SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1996
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[No Fee Required]
For the transition period from to
Commission file number 1-10522
PIONEER FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2479273
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1750 East Golf Road, Schaumburg, Illinois 60173
(Address of principal executive, offices) (Zip Code)
Registrant's telephone number, including area code (847) 995-0400
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ____
The number of shares of the registrant's common stock, $1.00 par value per
share, outstanding as of October 31, 1996 was 11,590,464.
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Investments-Note 1 and 3
Securities available for sale
Fixed maturities, at fair value
(cost: 1996-$676,722; 1995-$597,078) $ 671,810 $ 622,666
Equity securities, at fair value
(cost: 1996-$24,319; 1995-$13,333) 29,755 15,570
Fixed maturities held to maturity, at amortized cost
(fair value: 1996-$255,841; 1995-$252,728) 258,002 246,041
Mortgage loans--at unpaid balance 6,866 9,253
Real estate--at cost, less accumulated depreciation 17,555 18,250
Policy loans--at unpaid balance 81,368 79,122
Short-term investments--at cost,
which approximates fair value 14,170 51,690
Total Investments 1,079,526 1,042,592
Cash 41,845 20,274
Premiums and other receivables, less
allowance for doubtful accounts 22,857 23,429
Reinsurance receivables and amounts
on deposit with reinsurers 199,665 184,719
Accrued investment income 15,148 13,307
Deferred policy acquisition costs 228,731 219,874
Land, building and equipment-at cost, less
accumulated depreciation 24,129 26,433
Other 47,117 28,293
$1,659,018 $1,558,921
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited)
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Policy liabilities:
Future policy benefits $ 970,347 $ 961,127
Policy and contract claims 188,196 166,111
Unearned premiums 74,698 71,150
Other 17,377 16,077
1,250,618 1,214,465
General expenses and other liabilities 49,958 48,580
Amounts due to reinsurers 64,329 82,954
Deferred federal income taxes 5,614 2,393
Short-term notes payable 6,243 13,534
Long-term notes payable 22,828 21,504
Convertible subordinated debentures due 2000 - 9,695
Convertible subordinated notes due 2003 86,250 -
1,485,840 1,393,125
Redeemable Preferred Stock, no par value:
$2.125 cumulative convertible exchangeable
preferred stock
Authorized: 5,000,000 shares
Issued and outstanding:
(1995: 848,900 shares) - 21,222
Stockholders' Equity
Common Stock, $1 par value:
Authorized: 30,000,000 shares
Issued, including shares in treasury
(1996-12,638,928; 1995-11,207,591) 12,639 11,208
Additional paid-in capital 88,903 72,198
Unrealized appreciation (depreciation) of
available-for-sale securities-Note 3 (2,670) 4,518
Retained earnings 84,526 66,870
Less treasury stock at cost
(1996-1,132,300 shares; 1995-1,132,300 shares) (10,220) (10,220)
Total Stockholders' Equity 173,178 144,574
$1,659,018 $1,558,921
</TABLE>
See notes to condensed consolidated financial statements.
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Income:
Premiums and policy charges $198,932 $174,677 $556,656 $506,958
Net investment income 18,123 17,735 55,181 52,570
Other income and realized gains
and losses from investments 9,274 9,331 32,112 26,486
226,329 201,743 643,949 586,014
Benefits and expenses:
Benefits 141,119 121,502 391,780 352,039
Insurance and general expenses 55,932 59,032 162,645 158,540
Interest expense 1,831 994 4,592 4,316
Amortization of deferred policy
acquisition costs 16,516 15,357 54,821 50,865
215,398 196,885 613,838 565,760
INCOME BEFORE INCOME TAXES 10,931 4,858 30,111 20,254
Federal income taxes 3,662 1,542 10,087 6,623
NET INCOME 7,269 3,316 20,024 13,631
PREFERRED STOCK DIVIDENDS - 451 592 1,354
INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ 7,269 $ 2,865 $ 19,432 $ 12,277
NET INCOME PER COMMON SHARE
Primary $ .63 $ .32 $ 1.78 $ 1.74
Fully Diluted $ .52 $ .30 $ 1.48 $ 1.25
DIVIDENDS DECLARED
PER COMMON SHARE $ .055 $ .045 $ .165 $ .135
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 11,544 8,865 10,940 7,078
Fully Diluted 16,177 12,649 15,189 12,623
</TABLE>
See notes to condensed consolidated financial statements.
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,146 $ 20,242
INVESTING ACTIVITIES
Net decrease in
short-term investments 40,346 29,752
Purchases of investments (227,473) (147,215)
Sale of investments 124,347 112,714
Maturities of investments 30,771 7,317
Net sale (purchase) of property and equipment 444 (5,474)
Sale of subsidiaries, net of cash sold 5,078 -
Purchase of subsidiaries, net of cash acquired (22,739) (8,314)
NET CASH USED BY
INVESTING ACTIVITIES (49,226) (11,220)
FINANCING ACTIVITIES
Net proceeds from debt offering 83,016 -
Increase in notes payable 30,845 32,048
Repayments of notes payable (35,011) (23,611)
Proceeds from sale of agent receivables 20,012 13,875
Transfer of collections on previously
sold agent receivables (18,071) (14,699)
Policyholder account deposits 27,884 25,367
Policyholder account withdrawals (24,874) (27,523)
Dividends paid - preferred (592) (1,354)
Dividends paid - common (1,777) (799)
Stock options exercised 270 910
Purchase of treasury stock - (486)
Retirement of preferred stock (13,058) (460)
Other 7 13
NET CASH PROVIDED BY
FINANCING ACTIVITIES 68,651 3,281
INCREASE IN CASH 21,571 12,303
CASH AT BEGINNING OF PERIOD 20,274 8,612
CASH AT END OF PERIOD $ 41,845 $ 20,915
</TABLE>
See notes to condensed consolidated financial statements.
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1996
NOTE 1 -- ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (GAAP) for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Pioneer Financial Services, Inc. ("Pioneer" or "the Company") Annual Report on
Form 10-K for the year ended December 31, 1995.
EARNINGS PER SHARE
Primary earnings per share of Common Stock are determined by dividing net income
for the period, less dividends on Preferred Stock, by the weighted average
number of common stock and common stock equivalents (dilutive stock options)
outstanding. Fully diluted earnings per share assumes conversion of the
Preferred Stock outstanding and conversion of the Subordinated Debentures and
Notes with related tax-effected interest added back to net income. (See
discussion in Exhibit 11 on page 19).
NOTE 2 -- STOCKHOLDERS' EQUITY
The statutory accounting practices prescribed for Pioneer's insurance
subsidiaries by regulatory authorities differ from GAAP. The combined
statutory-basis capital and surplus of Pioneer's direct insurance subsidiaries
was $161,703,000 and $115,423,000 at September 30, 1996 and December 31, 1995,
respectively. Statutory net losses of the insurance subsidiaries amounted to
$283,000 for the three month period ended September 30, 1996 compared to
statutory net income of $1,602,000 for the same period in 1995. Statutory net
income amounted to $4,011,000 and $5,219,000 for the nine month periods ended
September 30, 1996 and 1995, respectively.
NOTE 3 -- INVESTMENTS
Realized investment gains for the three month periods ended September 30, 1996
and 1995 were $185,000 and $464,000, respectively, and $956,000 and $1,879,000
for the nine month periods ended September 30, 1996 and 1995, respectively.
Unrealized depreciation of available-for-sale securities at September 30, 1996
of $2,670,000 included unrealized depreciation of $121,000 less unrealized
appreciation of $3,986,000 on investments in escrow trust accounts pursuant to
agreements with certain reinsurers and net of deferred tax benefits of
$1,437,000. Unrealized appreciation on available-for-sale securities at
December 31, 1995 of $4,518,000 included gross appreciation of $27,150,000 less
unrealized appreciation of $17,397,000 on investments in escrow trust accounts
pursuant to agreements with certain reinsurers and net of deferred taxes and DAC
adjustments of $5,235,000.
NOTE 4 -- CONTINGENCIES
Pioneer and its subsidiaries are named as defendants in various legal actions,
some claiming significant damages, arising primarily from claims under insurance
policies, disputes with agents, reinsurance arbitrations, and other items.
Pioneer's management and its legal counsel are of the opinion that the
disposition of these actions will not have a material adverse effect on
Pioneer's financial position.
