).
"Leases" shall have the meaning set forth in Section 11.1.
(lll) "Licenses and Permits" shall have the meaning set forth in
Section 5.13.
(mmm) "Losses" shall have the meaning set forth in
(nnn) "Management Agreement" shall mean the management agreement, to
be effective as of the Closing Date, between the Buyer and a corporation formed
by the Executive Shareholders pursuant to which the services of the Executive
Shareholders will be made available to the Buyer for a period of three years in
consideration of the payment by the Buyer of $250,000 per year in the aggregate
and upon such other terms and conditions as shall be mutually agreed to by the
Buyer and the Executive Shareholders.
<PAGE>
(ooo) "Management Prepared Financial Statements" shall mean,
collectively, (i) for each Seller the unaudited balance sheet as of June 30,
1997, and the related income statement for the six months then ended, (ii)
collectively, for the Sellers taken as a whole, the unaudited combined balance
sheet as of June 30, 1997, and the related income statement for the six months
then ended, (iii) for the Sellers monthly combined and combining unaudited
balance sheets and the related income statements as of and for the month ending
July 31, 1997 and each month thereafter through the month ending thirty days
prior to the Closing Date, prepared by management of the Sellers, and (iv) for
the Sellers combined and combining unaudited balance sheets and the related
income statements for the period commencing January 1, 1997 through the month
ending 30 days prior to the Closing Date and the corresponding period in the
prior year.
(ppp) "Minimum Amount" shall have the meaning set forth in Section
3.2(c).
(qqq) "Multiemployer Plan" shall have the meaning set forth in ERISA
Section 3(37).
(rrr) "Net Revenue" shall have the meaning set forth in Section
3.3(a).
(sss) "Network Physicians" means primary care or specialist
physicians serving as independent contractors of any Seller or any Person
contracting with a Seller for the provision of health care or medical services
but who is not an Employee, each of whom has been identified pursuant to Section
5.17(e) and Schedule 5.17(e)(i).
(ttt) "New Farrell Consulting Agreement" shall have the meaning set
forth in Section 8.8(c).
(uuu) "Objection Notice" shall have the meaning set forth in Section
3.3(b).
(vvv) "Occurrence" shall have the meaning set forth in Section
5.15(b).
(www) "Other Contracts" shall mean all Equipment and Machinery
leases, and all loan agreements, security agreements, partnership or joint
venture agreements, license agreements, software licenses, service contracts,
suretyship contracts, guarantees, letters of credit, reimbursement agreements,
distribution agreements, contracts or commitments limiting or restraining any
Seller with respect to its Business from engaging or competing in any lines of
business or with any person, firm or corporation, contracts or commitments
granting any Seller rights of first refusal or exclusive rights or similar
rights with respect to its Business or any lines
<PAGE>
of business, documents granting the power of attorney with respect to the
affairs of any Seller, agreements not made in the ordinary course of business of
any Seller's Business, options to purchase any assets or property rights of the
Business, working capital maintenance or other form of guaranty agreements, and
all other agreements to which any Seller is a party and which are related to the
operation of its Business, all of which are listed on Schedule 5.16(a), but
excluding Leases, Third Party Payor Agreements and Purchase Orders.
(xxx) "Parent" shall have the meaning set forth in the introductory
paragraph hereto.
(yyy) "Permitted Encumbrances" means the Encumbrances set forth on
Schedule 1.1(yyy).
(zzz) "Person" shall mean any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization or Governmental Authority.
(aaaa) "Plans" shall have the meaning set forth in Section 5.17(a).
(bbbb) "Post-Closing Statement" shall have the meaning set forth in
Section 3.2(a).
(cccc) "Premises" shall mean the Leased Real Property.
(dddd) "Professional Liability Claims" shall have the meaning set
forth in Section 5.15(a).
(eeee) "Projections" shall mean collectively, (i) the projected
statement of operations for the twelve months ending September 30, 1998 of AHG
and FSN, and (ii) run rates of Gut, Sky, SASF and Surginet for the twelve months
ending September 30, 1998. All such projections have been prepared by the
management of the Sellers.
(ffff) "Purchase Orders" shall mean any outstanding purchase orders,
contracts or other commitments to suppliers of goods and services for materials,
supplies or other items used in the Business and listed on Schedule 5.16(a).
(gggg) "Purchase Price" shall mean the aggregate amount payable to
the Sellers pursuant to Section 3.
(hhhh) "Purchased Property" shall mean the (i) Accounts Receivable,
(ii) Contracts (except as set forth on Schedule 2.4(a)), (iii) Equipment and
Machinery, (iv) Files and Records, (v) Intangible Assets, (vi) Intellectual
Property, (vii) Inventory, (viii) Licenses and Permits (to the extent
transferable by the Sellers), (ix) Cash and Cash Equivalents, (x) any prepaid
expenses and other assets relating to the operations of each Business on the
Closing Date, (xi) all
<PAGE>
software, software systems, databases and all other information systems used in
the Businesses, (xii) all other tangible and intangible assets of the Sellers
and the Executive Shareholders (other than items of personal property owned by
the Executive Shareholders which are not material to the operations of the
Businesses and do not have an aggregate fair market value of more than $25,000)
used in the respective Businesses (whether or not such assets are reflected on
the June 30, 1997 Combined Balance Sheet) and related thereto, (xiii) all
proceeds (including any Cash and Cash Equivalents) received by the Sellers or
the Shareholders in respect of any or all of the foregoing on or after the
Closing Date, (xiv) all proceeds (including any Cash and Cash Equivalents)
received by the Sellers or the Shareholders in respect of any insurance policy
of the Sellers relating to an event occurring on or after July 1, 1997, and (xv)
all of the goodwill associated with the Businesses and the Purchased Property;
provided; however, that the Purchased Property shall not include those items
described on Schedule 1.1(hhhh) hereto.
(iiii) "Seller" and "Sellers" shall have the respective meanings set
forth in the introductory paragraph hereto.
(jjjj) "Sellers' Event of Breach" shall have the meaning set forth
in Section 11.1.
(kkkk) "Seller Indemnitees" shall have the meaning set forth in
Section 11.4.
(llll) "Shareholders" shall mean the shareholders or partners
(including general and limited partners), as the case may be, of each of the
Sellers, including the Executive Shareholders, as set forth on Schedule
1.1(llll).
(mmmm) "Subject Business" shall mean contracting with independent
physician delivery systems and third party payers for the management of
established independent physician networks (including providing MSO services,
quality management, utilization review and claims processing), where the
physician providers are compensated on a fee for service basis out of a
capitated pool.
(nnnn) "Subsidiaries" (or "Subsidiary" as the context may require)
shall mean each entity as to which a Person, directly or indirectly, owns or has
the power to vote, or to exercise a controlling influence with respect to, 10%
or more of the securities of any class of such entity the holders of which are
ordinarily, in the absence of contingencies, entitled to vote for the election
of directors (or persons performing similar functions) of such Person.
(oooo) "Tax Returns" shall mean any return, report, information
return or other document (including any related or supporting information) filed
or required to be filed with any Governmental Authority in connection with the
determination, assessment, collection or administration of any Taxes and shall
include any amended returns required as a result of any examination adjustments
made by the Internal Revenue Service or other Tax authority.
(pppp) "Taxes" shall mean for all purposes of this Agreement all
taxes however denominated, including any interest, penalties or additions to tax
that may become payable in respect thereof, imposed by any Governmental
Authority, which taxes shall include, without
<PAGE>
limiting the generality of the foregoing, all income taxes, payroll and employee
withholding taxes, unemployment insurance, social security, sales and use taxes,
excise taxes, franchise taxes, gross receipts taxes, occupation taxes, real and
personal property taxes, stamp taxes, utility, severance, production, premium,
capital stock, license, transfer and transfer gains taxes, workmen's
compensation taxes and other obligations of the same or a similar nature,
whether arising before, on or after the Closing; and "Tax" shall mean any one of
them.
(qqqq) "Third Party Payor Agreements" shall mean all agreements
listed on Schedule 5.16(a) hereto to which any Seller is a party relating to the
furnishing, management or maintenance of, or administration or data processing
services relating to, physician or other professional service networks in
connection with professional, medical or health maintenance services or other
health cost arrangements in connection with any of the Businesses.
(rrrr) "Transferred Consultant" shall have the meaning set forth in
Section 7.5(a).
(ssss) "Transferred Employee" shall have the meaning set forth in
Section 7.5(a).
(tttt) "Transferred Network Physician" shall mean a Network
Physician who is offered engagement as a Network Physician by the Buyer and who
serves as an independent contractor of the Buyer as of the Closing Date.
(uuuu) "Unrestricted Cash" shall mean the aggregate of cash of the
Sellers immediately available for disbursement without restriction or limitation
of any kind, plus Due from Plan/Client amounts, less Contract Reserve amounts,
less Physician Payable amounts, as said terms are historically used and
reflected in the Financial Statements.
(vvvv) "Working Capital Amount" shall have the meaning set forth in
Section 3.2(c).
(wwww) "Year 1 Adjustment" shall have the meaning set forth in
Section 3.3(a).
(xxxx) "Year 2 Adjustment" shall have the meaning set forth in
Section 3.3(a).
(yyyy) "Year 3 Adjustment" shall have the meaning set forth in
Section 3.3(a).
(zzzz) "Year 1 Earn-Out" shall have the meaning set forth in Section
3.3(a).
(aaaaa) "Year 2 Earn-Out" shall have the meaning set forth in
Section 3.3(a).
(bbbbb) "Year 3 Earn-Out" shall have the meaning set forth in
Section 3.3(a).
(ccccc) "Year 1 EBITDA" shall have the meaning set forth in Section
3.3(c)(1).
(ddddd) "Year 2 EBITDA" shall have the meaning set forth in Section
3.3(d)(1).
<PAGE>
(eeeee) "Year 3 EBITDA" shall have the meaning set forth in Section
3.3(e)(1).
(fffff) "Year 1 Earn-Out Period" shall have the meaning set forth in
Section 3.3(a).
(ggggg) "Year 2 Earn-Out Period" shall have the meaning set forth in
Section 3.3(a).
(hhhhh) "Year 3 Earn-Out Period" shall have the meaning set forth in
Section 3.3(a).
(iiiii) "Year 1 Threshold EBITDA" shall have the meaning set forth
in Section 3.3(a).
(jjjjj) "Year 2 Threshold EBITDA" shall have the meaning set forth
in Section 3.3(a).
(kkkkk) "Year 3 Threshold EBITDA" shall have the meaning set forth
in Section 3.3(a).
Section 1.2 Principles of Construction. Definitions used in this
Agreement shall apply equally to both the singular and plural forms of the terms
defined. Whenever used in this Agreement, the words "include," "includes" and
"including" shall be deemed to be followed by the phrase "without limitation."
Unless the context otherwise requires, all references herein to Articles,
Sections, Exhibits and Schedules shall be deemed references to articles and
sections of, and schedules to this Agreement. Unless the context otherwise
requires, the term "party" when used in this Agreement means a party to this
Agreement, and references to a party or other Person shall be deemed to include
successors and permitted assigns of such party. All references herein to any
agreement or document shall be deemed to include such agreement or document
(unless specific reference is made to that agreement or document as in effect on
a specific date), as the same may be amended, supplemented or otherwise modified
from time to time. The parties acknowledge and agree that they have been
represented by counsel and that each of the parties has participated in the
drafting of this Agreement. Accordingly, it is the intention and agreement of
the parties that the language, terms and conditions of this Agreement are not to
be construed in any way against or in favor of any party hereto by reason of the
responsibilities in connection with the preparation of this Agreement.
SECTION 2. PURCHASE AND SALE OF THE PURCHASED PROPERTY.
Section 2.1 Transfer of Assets. Subject to the terms and conditions
herein set forth, each Seller shall sell, convey, transfer, assign and deliver
to the Buyer, and the Buyer shall purchase, acquire and accept from each Seller
on the Closing Date, all right, title and interest of each Seller and its
Affiliates in or to the Purchased Property, wherever located, free and clear of
all Encumbrances except for Permitted Encumbrances. Notwithstanding anything to
the contrary
<PAGE>
contained in this Agreement, to the extent that the sale or assignment of any
Account Receivable is prohibited by applicable contract, law or regulation, this
Agreement shall not constitute an agreement to sell or assign such Account
Receivable, provided however, each Seller agrees to pay to the Buyer the
equivalent cash value of any and all such Account Receivable(s), and upon each
Seller's collection of any such Account Receivable shall immediately remit a
check to the Buyer for such amount. Each Seller covenants and agrees to use its
Best Efforts to collect any such Account Receivable and shall deliver to Buyer
on a monthly basis a report setting forth the status of any such outstanding
Account Receivable and describing its collection efforts.
Section 2.2 Sale at Closing Date. The sale, transfer, assignment and
delivery by each Seller of the Purchased Property to the Buyer, as herein
provided, shall be effected on the Closing Date by deeds, bills of sale,
endorsements, assignments and other instruments of transfer and conveyance
reasonably satisfactory in form and substance to counsel for the Buyer.
Section 2.3 Subsequent Documentation. Each Seller and each Executive
Shareholder shall, at any time and from time to time after the Closing Date,
upon the reasonable request of the Buyer and at the expense of the Sellers and
the Executive Shareholders, do, execute, acknowledge and deliver, or cause to be
done, executed, acknowledged and delivered (whether by any Seller, any
Shareholder or any other Person), all such further deeds, assignments, transfers
and conveyances as may be required for the better assigning, transferring,
granting, conveying and confirming to the Buyer or its successors and assigns or
for aiding and assisting in collecting and reducing to possession, any or all of
the Purchased Property. Each Seller and each Executive Shareholder hereby
constitutes and appoints, effective as of the Closing Date, the Buyer, its
successors and assigns as the true and lawful attorney-in-fact of such Seller or
Executive Shareholder with full power of substitution in the name of such Buyer
or in the name of the Seller or Executive Shareholder but for the benefit of the
Buyer (a) to collect for the account of the Buyer any item of Purchased Property
and (b) to institute and prosecute all proceedings which the Buyer may in its
discretion deem proper in order to assert or enforce any right, title or
interest in or to the Purchased Property and to defend or compromise (subject to
Section 10, if applicable) any and all actions, suits or proceedings in respect
of any of the Purchased Property. The Buyer shall be entitled to retain for its
own account any amounts collected pursuant to the foregoing powers, including
any amounts payable as interest in respect thereof. EACH SELLER AND EACH
EXECUTIVE SHAREHOLDER HEREBY DECLARES THAT THE FOREGOING APPOINTMENT IS COUPLED
WITH AN INTEREST AND SHALL BE IRREVOCABLE AND PERPETUAL AND SHALL NOT BE
TERMINATED BY ANY ACT OF ANY SELLER, ANY EXECUTIVE SHAREHOLDER OR THEIR
RESPECTIVE SUCCESSORS OR ASSIGNS, BY OPERATION OF LAW OR BY THE OCCURRENCE OF
ANY OTHER EVENT OR IN ANY OTHER MANNER.
Section 2.4 Assumption of Liabilities. On the Closing Date, the
Buyer shall execute and deliver an assumption agreement in the form attached
hereto as Exhibit A, pursuant to which the Buyer shall accept, assume and agree
to pay, perform and discharge when due, in accordance with the respective terms
and subject to the respective conditions thereof, all of the liabilities and
obligations of the Sellers pursuant to and under the Assumed Liabilities. The
"Assumed Liabilities" shall mean:
<PAGE>
(a) All liabilities and obligations of each Seller of any kind
arising from the operations of the Businesses beginning on or after the first
day following the Closing Date, other than those (i) to which the Buyer is
entitled to indemnification by the Executive Shareholders pursuant to Section 11
of the Agreement, (ii) Taxes with respect to periods ending on or prior to the
Closing Date, and (iii) Change of Control Payments, if any; provided, however,
that in the case of Contracts, Third Party Payor Agreements, Leases, and Other
Contracts, only to the extent such Contracts, Third Party Payor Agreement, Lease
or Other Contract is described in Schedule 5.16(a) of this Agreement; and
provided, further, that in no event shall the Buyer assume or be responsible for
the contracts listed on Schedule 2.4(a) (the "Excluded Contracts"); provided,
further, that in the event that the parties hereto become aware of the fact at
any time after the Closing that a contract of any of the Sellers in existence on
the Closing Date is not listed on either Schedule 5.16(a) or Schedule 2.4(a),
such contract, at the sole election of Buyer, shall be assigned to and assumed
by Buyer and shall for all purposes under this Agreement be treated as a
Contract under this Agreement; and
(b) Additional payables arising from the operations of the
Businesses prior to the first day following the Closing Date and specified on
Schedule 2.4(b), as such Schedule may be amended by the mutual agreement of the
Sellers and Buyer prior to the Closing Date.
Section 2.5 Excluded Liabilities. The Assumed Liabilities shall not
include, and the Buyer shall not assume or be liable for any liabilities and
obligations of the Sellers or any of their Affiliates not expressly assumed in
Section 2.4 (collectively, the "Excluded Liabilities"), including, without
limitation:
(a) Any liability or obligation relating to Professional Liability
Claims arising from services performed on or before the Closing Date;
(b) Any liability or obligation relating to the Plans or the
Compensation Arrangements (as such terms are defined in Section 5.17);
(c) Other than as required pursuant to Sections 2.4(a) or (b), any
liabilities or obligations to current or former employees of, or independent
contractors with, any Seller who do not become Transferred Network Physicians,
Transferred Consultants or Transferred Employees, as the case may be;
(d) Any employment-related liabilities for which the Buyer is
indemnified under Section 11.1(d) (an "Excluded Employee Obligation") and any
other liability for which the Buyer is indemnified under Section 11; Affiliates;
(e) Any liabilities with respect to Taxes of any Seller or
Shareholder or relating to any period ending on or prior to the Closing Date,
including liabilities related to (i) income Taxes of the Sellers or any of their
Affiliates whether arising before or after the Closing Date, (ii) Taxes
<PAGE>
relating to the Purchased Property acquired under the terms and conditions of
this Agreement for all periods (or portions thereof) ending on or prior to the
Closing Date, (iii) Taxes attributable to or imposed with respect to the
transfer, assignment and delivery of the Purchased Property under Section 12.3
hereof or otherwise or to any other transactions contemplated by this Agreement
and (iv) Taxes of any other Person for which any of the Sellers may be liable by
contract or otherwise;
(f) Any liabilities to any Shareholders or any of their
(g) Any liabilities or obligations relating to or arising under the
Farrell Consulting Agreement;
(h) Any liability arising from operations of the Businesses before
the Closing Date not expressly assumed pursuant to Section 2.4;
(i) Any liability or obligations under Contracts not included in
Purchased Property;
(j) Any liability or obligations relating to Nudel & Gluck, M.D.,
P.A. and Young, Schimmel & Kanter Surgical Associates, M.D., P.A.(d/b/a South
Florida Surgical Group); and
(k) Any other liability not expressly assumed pursuant to Section
2.4 notwithstanding the inclusion of any such liability on the June 30, 1997
Combined Balance Sheet or any Management Prepared Financial Statements.
Section 2.6 Breach of Representations. Nothing in Section 2.4 shall
limit the Buyer's right to indemnification for the breach by any Seller or any
Executive Shareholder of any of its representations, warranties or covenants
hereunder.
Section 2.7 Right of Enforcement. Commencing on the Closing Date,
the Buyer will have complete control over the payment, settlement or other
disposition of the Assumed Liabilities and the right to commence, conduct and
control all negotiations and proceedings with respect thereto. The Sellers and
the Executive Shareholders will notify the Buyer promptly of any claim made with
respect to any Assumed Liabilities or Purchased Property and shall not, except
with the Buyer's prior written consent, voluntarily make any payment of,
settlement or offer to settle, or consent to any compromise or admit liability
with respect to, any Assumed Liabilities or Purchased Property. The Sellers will
cooperate, with the Buyer in connection with any negotiations or proceedings
involving any Assumed Liabilities or Purchased Property.
SECTION 3. PURCHASE PRICE; EARN-OUT.