NOTE 5 -- BUSINESS ACQUISITIONS
On March 12, 1996, Pioneer acquired for a cost of $26,400,000, principally in
cash, the outstanding common shares of Universal Fidelity Life Insurance Company
(UFLIC). The acquisition was accounted for by the purchase method and,
accordingly, the purchase price was allocated to assets and liabilities acquired
based on estimates of their fair values.
In August 1996, the Company completed the acquisition of a block of individual
and small group health insurance business from Washington National Insurance
Company (WNIC) for approximately $19,000,000. The acquisition was structured as
a reinsurance transaction between WNIC and an insurance subsidiary of the
Company. The Company has reinsured the block of business on a 50% quota-share
basis to fund a portion of the acquisition. The Company entered into a new term
loan to fund the remaining costs and capital requirements of the transaction
(see Liquidity and Capital Resources). The total annualized revenues of the
assumed block are approximately $220,000,000. The block produced pre-tax
operating earnings of approximately $2,600,000 in 1995. WNIC will retain a
majority of the assets and reserves supporting the block of business pursuant to
the terms of the reinsurance agreement related to claims incurred prior to the
closing date of the transaction.
NOTE 6 -- CONVERTIBLE SUBORDINATED NOTES
In March 1996 the Company issued $86,250,000 of 6 1/2% convertible subordinated
notes due 2003. Net proceeds from the offering totaled approximately
$83,000,000. The notes are convertible into the Company's common stock at any
time prior to maturity, unless previously redeemed, at a conversion price of
$20.00 per share.
NOTE 7 -- CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
In May 1996, the Company completed its offer to redeem its cumulative
convertible exchangeable preferred stock. Approximately 326,000 shares of the
Preferred Stock were converted by shareholders into 521,000 shares of Common
Stock. The cost to redeem the remaining shares was approximately $13,600,000,
which includes a charge to income of $444,000.
NOTE 8 - CONVERTIBLE SUBORDINATED DEBENTURES
In August 1996, the Company completed the redemption of all its outstanding 8%
convertible subordinated debentures due 2000. $9,006,000 of the outstanding
debentures were converted into shares of Common Stock at a price of $11.75 per
share, or 85.11 shares for each $1,000 in principal amount of the debentures.
The remaining $119,000 of debentures were redeemed by the Company at principal
amount plus accrued interest to the redemption date.
NOTE 9 - SALE OF SUBSIDIARIES
Effective September 1996, the Company completed the sale of its managed
healthcare subsidiaries for cash consideration and warrants. The managed care
division was the smallest of the Company's business units and its sale will not
have a material impact on the Company's income.
NOTE 10 - SUBSEQUENT EVENTS
In October 1996, the Company signed an agreement to acquire SECURA Life
Insurance Company. The purchase price is $12,500,000, subject to adjustment.
The purchase, which is subject to regulatory approval, is expected to close in
the fourth quarter of 1996.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations - First Nine Months of 1996 Compared to First Nine Months
of 1995
Overview
The information set forth below is based on the Company's major product lines.
Nine Months
Ended September 30,
1996 1995
Revenues
Group Medical $ 318,862 $ 315,633
Senior Health and Life 212,701 177,865
Life Insurance 97,567 81,544
Other 14,819 10,972
TOTAL $ 643,949 $ 586,014
Pre-tax operating income(1)
Group Medical $ 14,719 $ 17,610
Senior Health and Life 12,722 4,653
Life Insurance 9,200 6,240
Corporate and Other (7,042) (4,968)
TOTAL $ 29,599 $ 23,535
(1) Represents the Company's income before taxes excluding the effects of
realized investment gains and losses. The 1996 amount also excludes
approximately $0.4 million in payments to redeeming stockholders relating to the
redemption of the Company's preferred stock. The 1995 amount also excludes
approximately $5.2 million in payments to converting bondholders and other
expenses relating to the conversion of the Company's 8% Convertible Subordinated
Debentures Due 2000 (the "8% Debentures").
Group Medical
Revenue. Total revenue in the Group Medical Division increased $3.3 million, or
1%, from $315.6 million to $318.9 million. Premiums increased $4.6 million or
2%, from $295.7 million to $300.3 million. The resulting increase in premiums
was due to the acquisition of a block of business from Washington National
Insurance Company (WNIC). The increase was offset by a decline in the major
medical in force due to the Company's discontinued marketing in certain states
due to the unfavorable regulatory environment.
Net investment income increased $0.5 million, or 7% from $6.3 million to $6.8
million. Total realized investment losses were $0.1 million compared to $0.6
million for the same period of 1995.
Other income decreased $2.4 million, or 16%, from $14.2 million to $11.8 million
due to the decrease in association group medical policyholders.
Benefits. The following table sets forth the earned premium, benefits, and loss
ratios for products issued by the Group Medical Division:
Nine Months
Ended September 30,
1996 1995
Earned Premium (1) $ 307,368 $ 309,615
Benefits (1) 194,683 195,085
Loss Ratio 63.3% 63.0%
(1) In the Company's statement of consolidated income, accident and health
premium revenue represent premiums written; the changes in unearned
premiums are reflected in accident and health benefits.
The loss ratio in 1996 was relatively unchanged from the first nine months of
1995.
Insurance and General Expenses. Insurance and general expenses increased $2.2
million, or 3%, from $84.5 million to $86.7 million. The increase related
primarily to cost containment and managed care expenses.
The amortization of Deferred Policy Acquisition Costs (DAC) decreased $1.4
million, or 1%, from $28.8 million to $27.2 million due to a decrease in the
level of new business costs deferred in 1996.
Senior Health and Life Division
Revenue. Total revenue in the Senior Health and Life Division increased $34.8
million, or 20%, from
$177.9 million to $212.7 million. Senior health premium increased $28.2
million, or 17%, from $169.2 million to $197.4 million due to an increase in new
Medicare supplement sales and the March 1996 acquisition of Universal Fidelity
Life Insurance Company (UFLIC).
Net investment income increased $3.7 million, or 60%, from $6.1 million to $9.8
million, primarily due to the acquisition of UFLIC and an increase in the
capital base of the division. The total realized gains decreased $1.8 million
from $3.1 million to $1.3 million.
Benefits. The following table sets forth the earned premium, benefits, and loss
ratios for senior health products:
Nine Months
Ended September 30,
1996 1995
Earned Premium (1) $ 192,275 $ 160,782
Benefits (1) 133,138 108,404
Loss Ratio 69.2% 67.4%
(1) In the Company's statement of consolidated income, accident and health
premium revenue represent premiums written; the changes in unearned
premiums are reflected in accident and health benefits.
During the period, the division experienced higher medical claims ratios, due in
large part to the shift in new business sales to a higher benefit and lower
expense component product. In addition, the mature block of Medicare supplement
business acquired from UFLIC has a higher average loss ratio and a lower
commission compensation level. The loss ratios are consistent with projected
levels.
Insurance and General Expenses. Insurance and general expenses increased $2.8
million, or 7%, from $41.6 million to $44.4 million due to the increased revenue
base. The expense ratio improved in 1996 due to efficiencies from the UFLIC
acquisition.
The amortization of DAC increased $2.4 million, or 16%, from $15.6 million to
$18.0 million due to an increase in the amortization rate on the Medicare
supplement block of business.
Life Insurance Divison
Revenue. Total revenue in the Life Insurance Division increased $16.0 million,
or 20%, from $81.5 million to $97.6 million. The increase was due to a 38%
increase in new term life sales.
Net investment income decreased $1.8 million, from $40.1 million to $38.3
million. The decrease was primarily due to a decrease in yields of investments
held in escrow trust accounts pursuant to agreements with certain reinsurers.
Benefits. Total life and annuity policy benefits increased $11.5 million, or
21%, from $54.0 million to $65.5 million. This increase was primarily due to
the increased life insurance in-force and higher than projected mortality in the
second quarter.
Insurance and General Expenses. Insurance and general expenses decreased $1.8
million, or 12%, from $15.4 million to $13.6 million. The decrease was
primarily due to consolidation costs incurred pursuant to the acquisition of
Connecticut National Life (CNL) in the first quarter of 1995. The unit cost of
administration per policy in-force was consistent with costs for the same period
in 1995.
The amortization of DAC increased $3.0 million, or 47%, from $6.5 million to
$9.5 million, due to the continued increase in new life production and in force
business.
Corporate and Other
Total revenue from the Company's managed healthcare subsidiaries included in the
segment was $14.8 million in 1996 compared to $11.0 million for the same period
of 1995.
Corporate expenses increased $0.9 million, or 5%, from $17.0 million to $17.9
million. Interest expense increased $0.4 million, or 7%, from $4.1 million to
$4.4 million. A decrease in interest expense due to the conversion of the
Company's 8% debentures in the third quarter of 1995 and 1996 was offset by the
offering of the Company's 6 1/2% notes in the first quarter of 1996.
CONSOLIDATED RESULTS OF OPERATIONS
Net Income. The Company's consolidated net income increased $6.4 million, or
47%, from $13.6 million to $20.0 million. This increase was due primarily to
improved profitability in the Life Division and Senior Health and Life as a
result of lower expense levels and increased new business production.
Premiums and Policy Charges. Total premiums and policy charges increased $49.7
million, or 9.8%, from $507.0 million to $556.7 million. This increase was due
primarily to the increase in accident and health premiums of $32.8 million, or
7%, which was due primarily to an increase in premiums from Medicare supplement
and long-term care products of $28.2 million, or 17%. Premiums from major
medical products increased $4.6 million or 2%. Life insurance premiums
increased $16.8, or 40%, primarily due to new business sales.
Net Investment Income. Net investment income increased $2.6 million, or 7%,
from $52.6 million to $55.2 million due to an increase in invested assets and
the acquisition of UFLIC. Annualized investment yields remained constant at
7.0%
Other Revenue. Other income and realized investment gains and losses increased
$5.6 million, or 33%, from $26.5 million to $32.1 million. The increase in
other income was due to the July 1995 acquisition of ACMG, fees related to the
August 1996 acquisition of the WNIC block of business, and service fees from
unaffiliated clients. The increase was partially offset by a decrease in
revenues from association group medical policyholders and a decrease in sales
to unaffiliated clients by the managed healthcare subsidiaries. Realized
investment gains decreased $0.9 million, or 49%, from $1.9 million to $1.0
million.
Benefits. Total benefits increased $39.7 million, or 11%, from $352.0 million
to $391.7 million. Accident and health benefits, which include the change in
unearned premiums, increased $28.2 million, or 9%, from $298.0 million to $326.2
million. The accident and health loss ratio increased to 65.6% from 64.5%.
Life and annuity benefits increased $11.5 million, or 21%. This increase was
due to higher than projected mortality in the second quarter of 1996 and an
increase in insurance in force.
Insurance and General Expenses. Insurance and general expenses (which includes
non-deferred commission compensation to agents) increased $4.1 million, or 3%,
from $158.5 million to $162.6 million. Expenses in the insurance divisions
increased due to the acquisition of UFLIC and an increase in expenses associated
with new marketing initiatives.
Amortization of DAC. Amortization of DAC increased $3.9 million, or 8%, from
$50.9 million to $54.8 million.
Income Tax Rate. The effective federal income tax rate was 34% due to the
continued investment in non-taxable securities included in the Company's
portfolio.
Results of Operations - Three Month Period Ended September 30, 1996 Compared to
1995
Overview
The information set forth below is based on the Company's major product lines.
Three Months
Ended September 30,
1996 1995
Revenues
Group Medical $ 116,288 $ 108,027
Senior Health 72,527 62,572
Life Insurance 34,857 25,965
Other 2,657 5,179
TOTAL $ 226,329 $ 201,743
Pre-tax operating income(1)
Group Medical $ 4,663 $ 4,675
Senior Health and Life 4,990 1,605
Life Insurance 3,489 4,237
Corporate and Other (2,396) (963)
TOTAL $ 10,746 $ 9,554
(1) Represents the Company's income before taxes excluding the effects of
realized investment gains and losses. The 1995 amount also excludes
approximately $5.2 million in payments to converting bondholders and other
expenses relating to the conversion of the 8% Debentures.
Group Medical
Revenue. Total revenue in the Group Medical Division increased $8.3 million, or
8%, from $108.0 million to $116.3 million. Premiums increased $9.4 million, or
9%, from $102.1 million to $111.5 million. The increase was due to the
acquisition of the WNIC block of business. The increase was offset by a decline
in the major medical in force due to the Company's discontinued marketing in
certain states due to the unfavorable regulatory environment.
Net investment income increased $0.5 million, or 60%, from $0.7 million to $1.2
million. Total realized investment losses were relatively unchanged compared to
the third quarter of 1995.
Other income decreased $1.6 million, or 31%, from $5.2 million to $3.6 million
due in part to the decrease in association group medical policyholders.
Benefits. The following table sets forth the earned premium, benefits, and loss
ratios for products issued by the Group Medical Division:
Three Months
Ended September 30,
1996 1995
Earned Premium (1) $ 113,338 $108,465
Benefits (1) 75,147 69,742
Loss Ratio 66.3% 64.3%
(1) In the Company's statement of consolidated income, accident and health
premium revenue represent premiums written; the changes in unearned
premiums are reflected in accident and health benefits.
The loss ratios increased due to adverse experience in the state of New Jersey.
The Company has implemented corrective rate action and will file for potential
refund from the state coverage pool. The remaining increase was due to the
69.7% loss ratio recorded on the assumed block of business from WNIC.
Insurance and General Expenses. Insurance and general expenses increased $1.5
million, from $28.9 million to $30.4 million. The increase related to an
increase in cost containment and managed care expenses and transition costs
associated with the acquisition of the WNIC block of business.
The amortization of Deferred Policy Acquisition Costs (DAC) decreased $1.3
million, or 15%, from $8.5 million to $7.2 million.
Senior Health and Life Division
Revenue. Total revenue in the Senior Health and Life Division increased $9.9
million, or 16%, from $62.6 million to $72.5 million. Senior health premium
increased $6.8 million, or 11%, from $59.1 million to $65.9 million due to the
acquisition of UFLIC. The total new sales of senior health products were down
approximately 8% for the quarter.
Net investment income increased $1.5 million, or 75%, from $2.0 million to $3.5
million, primarily due to increased invested assets and the acquisition of
UFLIC. The total realized gains decreased $1.5 million from $2.1 million to
$0.6 million.
Benefits. The following table sets forth the earned premium, benefits, and loss
ratios for senior health products:
Three Months
September 30,
1996 1995
Earned Premium (1) $ 68,127 $ 53,898
Benefits (1) 47,162 35,239
Loss Ratio 69.2% 65.4%
(1) In the Company's statement of consolidated income, accident and health
premium revenue represent premiums written; the changes in unearned
premiums are reflected in accident and health benefits.
During the quarter, the division experienced higher medical claims ratios, due
in large part to the shift in new business sales to a higher benefit and lower
expense component product. In addition, the mature block of Medicare supplement
business acquired from UFLIC has a higher average loss ratio and a lower
commission compensation level. The loss ratios are consistent with projected
levels. Insurance and General Expenses. Insurance and general expenses
were consistent with third quarter 1995 results. The expense ratio
remained relatively unchanged. The decline in administrative expense
levels within the insurance subsidiaries was offset by an increase in
marketing expenses associated with new marketing initiatives and the
acquisiton of UFLIC.
The amortization of DAC increased $1.3 million, or 9%, from $4.9 million to $6.2
million.
Life Insurance Divison
Revenue. Total revenue in the Life Insurance Division increased $8.9 million,
or 34%, from $26.0 million to $34.9 million. The increase was due to higher
sales of new term life products which increased 96% for the quarter.
Net investment income decreased $1.9 million, or 13%, from $14.9 million to
$13.0 million. The decrease was primarily due to a decrease in yields of
investments held in escrow trust accounts pursuant to agreements with certain
reinsurers.
Benefits. Total life and annuity policy benefits increased $5.0 million, or
28%, from $17.6 million to $22.6 million. This increase was primarily due to
the increased life insurance in-force and higher mortality in the third quarter
of 1996 compared to the favorable 1995 level.
Insurance and General Expenses. Insurance and general expenses increased $2.4
million, or 67%, from $3.7 million to $6.1 million. The increase was primarily
due to the increase in new business sales. The unit cost of administration per
policy in-force was consistent with costs for the same period of 1995.