Section 3.1 Purchase Price. As consideration for the sale and
transfer of the Purchased Property, the Buyer shall pay on the Closing Date an
amount equal to $70,000,000 (the "Initial Purchase Price"), payable as follows:
<PAGE>
(a) The Buyer will pay to the Sellers, collectively, an amount equal
to $50,000,000, subject to the proration provisions of Section 3.4 (the "Closing
Cash Installment") in cash by wire transfer to the "Broad and Cassel Trust
Account" in accordance with wire transfer instructions to be furnished in
writing by the Executive Shareholders (which shall be provided to the Buyer not
less than three Business Days before the Closing Date), for further credit to
each Seller in accordance with such Seller's Applicable Percentage.
(b) The Buyer will pay to the escrow agent designated in the Escrow
Agreement (the "Escrow Agent") in cash by wire transfer of immediately available
funds $20,000,000 (the "Escrow Deposit," which together with the interest or
other proceeds from the investment thereof and the amount of the Year 1
Earn-Out, Year 2 Earn-Out and Year 3 Earn-Out, if any, deposited pursuant to
Section 3.3 and not yet released from escrow, but less such amounts, if any,
previously distributed to the Buyer or to any of the Sellers pursuant to Section
3.3, is collectively referred to as the "Escrow Funds"). The Escrow Funds shall
be held in escrow by the Escrow Agent pursuant to the terms and conditions of
the Escrow Agreement in order to provide a fund for the payment to the Sellers
of any upward adjustments to the Initial Purchase Price and/or the payment to
the Buyer of any downward adjustments to the Initial Purchase Price to which
such party or parties may be entitled from time to time pursuant to this Section
3. At such times as payments to be made from the Escrow Funds are due and
payable pursuant to the terms and conditions of this Section 3, the Buyer and
the Sellers agree to give the Escrow Agent prompt notice to make the applicable
disbursements from the Escrow Funds.
Section 3.2 Working Capital Adjustment. The Purchase Price shall be
subject to a working capital adjustment after the Closing as follows:
(a) Within 60 days after the Closing, the Buyer shall prepare (with
the full cooperation and assistance of the Sellers and the Executive
Shareholders, to the extent requested by the Buyer) a statement of the
Businesses' (taken as a whole) current liabilities (to the extent assumed by the
Buyer) and current assets (to the extent purchased by the Buyer) as of the
Closing (the "Post-Closing Statement"), and shall submit such statement to the
Sellers for review and approval.
(b) Within 30 days after receipt of the Post-Closing Statement, the
Sellers shall notify the Buyer of any objections the Sellers may have to the
Post-Closing Statement. In the absence of any such objections, the Sellers shall
be deemed to have approved the Post-Closing Statement for purposes of the
adjustment to be made pursuant to this Section 3.2. If the Sellers notify the
Buyer of any such objections, the Buyer and the Sellers shall attempt to resolve
such objections in good faith for a period of 15 days from the date of such
notice of objection. If any objections of the Sellers cannot be resolved by the
Sellers and the Buyer within such 15-day period, such dispute shall immediately
be referred to an Independent Accounting Firm mutually selected by the parties.
The determination of such Independent Accounting Firm with respect to such
dispute shall be conclusive and binding on the Sellers and the Buyer. The party
whose determination differs the most from the determination of such Independent
Accounting Firm shall pay the fees of such firm.
<PAGE>
(c) Upon final determination of the Post-Closing Statement in
accordance with the foregoing, in the event that the current assets of the
Businesses (taken as a whole and to the extent purchased by the Buyer) less the
current liabilities of the Businesses (taken as a whole and to the extent
assumed by the Buyer), as stated in the Post-Closing Statement (the "Working
Capital Amount"), is an amount which is less than $1,000,000 (the "Minimum
Amount"), then the Purchase Price shall be reduced by the difference between the
Working Capital Amount and the Minimum Amount and the Sellers shall be jointly
and severally obligated to pay to the Buyer an amount equal to such difference
with 5 Business Days of the final determination of the Post-Closing Statement.
Section 3.3 Earn-Out. The Purchase Price shall be subject to
adjustment after the Closing as set forth in this Section 3.3:
(a) Earn-Out Definitions. Unless the context otherwise requires, as
used in this Agreement, the following terms shall have the following meanings:
(1) "Accountants" shall mean the independent public accountants of
the Buyer.
(2) "Earn-Out Period" shall mean each of the Year 1 Earn-Out Period,
the Year 2 Earn-Out Period and the Year 3 EarnOut Period.
(3) "EBITDA" shall mean the aggregate Net Revenue from the
operations of the Businesses, minus all expenses incurred in operating the
Businesses but before interest, income taxes, depreciation and amortization,
prepared in accordance with GAAP, consistently applied, and adjusted as follows:
(l)Introduced Business will be deemed to have been conducted at the Businesses'
cost of providing services for such Introduced Business plus the applicable IB
Profit Margin. (2) Any increase in EBITDA earned by the Businesses through the
restructuring of the Farrell Consulting Agreement that requires one-time cash
payments by Buyer or Buyer's Affiliates shall be deducted from EBITDA. (3) As
long as the Businesses are operated as a separate subsidiary or division,
administrative services provided to the Businesses will be actual corporate
overhead, including services provided by Parent or Parent's Affiliates, on a
cost basis, and will only include administrative services that are reasonably
and directly related to the Businesses. In the event the Businesses are
integrated into Parent or an Affiliate of Parent to the extent that the
corporate overhead attributable to the Businesses cannot be readily determined,
then, in lieu of actual overhead, an amount equal to a percentage of Net Revenue
of the Businesses shall be allocated to the Businesses as deemed overhead, which
percentage will be established by dividing (A) the amount of actual overhead
incurred with respect to the Businesses for the six month period immediately
preceding such integration by (B) the Net Revenue of the Businesses for said
six-month period. Said fixed percentage shall thereafter be applied to the Net
Revenue of the Businesses for purposes of determining the deemed overhead to be
allocated to the Businesses. (4) Net proceeds from dispositions of assets of the
Businesses shall be reinvested in the Businesses. (5) With respect to
acquisitions made from and after the Closing, in lieu of including Net Revenue
and expenses related to such acquisition in the calculation of EBITDA, net
income, determined in accordance with GAAP, from such acquisition shall be
included in EBITDA. (6) Expenses and capital expenditures with respect to the
items set forth in the Information
<PAGE>
Technologies Budget, will be allocated and treated as set forth in the
Information Technologies Budget regardless of their treatment under GAAP. (7)
Any and all amounts payable under, or in connection with the termination of, any
Leases which are assumed by the Buyer as part of the Contracts for Leased Real
Property which is no longer used in any of the Businesses shall be treated as
current expenses for purposes of calculating EBITDA regardless of their
treatment under GAAP.
(4) "IB Profit Margin' shall mean a profit margin equal to fifty
percent (50%) or such other agreed upon percentage (the "IB Profit Margin
Percentage") of the average profit margin of the Businesses for services similar
to the applicable Introduced Business provided during the fiscal quarter
immediately preceding the fiscal quarter in which the Businesses are to begin to
provide services for the Introduced Business. The proposed IB Profit Margin
Percentage and the proposed calculation of the IB Profit Margin (collectively,
the "IB Profit Margin Calculation") will be made by the Buyer in good faith and
presented in writing to the Executive Shareholders as soon as practicable prior
to the date on which services relating to the Introduced Business are to be
rendered. The Executive Shareholders shall, not later that five Business Days
after receipt of the IB Profit Margin Calculation, notify the Buyer in writing
of any objections thereto. Absent delivery of a written objection as provided
above, the IB Profit Margin Calculation will be conclusive and binding upon the
parties to this Agreement. If written objection is delivered to the Buyer and
the Buyer and the Executive Shareholders are unable, within 5 Business Days
after the receipt by the Buyer of such written objection, to resolve the
dispute, the Buyer, in its sole discretion, may elect either (i) to not make the
Introduced Business available to the Buyer or (ii) to submit the IB Profit
Margin Calculation to an Independent Accounting Firm mutually acceptable to the
Executive Shareholders and the Buyer whose determination shall be conclusive and
binding on the parties. In the event the Buyer elects to submit the matter to an
Independent Accounting Firm, the Businesses shall provide services for the
Introduced Business pending determination of the IB Profit Margin Calculation.
(5) "Independent Accounting Firm" shall mean one of the "big-six"
certified public accounting firms that does not have a conflict of interest with
respect to the preparation or review of the EBITDA Statements.
(6) "Introduced Business" shall mean business introduced to the
Buyer by Parent or Parent's Affiliates (i) as part of a contract with Parent or
its Affiliates, or (ii) by reason of introductions to the Buyer made by Parent
or Parent's Affiliates. The Executive Shareholders acknowledge and agree that
neither Parent nor any Parent Affiliate shall be obligated to introduce any
business to the Buyer or to otherwise cause any business that could be conducted
by the Buyer as Introduced Business to be referred to or conducted by the Buyer.
(7) "Net Revenue" shall be defined as the combined revenues of the
Businesses (including income on operating cash and monies held on behalf of
third parties remaining after Buyer distributes cash in excess of working
capital requirements to Parent) (after elimination of all inter-Business
transactions and balances) which are capitation fees (net of physician services
expenses for AHG only, and net of any retroactive
<PAGE>
adjustments under the terms of any managed care plans), service bureau billing
fees, administrative fees, facility fees, and fee for service billings (less
contractual adjustments, bad debt expense, charity adjustments, refunds, NSF
checks, collection agency fees and other adjustments to gross revenues), all as
computed in accordance with GAAP.
(8) "Year 1 Adjustment" shall mean the amount, if any, payable to
the Buyer from the Escrow Funds in accordance with the provisions of Section
3.3(c) and Section 3.4(a).
any, payable to the provisions
(9) "Year 2 Adjustment" shall mean the amount, if the Buyer from the
Escrow Funds in accordance with of Section 3.3(d) and Section 3.4(b).
(10) "Year 3 Adjustment" shall mean the amount, if any, payable to
the Buyer from the Escrow Funds in accordance with the provisions of Section
3.3(e) and Section 3.4(c).
(11) "Year 1 Earn-Out" shall mean the amount, if any, payable by the
Buyer to the Escrow Agent in accordance with the provisions of Section 3.3(c)
and Section 3.4(a).
(12) "Year 2 Earn-Out" shall mean the amount, if any, payable by the
Buyer to the Escrow Agent in accordance with the provisions of Section 3.3(d)
and Section 3.4(b).
(13) "Year 3 Earn-Out" shall mean the amount, if any, payable by the
Buyer to the Escrow Agent in accordance with the provisions of Section 3.3(e)
and Section 3.4(c).
(14) "Year 1 EBITDA" shall have the meaning set forth in Section
3.3(c)(1).
(15) "Year 2 EBITDA" shall have the meaning set forth in Section
3.3(d)(1).
(16) "Year 3 EBITDA" shall have the meaning set forth in Section
3.3(e)(1).
(17) "Year 1 Earn-Out Period" shall mean the 12 month period ending
on September 30, 1998.
(18) "Year 2 Earn-Out Period" shall mean the 12 month period ending
on September 30, 1999.
(19) "Year 3 Earn-Out Period" shall mean the 12 month period ending
on September 30, 2000.
(20) "Year 1 Threshold" shall mean $11,000,000.
(21) "Year 2 Threshold" shall mean the greater of (i) $11,000,000
or (ii) Year 1 EBITDA.
<PAGE>
(22) "Year 3 Threshold" shall mean the greater of (i) $11,000,000,
(ii) Year 1 EBITDA, or (iii) Year 2 EBITDA.
(b) EBITDA Statement. Within 75 calendar days after the last day of
each of the Year 1 Earn-Out Period, the Year 2 Earn-Out Period and the Year 3
Earn-Out Period, the Buyer shall prepare, the Accountants shall review, and the
Buyer shall deliver to AHG a statement reflecting the EBITDA from the
consolidated operations of the Businesses during such Earn-Out Period (each, an
"EBITDA Statement"), which statement will be determined in accordance with GAAP,
applied on a basis consistent with the financial statements of the Buyer and
Parent for such period. The parties shall ensure that the Accountants have full
access to the books, records, facilities and employees of the Businesses for
purposes of reviewing the EBITDA Statement and shall cooperate with the
Accountants to the extent reasonably requested to review the EBITDA Statement.
The EBITDA Statement will be examined by AHG (and, if AHG so chooses, by a firm
of independent certified public accountants), who shall, not later than 45
calendar days after receipt of the EBITDA Statement, raise any objections it has
to the EBITDA Statement by notifying the Buyer in writing within such time
period in a statement indicating the item or items disputed, AHG's proposed
adjustments and an adjusted EBITDA Statement reflecting such adjustments (an
"Objection Notice"). During such 45 day period, AHG and any such independent
certified public accountants shall have full access to the books and records,
other financial information (including the working papers of the Accountants)
and appropriate financial personnel of the Buyer reasonably necessary for the
preparation of an Objection Notice. Absent delivery of an Objection Notice as
provided above, the EBITDA Statement will be conclusive and binding upon the
parties to this Agreement for the purposes of any purchase price adjustment
under this Section 3.3. In the event that an Objection Notice is delivered by
AHG as provided above, and if the Buyer and AHG are unable, within 15 calendar
days after receipt by the Buyer of such Objection Notice, to resolve the
disputed exceptions, such disputed exceptions will be referred to an Independent
Accounting Firm mutually acceptable to AHG and the Buyer. The Independent
Accounting Firm shall, within 60 days following its engagement by the Buyer and
AHG for this purpose, deliver to AHG and the Buyer a written report determining
such disputed exceptions (the "IAF EBITDA Statement"). During such 60 day
period, the Independent Accounting Firm shall have full access to the books and
records, other financial information (including the working papers of the
Accountants and AHG's accountants, if any) and appropriate financial personnel
of the Buyer which the Independent Accounting Firm reasonably deems necessary or
advisable for the preparation of the IAF EBITDA Statement. The EBITDA reflected
in the IAF EBITDA Statement will be conclusive and binding upon the parties to
this Agreement for the purposes of any purchase price adjustment under this
Section 3.3, subject to application of the following provisions: (i) if the IAF
EBITDA Statement reflects EBITDA in excess of $300,000 over the amount of the
EBITDA reflected in the EBITDA Statement for the Earn-Out Period at issue, then
EBITDA for such Earn-Out Period shall be deemed to be equal to the EBITDA
reflected in the IAF EBITDA Statement, and the Buyer shall bear all the fees and
disbursements of the Independent Accounting Firm in respect of its services
under this Section 3.3 for such Earn-Out Period; (ii) if the IAF EBITDA
Statement reflects EBITDA that is equal to or less than $300,000 over the amount
of the EBITDA reflected in the EBITDA Statement for such Earn-Out Period, but
greater than the amount of the EBITDA reflected in such EBITDA Statement, then
EBITDA for such Earn-Out Period shall be deemed to be equal to (A) the sum of
(1) the EBITDA reflected
<PAGE>
in the EBITDA Statement and (2) the EBITDA reflected in the IAF EBITDA Statement
divided by (B) two, and AHG and the Executive Shareholders, on a joint and
several basis, shall bear all the fees and disbursements of the Independent
Accounting Firm in respect of its services under this Section 3.3 for the
Earn-Out Period at issue; and (iii) if the IAF EBITDA Statement reflects EBITDA
that is equal to or less than the amount of the EBITDA reflected in the EBITDA
Statement for such Earn-Out Period, then EBITDA for such Earn-Out Period shall
be deemed to be equal to the EBITDA reflected in the IAF EBITDA Statement, and
AHG and the Executive Shareholders, on a joint and several basis, shall bear all
the fees and disbursements of the Independent Accounting Firm in respect of its
services under this Section 3.3 for the Earn-Out Period at issue.
(c) Year 1 Adjustment/Year 1 Earn-Out Calculation.
(1) In the event the EBITDA for the Year 1 Earn-Out Period
calculated pursuant to Section 3.3(b)above (the "Year 1 EBITDA") is less than
$10,000,000, then the Year 1 Adjustment is the amount equal to seven multiplied
by the difference between the Year 1 EBITDA and $10,000,000.
(2) In the event the Year 1 EBITDA is equal to or less than the Year
1 Threshold and equal to or greater than $10,000,000, then the Year 1 Adjustment
is $0.00.
(3) In the event the Year 1 EBITDA is greater than the Year 1
Threshold, then the Year 1 Earn-Out is the amount equal to six multiplied by the
difference between the Year 1 EBITDA and the Year 1 Threshold.
(d) Year 2 Adjustment/Year 2 Earn-Out Calculation.
(1) In the event the EBITDA for the Year 2 Earn-Out Period
calculated pursuant to Section 3.3(b) above (the "Year 2 EBITDA") is equal to or
less than the Year 2 Threshold, then the Year 2 Adjustment is the amount equal
to the sum of (i) six multiplied by the difference between the Year 2 Threshold
and the greater of (x) $11,000,000 or (y) the Year 2 EBITDA, plus (ii) the
amount equal to seven multiplied by the amount, if any, by which the Year 2
EBITDA is less than $10,000,000; provided, however, that the Year 2 Adjustment
will be $0.00 if the Year 2 EBITDA is equal to or greater than $10,000,000 but
less than or equal to $11,000,000.
(2) In the event the Year 2 EBITDA is greater than the Year 2
Threshold, then the Year 2 Earn-Out is the amount equal to six multiplied by the
difference between the Year 2 EBITDA and the Year 2 Threshold; provided,
however, that the Year 2 Earn-Out will be $0.00 if the Year 2 EBITDA is equal to
or greater than $10,000,000 but less than or equal to $11,000,000.
(e) Year 3 Adjustment/Year 3 Earn-Out Calculation.
<PAGE>
(1) In the event the EBITDA for the Year 3 Earn-Out Period
calculated pursuant to Section 3.3(b) above (the "Year 3 EBITDA") is equal to or
less than the Year 3 Threshold, then the Year 3 Adjustment is the amount equal
to the sum Qf (i) four multiplied by the difference between Year 3 Threshold and
the greater of (x) $11,000,000 or (y) the-Year 3 EBITDA, plus (ii) the amount
equal to seven multiplied by the amount, if any, by which the Year 3 EBITDA is
less than $10,000,000; provided, however, that the Year 3 Adjustment will be
$0.00 if the Year 3 EBITDA is equal to or greater than $10,000,000 but less than
or equal to $11,000,000.
(2) In the event the Year 3 EBITDA is greater than the Year 3
Threshold, then the Year 3 Earn-Out is the amount equal to four multiplied by
the difference between the Year 3 EBITDA and the Year 3 Threshold; Provided,
however, that the Year 3 Earn-Out will be $0.00 if the Year 3 EBITDA is equal to
or greater than $10,000,000 but less than or equal to $11,000,000.
Section 3.4 Payment of Adjustment and Earn-Out: Distribution of
Escrow. The Year 1 Adjustment or Year 1 Earn-Out, Year 2 Adjustment or Year 2
Earn-Out and Year 3 Adjustment or Year 3 Earn-Out, if any, shall be paid within
5 Business Days of final determination of EBITDA for the applicable Earn-Out
Period pursuant to Section 3.3(b) and shall be paid to the Buyer or the Escrow
Agent, as the case may be, in the following manner:
(a) Year 1 Adjustment/Year 1 Earn-Out.
(1) In the event the Year 1 Adjustment is calculated pursuant to
Section 3.3(c)(1) above, then the Escrow Agent shall deliver to Buyer from the
Escrow Funds an amount equal to the Year 1 Adjustment, together with the
interest or earnings thereon as set forth in Section 3.4(d).
(2) In the event the Year 1 Earn-Out is calculated pursuant to
Section 3.3(c)(3) above, the Buyer shall pay to the Escrow Agent the Year 1
Earn-Out in cash by wire transfer of immediately available funds, which shall be
held by the Escrow Agent as part of the Escrow Funds. Upon receipt by the Escrow
Agent of the Year 1 Earn-Out, the Escrow Agent shall then deliver to AHG, on
behalf of the Sellers, an amount equal to one-third of the principal of the
Escrow Funds, together with the interest or earnings thereon as set forth in
Section 3.4(d).
(b) Year 2 Adjustment/Year 2 Earn-Out.