The amortization of DAC increased $1.1 million, or 58% from $2.0 million to $3.1
million, due to the continued increase in new life production and policies in
force.
Corporate and Other
Total revenue from the Company's managed healthcare subsidiaries included in the
segment was $2.7 million in 1996 compared to $5.2 million in 1995. The decrease
was due to a decline in sales to unaffiliated clients in 1996.
Corporate expenses decreased $7.0 million, or 68%, from $10.3 million to $3.3
million. Interest expense increased $0.8 million from $1.0 million to $1.8
million due to the issuance of the Company's 6 1/2% notes in the first
quarter of 1996, partially offset by the conversion of the Company's 8%
debentures in the third quarters of 1995 and 1996. The general corporate
expenses decreased due to $5.2 million paid to holders of the Company's 8%
debentures and other expenses in connection with the conversion of the
debentures in the third quarter of 1995, and improved operating efficiencies
in 1996.
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Income. The Company's consolidated net income increased $4.0 million, or
119%, from $3.3 million to $7.3 million. This increase was due to the $5.2
million pre-tax charge in the third quarter of 1995 to converting bondholders
and improved profitability in the Senior Health and Life Division as a result of
lower expense levels and increased new business sales.
Premiums and Policy Charges. Total premiums and policy charges increased $24.2
million, or 12%, from $174.7 million to $198.9 million. This increase was due
primarily to the increase in accident and health premiums of $16.1 million, or
10%, which was due primarily to an increase in premiums from major medical
products of $9.4 million, or 9%, principally due to the acquisition of the WNIC
block of business. Premiums from Medicare supplement and long-term care
products increased $6.8 million or 11%. Life insurance premiums increased $8.1,
or 61%, primarily due to new business sales.
Net Investment Income. Net investment income increased $0.4 million, or 2%,
from $17.7 million to $18.1 million due to an increase in invested assets and
the acquisition of UFLIC. Annualized investment yields decreased from 7.0% to
6.8%.
Other Revenue. Other income and realized investment gains and losses remained
relatively unchanged.
The increase due to the WNIC acquisition and the increase in service fees from
unaffiliated clients were offset by a decrease in sales from the managed
healthcare subsidiaries.
Benefits. Total benefits increased $19.6 million, or 16%, from $121.5 million
to $141.1 million. Accident and health benefits, which include the change in
unearned premiums, increased $14.6 million, or 14%, from $103.9 million to
$118.5 million. The accident and health loss ratio increased to 67.4% from
64.7%. Life and annuity benefits increased $5.0 million, or 28%. This increase
was due to increased life insurance in force and higher than projected mortality
in the third quarter of 1996.
Insurance and General Expenses. Insurance and general expenses (which includes
non-deferred commission compensation to agents) decreased $3.1 million, or 5%,
from $59.0 million to $55.9 million. Expenses in the insurance divisions
increased due to increased marketing expenses, the acquisition of UFLIC, and the
acquisition of the WNIC block of business. Corporate expenses decreased due to
expenses related to the conversion of the Company's 8% debentures in the third
quarter of 1995.
Amortization of DAC. Amortization of DAC increased $1.1 million, or 8%, from
$15.4 million to $16.5 million.
Income Tax Rate. The effective federal income tax rate was 34% due to the
continued investment in non-taxable securities included in the Company's
portfolio.
Other. Investments, amounts on deposit and due from reinsurers, deferred policy
acquisition costs, and other assets increased principally due to the
acquisitions of UFLIC and the WNIC block of business. The decrease in short-
term notes payable resulted from the use of proceeds from the Company's March
1996 public offering of 6 1/2% notes and the term loan agreement initiated
in August 1996 to retire outstanding debt. The term loan agreement increased
long-term notes payable. The remaining balance sheet amounts were
relatively consistent with the amounts at December 31, 1995.
DEFERRED POLICY ACQUISITION COSTS
Under generally accepted accounting principles, a DAC asset is established to
match properly the costs of writing new business against the expected future
revenues or gross profits from the policies. The costs which are capitalized
and amortized consist of first-year commissions in excess of renewal comissions
and certain home office expenses related to selling, policy issue, and
underwriting.
The deferred acquisition costs for accident and health policies and traditional
life policies are amortized over future premium revenues of the business to
which the costs are related. The rate of amortization depends on the expected
pattern of future premium revenues for a block of policies. The scheduled
amortization for a block of policies is established when the policies are
issued. However, the actual amortization of DAC will reflect the actual
persistency and profitability of the business. For example, if actual policy
terminations are higher than expected or if future losses are anticipated, DAC
could be amortized more rapidly than originally scheduled or written-off, which
would reduce earnings in the applicable period.
EFFECT OF INFLATION
In pricing its insurance products, the Company gives effect to anticipated
levels of inflation; however, the Company believes that the high rate of medical
cost inflation during recent years has had an adverse impact on its major
hospital accident and health claims experience. The Company continues to
implement rate increases, as permitted by state regulations, in response to this
experience.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated liquidity requirements are created and met primarily
by operations of its subsidiaries. The insurance subsidiaries' primary sources
of cash are premiums, investment income, and investment sales and maturities.
The insurance subsidiaries' primary uses of cash are operating costs, policy
acquisition costs, payments to policyholders and investment purchases. In
addition, liquidity requirements of the holding company are created by
dividends, interest payments on the 6 1/2% Notes, and other debt
service requirements. These liquidity requirements of the holding company
have historically been met through dividends from the non-insurance
subsidiaries which receive payments primarily from fees charged for
administrative and marketing services provided to the Company's insurance
subsidiaries and other unaffiliated companies. Dividends from the insurance
subsidiaries could be required in the future to meet such liquidity
requirements.
The ability of the insurance subsidiaries to pay dividends and make other
payments to the Company is subject to state insurance department regulations
which generally permit dividends and other payments to be paid for any twelve
month period in amounts equal to the greater of (i) net gain from operations in
the case of a life insurance company or net income in the case of all other
insurance companies for the preceding calendar year or (ii) 10% of surplus as of
the preceding December 31st. Any dividends in excess of these levels require
the prior approval of the Director or Commissioner of the applicable state
insurance department. The amount of dividends that the Company's insurance
subsidiaries could pay in 1996 without prior approval is approximately $5.4
million.
Notwithstanding the foregoing, if insurance regulators otherwise determine that
payment of a dividend or any other payment to an affiliate would be detrimental
to an insurance subsidiary's policyholders or creditors because of the financial
condition of the insurance subsidiary or otherwise, the regulators may block
dividends or other payments to affiliates that would otherwise be permitted
without prior approval.
The Company's insurance subsidiaries require capital to fund acquisition costs
incurred in the initial year of policy issuance and to maintain adequate surplus
levels for regulatory purposes. These capital requirements have been met
principally from internally generated funds, including premiums and investment
income, and capital contributions from the holding Company. The Company has
offered agent commission financing to certain of its agents and marketing
organizations which consists primarily of annualization of first year
commissions. This means that when the first year premium is paid in
installments, the Company will advance a percentage of the commissions that the
agent would otherwise receive over the course of the first policy year. The
Company through a subsidiary has entered into agreements with an unaffiliated
corporation to provide financing for a portion of its agent commission advance
program through the sale of agent receivables. Proceeds from such sales for the
nine month periods ended September 30, 1996 and 1995 were $20.0 million and
$13.9 million, respectively. The termination date of the current program is
December 31, 1997, subject to extension or termination as provided therein. The
Company has retained approximately $13.6 million of agent advances at September
30, 1996.
In July 1993, the Company issued $57.5 million of 8% Debentures. Net proceeds
from the offering totaled approximately $54.0 million. The 8% Debentures were
convertible into the Company's Common Stock at any time prior to maturity,
unless previously redeemed, at a conversion price of $11.75 per share. In
August 1995, the Company accepted the conversion of $46.9 million of the
outstanding 8% Debentures. The effect of the conversion was an increase in
stockholders' equity of $45.3 million and a charge of $3.5 million, net of
taxes, for payments to converting bondholders and other expenses relating to the
conversion. In August 1996, the Company completed the redemption of the
remaining outstanding debentures. The effect of the conversion was an increase
in stockholders' equity of $9.0 million.
In January 1995, an insurance subsidiary of the Company issued a note in the
amount of $1.7 million as a portion of the acquisition price of CNL. The
principal balance of the note may be reduced by the amount of capital losses
incurred by the Company on mortgage loan and real estate holdings of CNL through
January 31, 1997. During the third quarter 1996, a capital loss of $0.7 million
reduced the principal balance to $1.0 million. Interest is payable on the note
at the average earnings rate of these investments, currently eight percent. The
note matures in January 1997.
In September 1995, a non-insurance subsidiary of the Company borrowed $3.3
million from a finance company to finance the purchase of certain equipment.
The note, which is secured by the equipment purchased, bears interest at a fixed
rate of 7.81% and has principal and interest payments of $0.04 million payable
monthly through August 2005.
In March 1996, the Company issued $86.25 million of its 6 1/2% Notes. Net
proceeds from the offering totaled approximately $83.0 million. The
notes are convertible into the Company's Common Stock at any time prior to
maturity, unless previously redeemed, at a conversion price of $20.00 per share.
The Company has a line of credit arrangement for short-term borrowings with six
banks amounting to $30.0 million through July 1999, all of which was unused at
September 30, 1996 (the "Credit Facility"). The line of credit arrangement can
be terminated, in accordance with the agreement, at the Company's option.
In August 1996, the Company borrowed $25.0 million under a term loan agreement
with six banks to fund the acquisition of a block of business from Washington
National Insurance Company and to repay the notes issued as a portion of the
acquisiton price of UFLIC. The note bears interest at prime, with interest and
principal payable quarterly through July 2001.
The Company's debt agreements include provisions requiring maintenance of
minimum working capital and risk based capital and limiting the Company's
ability to incur additional indebtedness. The Company's debt agreements also
restrict the amount of retained earnings which is available for dividends and
require the maintenance of certain minimum insurance company ratings at the
Company's subsidiaries.
In February, May and August 1996, the Company's Board of Directors announced a
quarterly Common Stock dividend of 5.5 cents per share, with an expectation of a
total of 22 cents per share to be paid for 1996.
Management believes that the diversity of the Company's investment portfolio and
the liquidity attributable to the large concentration of investments in highly
liquid United States government agency securities provide sufficient liquidity
to meet foreseeable cash requirements. Because the Company's insurance
subsidiaries experience strong positive cash flows, including monthly cash flows
from mortgage-backed securities, the Company does not expect its insurance
subsidiaries to be forced to sell the held to maturity investments prior to
their maturities and realize material losses or gains. Although the Company has
the ability and intent to hold those securities to maturity, there could occur
infrequent and unusual conditions under which it would sell certain of these
securities. Those conditions would include a significant deterioration of the
issuer's creditworthiness, significant changes in tax law affecting the taxation
of securities, a significant business acquisition or disposition, and changes in
regulatory capital requirements or permissible investments.
Life insurance and annuity liabilities are generally long term in nature
although subject to earlier surrender as a result of the policyholder's ability
to withdraw funds or surrender the policy, subject to surrender and withdrawal
penalties. The Company believes its policyholder liabilities should be backed
by an investment portfolio that generates predictable investment returns. The
Company seeks to limit exposure to risks associated with interest rate
fluctuations by concentrating its invested assets principally in high quality,
readily marketable debt securities of intermediate duration and by attempting to
balance the duration of its invested assets with the estimated duration of
benefit payments arising from contract liabilities.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion of a new long-lived assets accounting standard and a new stock-
based employee compensation accounting standard and the impact of these
standards on the financial statements of the Company, see Note 2 of Notes to
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 - Stock Purchase Agreement among Direct Financial
Services, Inc., Preferred Health Choice, Inc.,
Individual Shareholders of PHC, ACMG, Inc., and
ACMG of Louisiana, Inc.
Exhibit 3.2 - Stock Purchase Agreement between Preferred Health
Choice, Inc. and United Payors & United Providers,
Inc., dated October 22, 1996.
Exhibit 3.3 - Termination and Release Agreement by and among
Pioneer Financial Services, Inc. and Anthony J.
Pino dated October 24, 1996.
Exhibit 11 - Statement of Computation of Per Share Earnings.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the third
quarter of 1996.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pioneer Financial Services, Inc.
November 8, 1996 /s/ Peter W. Nauert
Date Peter W. Nauert
Chairman and Chief Executive Officer
November 8, 1996 /s/ David I. Vickers
Date David I. Vickers
Treasurer and Chief Financial Officer
EXHIBIT 3.1
STOCK PURCHASE AGREEMENT
Agreement made as of August 31, 1996 among Direct Financial
Services, Inc., an Illinois corporation ("DFS"), Preferred Health
Choice, Inc., an Illinois corporation, ("PHC"), the undersigned
individual shareholders of PHC (collectively, the "Shareholders",
and individually, a "Shareholder"), ACMG, Inc., an Ohio corporation
(the "Company"), and ACMG of Louisiana, Inc., a Louisiana
corporation ("ACMG-Louisiana").
RECITALS
WHEREAS, the Shareholders own the number of shares of common
stock of PHC set forth opposite their signatures below (the "PHC
Shares");
WHEREAS, the Company is indebted to PHC or its subsidiaries in
the amount of $1,881,000; and
WHEREAS, the parties desire to consummate the series of
transactions (collectively, the "Transaction") provided for herein
pursuant to which, among other things (x) DFS shall purchase from
the Shareholders, and the Shareholders sell to DFS, all of the PHC
Shares, (y) PHC shall loan, to the Company certain amounts, and (z)
the Company shall issue to PHC promissory notes in the forms of
Exhibits A, B and C hereto (individually, a "Note", and
collectively, the "Notes") evidencing the outstanding indebtedness
of the Company to PHC and the amounts to be loaned by PHC to the
Company.
NOW, THEREFORE, in consideration of the premises and the
representation, warranties and covenants herein contained, and for
other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
THE TRANSACTION
1.1 Prior to September 30, 1996
(a) Pioneer Financial Services, Inc. ("PFS") shall amend its
existing 401(k) plan, among other things, to:
(i) waive the "last day" rule for 1996 for Company
participants, for purposes of PFS "matching" and profit
sharing contributions during 1996.
(ii) to fully vest Company participants as of the
date hereof.
(iii) to permit the payout of plan account balances
to Company participants as soon as practicable after the
date hereof.
(b) PFS shall pay to Company participants their account
balances in the PFS 401(k) plan.
1.2 Simultaneously with the execution and delivery of this
Agreement:
(a) DFS is purchasing from the Shareholders, and the
Shareholders are selling to DFS, the PHC Shares for a purchase
price of $0.99808448432 per share ($19,800 in the aggregate;
and, in connection therewith:
(i) Each Shareholder is transferring to PHC a
certificate or certificates representing the number of
PHC Shares set forth opposite such Shareholder's
signature below, duly assigned to PHC, in form and
substance satisfactory to PHC and its Counsel.
(ii) DFS delivering to each Shareholder, in cash, an
amount equal to the purchase price for his or her PHC
Shares.
(b) The Company is delivering executed copies of the
Notes to PHC.
(c) The Shareholders are delivering to PHC the written
resignations of Paul W. McVay, Charles Duncan, Lance Marshall,
Harold Bischoff, Peggy Eads, Belinda Cox, Sylvia Clasen and
Craig E. Steffen from their capacities as officers or
directors of PHC and its subsidiaries (other than the Company
and its subsidiaries).
(d) PHC, the Company and certain Shareholders are
entering into that certain Payroll Pledge Agreement of even
date herewith (the "Payroll Pledge Agreement") and such
Shareholders are assigning and transferring to PHC as
collateral thereunder their stock certificates representing
the capital stock of the Company owned or here after acquired
by such Shareholders.
(e) PHC, the Company and ACMG-Louisiana are entering
into that certain VHP Pledge Agreement of even date herewith
(the "VHP Pledge Agreement") which provides for the assignment
and transfer to PHC as collateral thereunder their shares, of,
or other equity interest in, Vantage Health Plan, Inc., a
Louisiana corporation ("VHP") (the Payroll Pledge Agreement
and the VHP Pledge Agreement being hereinafter sometimes
referred to collectively as the "Pledge Agreements").
(f) PHC has eliminated all amounts heretofore payable by
the Company or its subsidiaries to PHC, its subsidiaries or
affiliates other than those (x) represented by the Notes
attached as Exhibits A, B and C, or (y) payable under existing
written agreements between the Company or its subsidiaries and
PHC, its subsidiaries or affiliates.