(1) In the event the Year 2 Adjustment is calculated pursuant to
Section 3.3(d)(1) above, then the Escrow Agent shall deliver to the Buyer from
the Escrow Funds an amount equal to the Year 2 Adjustment, together with the
interest or earnings thereon as set forth in Section 3.4(d).
(2) In the event the Year 2 Earn-Out is calculated pursuant to
Section 3.3(d)(2) above, then the Buyer shall pay to the Escrow Agent the Year 2
Earn-Out in cash by wire transfer of immediately available funds, which shall be
held by the Escrow Agent as part of the Escrow Funds. Upon receipt by the Escrow
Agent of the Year 2 Earn-Out, the Escrow Agent shall then
<PAGE>
deliver to AHG, on behalf of the Sellers, an amount equal to one-half of the
principal of the Escrow Funds, together with the interest or earnings thereon as
set forth in Section 3.4(d).
(c) Year 3 Adjustment/Year 3 Earn-Out.
(1) In the event the Year 3 Adjustment is calculated pursuant to
Section 3.3(e)(1) above, then the Escrow Agent shall deliver to the Buyer from
the Escrow Funds an amount equal to the Year 3 Adjustment, together with the
interest or earnings thereon as set forth in Section 3.4(d). Any Escrow Funds
remaining after distribution of the Year 3 Adjustment to the Buyer shall be
disbursed to AHG, on behalf of the Sellers, promptly after disbursement of the
Year 3 Adjustment, together with interest or earnings thereon, to the Buyer.
(2) In the event the Year 3 Earn-Out is calculated pursuant to
Section 3.3(e)(2) above, then the Buyer shall pay to AHG, on behalf of the
Sellers, the Year 3 Earn-Out in cash by wire transfer of immediately available
funds, and the Escrow Agent shall transfer the Escrow Funds to AHG, on behalf of
the Sellers.
(d) Distributions of Interest or Earnings on the Escrow Funds.
Interest or other earnings on the Escrow Deposit and additional amounts paid by
the Buyer to the Escrow Agent pursuant to this Section 3.4 shall be disbursed
prorate to the recipient of principal held in the Escrow Funds. For income tax
purposes, it shall be assumed that the Sellers will be entitled to receive all
interest and other earnings on the principal amounts held in the Escrow Fund and
the Buyer and AHG agree to direct the Escrow Agent pursuant to joint
instructions to disburse to AHG, on behalf of the Sellers, an amount from the
Escrow Funds necessary for the Sellers to pay their federal income tax liability
on said interest and earnings, assuming for purposes hereof an effective tax
rate of 31%. The amount of any previous distributions for taxes made to AHG, on
behalf of the Sellers, shall be taken into account in the event that
disbursements from the Escrow Funds are later made to the Buyer and appropriate
adjustments will be made in accordance with joint instructions from the Buyer
and AHG to the Escrow Agent.
(e) Limitations on Purchase Price Adjustments/ EarnOuts.
Notwithstanding anything to the contrary contained in this Section 3, in no
event shall the Purchase Price, as adjusted pursuant to the provisions of
Sections 3.3 and 3.4, be greater than $110,000,000 nor less than $50,000,000.
(f) Adjustments in Excess of Escrow Funds. In the event that the
Adjustment for any Earn-Out Period should exceed the amount of the remaining
Escrow Funds, the amount of such excess shall be applied as a credit in favor of
the Buyer and shall be deducted from the amount otherwise payable by the Buyer
as the Year 2 Earn-Out and Year 3 Earn-Out, as applicable.
Section 3.5 Prorations and Other Adjustments.
<PAGE>
(a) All revenues and expenses arising from the business and
operations of the Businesses, including without limitation business and license
fees (and any retroactive adjustments thereof), utility charges, property and
equipment rentals, real and personal property Taxes and assessments, and similar
prepaid and deferred items shall be prorated between the Buyer and the Sellers
in accordance with the principle that the Sellers shall receive all revenues and
all refunds and shall be responsible for all expenses, payables, costs,
liabilities and obligations allocable to the conduct and operations of the
Businesses for the period on or prior to the Closing Date, and the Buyer shall
receive all revenues and be responsible for all expenses, payables, costs,
liabilities and obligations allocable to the conduct and operations of the
Businesses for the period after the Closing Date; provided, however, that the
parties shall allocate any real property Tax in accordance with Section 164(d)
of the Code. The Buyer and the Sellers shall deliver a statement setting forth
such prorations at the time of making any such proration payment.
Notwithstanding the foregoing, there shall be no proration with regard to, and
the Sellers shall remain solely liable with respect to, any Excluded Liabilities
and any assets not included in the Purchased Property.
(b) Any adjustments and prorations pursuant to this Section 3.5
will, insofar as feasible, be determined and paid on the Closing Date, with
final settlement and payment by the appropriate party or parties occurring no
later than 30 days after the actual amount becomes known.
SECTION 4. CLOSING.
The closing hereunder (the "Closing") shall take place on the first
practicable date after all required regulatory and other approvals have been
obtained and after the satisfaction or waiver of all other conditions precedent
set forth in Sections 8 and 9, but in any event no later than November 30, 1997,
or such other date as Buyer and AHG shall mutually agree, and shall be held at
the offices of Broad and Cassel, Miami, Florida, at 9:00 a.m. or at such other
place and time as may be mutually agreed to by the Buyer and AHG (the "Closing
Date"). Notwithstanding the actual time the following steps are taken on the
Closing Date, the parties hereto agree that the Closing shall be effective and
deemed for all purposes to have occurred as of 12:01 a.m. local time on the date
immediately following the Closing Date.
At the Closing, the parties agree to take the following steps in the
order listed below (provided, however, that upon their completion all of these
steps shall be deemed to have occurred simultaneously):
(a) Each of the Sellers and the Buyer shall deliver to the other a
copy of the resolutions of its Board of Directors and, in the case of each
Seller, its shareholders or partners, as the case may be, authorizing the
transactions contemplated by this Agreement as to such Seller, certified in each
case by its Secretary or Assistant Secretary or partner, as the case may be;
(b) Each of the Sellers and the Buyer shall deliver to the other a
good standing certificate of such party (which is dated not more than 15 days
prior to the Closing);
(c) Each of the Sellers shall deliver to the Buyer instruments
reasonably
<PAGE>
satisfactory to the Buyer and its counsel for such Seller to assign the
Purchased Property (including, without limitation, the Cash and Cash
Equivalents, which, at the election of the Buyer, shall be either by bank check
or wire transfer of immediately available funds) to the Buyer, and the Buyer
shall deliver to the Sellers the Assumption Agreement;
(d) Each of the Sellers shall deliver to the Buyer, or make
available at the locations specified by the Buyer prior to the Closing, the
originals of the Files and Records, Licenses and Permits and Contracts, together
with originals of any required consents to assignment;
(e) Each of the Sellers and their Affiliates shall have delivered to
the Buyer all other agreements, documents and certificates required by this
Agreement to be delivered by them to the Buyer at or before the Closing;
(f) Each of the Sellers and the Buyer shall deliver to each other
certificates by appropriate officers of such parties certifying the fulfillment
of the conditions set forth in Section 8, and, in the case of the Buyer, the
fulfillment of the conditions set forth in Section 9;
(g) The Buyer shall pay the Closing Cash Installment to the Sellers
and the Escrow Deposit to the Escrow Agent in accordance with Section 3.1, and
each of the Sellers, the Buyer and the Escrow Agent shall execute and deliver
the Escrow Agreement and documents acknowledging receipt from the other,
respectively, of the Purchased Property, the Closing Cash Installment and the
Escrow Deposit. ~
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND THE EXECUTIVE
SHAREHOLDERS.
Each of the Sellers and each of the Executive Shareholders, on a
joint and several basis, hereby represents and warrants to, and covenants with,
the Buyer as follows, each of which is relied upon by the Buyer in consummating
the transactions contemplated hereby regardless of any other investigation made
or information obtained by the Buyer; provided, however, that the
representations, warranties and covenants of each Executive Shareholder in this
Section 5 shall be made only as to himself and to each Seller in which such
Executive Shareholder owns any shares or partnership interests, as the case may
be:
Section 5.1 Organization: Qualification to Do Business:
Subsidiaries.
(a) Each of the Sellers (except FSN), and Florida Specialty Network,
Inc. ("FSN Inc."), is a corporation duly organized, validly existing and in good
standing under the laws of the State of Florida, and is duly qualified as a
foreign corporation in each jurisdiction in which it is required to be so
qualified, and has all requisite corporate power and authority to own its
properties and assets and to conduct its business as now conducted. The Sellers
have furnished the Buyer true, complete and correct copies of the Articles of
Incorporation and By-laws of each Seller (except FSN), and FSN Inc., with all
amendments thereto. Schedule 5.1(a) sets forth as to
<PAGE>
each Seller the name and security ownership of each holder of equity or any
right to acquire equity of such Seller.
(b) FSN is a limited partnership duly organized, validly existing
and in good standing under the laws of the State of Florida, and is duly
qualified as a foreign limited partnership in each jurisdiction in which it is
required to be so qualified, and has all partnership powers necessary to own its
properties and conduct its business as now conducted. The Sellers have furnished
the Buyer true, complete and correct copies of FSN's limited partnership
agreement, with all amendments thereto (the "FSN Limited Partnership
Agreement"). FSN's sole general partner, FSN Inc. has all requisite corporate
power and authority to fulfill its duties as the sole general partner of FSN in
accordance with the FSN Limited Partnership Agreement. Schedule 5.1(b) sets
forth the name and ownership interest of each partner of FSN and of each person
who has a right to acquire any interest in FSN.
(c) None of the Sellers has any direct or indirect Subsidiaries, or
has made any advances to or investments in, or owns any securities of or other
interests in, any Person.
(d) Each Shareholder has full power to vote his or her shares
without obtaining the consent or approval of any Person.
Section 5.2 Authorization and Validity of Agreement. Each Seller has
all requisite corporate (or, in the case of FSN, partnership) power and
authority to enter into this Agreement and to carry out its obligations
hereunder. Except for FSN, the execution and delivery of this Agreement and the
performance of each Seller's obligations hereunder have been duly authorized by
all necessary corporate action by the Board of Directors and shareholders of
such Seller, and no other corporate or shareholder proceedings on the part of
such Seller are necessary to authorize such execution, delivery and performance.
The execution and delivery of this Agreement and the performance of FSN's
obligations hereunder have been duly authorized by all necessary partnership
action on behalf of FSN, and by FSN Inc., as sole general partner on behalf of
FSN, and no other proceedings on the part of FSN or FSN Inc. are necessary to
authorize such execution, delivery and performance. This Agreement has been duly
executed and delivered by each Seller and each Executive Shareholder and
constitutes its or his legal, valid and binding obligation, enforceable against
it or him in accordance with its terms.
Section 5.3 No Conflict or Violation. The execution, delivery and
performance by each Seller and each Executive Shareholder of this Agreement (a)
does not and will not, as of the violate of the Closing Date, conflict with any
Provision of the Articles of Incorporation or By-laws (or, in the case
Certificate of Limited Partnership or the FSN Limited Agreement) of such Seller,
(b) does not and, as of Closing Date, will not violate any order, judgment or
decree of any court, arbitrator or other Governmental Authority or, except as
set forth on Schedule 5.19, to the knowledge of each Seller and each Executive
Shareholder, any provision of law, (c) as of the date hereof, except as set
forth on Schedule 5.3 does not, and as at the Closing Date will not, violate or
result in a breach of or constitute (with due notice or lapse of time or both) a
default under, or give rise to a right to terminate or modify, any Contract or
any other contract, lease, loan agreement, mortgage, security agreement or other
agreement or instrument (whether or not
<PAGE>
the same is in writing) to which any Seller or Shareholder is a party or by
which it or any of them is bound or to which any of its or their properties or
assets is subject, and (d) will not result in the creation or imposition of any
Encumbrance upon any of the Purchased Property or accelerate any indebtedness of
any Seller to which the Purchased Property may be bound, or result in the
cancellation, modification, revocation or suspension of any of the Licenses and
Permits.
Section 5.4 Consents and Approvals. Schedule 5.4 sets forth a true
and complete list of (i) each consent, waiver, authorization or approval of any
Governmental Authority, or of any other Person, and (ii) to the knowledge of
each Seller and~each Executive Shareholder, each declaration to or filing or
registration with any such Governmental Authority that is required in connection
with the execution and delivery of this Agreement by each Seller or the
performance by each Seller of its obligations hereunder.
Section 5.5 Financial Statements and Prolections.
(a) The Sellers have heretofore delivered to the Buyer true and
complete copies of the Financial Statements, accompanied in the case of the
Audited Financial Statements by reports thereon from the Sellers' independent
certified public accountants. The Audited Financial Statements and the
Management Prepared Financial Statements (i) were prepared in accordance with
GAAP applied on a consistent basis, (ii) present fairly the financial condition,
results of operation and cash flows of each Business (and, in the case of the
Audited Financial Statements presenting combined financial statements, the
Businesses taken as a whole) as of their respective dates, (iii) are complete,
correct and in accordance with the books of account and records of each Seller,
(iv) can be legitimately reconciled with the financial statements and the
financial records maintained and the accounting methods applied by each Seller
for federal income tax purposes, and (v) in the case of the Audited Financial
Statements, contain all entries recommended by the Sellers' independent
certified public accountants. Except as provided in the Audited Financial
Statements or the Management Prepared Financial Statements, or as fully
disclosed in Schedule 5.5, no Seller has any liabilities or obligations (whether
accrued, absolute, contingent, whether due or to become due or otherwise) which
might be or become a charge against the Purchased Property, including any "loss
contingencies" considered "probable" or "reasonably possible" within the meaning
of the Financial Accounting Standard Board's Statement of Financial Accounting
Standards No. 5, except trade payables and similar liabilities and obligations
incurred in the ordinary and regular course of business since the dates of the
Audited Financial Statements and the Management Prepared Financial Statements,
respectively. The Audited Financial Statements were audited by Rachlin, Cohen &
Holtz. The Projections are reasonable in light of the historical operations and
results of the Businesses, represent each Seller's management's good faith best
estimate of the future operating performance of such Seller's Business, and were
prepared on an accounting basis consistent with historical earnings reports of
each Seller as set forth in the Financial Statements.
(b) The most recent Management Prepared Financial Statements as at
the date hereof reflect all adjustments, which consist only of normal accruals,
including provision for accrued liabilities, including vacation and sick,
medical claims and extended reporting endorsement for each of the Sellers
(including all incurred but not reported ("IBNR") amounts).
<PAGE>
Section 5.6 Absence of Certain Changes or Events.
(a) Except as set forth in Schedule 5.6(a), since January 1, 1997:
(1) there has not been any material adverse change in the assets,
properties, business, operations, prospects, net income or condition (financial
or other) of any Business, no event has occurred and, to the knowledge of each
Seller and each Executive Shareholder, no factor or condition exists that would
reasonably be likely to result in any such change;
(2) there has not been any material loss, damage, destruction or
other casualty to the Purchased Property (whether or not insured);
(3) there has been no adverse change in the amount of total assets
set forth on the December 31, 1996 Combined Balance Sheet except for reductions
attributable to amortization and/or depreciation on a basis consistent with past
practice as reflected in the Audited Financial Statements or the Management
Prepared Financial Statements;
(4) there has not been any change in any method of accounting or
accounting practice of any Business or any Seller relating to its Business;
(5) there has not been a loss of the employment, services or
benefits of any Consultants or Employees, or of any Network Physicians (A) in
excess of 8\ of the number of Network Physicians engaged in respect of any
single Third Party Payor Agreement, or (B) which would cause any Seller to be in
breach of any Third Party Payor Agreement to which it is a party; and
(6) there has not been any default, breach or termination of, or any
notification of any of the foregoing, or any modification or requested
modification that would be materially adverse to any Seller, in respect of, any
Third Party Payor Agreement or any Contract;
(b) Since January 1, 1997, each Seller has operated its Business in
the ordinary course of its business consistent with past practice (including
without limitation by keeping in full force and effect insurance comparable in
amount and scope to the coverage maintained by it (or on behalf of it) at such
date), and, except as set forth in Schedule 5.6(b) hereto, no Seller has:
(1) permitted any of the Purchased Property (real or personal,
tangible or intangible) to be sold, licensed or subjected to any Encumbrance
(other than a Permitted Encumbrance) except in dispositions of inventory or of
wornout or obsolete equipment for fair or reasonable value in the ordinary
course of business consistent with past practices, canceled any debts or claims,
or waived or released any rights material to such Business relating to the
operations of such Business, or defaulted on any material obligation relating to
the operations of its Business;
(2) failed to exercise all Best Efforts to maintain and preserve for
the Buyer its
<PAGE>
relationships with customers, suppliers, managers, Employees, Network
Physicians, Consultants, parties to Third Party Payor Agreements and actively
sought prospective parties to Third Party Payor Agreements (including, without
limitation PruCare), active patients and others having business relationships
with the Business;
(3) acquired any assets or properties, or entered into any other
transaction, other than in the ordinary course of business consistent with past
practice and which does not require payment of aggregate amounts exceeding
$10,000;
(4) made or committed to make any capital expenditure other than
ordinary repairs or maintenance;
(5) paid, lent or advanced any amount to, or sold, transferred or
leased any properties or assets to, or entered into any agreement or arrangement
with, any of its Affiliates;
(6) issued, granted or sold any capital stock, partnership
interests, options, or other right to purchase any equity interests in such
Seller, or issued any security convertible into such capital stock, partnership
interests or equity interests, or entered into any subscription contract or
other arrangements obligating such Seller to issue or sell any of the foregoing,
or redeem, purchase or otherwise acquire any such capital stock or equity
interests;
(7) made any change in any method of accounting or accounting
principle, method, estimate or practice except for any such change required by
reason of a concurrent change in GAAP, or written down the value of any
inventory or written off as uncollectible any accounts receivable except in the
ordinary course of business consistent with past practice;
(8) settled, released or forgiven any claim or litigation or waived
any right thereto;
(9) made, entered into, modified, amended or terminated any
Contract, including any Third Party Payor Agreement or bid with respect to any
of the Businesses, that could be materially adverse to any Seller;
(10) deferred the payment of any expense or liability, or prepaid
any expense or liability, in anticipation of the consummation of the
transactions contemplated hereby;
(11) accelerated the collection of any accounts receivable or any
other amounts owed to it;
(12) decreased by a material amount the quantity of Equipment and
Machinery or Inventory maintained for use in its Business;
(13) failed to discharge or satisfy any Encumbrance or pay or
satisfy any obligation or liability (whether absolute, accrued, contingent or
otherwise) arising from the operation of its Business in a timely manner, other
than liabilities being contested in good faith and for which adequate reserves
have been provided, each of which is set forth on Schedule
<PAGE>
5.6(b)(13) hereof, and Permitted Encumbrances;
(14) failed to continue to maintain the Purchased Property in
accordance with past practice; or
(15) entered into any agreement or made any commitment to do any of
the foregoing or taken any other action that would cause any of the
representations and warranties made by any Seller in this Agreement not to
remain true and correct.
(c) Except as set forth on Schedule 5.6(c):
(1) from and after July 1, 1997, no Seller has declared, set aside,
paid or made any dividend or other distribution or payment (whether in cash,
stock, interests, equity or property) with respect to, or purchased or redeemed,
any shares of the capital stock or any partnership interests or other equity
interests (including profit sharing plans or distributions relating to such
Seller's financial results) of such Seller, or otherwise withdrawn any cash from
such Seller for the direct or indirect benefit of the holders of any such shares
or interests or for any third party, or made or agreed to make any other
payments to any Shareholder or any of his or her Affiliates; provided, however,
that nothing set forth in this Section 5.6(c)shall prohibit or require
disclosure of cash distributions to the extent that after giving effect to such
cash distributions the Sellers still have at least $1,000,000 in Unrestricted
Cash in the aggregate;
(2) from and after July 1, 1997, no Seller has entered into any new
(or amended any existing) employee benefit plan, program or arrangement or any
new (or amend any existing) employment, independent contractor, severance or
consulting agreement, granted any general increase in the compensation of
officers or Employees (including any such increase pursuant to any bonus,
pension, profit-sharing or other plan or commitment) or granted any increase in
the compensation payable or to become payable to any Network Physician,
Consultant or Employee, except (i) in accordance with preexisting contractual
provisions or consistent with past practice, (ii) increases on an annual basis
for the 1997 calendar year up to a maximum amount of five percent in excess of
such Person's aggregate compensation for the 1996 calendar year and (iii) in
respect of the Executive Shareholders, as permitted in Section 7.2(i) below; and
(3) from and after July 1, 1997, no Seller has made or agreed to
make any payment or incurred or agreed to incur any obligation or liability
(whether absolute, accrued, contingent or otherwise) with respect to any
Contract except in accordance with the terms of such Seller's Contracts as in
effect on June 30, 1997, or in accordance with the terms of Contracts which such
Seller has modified or entered into after June 30, 1997 with the prior written
consent of the Buyer.
Section 5.7
Tax Matters.
(a) The Sellers have provided the Buyer a true and complete copy of
all Tax
<PAGE>
Returns filed by each Seller since January 1, 1994.
(b) Except as set forth in Schedule 5.7(b), all Tax Returns required
to be filed before the Closing Date in respect of each Seller have been filed on
a timely basis, and each Seller has paid when due, Taxes required to be paid in
respect of the periods covered by such Tax Returns and has adequately reserved
for the payment of all Taxes with respect to periods ended on or before the
Closing Date for which tax returns have not yet been filed. All Taxes of each
Seller have been paid or adequately provided for, there are not any proposed
additional Tax assessments against any Seller not adequately provided for in the
June 30, 1997 Combined Balance Sheet. There are no unpaid Taxes which are or
could become an Encumbrance on the Purchased Property. No Tax liens have been
filed against the Purchased Property of any Seller and there are no audits
pending with respect to any Seller with any Governmental Authority. The charges,
accruals and reserves with respect to Taxes on the books of each Seller are
adequate (as determined in accordance with GAAP). All Taxes that any Seller is
or was legally required to withhold or collect have been duly withheld or
collected and, to the extent required, have been paid to the proper Governmental
Authority.
(c) To the knowledge of each Seller and each Executive Shareholder,
Schedule 5.7(c) sets forth each state and locality with jurisdiction to impose
any Tax on the Purchased Property or the Business at any time prior to the
Closing Date. Each of the Sellers represent that they have properly and timely
filed all Tax Returns required to be filed in such jurisdictions on or before
the Closing Date.
Section 5.8 Absence of Undisclosed Liabilities. None of the Sellers
has any indebtedness or liability, absolute or contingent, known or unknown
relating to its Business, which is not shown or provided for on the most recent
Management Prepared Financial Statements, other than liabilities as shall have
been incurred or accrued in the ordinary course of business since the date of
such Management Prepared Financial Statements, and which are consistent in
amount and type with those incurred during the year ended December 31, 1996.
Except as shown in the most recent Management Prepared Financial Statements,
none of the Sellers is directly or indirectly liable upon or with respect to (by
discount, repurchase agreements or otherwise), or obliged in any other way to
provide funds in respect of, or to guarantee or assume, any debt, obligation or
dividend of any Person in connection with its Business, except endorsements in
the ordinary course of business in connection with the deposit, in banks or
other financial institutions, of items for collection.
Section 5.9 Accounts Receivable; Banking.
(a) All Accounts Receivable (i) reflected on the June 30, 1997
Combined Balance Sheet or (ii) acquired by each Business after June 30, 1997
have been collected or are (or will be) current and collectible in amounts not
less than the aggregate amount thereof (net of reserves established in
accordance with prior practice) carried or to be carried on the books of each
Business, are not subject to any counterclaims or set-offs, and have arisen only
in the ordinary course of business in accordance with the customary credit
policies of each of the Sellers.
<PAGE>
(b) Schedule 5.9(b) contains a complete list of all of each Seller's
bank accounts (including name, location, and account number) and all lines of
credit owned or used by each Seller, and the names of all persons with authority
to withdraw funds from, or execute drafts or checks on, each such account.
Section 5.10 Real Property; Leases.
(a) None of the Sellers, the Shareholders or their respective
Affiliates owns, directly or indirectly, any real property that is used in its
Business except as set forth on Schedule 5.10(a).
(b) Schedule 5.10(b) sets forth a list of all properties in which
any Seller has a leasehold interest and which is used in connection with its
Business (each, a "Lease" and collectively, the "Leases"; the property covered
by such Leases is referred to herein as the "Leased Real Property"). None of the
Leased Real Property consists of a Lease of an entire building.
(c) Except as set forth in Schedule 5.10(c), no Lease has been
modified or amended in writing. No party to any Lease has given any Seller
written notice of or made a claim with respect to any breach or default.
(d) Except as set forth in Schedule 5.10(d), none of the Leased Real
Property is subject to (i) any sublease, license or other agreement granting to
any person or entity any right to the use, occupancy or enjoyment of such
property or any portion thereof or (ii) to the knowledge of each Seller and each
Executive Shareholder, any restrictive covenant, zoning ordinance, building
code, use or occupancy restriction that restricts the use of such Leased Real
Property in connection with the Businesses.
(e) To the knowledge of each Seller and each Executive Shareholder,
the plumbing, electrical, heating, air conditioning, elevator, ventilating and
all other mechanical or structural systems for which any Seller is responsible
under the Leases in the buildings or improvements are in good working order and
condition, and the roof, basement and foundation walls of such buildings and
improvements for which such Seller is responsible under the Leases are in good
condition and free of leaks and other defects. To the knowledge of each Seller
and each Executive Shareholder, all such mechanical and structural systems and
such roofs, basement and foundation walls for which others are responsible under
said Leases are in good working order and condition and free of leaks and other
defects. To each Seller's and each Executive Shareholder's knowledge, there is
no asbestos-containing material in any of the buildings or facilities on the
Leased Real Property or any polychlorinated biphenyls in any hydraulic oils,
transformers, capacitors or other electrical equipment, nor does any Seller or
Executive Shareholder operate any underground or aboveground tanks on the Leased
Real Property.
Section 5.11 Equipment and Machinery. Schedule 5.11 sets forth a
complete and correct list and brief description of each item of Equipment and
Machinery having an original purchase cost or aggregate lease cost exceeding
$2,500. Each Seller has good title, free and clear
<PAGE>
of all title defects and objections, and Encumbrances (other than the
Encumbrance of current property taxes and assessments not yet due and payable,
if any), to the Equipment and Machinery owned by it. Except as set forth on
Schedule 5.3, each Seller holds good and transferable leaseholds in all of the
Equipment and Machinery leased by it, in each case under valid and enforceable
leases. No Seller is in default with respect to any item of Equipment or
Machinery leased by it, and no event has occurred that constitutes or with due
notice or lapse of time or both may constitute a default under any lease
thereof. To the knowledge of each Seller and each Executive Shareholder, the
Equipment and Machinery is sufficient and adequate to carry on the Business of
each Seller as presently conducted and, to the knowledge of each Seller and each
Executive Shareholder, all material items thereof have generally been maintained
in satisfactory operating condition and repair, ordinary wear and tear excepted.
Section 5.12 Intellectual Property; Intangible Assets.
(a) Schedule 5.12(a) sets forth a complete and correct listing of
the Intellectual Property. Except as described in Schedule 5.12, all
Intellectual Property listed therein is owned by the Sellers, free and clear of
all Encumbrances and is in good standing and is not known to be the subject of
any challenge. As of the date hereof, except as described in Schedule 5.12(a),
there are no unresolved claims made and there has not been communicated to any
of the Sellers the threat of any claim that the holder of such Intellectual
Property is in violation or infringement of any service mark, patent, trademark,
trade name, trademark or trade name registration, copyright, copyright
registration or other intellectual property of any other Person. Each Seller is
the owner of the Intellectual Property and other proprietary and trade rights
necessary for the conduct of its Business as now conducted, and without any
known conflict with the rights of others, and no Seller has knowingly forfeited
or otherwise relinquished any such Intellectual Property or other proprietary
right necessary for the conduct of its Business as conducted on the date hereof.
Each Seller owns or has the right to use all computer software, software systems
and databases and all other information systems included in the Purchased
Property and has the right to transfer title thereto or such rights of the use
thereof to the Buyer free and clear of any Encumbrances. All of the Intellectual
Property listed on Schedule 5.12(a) are subsisting and have not been abandoned,
and all required annuities, renewal fees, maintenance fees, royalty payments,
amendments and/or other filings or payments which are necessary to preserve and
maintain such Intellectual Property have been filed and/or made.
(b) Schedule 5.12(b) sets forth a true and complete list of all of
the Intangible Assets. There is no restriction affecting the use of any of the
Intangible Assets, and no license has been granted with respect thereto. Each of
the Intangible Assets is valid and in good standing, is not currently being
challenged, is not involved in any pending or, to the knowledge of each Seller
and each Executive Shareholder, threatened administrative or judicial
proceeding, and, to the knowledge of each Seller and each Executive Shareholder,
does not conflict with any rights of any other Person. Each Seller's rights in
and to the Intangible Assets are sufficient and adequate in all respects to
permit the conduct of its Business as now conducted and none of the products or
operations of such Business involves any infringement of any proprietary right
of any other Person.
<PAGE>
Section 5.13 Licenses and Permits.
(a) Schedule 5.13(a) sets forth a true and complete list of all
licenses, permits, franchises, authorizations and approvals issued or granted to
each Seller with respect to its Business by any Governmental Authority (the
"Licenses and Permits"), and all pending applications therefor. Such list, where
applicable, specifies the date issued, granted or applied for, the expiration
date and the current status thereof. Each License and Permit has been duly
obtained, is valid and in full force and effect, and is not subject to any
pending or threatened administrative or judicial proceeding to revoke, cancel,
suspend or declare such License and Permit invalid in any respect. To the
knowledge of each Seller and each Executive Shareholder, no license, permit,
franchise, authorization or approval by or from any Governmental Authority,
other than the Licenses and Permits, is required to permit the continued lawful
conduct of the Businesses in the manner now conducted and none of the operations
of the Businesses are being conducted in a manner that violates any of the terms
or conditions under which any License and Permit was granted. Except as set
forth in Schedule 5.13(a), no such License and Permit will in any way be
affected by, or terminate or lapse by reason of, the transactions contemplated
by this Agreement.
(b) To the knowledge of each Seller and Executive Shareholder, no
Network Physician ever has (i) had his/her license to practice medicine in any
jurisdiction denied, surrendered, limited, suspended, revoked or subject to
probationary conditions or is subject to any pending proceedings regarding any
of the foregoing, (ii) had his/her Federal or State Drug Enforcement Agency
controlled substance authorization denied, revoked, suspended, reduced or not
renewed or has been subject to institution of, or is subject to any pending or
threatened proceedings regarding any of the foregoing, or (iii) been the subject
of administrative sanctions or been suspended from or lost eligibility for
participating in Medicare, Medicaid or other medical insurance programs offered
by any Governmental Authority or any non-governmental body or is subject to any
pending or threatened proceedings regarding any of the foregoing.
Section 5.14 Litigation. Except as set forth in Schedule 5.14, there
are no claims, actions, suits, proceedings, labor disputes or investigations
pending or, to the knowledge of each Seller and each Executive Shareholder,
threatened, before any Governmental Authority, or before any arbitrator or
mediator of any nature, domestic or foreign, brought by or against any Seller or
any of its officers, directors, employees, agents or Affiliates involving,
affecting or relating to its Business, the Purchased Property or the
transactions contemplated by this Agreement, nor is any basis known to any
Seller or any Executive Shareholder for any such action, suit, proceeding or
investigation. Schedule 5.14 sets forth a list and a summary description of all
such pending actions, suits, proceedings, disputes or investigations. Neither
any Business nor any Purchased Property is subject to any order, writ, judgment,
award, injunction or decree of any Governmental Authority or arbitrator,
domestic or foreign, that affects any Businesses or Purchased Property, or that
would or might interfere with the transactions contemplated by this Agreement.
Section 5.15 Professional Liability Claims.
(a) Except as set forth in Schedule 5.15(a), to the knowledge of
each Seller and
<PAGE>
each Executive Shareholder, in respect of Network Physicians: (i) there is no
notice, demand, claim, action, suit, inquiry, hearing, proceeding, notice of
violation or investigation of a civil, criminal or administrative nature before
any Governmental Authority or before any arbitrator or mediator of any nature
against or involving any professional services performed in connection with or
on behalf of any Business, or class of claims or lawsuits involving the same or
similar services performed in connection with or on behalf of any Business
which, in any such case, is pending or, to the knowledge of the Sellers and the
Executive Shareholders, threatened (collectively, "Professional Liability
Claims") and (ii) there has not been any Occurrence (as such term is defined
below).
(b) The term "Occurrence" shall mean any accident, happening or
event which takes place at any time which is caused or allegedly caused by any
such accident, happening or event otherwise involving any professional services
performed in connection with or on behalf of any Business that is likely to
result in a claim or loss.
Section 5.16 Contracts.
(a) Schedule 5.16(a) sets forth a complete and correct list of all
Contracts (as in effect on the date hereof), which list of Contracts constitutes
all the contracts, agreements, understandings or commitments, whether or not the
same are in writing, to which each Seller is a party in connection its Business.
(b) Each Contract is valid, binding and enforceable against the
parties thereto in accordance with its terms, and in full force and effect. Each
Seller has performed all material obligations required to be performed by it
under, and is not in default or delinquent in performance, status or any other
respect (claimed or actual) in connection with any Contract, and no event has
occurred which, with due notice or lapse of time or both, would constitute such
a default. To the knowledge of each Seller and each Executive Shareholder, no
other party to any Contract is in default in respect thereof, and no event has
occurred which, with due notice or lapse of time or both, would constitute such
a default.
(c) Except as set forth in Schedule 5.16(c), with respect to each
Contract, each Seller which is a party thereto has complied in all material
respects with and expects to comply in all material respects with all material
terms thereof, all certifications and representations of such Seller with
respect thereto and all statutes and regulations applicable thereto. By way of
example, and not by way of limitation, "material obligations" or "material
terms" shall include (i) any obligation to comply with rules or regulations
imposed by any party to a Third Party Payor Agreement, whether or not such rules
or regulations are attached to the relevant Contract, (ii) any obligation to
provide most favored pricing terms, (iii) non-competition agreements, (iv)
exclusive service requirements, (v) requirements to report information, or to
furnish reports, (vi) confidentiality obligations, (vii) indemnification
obligations and obligations to maintain insurance, and (viii) any term in
respect of which the failure to observe or comply with would, with due notice or
lapse of time or both, constitute a ground for default or termination.
(d) Each Seller has permitted the Buyer to inspect and review true
and complete
<PAGE>
copies of all of the Contracts to which it is a party (and, in the case of oral
agreements, true and complete written summaries of the material terms of such
oral agreements), all attachments, schedules, exhibits, annexes, all rules,
regulations or other documents referenced in such Contracts, together with and
all amendments and addendums thereto (including any and all oral modifications
to such agreements and all amendments that do not require the consent of any
Seller). Except as set forth in Schedule 5.16(d), each Seller has full legal
power and authority to assign its rights under such Contracts to the Buyer in
accordance with this Agreement, and such assignment will not affect the
validity, enforceability or continuity of any of such Contracts. All consents,
waivers, approvals and authorizations which may be required under the Contracts
with respect to the transactions contemplated hereby are listed on Schedule
5.16(d).
(e) Except as set forth in Schedule 5.16(e), none of the Contracts
that any Seller has with its Network Physicians, Consultants or Employees
provides or requires that (i) any Person other than the aforementioned personnel
and such Seller will be a party to such Contracts (including any party to any
Third Party Payor Agreement), and the assignment of each Seller's agreements
with such Persons to the Buyer does not require the consent or approval of any
party to any Third Party Payor Agreement or any other Person, or (ii) any
compensation or payment be made to any such Person (a "Change of Control
Payment") by reason of (A) the transactions contemplated by this Agreement,
including by reason of the sale of all or substantially all of the assets
relating to the Businesses or (B) the acquisition by any Person of beneficial
ownership of 50` or more of the voting securities of the Buyer or any of its
Affiliates or (C) the merger of the Buyer or any of its Affiliates with and into
another Person.
(f) Set forth in Schedule 5.16(f) is a true and correct schedule
reflecting the monthly capitation fees required to be paid by each party to a
Third Party Payor Agreement to any Seller in accordance with each Third Party
Payor Agreement.
(g) None of the Sellers is required to make any payments to, or to
receive lower capitation fees from, any party to any Third Party Payor Agreement
in accordance with the foregoing provisions or by reason of any other provision
in any Third Party Payor Agreement, and none of the Sellers has any reason to
believe that any such payment or reduction in capitation fees will be required
under the terms of any Third Party Payor Agreement in the foreseeable future.
(h) Except as set forth in Schedule 5.16(h), there are no
non-competition or exclusive service agreements (i) between any Executive
Shareholder, any Seller or their respective Affiliates, and any party to any
Third Party Payor Agreement, that would restrict any such Seller, Executive
Shareholder or Affiliate in the manner in which it conducts, or could conduct,
its Business, or that would restrict the manner in which the Buyer or its
Affiliates conducts, or could conduct, its (or their) businesses, including,
after the Closing, the Businesses or (ii) between any Seller and any Network
Physician, Consultant, Employee or Shareholder, that would restrict any such
Person from performing services for the Buyer or its Affiliates. Each Seller has
previously furnished the Buyer with true, correct and complete copies of all the
agreements (including all amendments thereto) set forth in Schedule 5.16(h).
(i) Except as set forth on Schedule 5.16(i), since June 30, 1997, no
party to any
<PAGE>
Third Party Payor Agreement has terminated or changed significantly, or to the
knowledge of the Sellers and the Executive Shareholders, intends to terminate or
change significantly, its relationship with any of the Businesses.
(j) There has been no material change in the terms of or manner of
administering any of the Contracts since June 30, 1997.
(k) To the knowledge of each Seller and each Executive Shareholder,
no current Network Physician, Consultant, or Employee intends to terminate or
materially change the terms of his agreements with any of the Sellers relating
to its Business.
Section 5.17 Employee Plans and Benefits; Employees and Independent
Contractors.
(a) Except as set forth on Schedule 5.17(a), neither any Seller nor
any member of a "controlled group" (within the meaning of Section 4971(e)(2)(B)
of the Code) that includes a Seller (hereinafter referred to as an "ERISA
Affiliate") is a party to or participates in or has any liability or contingent
liability with respect to:
any "employee welfare benefit plan" or Employee pension plan" (as
those terms are respectively defined in ERISA Sections 3(1)and 3(2)) or a
Multiemployer Plan (referred to collectively as the "Plans"); or
any retirement or deferred compensation plan, incentive compensation
plan, stock plan, unemployment compensation plan, vacation pay, severance pay,
bonus or benefit arrangement, insurance or hospitalization program or any other
fringe benefit arrangements for any employee, director, consultant or agent,
whether pursuant to contract, arrangement, custom or informal understanding,
which does not constitute an "employee benefit plan," as defined in Section 3(3)
of ERISA (referred to collectively as "Compensation Arrangements".
Complete and accurate copies of any such written Plans and
Compensation Arrangements (or related insurance policies), including any
amendments thereto, have been furnished to Buyer, along with copies of any
employee handbooks or similar documents describing such Employee Plans and
Compensation Arrangements. Any unwritten Employee Plans or Compensation
Arrangements also are listed in Schedule 5.17(a), and complete descriptions
thereof have been furnished to Buyer. Except as disclosed in Schedule 5.17(a),
neither Seller nor any ERISA Affiliate-is a party to and or has in effect or to
become effective after the date of this Agreement any plan or arrangement that
will become a Plan or Compensation Arrangement.
(b) Each Plan and Compensation Arrangement has been administered in
compliance with its own terms and in material compliance with the provisions of
ERISA, the Code, the Age Discrimination in Employment Act and any other
applicable Federal or state laws.
(c) No Seller has within the last six (6) years, does or is required
to contribute to any Multiemployer Plan with respect to the Employees, and
neither any or the Sellers nor any
<PAGE>
ERISA Affiliate of any of them has incurred, within the last six (6) years, or
reasonably expect to incur any "withdrawal liability," as defined under Section
4201 et seq. of ERISA.