(g) PHC, on the one hand, and the Shareholders, on the
other hand, have received such other documents or instruments
as they or their counsel have reasonable requested in
connection with the transactions contemplated hereby.
1.3 The Shareholders' Agreement dated as of July 24, 1995
among Direct Financial Services, Inc., PHC and certain of the
Shareholders (the Shareholders' Agreement") is terminated as of the
date hereof; and no party thereto shall have any further right,
obligation or liability thereunder.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF DFS
DFS hereby represents and warrants to the Company, the
Shareholders and their respective successors and assigns as
follows:
2.1 Organization and Qualification. DFS and PHC are
corporations duly incorporated and in good standing as domestic
corporations under the laws of the State of Illinois.
2.2 Authority Relative to this Agreement. DFS and PHC each
has the requisite corporate power and authority to execute and
deliver this Agreement, PHC has the requisite corporate power and
authority to execute and deliver the Pledge Agreements, and DFS and
PHC have the requisite corporate power and authority to fulfill
their obligations hereunder and thereunder. The execution and
delivery of this Agreement by DFS and PHC, the execution and
delivery of the Pledge Agreements by PHC and the performance of
their obligations hereunder and thereunder have been duly and
validly authorized by the Board of Directors of DFS and PHC and the
shareholders of PHC, and no other corporate proceedings on the part
of DFS or PHC are necessary, as a matter of law or otherwise, in
connection therewith. This Agreement and the Pledge Agreements
have been duly and validly executed and delivered by DFS or PHC, as
the case may be; and, assuming that they constitute the valid and
binding agreements of the Company, ACMG-Louisiana and the
Shareholders, as the case may be, this Agreement constitutes the
valid and binding agreements of DFS and PHC, and the Pledge
Agreements constitute the valid and binding agreements of PHC,
enforceable against DFS or PHC, as the case may be, in accordance
with their respective terms, except (a) as such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to
creditors' rights, and (b) as the remedy of specific performance
and injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court before
which any proceeding therefore may be brought.
2.3 Consents and Approvals; No Violation.
(a) The execution and delivery of this Agreement and the
Pledge Agreements do not and the consummation of the
transactions contemplated hereunder and thereunder will not:
(i) conflict with any provision of the certificate
of incorporation or bylaws of DFS or PHC;
(ii) conflict with, result in the breach of or
constitute a default (or give rise to any right of
termination, cancellation or acceleration) under any of
the terms, conditions or provisions of any note, lease,
mortgage, license, agreement or other instrument or
obligation to which DFS or PHC is a party or by which PHC
or DFS or any of their assets may be bound; or
(iii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to DFS or PHC.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court,
administrative agency or commission, insurance regulatory
authority or other governmental authority or instrumentality,
domestic or foreign, (a "Governmental Entity") is required by
or on behalf of DFS or PHC in connection with the execution
and delivery of this Agreement or the Pledge Agreements by PHC
or the consummation by PHC of the transactions contemplated
hereby and thereby.
2.4 Certain Fees and Expenses. No person or entity has been
authorized by DFS or PHC to act for DFS or PHC in connection with
the transactions provided for in this Agreement in a way which
would entitle such person to receive from the Company or the
Shareholders any broker's fees, commissions, finder's fees,
investment banking or financial advisory fees in connection with
this Agreement (or for reimbursement of any expenses related
thereto).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY, ACMG-LOUISIANA AND THE SHAREHOLDERS
The Company, ACMG-Louisiana and the Shareholders, jointly and
severally, hereby represent and warrant to DFS, PHC and their
respective successors and assigns as follows:
3.1 Organization and Qualification. The Company and ACMG-
Louisiana are corporations duly organized, validly existing and in
good standing as domestic corporations under the laws of the states
of Ohio and Louisiana, respectively, and are duly qualified to do
business as a foreign corporation and are in good standing in each
other jurisdiction in which the character of its properties or the
nature of its business makes such qualification necessary. The
Company and ACMG-Louisiana have the requisite corporate power and
authority to own, use or lease their respective properties and to
carry on their respective businesses as now being conducted.
3.2 Authority Relative to this Agreement. The Company and
ACMG-Louisiana each has the requisite corporate power and authority
to execute and deliver this Agreement and the VHP Pledge Agreement,
the Company has the requisite corporate authority to execute and
deliver the Notes and the Payroll Pledge Agreement, and the Company
and ACMG-Louisiana have the requisite corporate power and authority
to fulfill their obligations hereunder and thereunder. The
execution and delivery of this Agreement, the Pledge Agreements and
the Notes by the Company, and the execution and delivery of this
Agreement and the VHP Pledge Agreement by ACMG-Louisiana and the
performance of their respective obligations hereunder and
thereunder have been duly and validly authorized by the Board of
Directors of the Company and, ACMG-Louisiana, respectively, and no
other corporate proceedings on the part of the Company or ACMG-
Louisiana are necessary, as a matter of law or otherwise, in
connection therewith. This Agreement has been duly and validly
executed and delivered by the Company, ACMG-Louisiana and the
Shareholders, the Notes and the Payroll Pledge Agreement have been
duly and validly executed and delivered by the Company, the VHP
Pledge Agreement has been duly and validly executed by the Company
and ACMG-Louisiana and, assuming this Agreement and the Pledge
Agreements constitute the valid and binding agreements of DFS or
PHC, as the case may be, this Agreement, the Pledge Agreements and
the Notes constitute the valid and binding agreements of the
Company, ACMG-Louisiana and the Shareholders, and the Notes
constitute the valid and binding agreement of the Company,
enforceable against the Company, ACMG-Louisiana and the
Shareholders, as the case may be, in accordance with their
respective terms, except (a) as such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights, and
(b) as the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and
to the discretion of the court before which any proceeding therefor
may be brought.
3.3 Title to Shares.
(a) Each of the Shareholders owns of record and
beneficially the number of PHC Shares set forth opposite his
signature below.
(b) The PHC Shares formerly owned by Marjorie Knapp have
been duly, validly, legally and properly repurchased pursuant
to the Shareholders' Agreement.
(c) By virtue of the transactions contemplated herein,
PHC will acquire good and valid title to all of the PHC
Shares, free and clear of all liens, charges, pledges,
encumbrances, equities, rights of first refusal, options or
claims of any nature (other than those created by PHC).
3.4 Consents and Approvals; No Violation.
(a) The execution and delivery of this Agreement, the
Pledge Agreements and the Notes do not and the consummation
of the transactions contemplated hereby and thereby will not:
(i) conflict with any provision of the certificate
of incorporation or bylaws of the Company or ACMG-
Louisiana;
(ii) conflict with, result in the breach of or
constitute a default (or give rise to any right of
termination, cancellation or acceleration) under any of
the terms, conditions or provisions of any note, lease,
mortgage, license, agreement or their instrument or
obligation to which the Company, ACMG-Louisiana or any
Shareholder is a party or by which the Company, ACMG-
Louisiana or any Shareholder or any of their assets may
be bound; or
(iii) violate any writ, order, injunction, decree,
statute, rule or regulation applicable to the Company,
ACMG-Louisiana or any Shareholder.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental
Entity is required by or on behalf of the Company, ACMG-
Louisiana or any Shareholder in connection with the execution
and delivery of this Agreement by the Shareholders or the
transactions contemplated hereby or thereby.
3.5 Certain Fees and Expenses. No person or entity has been
authorized by the Company, ACMG-Louisiana or the Shareholders to
act for the Company, ACMG-Louisiana or the Shareholders in
connection with the transactions provided for in this Agreement in
a way which would entitle such person to receive from DFS or PHC
any broker's fees, commissions, finder's fees, investment banking
or investment advisory fees in connection with this Agreement (or
for reimbursement of any expenses related thereto).
ARTICLE IV
ADDITIONAL COVENANTS
4.1 Confidentiality. The parties hereto each agrees that
after the date hereof it will hold in confidence all information,
data and documents obtained by it or any of its representatives or
affiliates from any representative, officer, director or employee
of any other party (the "Furnishing Parties") and that neither it
nor any of its representatives or affiliates will disclose any such
information, data or documents to any third party other than as
required by law or required or requested by or any regulatory
authority in connection with the transactions contemplated herein.