(d) Except as described in Schedule 5.17(d), with respect to each
Plan and, to the extent applicable, each Compensation Arrangement: (i) each Plan
that is intended to be tax-qualified, and each amendment thereto, is the subject
of a favorable determination letter, and no plan amendment that is not the
subject of a favorable determination letter would affect the validity of a
Plan's letter; (ii) no condition or event exists or is expected to occur that
could subject, directly or indirectly, any assets to any material liability,
contingent or otherwise, or the imposition of any lien under the Code or Title
IV of ERISA.
(e) Attached hereto as Schedules 5.17(e)(i). (ii) and (iii),
respectively, are true and complete lists, as of ten Business Days prior to the
date of this Agreement, of (i) all Network Physicians, (ii) all Consultants, and
(iii) all Employees. Set forth opposite the name of each Employee is such
Employee's employment position title, the base salary, any bonus provisions, any
additional compensation arrangements, all other benefits to which such person is
entitled. Each Seller, for each of the persons who are, or may be deemed,
Employees of such Seller's Business, as listed on Schedule 5.17(e)(iii), has
either paid or adequately provided for the payment of all accrued benefits such
Employees are entitled to receive as of the Closing Date as set forth on
Schedule 5.17(e)(iii), including all accrued vacation, sick or personal time and
benefits due under any Plans.
(f) There are no severance pay, stay or retention bonus,
continuation pay or termination pay arrangements between any Seller and any
officer, director, employee, independent contractor, consultant or Shareholder
thereof, that will become Assumed Liabilities. Each Seller has paid on a current
basis and will continue to pay on a current basis through the Closing Date all
amounts owed to any officer, employee, independent contractor and consultant.
Each Seller has previously permitted Buyer to inspect and review true and
correct copies of all the agreements described in the foregoing sentence. The
Buyer assumes no liability or obligation with respect to, and receives no right
or interest in, any of the employment, consulting or independent contractor
agreements to which any Seller or Affiliate thereof is or was from time to time
a party.
(g) None of the Sellers or the Executive Shareholders has received
notice or has any knowledge (i) of any discrepancy in any application filed with
any Seller at any time by such Network Physician or (ii) that any Network
Physician (whether or not credentialed by any Seller) has been decredentialed by
any party to a Third Party Payor Agreement or otherwise. With respect to each
Network Physician, (i) no regulatory authority has asserted any claim against
any Seller challenging the characterization of such Network Physician as an
independent contractor, and no such assertion is pending, or to each of the
Seller's and Executive Shareholder's knowledge, threatened, and (ii) no
liability exists or is pending or, to each of the Seller's and Executive
Shareholder's knowledge, threatened, which results from characterization of any
Network Physician as an independent contractor.
(h) The Sellers have permitted Buyer to inspect and review true,
complete and correct copies of their forms of independent contractor or
employment agreements used with
<PAGE>
respect to each of the Network Physicians.
Section 5.18 Insurance.
(a) Schedule 5.18(a) lists (i) the fidelity bonds, (ii) the
aggregate coverage amount, (iii) the type and generally applicable deductibles,
(iv) a brief description of each claim of more than $10,000, and (v) the
aggregate amounts paid out under each such policy during the period from January
1, 1995 to the date hereof, of or relating to all policies of general and
professional liability and other forms of insurance of each Seller insuring each
Business, Consultants and all Employees of the Sellers, the Purchased Property,
and all insurance required under the Contracts or the Leases. Each Seller has
furnished a true, complete and accurate copy of all such policies and bonds to
the Buyer. Except as set forth in Schedule 5.18(a), all such policies and bonds
are in full force and effect, and are sufficient for all Contracts and, to the
knowledge of the Sellers and the Executive Shareholders, all applicable
requirements of law. None of the Sellers is in material default under any
provisions of any such policy of insurance or has received notice of
cancellation of any such insurance. None of the Sellers has received (i) any
notice that any issuer of any such policy has filed for protection under
applicable bankruptcy laws or is otherwise in the process of liquidating or has
been liquidated, (ii) any other indication that such policies are no longer in
full force and effect or that the issuer of any such policy is no longer willing
or able to perform its obligations thereunder. There is no claim by any Seller
pending under any of such policies or bonds as to which coverage has been
questioned, denied or disputed by the underwriters of such policies or bonds or
any notice that a defense will be afforded with reservation of rights. Since
December 31, 1996, except as set forth in Schedule 5.18(a), none of the Sellers
or the Executive Shareholders has received any written notice from or on behalf
of any insurance carrier issuing such policies, that there will hereafter be a
cancellation, or an increase in a deductible or non-renewal of existing
policies. All premiums due on such policies have been paid, and the aggregate
amount of all claims under such policies do not exceed policy limits. Each
Seller has given notice to the insurers of all claims that may be insured
thereunder. The insurance maintained by each Seller in connection with its
Business is adequate in accordance with the requirements of any applicable
Leases. After the Closing each Seller will provide the Buyer with all reasonable
assistance and information necessary to enable the Buyer to obtain and maintain
insurance coverage for the Businesses and the Purchased Property.
(b) Except as set forth on Schedule 5.18(b), none of the Sellers is
obligated, pursuant to any of the Contracts or otherwise, to maintain insurance
for the benefit of any Person (including any Network Physician or customer), or
to name any Person (including any Network Physician or customer) as an
additional insured party.
Section 5.19 Compliance with Law.
(a) Except as set forth on Schedule 5.19, and except with respect to
Environmental Laws which are referred to in Section 5.19(f), the operations of
each Business have been conducted in accordance with all applicable laws,
regulations, orders and other requirements of all courts and other Governmental
Authorities having jurisdiction over any Seller or its Network Physicians,
Consultants, Employees, assets, properties and operations, including all such
laws,
<PAGE>
regulations, orders and requirements promulgated by or relating to consumer
protection, equal opportunity, health, architectural barriers to the
handicapped, fire, zoning and building and occupation safety, and, to the
knowledge of each Seller and each Executive Shareholder, there are no
circumstances arising out of the operation of any Business prior to the Closing
that will give rise to any claim against the Buyer under any such laws if the
Closing occurs, except where the failure to comply would not have material
adverse effect on the Purchased Property, operations, prospects, net income or
condition (financial or other) of such Business. None of the Sellers, Executive
Shareholders or their respective Affiliates has received notice of any violation
of any such law, regulation, order or other legal requirement or, to the best
knowledge of each Seller and each Executive Shareholder, are in default with
respect to any order, writ, judgment, award, injunction or decree of any
Governmental Authority or arbitrator, domestic or foreign, applicable to any
Business or any of the assets, properties or operations with respect thereto.
(b) None of the Sellers, the Shareholders, or persons or entities
providing professional services for any Business, and, to the knowledge of the
Sellers and the Executive Shareholders, the Network Physicians, have engaged in
any activities which are prohibited under Section 1320a-7b to Title 42 of the
United States Code or the regulations promulgated thereunder, or related state
or local statutes or regulations, or which are prohibited by rules of
professional conduct including, but not limited to, the following: (i) knowingly
and willfully making or causing to be made any false statement or representation
of a fact in any application for any benefit or payment; (ii) any failure by a
claimant to disclose knowledge of the occurrence of any event affecting the
initial or continued right to any benefit or payment on its own behalf or on
behalf of another, with the intent to secure fraudulently such benefit or
payment; (iii) knowingly and willfully offering, paying, soliciting or receiving
any remuneration (including any kickback, bribe or rebate) directly or
indirectly, overtly or covertly, in cash or in kind, or offering to receive such
remuneration (A) in - referring an individual to a person or accepting a an
individual from a person for the furnishing or the furnishing of any item or
service for Which made in whole or in part by the Medicare or Medicaid or (B) in
return for purchasing, leasing or ordering or for, or recommending any good,
facility, service or item payment may be made in whole or in part by the
Medicare or Medicaid programs or (iv) knowingly and willfully making or causing
to be made, agreeing to be made, or aware that there is any agreement to make,
any political contribution or any contributions, payments or gifts of their
respective funds or property to or for the private use of any employee, official
or agent of any Governmental Authority, in circumstances in which the payment or
the purpose of such contribution, payment or gift relates to any Business and is
illegal under the laws of any Governmental Authority. Furthermore, each Seller
has at all times billed for professional services in accordance with 42 U.S.C.
Section 1395nn and the regulations promulgated thereunder, and has not been
engaged in any conduct violation of 42 U.S.C. Section 1395nn or the regulations
thereunder, including, without limitation, billing for or receiving payment for
a service which arose out of a refund prohibited by that Section.
(c) All bills submitted by or on behalf of each Seller, its
Consultants, Employees or Executive Shareholders, and, to the knowledge of each
Seller and Executive Shareholder, its Network Physicians, to Medicare or
Medicaid have been submitted in compliance with all laws, regulations and manual
instructions pertaining to billing for services rendered to recipients and
beneficiaries of the Medicaid and Medicare programs.
<PAGE>
(d) Each Seller and each Executive Shareholder has at all times
complied with the requirements of all state laws relating to self referrals,
including, without limitation, the 1992 Florida Patient Self Referral Act, as
amended, and codified at Sections 455.236 and 455.237, Florida Statutes, which
prohibits physicians who have an ownership or investment interest in certain
health care facilities from referring patients to such facilities for the
provisions of designated and other health services. Furthermore, each Seller and
each Executive Shareholder has filed all reports required to be filed by state
and federal law regarding compensation arrangements and financial relationships
between a physician and an entity to which the physician refers patients.
(e) Each Seller is in compliance with all federal, state and local
laws, rules and regulations relating to the employment authorization of its
employees and independent contractors (including the Immigration Reform and
Control Act of 1986, as amended and supplemented, and Sections 212(n) and 274A
of the Immigration and Nationality Act, as amended and supplemented, and all
implementing regulations relating thereto), and no Seller is employing or
engaging as an independent contractor any unauthorized aliens (as such term is
defined under 8 CFR ss.274a.1(a)(1994)). No Seller or Executive Shareholder is a
party to, or is otherwise bound by, any agreement or arrangement, including any
confidentiality, non-competition or proprietary rights agreement, between such
individual and any other Person that in any way adversely affects the
performance of his duties or the ability of any Seller to conduct its Business.
(f) To the knowledge of the Sellers, the operations of each Business
have been conducted in accordance with all applicable Environmental Laws except
where the failure to comply would not have a material adverse effect on the
Purchased Property, operations, prospects, net income or condition (financial or
other) of such Business. None of the Sellers or Executive Shareholders has
received notice from any Governmental Authority with respect to, nor do they
have any knowledge of, any material violation by any Seller of any law,
regulation or ordinance of any federal, state or local government relating to
the storage, disposal or release of Hazardous Materials. For purposes of this
Section 5.19(f), the term "Hazardous Materials" means any flammable materials,
explosives, radioactive materials, hazardous wastes, hazardous or toxic
substances, infectious wastes, medical wastes or related or similar materials.
Section 5.20 Change in Ownership. Neither the purchase of the
Purchased Property by the Buyer nor the consummation of the transactions
contemplated by this Agreement will result in any material adverse change in the
Businesses or in the loss of the benefits of any material relationship with any
party to any Third Party Payor Agreement or any other customer or supplier.
Section 5.21 Files and Records. All the Files and Records included
in the Purchased Property are true and complete in all material respects, are
maintained in accordance with good business practice and all laws and
regulations of any Governmental Authority applicable to the business, and
accurately present and reflect in all material respects all of the transactions
therein described.
<PAGE>
Section 5.22 Related Party Transactions. Schedule 5.22 hereto sets
forth, in respect of the Businesses, (i) all management, computer, telephone or
other services, and all space, facilities and services, provided by any Seller
or its Affiliates to any other Seller or its Affiliates at any time since
January 1, 1994 that could or will result in aggregate payments by any Seller of
$2,500 or more, and (ii) all other Contracts and transactions between any Seller
or its Affiliates and any other Seller or its Affiliates currently in effect or
which were in effect or occurred since January 1, 1994 that resulted in or will
result in aggregate payments by any Seller of $2,500 or more.
Section 5.23 Sufficiency of and Title to Assets. Upon the
consummation of the transactions contemplated by this Agreement, the Sellers
will have assigned, transferred and conveyed to the Buyer all of the Purchased
Property free and clear of any Encumbrances, except for Permitted Encumbrances,
which Purchased Property (a) constitutes all of the properties and assets now
held or employed by the Sellers or any of their Affiliates that are attributable
to the Businesses, (b) constitutes and on the Closing Date will constitute, all
of the property and assets that are necessary to permit the operation of the
Businesses as historically and currently conducted, (c) is suitable for the
purposes for which it is currently used, and (d) is to be conveyed hereunder in
good operating condition and repair, subject to reasonable use, wear and tear.
No assets used in the Businesses are owned by any party other than one of the
Sellers except for property that is the subject of the Contracts.
Section 5.24 Accuracy of Information. None of the Sellers' or
Executive Shareholders' representations, warranties or statements contained in
this Agreement, or in the schedules, exhibits and other attachments hereto,
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make any of such representations, warranties or
statements in light of the circumstances under which they were made not
misleading.
Section 5.25 Brokers. Except for Mr. Jeffrey Binder of JeMJ
Financial Services, Inc. and for Mr. Joseph Farrell, the fees and expenses of
which shall be the sole responsibility of the Sellers and the Executive
Shareholders, no broker, investment banker, financial advisor or other Person is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of any Seller. The Sellers and the
Executive Shareholders, jointly and severally, agree to indemnify and hold
harmless the Buyer against any fee, loss or expense arising out of any claim by
any broker of finder employed or alleged to have been employed by any of them.
Section 5.26 Disclosure. Each of the Shareholders has been furnished
with a copy of this Agreement and has been given sufficient opportunity to ask
questions and receive answers from the Sellers and the Executive Shareholders as
to all financial terms and all other material terms of this Agreement.
Section 5.27 Survival. Each of the representations and warranties
set forth in this Article 5 shall survive the Closing, notwithstanding any
investigation on the part of the Buyer, for
<PAGE>
a period terminating on the second anniversary of the Closing Date; provided,
however, that the representations and warranties contained in Sections 5.1, 5.2,
5.7, 5.14, 5.15, 5.17 and 5.19 shall survive until the fourth anniversary of the
Closing Date.
SECTION 6. BUYER AND PARENT.
REPRESENTATIONS AND WARRANTIES OF THE
The Buyer and Parent hereby, jointly and severally represent and
warrant to, and covenant with, the Sellers as follows:
Section 6.1 Corporate Organization. Each of the Buyer and Parent is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Florida and the State of Delaware, respectively, is duly
qualified as a foreign corporation in each jurisdiction in which it is required
to be so qualified, and each has all requisite corporate power and authority to
own its properties and assets and to conduct its businesses as now conducted.
The Buyer is a wholly owned subsidiary of Parent. Each of Parent and the Buyer
has furnished to the Sellers true, complete and correct copies of its Articles
or Certificate of Incorporation and By-laws, with all amendments thereto.
Section 6.2 Authorization and Validity of Agreement. Each of the
Buyer and Parent has all requisite corporate power and authority to enter into
this Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and the performance of the respective obligations of
the Buyer and Parent hereunder have been duly authorized by all necessary
corporate action by the Buyer and Parent, respectively, and no other corporate
or shareholder proceedings on the part of the Buyer or Parent are necessary to
authorize such execution, delivery and performance. This Agreement has been duly
executed and delivered by each of the Buyer and Parent, respectively, and
constitutes the legal, valid and binding obligation of the Buyer and Parent,
enforceable against each in accordance with its terms.
Section 6.3 No Conflict or Violation. Except as set forth on
Schedule 6.3, the execution, delivery and performance by the Buyer and Parent of
this Agreement do not and will not violate or conflict with any provision of the
Articles or Certificate of Incorporation or By-Laws of the Buyer or Parent,
respectively, and do not and will not violate any provision of law, or any
order, judgment or decree of any Governmental Authority, nor violate nor will
result in a breach of or constitute (with due notice or lapse of time or both) a
default under, or give rise to a right to terminate or modify, any contract,
lease, loan agreement, mortgage, security agreement, trust indenture or other
agreement or instrument to which the Buyer or Parent is a party or by which it
is bound or to which any of its properties or assets is subject.
Section 6.4 Consents and Approvals. Except as disclosed on Schedule
6.4, the execution, delivery and performance of this Agreement on behalf of the
Buyer and Parent does not require the consent or approval of, or filing with,
any Governmental Authority or other entity or person except such consents,
approvals and filings, of which the failure to obtain or make would not,
individually or in the aggregate, have a material adverse effect on the ability
of the
<PAGE>
Buyer or Parent to consummate the transactions contemplated hereby.
Section 6.5 Litigation. There are no claims, actions, suits,
proceedings, labor disputes or investigations pending, or to the knowledge of
the Buyer or Parent, threatened, before any Governmental Authority, or before
any arbitrator or mediator of any nature, domestic or foreign, brought by or
against the Buyer or Parent or any of their respective officers, directors,
employees, agents or Affiliates, involving, affecting or relating to the
transactions contemplated by this Agreement or which would prohibit the Buyer or
Parent from consummating the transactions contemplated by this Agreement nor is
any basis known to the Buyer or Parent for any such action, suit, proceeding or
investigation.
Section 6.6 Financing. As of the date hereof, neither the Buyer nor
Parent has any reason to believe that the Buyer will not be able to obtain the
financing necessary for it to consummate the transactions contemplated by this
Agreement.
Section 6.7 Brokers. No broker, investment banker, financial advisor
or other Person is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions contemplated
by this Agreement based on arrangements made by or on behalf of the Buyer. The
Buyer and the Parent, jointly and severally, agree to indemnify and hold
harmless the Sellers and the Shareholders against any fee, loss or expense
arising out of any claim by any broker or finder employed or alleged to have
been employed by Buyer or Parent.
Section 6.8 Accuracy of Representations and Warranties. None of the
Buyer's or Parent's representations, warranties or statements contained in this
Agreement contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make any such representations or warranties
not misleading or includes any untrue statement of a material fact or omits to
state any material fact necessary in order to make such statements, in the light
of the circumstances under which they were made, not misleading.
Section 6.9 Survival. Each of the representations and warranties set
forth in this Article 6 shall survive the Closing, notwithstanding any
investigation on the part of the Sellers or the Executive Shareholders, for a
period terminating on the second anniversary of the Closing Date; provided,
however, that the representation and warranty contained in Sections 6.1, 6.2 and
6.5 shall survive until the fourth anniversary of the Closing Date.
SECTION 7.
COVENANTS.
Each Seller and each of the Executive Shareholders, jointly and
severally, and, to the extent expressly specified, the Buyer and Parent,
covenants as follows:
Section 7.1 Information and Certain Tax Matters.
(a) Each Seller will give to the Buyer and to its officers,
employees, accountants,
<PAGE>
counsel and other representatives reasonable access during its normal business
hours throughout the period prior to the Closing to all of such Seller's
properties, Files and Records, Licenses and Permits, Contracts, Tax Returns, and
other Purchased Property relating to the Businesses (subject to any limitations
that are reasonably required to preserve any applicable attorney-client
privilege or third-party confidentiality obligation). Such access by the Buyer
will be coordinated through one of the Executive Shareholders, as
representatives of the Sellers.
(b) After the Closing Date, the Sellers and the Buyer will provide
to each other and to their respective officers, employees, counsel and other
representatives, upon request (subject to any limitations that are reasonably
required to preserve any applicable attorney-client privilege or third-party
confidentiality obligation), access for inspection and copying, of all Files and
Records, Licenses and Permits, Contracts and any other information existing as
of the Closing Date and relating to the Businesses or the Purchased Property,
and will make their respective personnel reasonably available to provide
information relating to the Businesses or the Purchased Property prior to the
Closing Date, and as otherwise may be necessary or desirable to enable the party
requesting such assistance to: (i) comply with reporting, filing or other
requirements imposed by any foreign, local, state or federal court, agency or
regulatory body; (ii) assert or defend any claims or allegations in any
litigation or arbitration or in any administrative or legal proceeding other
than claims or allegations that one party to this Agreement has asserted against
the other; or (iii) subject to clause (ii) above, perform its obligations under
this Agreement. The party requesting such information or assistance shall
reimburse the other party for all out-of-pocket costs and expenses incurred by
such party in providing such information and in rendering such assistance. The
access to files, books and records contemplated by this Section 7.1(b) shall be
during normal business hours and upon not less than two Business Days' prior
written request and shall be subject to such reasonable limitations as the party
having custody or control thereof may impose to preserve the confidentiality of
information contained therein. For a period of seven years after the Closing
Date, the Buyer shall keep and preserve all medical and other records of the
Sellers in its possession which are existing as of the Closing Date and which
are required to be kept and preserved (i) by any applicable federal or state law
or regulation or (ii) in connection with any claim or controversy still pending
involving any of the Sellers.