Such obligation of confidentiality shall not extend to any
information, data or document which is shown to have been
previously known to such party or generally known to others engaged
in the same business as the Furnishing Parties, or that is or shall
become part of public knowledge or that shall have been lawfully
received by such party from a third party other than professional
advisors and other representatives or which is required or
requested by any regulatory entity to be submitted to such
regulatory entity.
4.2 Communications. No party will issue any press release
relating to the transactions contemplated by this Agreement without
the prior written approval of the other parties as to the content
thereof, which approval shall not be unreasonably withheld or
delayed. Nothing in this Section 4.2, however, shall be deemed (a)
to prohibit any disclosure reasonably required by any applicable
law or by any governmental or regulatory authority or (b) to
prevent either party from disclosing the general nature of the
transactions contemplated hereby without identifying the other
party or any of its affiliates.
4.3 Expenses. Whether or not the transactions contemplated
hereby are consummated, all costs and expenses (including without
limitation, fees and expenses of counsel and accountants) incurred
in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expense except as
otherwise specifically set forth herein.
4.4 Brokers or Finders. No party hereto nor any of their
respective affiliates shall enter into any agreement or arrangement
with any agent, broker, investment banker or other firm or person
pursuant to which such person shall be entitled to any broker or
finder's fee or any other commission or similar fee from any other
party in connection with any of the transactions contemplated by
this Agreement.
4.5 Additional Actions. Subject to the terms and conditions
of this Agreement, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all reasonable
action and to do, or cause to be done, all things reasonably
necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions
contemplated by this Agreement as promptly as reasonably
practicable. In case at any time after the date hereof any further
action is necessary or desirable to carry out the purposes of this
Agreement, each party to this Agreement, to the extent within such
party's reasonable control, shall take all such necessary action.
4.6 Shareholder Liability. The Shareholders shall cause the
Company, and the Shareholders and the Company shall cause ACMG-
Louisiana, to perform fully and in a timely manner their
obligations hereunder and under the Notes and the Pledge
Agreements. The parties hereto each acknowledges and agrees that no
other party hereto is making any representation or warranty,
express or implied, except as provided herein or therein.
4.7 Payroll.
(a) For each bi-weekly payroll period of the Company
commencing August 19, 1996 through September 29, 1996, PHC
shall lend to the Company, by wire transfer to an account
designated in writing by the Company in immediately available
funds, prior to 3:00 p.m., EST, on the day prior to the date
the Company is required to fund such payroll expense and on
the terms and subject to the conditions set forth in the form
of Note attached as Exhibit B hereto, an amount equal to such
payroll expense; provided, however, that PHC's obligations
hereunder shall not exceed $750,000 in the aggregate. The
Company shall repay such loans in accordance with the terms of
such Note.
(b) PHC, directly or indirectly through one of its
affiliates, will continue to provide payroll administrative
services (but not employee benefit administrative services)
through December 31, 1996 in substantially the same manner
such services have heretofore been provided by PHC or its
affiliates; provided, however, that PHC shall have no
obligation to provide such services if the Company does not
provide PHC or its designee with such information as PHC or
its designee may reasonably request, at such times as PHC or
its designee may reasonable request, in connection with the
performance of such services and if, for all payroll periods
beginning September 30, 1996, the Company does not deliver,
prior to the time payment is required, sufficient funds to the
PHC or its designee to enable it to make any payroll payment
required hereunder.
4.8 Insurance. PHC will cooperate with the Company in
maintaining corporate and insurance and bonds heretofore covering
the Company; provided, however, that neither PHC nor any of its
affiliates shall be required to modify their existing coverage or
to incur any additional expense with respect thereto.
4.9 Non-Solicitation. For a period of one year from the date
hereof, no party hereto or any of their affiliates shall solicit,
recruit, employ, contract with, or attempt to solicit, recruit,
employ or contract with, any employee of any other party or its
affiliates.
4.10 Non-Compete. Except as the Company may consent, for a
period of one year from the date hereof, neither PFS nor any of its
affiliates will invest in, or otherwise participate in the
management of, any health maintenance organization serving the
areas now served by the four health maintenance organizations in
which the Company or its subsidiaries are shareholders as described
in Exhibit D hereto.
4.11 Pino Participation. So long as Anthony J. Pino is an
employee of PFS or its affiliates during such period, for a period
of nine months from the date hereof, PFS will make Mr. Pino
available to attend board meetings of the South Carolina health
maintenance organization of which the Company or its subsidiaries
is a shareholder and for general consultation with respect to such
organization, in each case, on a limited basis and upon reasonable
notice.
4.12 Certain Transactions. Neither the Company nor the
Shareholders shall, and the Shareholders shall not permit the
Company to, participate in an Offering, Asset Sale, Merger or Stock
Sale (as those terms are defined in the Payroll Pledge Agreement)
without first ensuring, in a manner reasonably satisfactory to
PHC, that payment of all amounts due under the promissory note of
even date herewith of the Company to PHC in the principal amount of
$1,300,000 are paid in full as provided therein.
4.13 Investments in VHP. No Shareholder shall, and the
Shareholders and the Company shall ensure that no direct or
indirect subsidiary or other affiliate of the Company other than
ACMG-Louisiana shall, purchase or own, or become entitled to
purchase or own, any share of capital stock of, or other equity
interest in, VHP.
ARTICLE V
RELEASE; INDEMNIFICATION
5.1 Release. The Company, ACMG-Louisiana and each of the
Shareholders, for themselves and their respective subsidiaries,
successors, assigns, employees, officers, directors, shareholders,
representatives, agents and affiliates, hereby releases and
discharges DFS, PHC and their respective affiliates, successors,
assigns, employees, officers, directors, shareholders,
representatives, agents and affiliates of and from all claims,
demands, actions, suits, judgements, damages, and liabilities, at
law or in equity, whether known or unknown, from the beginning of
time, except those arising hereunder or under the Pledge
Agreements.
5.2 Indemnification.
(a) The Company, ACMG-Louisiana and each of the
Shareholders, jointly and severally, shall indemnify, defend
and hold harmless DFS, PHC, and their respective subsidiaries
and affiliates and their respective officers, directors,
agents, employees, representatives, successors and assigns
("PHC Indemnified Parties") from and against any and all
claims, actions, suits, proceedings, demands, assessments,
judgements, losses expenses, damages, recoveries and
deficiencies, including without limitation interest,
penalties, and reasonable attorney's fees, expert witness
fees, costs and other expenses (collectively, "Losses") borne
by or asserted against any PHC Indemnified Party in any way
arising out of, relating to or resulting from (v) any
misrepresentation or breach of warranty contained in this
Agreement or the Pledge Agreements, (w) any other breach by
the Company, ACMG-Louisiana or the Shareholders of their
obligations under this Agreement or the Pledge Agreements, (x)
PHC's obligations under Section 4.7(b) hereof to the extent
not arising out of PHC's wilful misconduct or gross
negligence, (y) otherwise relating to the ownership or
operation of the Company or its subsidiaries or affiliates, or
(z) the cessation of employment of Marjorie Knapp or the
repurchase of her shares pursuant to the Shareholders'
Agreement or otherwise.
(b) The following provisions shall be applicable in the
event that any PHC Indemnified Party asserts indemnity rights
pursuant to this Article V relating to any third party claim:
(i) Within 30 days after the receipt by the party
entitled to indemnity hereunder (the "Indemnified Party")
of any claim or demand (including but not limited to,
notice of any action, suit or proceeding) by any third
party against an Indemnified Party which gives rise to a
right to claim of indemnification hereunder, the affected
Indemnified Party shall give the Company and the
Shareholders (collectively, the "Indemnifying Party")
written notice of such claim or demand; provided,
however, that the failure to give such notice shall not
relieve the Indemnifying Party of its obligations
hereunder except to the extent that such failure is
materially prejudicial to the Indemnifying Party.