(c) The Buyer, Parent, the Sellers and the Executive Shareholders
shall cooperate fully, as and to the extent reasonably requested by the other
party, in connection with any Tax audit, litigation or other Tax proceeding
relating to the Businesses or the Purchased Property. Such cooperation shall
include the retention and, upon the other party's request, the provision of
records and information reasonably relevant to any such audit, litigation or
other proceeding and making employees available on a mutually convenient basis
to provide additional information and explanation of any records and information
provided hereunder. The Buyer, Parent, the Sellers and the Executive
Shareholders further agree to furnish or cause to be furnished to each other, as
promptly as practicable, such information and assistance relating to the
Businesses as is reasonably necessary to the preparation and filing of any Tax
Return, claim for refund or other required or optional filings relating to Tax
matters, for the preparation for and proof of facts during any Tax audit, for
the preparation for any Tax protest, for the prosecution or defense of any suit
or other proceeding relating to Tax matters and for the answer to any inquiry
relating to Tax matters by any Governmental Authority.
<PAGE>
(d) Without limiting the generality of the foregoing, each Seller
agrees (i) to provide both before and after the Closing Date financial
information reasonably requested by the Buyer from time to time in connection
with the preparation by the Buyer of financial statements relating to the
Businesses and (ii) to use its Best Efforts to cause Sellers' independent
accountants to provide any such information (including copies of all workpapers)
reasonably promptly upon the request of the Buyer. The Buyer will use such
information for its normal business purposes only, including, without
limitation, preparation of financial information required to be included in
reports filed with the Securities Exchange Commission and each Seller will use
its Best Efforts to provide or cause to be provided to the Buyer such
information in a timely fashion.
(e) The Sellers agree to retain possession of all accounting,
business, financial and Tax records and information (i) relating to the
Businesses in existence on the Closing Date transferred to the Buyer hereunder
and (ii) coming into existence after the Closing Date which relate to the
Businesses before the Closing Date, for the period not less than seven years
from the Closing Date. In addition, from and after the Closing Date, the Sellers
agree that they will not unreasonably withhold access by the Buyer and its
attorneys, accountants and other representatives (after reasonable notice and
during normal business hours and with reasonable charge), to such personnel,
books, records, documents and any or all other information relating to the
Businesses as the Buyer may reasonably deem necessary to properly prepare for,
file, prove, answer, prosecute and/or defend any such return, filing, audit,
protest, claim, suit, inquiry or other proceeding or for other legitimate
business purposes. Such access shall include, without limitation, access to any
computerized information retrieval systems relating to the Businesses.
Section 7.2 Conduct of the Businesses.
From and after the date of this Agreement and until the Closing
Date, except as set forth on Schedule 7.2 or as otherwise contemplated by this
Agreement or as the Buyer shall otherwise consent to in writing, each Seller
will, with respect to its Business, and each Executive Shareholder will cause
each Seller in which he or his Affiliates have any direct or indirect ownership
interest to:
(a) carry on its Business in the ordinary course in a manner
consistent with past practice, including without limitation by keeping in full
force and effect insurance comparable in amount and scope to the coverage
maintained by it (or on behalf of it) on the date hereof, not cancel any debts
or claims, or waive or release any rights material to such Business relating to
the operations of such Business, or default on any material obligation relating
to the operations of its Business;
(b) not permit all or any of the Purchased Property
o (real or personal, tangible or intangible) to be sold, licensed or
subjected to any Encumbrance (other than a Permitted Encumbrance) except in
dispositions of inventory or of worn-out or obsolete equipment for fair or
reasonable value in the ordinary course of business consistent with past
practices;
<PAGE>
(c) exercise all Best Efforts to maintain and preserve for the Buyer
its relationships with customers, suppliers, managers, Employees, Network
Physicians, Consultants, parties to Third Party Payor Agreements and actively
sought prospective Parties to Third Party Pavor Agreements (including, without
llmlcatlon ~rucare) ana owners nav1ng Business relationships with the Business;
(d) not acquire any assets or properties, or enter into any other
transaction, other than in the ordinary course of business consistent with past
practice and which does not require payment of aggregate amounts exceeding
$10,000;
(e) not enter into any new (or amend any existing) Plan, including,
any employee benefit plan, program or arrangement or any new (or amend any
existing) employment, independent contractor, severance or consulting agreement,
grant any general increase in the compensation of officers or Employees
(including any such increase pursuant to any bonus, pension, profit-sharing or
other plan or commitment) or grant any increase in the compensation payable or
to become payable to any Network Physician, Consultant or Employee, except (i)
in accordance with pre-existing contractual provisions or consistent with past
practice, (ii) increases on an annual basis for the 1997 calendar year up to a
maximum amount of five percent in excess of such Person's aggregate compensation
for the 1996 calendar year and (iii) in respect of the Executive Shareholders,
as permitted in Section 7.2(i)(B) below;
(f) not issue, grant or sell any capital stock, partnership
interests, options, or other right to purchase any equity interests in such
Seller, or issue any security convertible into such capital stock, partnership
interests or equity interests, or enter into any subscription contract or other
arrangements obligating such Seller to issue or sell any of the foregoing, or
redeem, purchase or otherwise acquire any such capital stock or equity
interests;
(g) not make or commit to make any capital expenditure except as
expressly contemplated by the Information Technologies Budget, other than
ordinary repairs or maintenance;
(h) not pay, lend or advance any amount to, or sell, transfer or
lease any properties or assets to, or enter into any agreement or arrangement
with, any of its Affiliates;
(i) not declare, set aside, pay or make any dividend or other
distribution or payment (whether in cash, stock, interests,
o equity or property) with respect to, or purchase or redeem, any
shares of the capital stock or any partnership interests or other equity
interests (including profit sharing plans or distributions relating to such
Seller's financial results) of such Seller, or otherwise withdraw any cash from
such Seller for the direct or indirect benefit of the holders of any such shares
or interests or for any third party, or make or agree to make any other payments
to any Shareholder or any of his or her Affiliates; provided, however, that
nothing set forth in this Section 7.2(i) shall prohibit cash distributions to
the extent that after giving effect to such cash distributions the Sellers still
have at least $1,000,000 in Unrestricted Cash in the aggregate;
<PAGE>
(j) not make any change in any method of accounting or accounting
principle, method, estimate or practice except for any such change required by
reason of a concurrent change in GAAP, or write down the value of any inventory
or write off as uncollectible any accounts receivable except in the ordinary
course of business consistent with past practice;
(k) not settle, release or forgive any claim or litigation or waive
any right thereto;
(l) not make, enter into, modify, amend or terminate any Contract,
including any Third Party Payor Agreement or bid with respect to any of the
Businesses;
(m) not defer the payment of any expense or liability, or prepay any
expense or liability, in anticipation of the consummation of the transactions
contemplated hereby;
(n) not accelerate the collection of any accounts receivable or any
other amounts owed to it;
(o) not decrease by a material amount the quantity of Equipment and
Machinery or Inventory maintained for use in its Business;
(p) discharge or satisfy all Encumbrances and pay or satisfy all
obligations or liabilities (whether absolute, accrued, contingent or otherwise)
arising from the operation of its Business in a timely manner, other than
liabilities being contested in good faith and for which adequate reserves have
been provided, each of which is set forth on Schedule 5.6(b)(13) hereof, and
Permitted Encumbrances;
(q) continue to maintain the Purchased Property in accordance with
present practice; and
(r) not enter into any agreement or make any commitment not in
compliance with any of the foregoing and not take any other action that would
cause any of the representations and warranties made by any Seller in this
Agreement not to remain true and correct.
Section 7.3 Tax Reporting and Allocation of Consideration.
(a) Each of the Sellers and the Buyer acknowledge and agree that (i)
the Sellers will be responsible for and will perform all Tax withholding,
payment and reporting duties with respect to any wages and other compensation
paid by any Seller to any Transferred Employee (and, if applicable, any
Transferred Consultant) in connection with operating the Businesses prior to or
on the Closing Date and (ii) the Buyer will be responsible for and will perform
all Tax withholding payment and reporting duties with respect to any wages and
other compensation paid by Buyer to any employee or independent contractor in
connection with operating the Businesses after the Closing Date.
<PAGE>
(b) The Buyer and each of the Sellers recognize their mutual
obligations pursuant to Section 1060 of the Code to timely file IRS Form 8594
(the "Asset Acquisition Statement") with each of their respective federal income
Tax Returns. The Buyer and each of the Sellers acknowledge that they will
allocate the Purchase Price and the Assumed Liabilities among the Purchased
Property in the manner set forth on Schedule 7.3(b) (such agreed allocation
hereinafter referred to as the "Allocation"). The Buyer and each of the Sellers
further agree to act in accordance with the Allocation, if any, in any Tax
Returns or similar filings. In the event that any Tax authority disputes the
Allocation, if any, the Sellers or the Buyer, as the case may be, shall promptly
notify the other party of the nature of such dispute and shall provide
reasonable cooperation with the goal of resolving such dispute.
Section 7.4 Supplemental Schedules. The Sellers and the Executive
Shareholders shall, from time to time prior to the Closing (but no later than
three Business Days prior to the Closing), by notice in accordance with this
Agreement, supplement or amend any Schedule to correct any matter which would
constitute a breach of any representation or warranty herein contained. No such
supplemental or amended Schedule shall be deemed to cure any breach of such
representation or warranty for purposes of conditions to Closing or termination,
or for any other purpose, and the Buyer shall continue to have all of its rights
and remedies hereunder.
Section 7.5 Transferred Persons.
(a) The Buyer, in its sole discretion, may offer employment or
engagement, as the case may be, to as many Consultants and Employees whose
Contracts are not being assumed by the Buyer as is consistent with, and subject
to, the Buyer's requirements and employment policies. Notwithstanding anything
to the contrary in the previous sentence, within five Business Days prior to the
Closing, the Buyer shall offer employment to the Employees listed on Schedule
7.5(a), such terms of employment to be no more advantageous to such Employees
than the terms on which such Employees are currently employed as set forth on
Schedule 5.17(e)(iii) opposite their respective names (an "Engagement Notice"),
provided, however, that nothing herein requires the Buyer to employ any such
Employees for any period of time after the Closing Date except that (i) the
Buyer agrees not to terminate the employment of any such Employees without the
prior consent of the Executive Shareholders, which consent will not be
unreasonably withheld or delayed, for a period ending 90 days after the Closing
Date, and (ii) the Buyer agrees to offer to employ each of Judith Margulies and
Greta Gottlieb at her respective current salary and not to terminate the
employment of either one without the prior consent of the Executive
Shareholders, which consent will not be unreasonably withheld or delayed, for a
period ending one year after the Closing Date. All Employees hired by Buyer
shall be referred to as "Transferred Employees" and all Consultants engaged by
Buyer, including Consultants relating to Contracts assumed by Buyer, shall be
referred to as "Transferred Consultants." Promptly following the delivery by the
Buyer of the list of Transferred Consultants and Transferred Employees, each
Seller will make appropriate arrangements with each of its Consultants, and
Employees being so transferred, in order to terminate any existing agreements
which are not being assigned to the Buyer, including any non-competition
restrictions that may be contained in related agreements, or, if requested by
the Buyer, provide for the assignment of such employment, consulting or
independent contractor
<PAGE>
agreements to the Buyer at the Closing to the extent such contracts or
agreements constitute Contracts.
(b) All Transferred Employees (but not Network Physicians or
Transferred Consultants) shall participate in the employee benefit plans,
programs, policies and arrangements of the Buyer in accordance with the terms
thereof generally applicable to employees of the Buyer. Except to the extent
expressly provided for in Section 7.5(a), nothing herein requires the Buyer to
employ any Transferred Employee or to engage any Network Physicians, or
Transferred Consultants for any period of time after the Closing Date.
(c) Except as otherwise expressly provided in Section 2.4, neither
the Buyer nor its Affiliates shall assume or have any direct or indirect
obligation or liability of any nature, whether matured or unmatured, accrued or
contingent, due or to become due or otherwise, to any Network Physician,
Transferred Consultant or Transferred Employee or other present or former
employee of or independent contractor with any of the Sellers or its Affiliates,
or to any dependent, survivor or beneficiary thereof, arising out of or in
relation to such person's employment or engagement with any of the Sellers or
its Affiliates or the termination of such employment, nor shall the Buyer or its
Affiliates have any such liability to any such Person to make any Change of
Control Payments.
(d) Sellers shall assume full responsibility and liability for
offering and providing "continuation coverage" to any "qualified beneficiary"
who is covered by a "group health plant' sponsored or contributed to by any
Seller and who has experienced a "qualifying event" or is receiving
"continuation coverage" on or prior to the Closing. "Continuation coverage,"
"qualified beneficiary," "qualifying event" and "group health plan" all shall
have the meanings given such terms under Section 4980B of the Code and Section
601 et seq. of ERISA. Sellers, jointly and severally, shall hold Buyer and any
entity required to be combined with Buyer (within the meaning of Sections
414(b), (c), (m) or (i) of the Code) harmless from and fully indemnify them
against any costs, expenses, losses, damages and liabilities incurred or
suffered by them directly or indirectly, including, but not limited to,
reasonable attorneys' fees and expenses, which relate to continuation coverage
and arise as a result of any action or omission by Seller or because Buyer is
deemed to be a successor employer to any Seller.
Section 7.6 Consents and Approvals. The Sellers and the Executive
Shareholders (a) shall, at their own cost and expense, use their Best Efforts to
obtain all necessary consents, waivers, authorizations, domestic and foreign,
and of all other persons, firms or corporations required in connection with the
execution, delivery and performance by them of this Agreement, and (b) shall
diligently assist and cooperate with the Buyer in preparing and filing all
documents required to be submitted by the Buyer to any Governmental Authority in
connection with such transactions and in obtaining any consents, waivers,
authorizations or approvals from any Governmental Authority which may be
required to be obtained by the Buyer in connection with such transactions (which
assistance and cooperation shall include timely furnishing to the Buyer all
information concerning the Sellers, the Executive Shareholders and their
respective Affiliates that counsel to the Buyer reasonably determines is
required to be included in such documents or would be helpful in obtaining any
such required consent, waiver, authorization or approval
<PAGE>
Section 7.7 Negotiations. From and after the date hereof through and
until the earlier to occur of Closing or termination of this Agreement, neither
the Sellers, nor their respective officers, directors, Employees or Shareholders
nor anyone acting on behalf of the Sellers or any of the foregoing persons
shall, directly or indirectly, encourage, solicit, engage in discussions or
negotiations with, or provide any information to, any person, firm, or other
entity or group (other than the Buyer or its representatives) concerning any
merger, sale of substantial assets, purchase or sale of shares of capital stock
or similar transaction involving any Seller or any of the Businesses or any
other transaction inconsistent with the transactions contemplated hereby. The
Sellers and the Executive Shareholders shall promptly communicate to the Buyer
any inquiries or communications concerning any such transaction which they may
receive or of which they may become aware prior to the termination of this
Agreement.
Section 7.8 Further Assurances. Upon the reasonable request of the
Buyer at any time after the Closing Date, each Seller shall forthwith execute
and deliver such further instruments of assignment, transfer, conveyance,
endorsement, direction or authorization and other documents as the Buyer or its
counsel may request to perfect title of the Buyer and its successors and assigns
to the Purchased Property or otherwise to effectuate the purposes of this
Agreement.
Section 7.9
Covenant Not to Compete.
(a) The Sellers and the Executive Shareholders agree for themselves
and their respective Affiliates that, for a period commencing on the Closing
Date hereof and ending on the fifth anniversary of the Closing Date, without the
written consent of the Buyer, they shall not, jointly or severally, provide or
have any interest in any Person that provides or is engaged in, whether as an
owner, employee, officer, director, shareholder, partner, contractor,
consultant, agent, joint venturer, or advisor, (i) subspecialty capitated or
discounted fee for service networks, or related administrative or management
services, to any Person providing, directly or indirectly, health care services
or (ii) the business presently engaged in, or engaged in at such time by any
Seller, any Executive Shareholder, the Buyer, or any of their respective
Affiliates, in either case in the United States of America, its territories and
possessions.
(b) The Sellers and the Executive Shareholders acknowledge and agree
that the restrictions set forth in Section 7.9(a), including the territory set
forth therein, are reasonable and necessary to protect the legitimate business
interests of the Buyer including the goodwill of the Sellers, the Executive
Shareholders, and their respective Affiliates being purchased by the Buyer
pursuant to this Agreement and the substantial relationships (as reflected, in
part, in the Contracts)
with payors and other medical providers and patients that are being
transferred to the Buyer as contemplated by this Agreement.
<PAGE>
(c) The Sellers and the Executive Shareholders agree that a monetary
remedy for a breach of the agreement set forth in Section 7.9(a) hereof will be
inadequate and impracticable and further agree that such a breach would cause
the Buyer irreparable harm, and that the Buyer shall be entitled to temporary
and permanent injunctive relief without the necessity of proving actual damages.
In the event of such a breach, the Sellers and the Executive Shareholders agree
that, in addition to all other remedies available at law or in equity, the Buyer
shall be entitled to such injunctive relief, including temporary restraining
orders, preliminary injunctions and permanent injunctions as a court of
competent jurisdiction shall determine.
(d) If any provision of this Section 7.9 is invalid, void or
unenforceable in part, it shall be curtailed, both as to time and location, to
the minimum extent required for its validity under applicable laws and shall be
binding and enforceable with respect to each Seller and each Shareholder as so
curtailed.
(e) The foregoing five-year period shall be tolled for any period(s)
of violation or period(s) of time required for litigation to enforce the
covenants herein.
Section 7.10 Non-Solicitation of Employees. The Sellers and the
Executive Shareholders agree for themselves and their respective Affiliates, for
a period commencing on the Closing Date hereof and ending on the fifth
anniversary of the Closing Date, not to make, offer, solicit or induce to enter
into, any written or oral arrangement, agreement or understanding regarding
employment or retention as a consultant or independent contractor with any
person who (i) was, on the date hereof, a Network Physician, Consultant, or an
Employee of any Seller and employed or engaged in any Business, or (ii) is at
the time of such solicitation, or who was at any time during the six-month
period prior to such solicitation, an employee or consultant or independent
contractor of Buyer or an Affiliate of Buyer, without the written consent of the
Buyer.
Section 7.11 Assignment of Contracts and Warranties. Each Seller
assigns to the Buyer effective from and after the Closing all right, title and
interest of each Seller and its Affiliates in, to and under the Contracts.
Notwithstanding the foregoing, no Contract shall be assigned contrary to law or
the terms of such Contract and, with respect to Contracts that cannot be
assigned to the Buyer, the performance obligations of the applicable Seller
thereunder shall, unless not permitted by such Contract, be deemed to be
subleased or subcontracted to the Buyer until such Contract has been assigned.
The Buyer shall reasonably assist each Seller in obtaining any necessary
approvals to such subleases and subcontracts. The Buyer shall take all necessary
actions to perform and complete all Contracts in accordance with their terms if
neither assignment, subleasing nor subcontracting is permitted by the other
party, and each Seller shall pay over to the Buyer any amounts received by such
Seller after the Closing Date as a result of performance by the Buyer of such
Contracts; provided; however, to the extent any such Contract is a Key Contract,
nothing set forth herein shall require the Buyer to assume any obligation of any
of the Sellers under such Key Contract until the consent to assignment with
respect thereto has been obtained unless the Buyer shall have waived the
requirement that such consent be obtained as a condition to Closing as
contemplated in Section 8.7 hereof.
<PAGE>
Section 7.12 Notice of Breach.
(a) The Sellers and the Executive Shareholders shall promptly give
the Buyer and Parent notice with particularity upon having knowledge of any
matter that may constitute a breach of any of their respective representations,
warranties, agreements or covenants contained in this Agreement.
(b) Each of the Buyer and Parent shall promptly give the Sellers and
the Executive Shareholders written notice with particularity upon having
knowledge of any matter that may constitute a breach of any of their respective
representations, warranties, agreements or covenants contained in this
Agreement.
Section 7.13 Bulk Sales Compliance. The Sellers and the Executive
Shareholders shall take all action necessary such that all transactions
contemplated by this Agreement comply in all material respects with any "Bulk
Transfer" provisions of the Uniform Commercial Code which may be in effect in
each applicable jurisdiction.
Section 7.14 Conduct of the Businesses after Closing. Each of
Parent, the Buyer, the Sellers and the Executive Shareholders covenant and agree
that the business of the Buyer shall be conducted in accordance with the
provisions of this Section 7.14 from and after the Closing Date through and
including the third anniversary of the Closing Date: ~
(a) Parent, the Buyer and the Executive Shareholders acknowledge
that it is their intent to exercise their Best Efforts to facilitate the growth
and profitability of the Subject Business; provided, however, that nothing set
forth in this Agreement shall require the Parent or any Affiliate of the Parent
to refer any business to or to otherwise conduct any business through the Buyer.
Parent is not prohibited from acquiring or merging with other entities engaged
in the Subject Business, or from being acquired by or merged with those who are,
but in the event the Buyer is sold or otherwise ceases to be an Affiliate of the
Parent, the Parent will seek to obtain contractual protection from the acquiring
entity or entities to agree not to interfere with the existing business of the
Buyer or with the Buyer's existing contractual relationships.
(b) Notwithstanding anything to the contrary in this Section 7.14,
the prior approval of the Board of Directors of the Buyer shall be required for
any Third Party Payor Agreements to which the Buyer or any of its subsidiaries
is a party and which involves aggregate payments or liabilities in excess of
$100,000. Parent shall use its Best Efforts to cause the directors designated by
it to vote in favor of any such contract unless Parent determines in good faith
that the operations, prospects, net income or condition (financial or other) of
Parent or any Affiliate of Parent would be adversely affected by entering into
or performing the contract.
(c) Without the consent of the Executive Shareholders, Buyer shall
not sell, merge, transfer, consolidate or otherwise dispose of any material part
of the Businesses to any other party, other than as a whole entity or entities;
provided, however, that nothing set forth in this Section 7.14 shall prohibit or
restrict Buyer from making any distributions of any kind to the Parent.
<PAGE>
Section 7.15 Meetings of the Board of Directors of Buyer. From and
after the Closing Date through and including the third anniversary of the
Closing Date, the Executive Shareholders shall be entitled to attend and
participate in a non-voting capacity in all meetings of the board of directors
of the Buyer. In this regard, the Executive Shareholders will receive all
notices and other materials distributed to members of the board of directors of
the Buyer in such capacity.
Section 7.16 Information Technologies Budget. Within 30 days
following the date of this Agreement, Buyer and AHG shall mutually agree upon a
budget for information technologies expenditures (the "Information Technologies
Budget"). The Information Technologies Budget will designate which items will be
expensed and which items will be capitalized for purposes of calculating EBITDA
regardless of the treatment of such items under GAAP.
Section 7.17 Indemnification for Certain Liabilities. Jacob Nudel,
M.D. and Gut agree to jointly and severally indemnify and hold harmless Buyer
Indemnitees (as said term is define in Section 11) from and against any Losses
(as said term is defined in Section ll) arising out of, relating to or resulting
from the following legal action: Charles Gluck, M.D., Plaintiff, vs. Jacob
Nudel, M.D., et al, Defendants, filed in the Circuit Court of the Seventeenth
Judicial Circuit in and for Broward County, Florida, General Jurisdiction
Division, Case No. 97 04553. In the event said action has not been dismissed
with prejudice on or before the Closing Date or in the event that all
Encumbrances on any of the Purchased Property arising out of said litigation or
the settlement thereof have not been released in full on or before the Closing
Date to the Buyer's satisfaction, at the election of the Buyer, in its sole
discretion, it shall withhold from the Closing Cash Installment payable to Gut
an amount not to exceed 50% of such sum and to pay said sum to a mutually
acceptable escrow agent to be held in escrow and released pursuant to the terms
and conditions of a mutually acceptable escrow agreement in order to provide a
fund for the payment of any indemnification claim to which the Buyer Indemnitees
may be entitled pursuant to the terms and conditions set forth in this Section
7.17. At the election of Buyer, in its sole discretion, it may also direct that
up to 50` of Gut's share of any future distributions to be made to AHG, on
behalf of the Sellers, pursuant to Section 3.4 be deposited into the escrow
agreement entered into pursuant to this Section 7.17. Jacob Nudel, M.D. and Gut
acknowledge and agree that if the indemnification claims under this Section
exceed the amount held pursuant to said indemnification agreement, Jacob Nudel,
M.D. and Gut shall remain liable for any such excess.
Section 7.18 Refinancing of Existing Bank Loan. Pursuant to that
certain Business Loan Agreement dated March 7, 1997 between FSN and Executive
National Bank, FSN borrowed the principal amount of $240,000. Magellan agrees to
refinance the outstanding indebtedness under said bank loan as follows. At the
Closing, Magellan agrees to loan the Buyer such amount as is necessary to enable
the Buyer to pay said bank loan, including all accrued interest, in full. The
loan from Magellan shall bear interest at the same rate as that of the bank loan
and shall be payable in three equal annual installments on each of the first
three anniversaries of the Closing Date. Payments of principal shall be taken
into account in connection with the calculation of the earn-out and/or
adjustment amounts pursuant to Section 3.3.
<PAGE>
SECTION 8. CONDITIONS TO OBLIGATIONS OF BUYER.
The obligations of the Buyer to consummate the transactions
contemplated by this Agreement are subject to the fulfillment, at or before the
Closing Date, of the following conditions, any one or more of which may be
waived by the Buyer in its sole discretion.
Section 8.1 Representations and Warranties. All representations and
warranties made by each Seller and each Executive Shareholder in this Agreement
shall be true and correct on and as of the Closing Date as if again made by such
Seller and such Executive Shareholder on and as of such date.
Section 8.2 Performance of Seller's and Shareholders' Obligations.
Each Seller and each Executive Shareholder shall have performed in all respects
all obligations required under this Agreement to be performed by them on or
before the Closing Date.
Section 8.3 Consents and Approvals. All consents, waivers,
authorizations and approvals of any Governmental Authority, and of any other
person, firm or corporation, required of each Seller and each Shareholder in
connection with the execution, delivery and performance of this Agreement, shall
have been duly obtained and shall be in full force and effect on the Closing
Date.
Section 8.4 No Violation of Orders. No preliminary or permanent
injunction or other order issued by any Governmental Authority, nor any statute,
rule, regulation, decree or executive order promulgated or enacted by any
Governmental Authority, which declares this Agreement invalid in any respect or
prevents the consummation of the transactions contemplated hereby, or which
materially and adversely affects the Purchased Property, operations, prospects,
net income or financial condition of any Seller shall be in effect; and no
action or proceeding before any Governmental Authority shall have been
instituted or threatened by any Governmental Authority or by any other person,
or entity which seeks to prevent or delay the consummation of the transactions
contemplated by this Agreement or which challenges the validity or
enforceability of this Agreement.
Section 8.5 No Material Adverse Change. During the period from July
1, 1997 to the Closing Date, there shall not have been any material adverse
change in the Purchased Property, business, operations, prospects, net income or
condition (financial or other) of the Businesses of the Sellers, taken as a
whole.
Section 8.6 Due Diligence with Respect to Third Party Payors. The
Buyer shall have completed its due diligence investigation of the Third Party
Payor Agreements, the parties thereto and actively sought prospective parties to
Third Party Payor Agreements (including, without limitation PruCare) and shall
have concluded, in its sole and absolute discretion, that the results of such
investigation are satisfactory to it and that it is willing, following such
review, to consummate the transactions contemplated by this Agreement. The
Sellers and the Executive Shareholders acknowledge and agree that the Buyer may
conclude for any reason deemed
<PAGE>
sufficient by it that the results of such investigation are not satisfactory.
Section 8.7 Consents under Key Contracts. On or before the Closing
Date, the Sellers shall have obtained all necessary or appropriate consents,
approvals, notations, authorizations, exemptions or waivers from parties to the
Contracts, Licenses and Permits listed or referred to on Schedule 8.7 (as the
same shall be amended at the Buyer's request to reflect Contracts, Licenses and
Permits disclosed on any supplemental Schedule delivered pursuant to Section
7.4) (collectively, the "Key Contracts") on terms satisfactory to the Buyer;
provided, however, that the Buyer shall not require any changes to any such
Contracts or Licenses and Permits in connection with such consents, approvals,
notations, authorizations, exemptions or waivers; and provided, further that
none of the Sellers shall make any changes to any such Contracts or Licenses and
Permits in connection with such consents, approvals, notations, authorizations,
exemptions or waivers.
Section 8.8 Farrell Consulting Arrangement.
(a) The Sellers shall have demonstrated and presented evidence to
the Buyer's satisfaction that the Farrell Consulting Agreement shall have been
terminated as of the Closing, which termination shall provide an express
exculpation of each of the Buyer and its Affiliates, the Sellers and the
Executive Shareholders as to any past, present or future liability or obligation
toward the Farrell Parties arising out of the Farrell Consulting Agreement and
each of the Farrell Parties shall have agreed to indemnify and hold harmless, on
a joint and several basis, each of the Sellers, the Executive Shareholders and
the Buyer and its Affiliates from and against any damages, costs and expenses
suffered by any such party arising from any such claim.
(b) Each of the Farrell Parties shall have executed and delivered to
the Buyer a buy-out agreement with the Buyer (with its effectiveness conditioned
on completion of the Closing) in such form as shall be mutually acceptable to
the parties.
(c) Joseph Farrell shall have executed and delivered to the Buyer a
consulting agreement with the Buyer (with its effectiveness conditioned on
completion of the Closing) in such form as shall be mutually acceptable to the
parties (the "New Farrell Consulting Agreement"). Notwithstanding anything to
the contrary set forth in the New Farrell Consulting Agreement, Buyer shall not
be responsible for any compensation or other benefits or expenses owing to Mr.
Farrell in excess of $800,000 per year, and the Sellers and the Executive
Shareholders agree, jointly and severally, to be responsible for and to
indemnify and hold Buyer and its Affiliates harmless from and against any and
all liability for amounts owing to Mr. Farrell in excess of $800,000 per year.
(d) Global Health Systems, Inc., a limited partner of FSN, shall
have agreed to provide software support services to the Buyer relating to the
Business of and the Purchased Property relating to FSN for no more than $60,000
per year during the EarnOut Periods in substantially the same manner as Global
Health Systems, Inc. performed such services prior to the Closing, such
agreement to be in form and substance reasonably satisfactory to the Buyer, and
the Buyer shall have received such assurances as it deems necessary or advisable
that the Buyer will
<PAGE>
continue to have a perpetual license to the underlying software with the right
to make modifications.
Section 8.9 Employment Agreement with Dr. Jones. The Buyer and Dr.
J.R. Jones shall have executed and delivered an amendment to that certain
employment agreement with Dr. Jones identified on Schedule 5.16(a) (with its
effectiveness conditioned on completion of the Closing), containing mutually
acceptable nonsolicitation and non-competition provisions in favor of the Buyer
in such form as shall be mutually acceptable to the parties.
Section 8.10 Financial Statements and Projections. On the Closing
Date, the most recent Management Prepared Financial Statements available prior
to the Closing reflect provision for accrued liabilities, including vacation and
sick, medical claims and extended reporting endorsement for each of the Sellers
(including all IBNR amounts), in an amount which the Sellers and Executive
Shareholders reasonably believe will be adequate to meet such accrued
liabilities. On the Closing Date, the Sellers shall have Cash and Cash
Equivalents and Accounts Receivable in an amount sufficient to satisfy the
aggregate current liabilities of the Sellers as set forth in the most recent
Management Prepared Financial Statements. The Audited Financial Statements and
the Management Prepared Financial Statements reflect all professional liability
claims and reserves, including all IBNR amounts, as at the respective dates of
the Audited Financial Statements and the Management Prepared Financial
Statements.
Section 8.11 Opinion of Counsel. The Buyer shall have received a
favorable opinion, dated as of the Closing Date, from Broad and Cassel, counsel
to the Sellers and the Executive Shareholders, in form and substance reasonably
satisfactory to the Buyer and its counsel, to the effect set forth on Exhibit C.
Section 8.12 Other Closing Documents. The Buyer shall have received
such other certificates, instruments and documents in confirmation of the
representations and warranties of the Sellers and the Shareholders or in
furtherance of the transactions contemplated by this Agreement as the Buyer or
its counsel may reasonably request, including, without limitation, the
Management Agreement in form and substance satisfactory to the Buyer.
Section 8.13 Legal Matters. All certificates, instruments, opinions
and other documents required to be executed or delivered by or on behalf of any
of the Sellers and the Shareholders under the provisions of this Agreement, and
all other actions and proceedings required to be taken by or on behalf of any of
the Sellers and the Shareholders in furtherance of the transactions contemplated
hereby, shall be reasonably satisfactory in form and substance to counsel for
the Buyer. Each of the Sellers shall have provided the Buyer with a certificate
stating that it is not a "foreign person" within the meaning of Treasury
Regulations ss. 1.1445-2(b). The certificate shall be in such form as shall be
mutually acceptable to the parties.
Section 8.14 TPA and UR Licenses. The Buyer shall have received
approval from all required state agencies, including Florida's and Texas'
Department of Insurance, to operate as a "third party administrator" or the
Buyer shall have otherwise received such assurances as the Buyer, in its sole
discretion, deems necessary or advisable, that it will be able to operate the
Businesses pursuant to an agreement with a holder of a TPA license upon such
terms
<PAGE>
and conditions acceptable to the Buyer in its sole discretion.
SECTION 9. CONDITIONS TO OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to consummate the transactions
contemplated by this Agreement are subject to the fulfillment, at or before the
Closing Date, of the following conditions, any one or more of which may be
waived by the Sellers in their sole discretion:
Section 9.1 Representations and Warranties of the Buyer. All
representations and warranties made by the Buyer and Parent in this Agreement
shall be true and correct on and as of the Closing Date as if again made by the
Buyer and Parent on and as of such date.
Section 9.2 Performance of the Buyer's Obligations. Each of the
Buyer and Parent shall have performed in all respects all obligations required
under this Agreement to be performed by it on or before the Closing Date.
Section 9.3 Consents and Approvals. All consents, waivers,
authorizations and approvals of any Governmental Authority and of any other
person, firm or corporation, required of the Buyer and Parent in connection with
the execution, delivery and performance of this Agreement, shall have been duly
obtained and shall be in full force and effect on the Closing Date.
Section 9.4 No Violation of Orders. No preliminary or permanent
injunction or other order issued by any Governmental Authority, nor any statute,
rule, regulation, decree or executive order promulgated or enacted by any
Governmental Authority -which declares this Agreement invalid or unenforceable
in any respect or which prevents the consummation of the transactions
contemplated hereby shall be in effect and no action or proceeding before any
Governmental Authority shall have been instituted or threatened by any
Governmental Authority or by any other person which seeks to prevent or declare
the consummation of the transactions contemplated by this Agreement or which
challenges the validity or enforceability of this Agreement.
Section 9.5 Opinion of Counsel. The Sellers shall have received a
favorable opinion, dated as of the Closing Date, from Dow, Lohnes & Albertson,
PLLC, counsel to the Buyer and Parent, in form and substance reasonably
satisfactory to the Sellers and their counsel, to the effect set forth on
Exhibit D. In addition, the Sellers shall have received a favorable opinion,
dated as of the Closing Date, from in-house counsel of the Buyer and Magellan,
in form and substance reasonably satisfactory to the Sellers and their counsel,
to the effect that the execution and delivery of this Agreement by the Buyer and
Parent did not, and the performance of this Agreement by the Buyer and Parent
will not violate or conflict with any provision of the Articles or Certificate
of Incorporation or By-Laws of the Buyer or Parent, respectively, and did not
and will not violate any provision of any order, judgment or decree of any
Governmental Authority to which either the Buyer or Parent is bound, and (other
than as disclosed in Schedule 6.4) did not and will not violate or result in a
breach of or constitute (with due notice or lapse of time or both) a default
under any material loan agreement, mortgage, security agreement or trust
indenture to which the Buyer or Parent is a party or by which it is bound or to
which any of its
<PAGE>
properties or assets is subject, which violation, breach or default would have a
material adverse effect on the financial condition of the Buyer or Parent, taken
as a whole.
Section 9.6 Other Closing Documents. The Sellers shall have received
such other certificates, instruments and documents in confirmation of the
representations and warranties of the Buyer and Parent or in furtherance of the
transactions contemplated by this Agreement as the Sellers, the Executive
Shareholders or their counsel may reasonably request, including, without
limitation, the Management Agreement in form and substance satisfactory to the
Executive Shareholders.
Section 9.7 Legal Matters. All certificates, instruments, opinions
and other documents required to be executed or delivered by or on behalf the
Buyer and Parent under the provisions of this Agreement, and all other actions
and proceedings required to be taken by or on behalf of the Buyer and Parent in
furtherance of the transactions contemplated hereby, shall be reasonably
satisfactory in form and substance to counsel for the Sellers.
SECTION 10. TERMINATION AND ABANDONMENT.
Section 1..1 Methods of Termination: Upset Date This Agreement may
be terminated and the transactions contemplated hereby may be abandoned at any
time before the Closing:
(a) By the mutual written consent of the Buyer and all of the
Sellers;
(b) By the Buyer, if all the conditions set forth in Section 8 of
this Agreement shall not have been satisfied or waived on or before November 30,
1997 unless such satisfaction frustrated or made impossible by any act or
failure to act of the Buyer;
(c) By agreement of all the Sellers if all the conditions set forth
in Section 9 of this Agreement shall not have been satisfied or waived on or
before November 30, 1997, unless such satisfaction has been frustrated or made
impossible by any act or failure to act of any Seller or any Shareholder;
(d) By either the Buyer, on the one hand, or the agreement of all
the Sellers, on the other, if the Buyer, in the case of the Sellers, or any of
the Sellers or the Executive Shareholders, in the case of the Buyer, fails to
comply in any material respect with any of its covenants or agreements contained
herein or in any document delivered in connection herewith, or breaches any of
its representations and warranties in any material way;
(e) By the Buyer or agreement of all the Sellers if a Governmental
Authority of competent jurisdiction shall have issued an order, decree or ruling
or taken any other action (which order, decree or ruling the parties hereto
shall use their reasonable efforts to lift), which permanently restrains,
enjoins or otherwise prohibits the transactions contemplated by this
<PAGE>
Agreement; or
(f) By the Buyer on or before October 23, 1997, in the event Parent
and the minority shareholders of Care Management Resources, Inc. (i) shall not
have terminated that certain shareholders agreement with respect to their
interests in said corporation, or (ii) shall not have otherwise amended said
shareholders agreement to Parent's satisfaction, or (iii) shall not have
otherwise entered into an agreement providing for such termination or amendment,
all upon such terms and conditions acceptable to Parent, in its sole discretion.
Section 10.2 Procedure Upon Termination. In the event of termination
and abandonment of this Agreement by the Sellers or the Buyer pursuant to
Section 10.1, written notice thereof shall forthwith be given to the other party
or parties, as applicable, and this Agreement shall terminate and the
transactions contemplated hereby shall be abandoned, without further action by
the Sellers or the Buyer. If this Agreement is terminated as provided herein, no
party to this Agreement shall have any liability or further obligation to any
other party to this Agreement except as provided below and elsewhere in this
Agreement, including Sections 12.3, 12.4, 12.8 and 12.14 hereof; provided,
however, that no termination of this Agreement pursuant to this Section 10 shall
relieve any party of liability for a breach of any provision of this Agreement
occurring before such termination. Upon the termination of this Agreement,
Parent and Buyer, on the one hand, and the Sellers and Executive Shareholders,
on the other, shall return all confidential materials previously furnished to
the other except to the extent that a party may require such materials for
purposes of enforcing its rights or pursuing any of its remedies under this
Agreement, at law or in equity. This provision shall survive the termination of
this Agreement.
SECTION 11. INDEMNIFICATION.
Section 11.1 Indemnification by the Sellers and the Executive
Shareholders. Notwithstanding the Closing or the delivery of the Purchased
Property and regardless of any investigation at any time made by or on behalf of
the Buyer or Parent or of any knowledge or information that the Buyer or Parent
may have, each Seller and each of the Executive Shareholders agrees to jointly
and severally indemnify and fully defend, save and hold the Buyer, any Affiliate
of the Buyer and their respective directors, officers and employees (the "Buyer
Indemnitees"), harmless if any Buyer Indemnitee shall at any time or from time
to time suffer any damage, liability, loss, cost, expense (including all
reasonable attorneys' and experts' fees and disbursements), deficiency,
interest, penalty, impositions, assessments or fines, whether or not arising
with respect to any claim, charge, suit, proceeding, investigation, arbitration
or mediation and, if instituted, whether at any trial or appellate level, and
whether raised by the parties hereto or any third party (collectively, "Losses")
arising out of or resulting from, or shall pay or become obliged to pay any sum
on account of, any Sellers' Event of Breach. As used herein, "Sellers' Event of
Breach" shall be and mean any one or more of the following:
any untruth or inaccuracy in any representation of any Seller or any
Executive Shareholder or the breach of any warranty of any Seller or Executive
Shareholder, without giving effect to any "materiality" qualification or
limitation stated in such representation or warranty and
<PAGE>
without regard to whether the indemnifying Seller or Executive Shareholder made
such representation or breached such warranty (including, without limitation,
(i) any misrepresentation in, or omission from, any statement, certificate,
schedule, exhibit, annex or other document furnished pursuant to this Agreement
by any Seller or any Shareholder (or any of their representatives) to the Buyer
(or any representative of the Buyer) and any misrepresentation in or omission
from any document furnished to the Buyer in connection with the Closing and (ii)
any and all liabilities of or claims against any Business, the Purchased
Property, or any Buyer Indemnitee arising out of any action, suit, proceeding,
dispute or investigation or order, writ, judgment, award, injunction or decree
of the character described in Section 5.15 or out of any Contract to the extent
not set forth in Schedule 5.16(a) or with respect to any obligation under any
such Contract with respect to any period prior to the Closing Date);
(b) any failure of any Seller or any Executive Shareholder to
perform or observe any term, provision, covenant, agreement or condition on the
part of any Seller or any Executive Shareholder to be performed or observed;
(c) any claim or cause of action by any party against any Buyer
Indemnitee, with respect to the Excluded Liabilities; or with respect to Losses
arising with respect to the operation of any Business or the Purchased Property
on or prior to the Closing Date or with respect to any services provided by the
Seller or its employees, independent contractors or consultants on or prior to
the Closing Date;
(d) any direct or indirect obligations or liabilities described in
Section 7.5(c) that may arise before or after the Closing Date; or
(e) any claim or cause of action against any Buyer Indemnitee by any
Shareholder (other than the Executive Shareholders) other than by reason of
their employment agreements, if any, with the Buyer;
provided, however, that, except as otherwise stated in the following
proviso, the Sellers and the Executive Shareholders shall have no obligation to
make any payment under Section 11.1(a) with respect to any representation or
warranty made in good faith without actual knowledge or notice of falsity unless
the aggregate amount to which all Buyer Indemnitees are entitled by reason of
all such claims exceeds $100,000, it being understood that once such amount is
exceeded, the aggregate of all such claims (including such $100,000 amount and
any amount in excess thereof) shall be payable jointly and severally by the
Sellers and the Executive Shareholders to the Buyer. In addition, the Sellers
and the Executive Shareholders shall have no obligation to make any payment
under Section 11.1(a) with respect to the representation and warranty made in
Section 5.13(b), made in good faith without actual knowledge or notice of
falsity, unless such Losses arise as a result of events, conditions or facts
existing before the Closing Date.
Section 11.2 Procedures for Indemnification by the Sellers. If a
Sellers' Event of Breach occurs or is alleged and a Buyer Indemnitee asserts
that the Sellers or any of the Executive Shareholders has become obligated to
such Buyer Indemnitee pursuant to Section 11.1, or if any suit, action,
investigation, mediation, claim or proceeding is begun, made or instituted as
<PAGE>
a result of which the Sellers or any of the Executive Shareholders may become
obligated to a Buyer Indemnitee hereunder, such Buyer Indemnitee shall give
written notice to the Sellers and the Executive Shareholders. The Sellers and
the Executive Shareholders agree to jointly and severally defend, contest or
otherwise protect the Buyer Indemnitee against any such suit, action,
investigation, claim or proceeding at their sole cost and expense. The Buyer
Indemnitee shall have the right, but not the obligation, to participate at its
own expense in the defense thereof by counsel of the Buyer Indemnitee's choice
and shall in any event cooperate with and assist the Sellers and the Executive
Shareholders to the extent reasonably possible. If the Sellers and the Executive
Shareholders fail to timely defend, contest or otherwise protect against such
suit, action, investigation, claim or proceeding, the Buyer Indemnitee shall
have the right to do so, including the right to make any compromise or
settlement thereof, and the Buyer Indemnitee shall be entitled to recover the
entire cost thereof jointly and severally from the Sellers or the Executive
Shareholders, including reasonable attorneys' fees, disbursements and amounts
paid as the result of such suit, action, investigation, mediation, claim or
proceeding.
Section 11.3 The Buyer's Right of Set-Off. In the event the Buyer
has a claim against any of Sellers or Executive Shareholders for indemnification
pursuant to this Section 11 or as a result of the failure by the Sellers or the
Executive Shareholders to pay the Buyer any amounts owed to it pursuant to
Section 3, the Buyer may set-off the amount of such Losses against any amounts
payable directly or indirectly by or on behalf of the Buyer to the Sellers from
time to time pursuant to this Agreement or the agreements and documents
referenced herein, including without limitation any amounts payable by the Buyer
to the Escrow Agent pursuant to Section 3.
Section 11.4 Indemnification by the Buyer and Parent.
Notwithstanding the Closing or the delivery of the Purchased Property and
regardless of any investigation at any time made by or on behalf of the Sellers
or the Executive Shareholders or of any knowledge or information that the
Sellers or the Executive Shareholders may have, the Buyer and Parent shall
jointly and severally indemnify and agree to fully defend, save and hold each of
the Sellers, and its directors, officers and employees, and each Executive
Shareholder (collectively, the "Seller Indemnitees"), harmless if any Seller
Indemnitee shall at any time or from time to time suffer any Losses arising out
of or resulting from, or shall pay or become obligated to pay any sum on account
of, any Buyer's Event of Breach. As used herein, "Buyer's Event of Breach" shall
be and mean any one or more of the following:
(i) any untruth or inaccuracy in any representation of the Buyer or
Parent or the breach of any warranty of the Buyer or Parent contained in this
Agreement;
(ii) any failure of the Buyer or Parent duly to perform or observe
any term, provision, covenant, agreement or condition contained in this
Agreement on the part of the Buyer or Parent to be performed or observed; and
(iii) any claim or cause of action by any party against any Seller
Indemnitees with respect to Assumed Liabilities;
provided, however, that neither the Buyer nor Parent shall have any obligation
to make any
<PAGE>
payment under Section 11.4(a) with respect to any representation or warranty
made in good faith without actual knowledge or notice of falsity unless the
aggregate amount to which all Seller Indemnitees are entitled by reason of all
such claims exceeds $100,000, it being understood that once such amount is
exceeded, the aggregate of all such claims (including such $100,000 amount and
any amount in excess thereof) shall be payable by the Buyer and Parent on demand
by the Seller Indemnitees.
Section 11.5 Procedures for Indemnification by the Buyer and Parent.
If a Buyer's Event of Breach occurs or is alleged and a Seller Indemnitee
asserts that the Buyer or Parent has become obligated to it pursuant to Section
11.4, or if any suit, action, investigation, claim or proceeding is begun, made
or instituted as a result of which the Buyer or Parent may become obligated to a
Seller Indemnitee hereunder, such Seller Indemnitee shall give written notice to
the Buyer and Parent. The Buyer and Parent agree to defend, contest or otherwise
protect such Seller Indemnitee against any such suit, action, investigation,
claim or proceeding at its sole cost and expense. Such Seller Indemnitee shall
have the right, but not the obligation, to participate at its own expense in the
defense thereof by counsel of its choice and shall in any event cooperate with
and assist the Buyer or Parent to the extent reasonably possible. If the Buyer
or Parent fails timely to defend, contest or otherwise protect against such
suit, action, investigation, claim or proceeding, such Seller Indemnitee shall
have the right to do so, including the right to make any compromise or
settlement thereof, and such Seller Indemnitee shall be entitled to recover the
entire cost thereof from the Buyer or Parent including reasonable attorneys'
fees, disbursements and amounts paid as the result of such suit, action,
investigation, claim or proceeding.
Section 11.6 The Sellers' and Executive Shareholders' Right of Set-Off. In the
event the Sellers or Executive Shareholders have a claim against the Buyer or
Parent for indemnification pursuant to this Section 11 or as a result of the
failure by the Buyer or Parent to pay the Sellers any amounts owed to them
pursuant to Section 3, the Sellers and Executive Shareholders may set-off the
amount of such Losses against any amounts payable directly or indirectly by or
on behalf of the Sellers or Executive Shareholders to the Buyer or Parent from
time to time pursuant to this Agreement or the agreements and documents
referenced herein, including without limitation any amounts payable by the
Sellers or Executive Shareholders pursuant to Section 3.
Section 11.7 Purchase Price Adjustment. The Buyer and each of the
Sellers agree to treat any payments under this Section 11 as an adjustment to
the Purchase Price for all federal, state and local Tax purposes.
MISCELLANEOUS.
SECTION 12.
Section 12.1 Successors and Assigns; Restrictions on Assignment and
Transfer of Purchase Price. Except as otherwise provided in this Agreement, no
party hereto shall assign this Agreement or any rights or obligations hereunder
without the prior written consent of the other party hereto and any such
attempted assignment without such prior written consent shall be void and of no
force and effect, Provided, that the Buyer may assign its rights hereunder to
any of its
<PAGE>
Affiliates, and the Buyer may assign its rights to indemnification or damages
hereunder to the lender or lenders providing financing to the Buyer; provided,
further, that no such assignment shall reduce or otherwise vitiate any of the
obligations of any of the Sellers, the Executive Shareholders or Parent
hereunder. This Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective successors, permitted assigns,
heirs, beneficiaries, estates, executors and personal representatives.
Section 12.2 Governing Law. Jurisdiction. This Agreement shall be
construed, performed and enforced in accordance with, and governed by, the laws
of the State of Florida, without giving effect to the principles of conflicts of
laws thereof.
Section 12.3 Expenses. Except as otherwise provided herein, each of
the parties hereto shall pay its own expenses in connection with this Agreement
and the transactions contemplated hereby, including any legal and accounting
fees, whether or not the transactions contemplated hereby are consummated. The
Sellers shall pay all state and local sales, use, transfer, excise, value-added
or other similar Taxes and all recording and filing fees that may be imposed by
reason of the sale, transfer, assignment and delivery of the Purchased Property
and shall prepare and file all Tax Returns related thereto. The Buyer shall pay
50` and the Sellers shall pay 50` of the Hart-Scott-Rodino filing fee, if any,
required in connection with the transaction contemplated hereby.
Section 12.4 Joint and Several Obligations.
Notwithstanding anything to the contrary contained in this Agreement, each and
every obligation of any Seller or Executive Shareholder hereunder shall be a
joint and several obligation of all the Sellers and Executive Shareholders.
Section 12.5 Severability. In the event that any part of this Agreement is
declared by any court or other judicial or administrative body to be null, void
or unenforceable, said provision shall survive to the extent it is not so
declared, and all of the other provisions of this Agreement shall remain in full
force and effect.
Section 12.6 Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given (i) on the date of service if served personally on the
party to whom notice is to be given; (ii) on the day of transmission if sent via
facsimile transmission to the facsimile number given below, and telephonic
confirmation of receipt is obtained promptly after completion of transmission;
(iii) on the day after delivery to Federal Express or similar overnight courier;
or (iv) on the fifth day after mailing, if mailed to the party to whom notice is
to be given, by first class mail, registered or certified, postage prepaid and
properly addressed, to the party as follows:
<PAGE>
If to the Sellers and/or the Executive Shareholders
Allied Health Group, Inc.
Florida Specialty Network, Ltd.
3106 Commerce Parkway
Miramar, FL 33025
Gut Management, Inc.
2245 North University Drive
Pembroke Pines, FL 33024
Sky Management Co.
11410 North Kendall Drive
Suite 212
Miami, FL 33176
Surginet, Inc.
3106 Commerce Parkway
Miramar, FL 33025
Surgical Associates of South Florida, Inc.
3106 Commerce Parkway
Miramar, FL 33025
Florida Specialty Network, Ltd.
3106 Commerce Parkway
Miramar, FL 33025
Lawrence Schimmel, M.D.
9320 S.W. 61st Court
Miami, Florida 33156
Jacob Nudel, M.D.
4281 Casper Court
Hollywood, FL 33021
Copy to:
David Russin, M.D.
715 West 49th Street
Miami Beach, Florida 33140
Broad and Cassel
201 S. Biscayne Boulevard
Suite 3000
<PAGE>
Miami, Florida 33131
Attention: Mike Segal, P.A.
Telecopy: (305) 373-9443
If to the Buyer and/or Parent:
Magellan Health Services, Inc.
3414 Peachtree Road, NE, Suite 1400
Atlanta, Georgia 30326
Attention: Vice President-Mergers and Acquisitions
Copy to:
Magellan Health Services, Inc.
3414 Peachtree Road, NE, Suite 1400
Atlanta, Georgia 30326
Attention: General Counsel
Any party may change its address for the purpose of this Section by
giving the other party written notice of its new address in the manner set forth
above.
Section 12.7 Amendments; Waivers. This Agreement may be amended or
modified, and any of the terms, covenants, representations, warranties or
conditions hereof may be waived, only by a written instrument executed by the
parties hereto, or in the case of a waiver, by the party waiving compliance. Any
waiver by any party of any condition, or of the breach of any provision, term,
covenant, representation or warranty contained in this Agreement, in any one or
more instances, shall not be deemed to be nor construed as further or continuing
waiver of any such condition, or of the breach of any other provision, term,
covenant, representation or warranty of this Agreement.
Section 12.8 Public Announcements. The parties agree that after the
signing of this Agreement, neither party shall make any press release or public
announcement concerning this transaction without the prior written approval of
the other party unless, in the opinion of such party's counsel, a press release
or public announcement is required by applicable law or stock exchange rules.
If, in the opinion of such party's counsel, any such announcement or other
disclosure is required by applicable law or stock exchange rules, the disclosing
party agrees to give then nondisclosing party prior notice and an opportunity to
comment on the proposed disclosure.
Section 12.9 Entire Agreement. This Agreement contains the entire
understanding between the parties hereto with respect to the transactions
contemplated hereby and supersedes and replaces all prior and contemporaneous
agreements and understandings, oral or written, with regard to such
transactions. All exhibits and schedules hereto and any documents and
instruments delivered pursuant to any provision hereof are expressly made a part
of this Agreement as fully as though completely set forth herein.
<PAGE>
Section 12.10 Parties in Interest. Nothing in this Agreement is
intended to confer any rights or remedies under or by reason of this Agreement
on any persons other than the Sellers, and the Buyer and their respective
successors and permitted assigns. Nothing in this Agreement is intended to
relieve or discharge the obligations or liability of any third persons to the
Sellers or the Buyer. No provision of this Agreement shall give any third
persons any right of subrogation or action over or against the Sellers or the
Buyer.
Section 12.11 Scheduled Disclosures. Disclosure of any matter, fact
or circumstance in a Schedule to this Agreement shall not be deemed to be
disclosure thereof for purposes of any other Schedule hereto.
Section 12.12 Section and Paragraph Headings. The section and
paragraph headings in this Agreement are for reference purposes only and shall
not affect the meaning or interpretation of this Agreement.
Section 12.13 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same instrument.
Section 12.14 Post-Closing Survival. All covenants and agreements
which by their respective terms are intended to survive the consummation of the
transactions contemplated by this Agreement shall survive such consummation in
accordance with their respective terms and conditions.
Section 12.15 Confidentiality. After the Closing, the Sellers and
the Executive Shareholders hereby agree to hold in strict confidence all
business and other information relating to the Purchased Property and the
Business and, except as otherwise required by law or as to information which
becomes publicly available, not to disclose or otherwise reveal any such
confidential information to any other person or entity without in each instance
the prior written consent of the Buyer
Section 12.16 Litigation. It is recognized by the parties to this
Agreement that litigation may arise at some time in the future relating to the
Sellers, the Buyer, Parent, the Purchased Property or the Assumed Liabilities
which may be related directly or indirectly to the period prior to the Closing
or the period subsequent to the Closing, or both. Each of the parties to this
Agreement agrees, therefore, that to the extent reasonable under the
circumstances, it will fully cooperate with and provide information, records,
documents and assistance of employees to the other parties with respect to any
litigation or potential litigation in which the other party is or may be
involved.
Section 12.17 Specific Performance. Each of the Sellers and the
Executive Shareholders acknowledge that the Buyer will be irreparably harmed and
the Buyer will have no adequate remedy at law if any of the Sellers or the
Executive Shareholders fail to perform any of their obligations under this
Agreement. It is accordingly agreed that, in addition to any other remedies
which may be available to it, the Buyer will have the right to obtain injunctive
relief to restrain a breach or threatened breach of, or otherwise obtain
specific performance of, the Sellers'
<PAGE>
and the Executive Shareholders' covenants and other agreements contained in this
Agreement.
Section 12.18 Retention of Independent Accounting Firms. If an
Independent Accounting Firm is retained pursuant to Section 3 of this Agreement,
the Buyer, the Sellers and the Executive Shareholders shall each execute such
accounting firm's retention agreement, if any, and shall each be bound by the
obligation, if any, contained therein to provide indemnification, contribution
and related expense reimbursement to such Independent Accounting Firm.
Section 12.19 Limited Obligations of Parent. Parent hereby
guarantees the full and prompt payment when due of the Purchase Price payable
pursuant to and in accordance with the provisions set forth in Section 3. The
parties expressly agree that, notwithstanding anything to the contrary contained
in this Agreement, Parent shall not be liable to any third parties in respect of
any of the Assumed Liabilities or in respect of any other matter not related to
Parent's express obligations as set forth in this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed either in an individual capacity or by their respective officers
"hereunto duly authorized, as the case may be, as of the date first above
written.
CMSF, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
ALLIED HEALS GROUP, INC,
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
GUT MANAGEMENT, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
SKY MANAGEMENT CO.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
- - JI ~
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed either in an individual capacity or by their respective officers
"hereunto duly authorized, as the case may be, as of the date first above
written.
CMSF, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
AILIED HEALS GROUP, INC,
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
GUT MANAGEMENT, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
SKY MANAGEMENT CO.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.,
BY ITS GENERAL PARTNER, FLORIDA
SPECIALTY NETWORK, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
SURGICAL ASSOCIATE. OF SOUTH
FLORIDA, INC.,
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
SURGINET, INC
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GHS 10-K AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,466,000
<SECURITIES> 400,000
<RECEIVABLES> 252,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,169,000
<PP&E> 6,454,000
<DEPRECIATION> 1,834,000
<TOTAL-ASSETS> 10,712,000
<CURRENT-LIABILITIES> 1,344,000
<BONDS> 5,412,000
0
0
<COMMON> 65,000
<OTHER-SE> 4,136,000
<TOTAL-LIABILITY-AND-EQUITY> 10,712,000
<SALES> 1,830,000
<TOTAL-REVENUES> 1,830,000
<CGS> 843,000
<TOTAL-COSTS> 1,428,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 485,000
<INCOME-PRETAX> (11,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,000)
<DISCONTINUED> 2,083,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,072,000
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