(ii) The Indemnifying Party shall have the right
(without prejudice to the right of any Indemnified Party
to participate at its own expense through counsel of its
choosing), to defend against such claim or demand at its
expense and through counsel of its own choosing (the
choice of such counsel to be subject to the reasonable
consent of the affected Indemnified Parties) and to
control such defense if it gives written notice of its
intention to do so within 15 days of the receipt of the
notice referred to in Section 5.2 (b) above. If the
Indemnifying Party shall decline or fail to assume the
defense of such claim or demand, the affected Indemnified
Parties shall have the right to assume control of such
defense at the expense of the Indemnifying Party. The
Indemnified Parties shall cooperate fully in the defense
of such claim or demand and shall make available to the
Indemnifying Party or its counsel all pertinent
information under their control relating thereto. The
Indemnifying Party agrees to cooperate with the
Indemnified Parties in order to enable their counsel to
participate in the defense and to deliver to the
Indemnified Parties Copies of all pleading and other
information within the Indemnifying Party's knowledge or
possession reasonable requested by the Indemnified
Parties that is relevant to the defense of any such claim
or demand. The Indemnifying Party and the Indemnified
Parties and their respective counsel shall maintain
confidentiality with respect to all such information
consistent with the conduct of a defense hereunder.
(iii)The Indemnifying Party shall have the
right to elect to settle any such claim or demand for
monetary damages only at its sole expense and provided
the settlement includes an unconditional release of all
Indemnified Parties, subject to the consent of the
affected Indemnified Parties; provided, further, that if
the affected Indemnified Parties fail to give such
consent within 20 days of being requested to do so, the
affected Indemnified Parties shall, at their expense,
assume the defense of such claim or demand regardless of
the outcome of such matter, the Indemnifying Party's
liability hereunder shall be limited to the amount of any
such proposed settlement plus costs and expenses incident
to the defense and settlement of such claim or demand.
(iv) In the event the Indemnifying Party
assumes the defense of a claim or demand, the Indemnified
Parties shall have the right thereafter to take over
control of the defense of any claim or demand from the
Indemnifying Party at any time and to elect to settle
such claim or demand; provided, however, that in such
case, unless otherwise agreed by the Indemnifying Party,
the Indemnifying Party shall have no indemnification
obligations with respect to such claim, demand or
settlement except for the costs and expenses of such
Indemnifying Party incurred in the defense of the claim
or demand.
ARTICLE VI
GENERAL PROVISIONS
6.1 Amendment. This Agreement may not be amended except by
an instrument in writing signed by or on behalf of each of the
parties hereto.
6.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given upon personal
delivery, facsimile transmissions (with written or facsimile
confirmation of receipt), telex or delivery by an overnight express
courier service (delivery, postage or freight charges prepaid), or
on the fourth day following deposit in the United States mail (if
sent by registered or certified mail, return receipt requested,
delivery postage or freight charges prepaid), addressed to the
Shareholders at the addresses set forth under their signatures
below or to the other parties at the following addresses (or at
such other address for a party as shall be specified by like
notice):
(a)if to DFS or PHC, to: Direct Financial Services, Inc.
President
1750 E. Golf Rd.
Schaumburg, IL 60173
with a copy to: Mr. Billy B. Hill, Jr.
Pioneer Financial Services, Inc.
1750 E. Golf Road
Schaumburg, IL 60173
(b)if to the Company or ACMG, Inc.
ACMG-Louisiana, to: President
2570 Technical Drive
Miamisburg, Ohio 45342
with a copy to: Mr. John Peck
Peck, Shaffer & Williams
425 Walnut, Suite 2200
Cincinnati, Ohio 45202
6.3 Interpretation. When a reference is made in this
Agreement to an Article, Section, Exhibit or Schedule, such
reference shall be to an Article, Section, Exhibit or Schedule to
this Agreement unless otherwise indicated. All Exhibits referred to
herein are hereby incorporated by reference herein. The words
"include," "includes" and "including" when used herein shall be
deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement. Whenever a
representation or warranty herein is made to the "knowledge," "best
knowledge" or awareness of a party, it shall refer to matters
within the actual knowledge of such party and such party's
officers, provided that, in the case of each party, such references
shall be deemed to impose upon such party a duty to conduct a
reasonable investigation of the matters covered thereby including
making inquiries of appropriate officers and key employees with
respect to matters within such persons' areas of responsibility, as
well as investigation of reasonably available corporate records
concerning such matters.
6.4 Counterparts. This Agreement may be executed in two
counterparts, each of which shall be considered one and the same
document and shall become effective when the counterparts have been
signed by each of the parties and delivered to the other party, it
being understood that each party need not sign the same
counterpart.
6.5 Miscellaneous. This Agreement, the Pledge Agreements, the
Exhibits, Schedules, Notes, documents, instruments and other
agreements specifically referred to herein (a) constitute the
entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with
respect to the subject matter hereof; (b) are not intended to
confer upon any other person any rights or remedies hereunder.
Each party hereby acknowledges and agrees that it has not repied
upon any statement, representation or warranty relating to the
matters covered by this Agreement other than those contained
herein.
6.6 Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the
laws of the State of Illinois, without giving effect to its
conflict of law provisions.
6.7 Severability. In case any provision in this Agreement
shall be found by a court of competent jurisdiction to be invalid,
illegal or unenforceable, such provision shall be construed and
enforced as if it had been narrowly drawn so as not to be invalid,
illegal or unenforceable, and the validity, legality and
enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
6.8 Successors and Assigns. PHC shall have the right to
assign their rights hereunder to any wholly-owned direct or
indirect subsidiary of PFS. Neither the Company, ACMG-Louisiana
nor the Shareholders shall be permitted to assign their rights or
liabilities hereunder without the prior written consent of PHC.
This Agreement shall be binding upon the parties hereto and their
respective successors and permitted assigns and shall inure to the
benefit of the parties hereto and their respective permitted
successors and assigns.
6.9 Time of the Essence. The parties agree that time is of
the essence of each provision of this Agreement.
6.10 Attorneys' Fees. In the event of any dispute with respect
to the subject matter of this Agreement, the prevailing party shall
be entitled to such party's reasonable attorneys' fees and court
costs incurred in resolving or settling the dispute, in addition to
any and all other damages to which such party may be entitled.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.
PREFERRED HEALTH CHOICE, INC.
By: _________________________________________
Its:_________________________________________
THE SHAREHOLDERS: PHC SHARES:
__________________________________________ 6,505
Paul W. McVay
__________________________________________ 5,856
Charles P. Duncan
__________________________________________ 3,702
Lance D. Marshall
__________________________________________ 2,294
Peggy A. Eads
__________________________________________ 719
Belinda C. Cox
__________________________________________ 263
Harold L. Bischoff
__________________________________________ 80
Sylvia L. Clasen
__________________________________________ 61
Doris M. Young
__________________________________________ 97
James Hammond
__________________________________________ 212
Pamela Roberson
__________________________________________ 35
Craig E. Steffen
__________________________________________ 10
Karen S. Puckett
__________________________________________ 4
Anne L. Wassum
ACMG, INC.
By: ____________________________________
Its:____________________________________
DIRECT FINANCIAL SERVICES, INC.
By: ____________________________________
Its:____________________________________
ACMG OF LOUISIANA, INC.
By: ____________________________________
Its:____________________________________
acmg\agreemen\stkprcha.092
EXHIBIT 3.2
STOCK PURCHASE AGREEMENT
between
PREFERRED HEALTH CHOICE, INC.
and
UNITED PAYORS & UNITED PROVIDERS, INC.
OCTOBER 22, 1996
STOCK PURCHASE AGREEMENT
Agreement made as of October 22, 1996, but effective as of
September 30, 1996, between Preferred Health Choice, Inc., an
Illinois Corporation ("PHC") and a wholly-owned indirect subsidiary
of Pioneer Financial Services, Inc. a Delaware corporation ("PFS"),
and United Payors & United Providers, Inc., a Delaware corporation
("Buyer").
RECITALS
WHEREAS, PHC owns an aggregate of 8,499,998 shares (the
"Shares") of Common Stock, without par value, constituting all of
the issued and outstanding capital stock of National Health
Services, Inc., a Wisconsin corporation ("NHS");
WHEREAS, NHS owns an aggregate of 1,000 shares of capital
stock of Healthcare Review Corporation, a Kentucky corporation
("HRC"), which shares represent all of the issued and outstanding
shares of capital stock of HRC;
WHEREAS, NHS and PFS desire to enter into a Health Care
Administrative Services Agreement, dated as of October 24, 1996
(the "Services Agreement");
WHEREAS, NHS and National Group Life Insurance Company, an
Illinois corporation and an affiliate of PHC ("NGL"), desire to
enter into a Lease, dated as of October 24, 1996 (the "Lease");
WHEREAS, Buyer desires to acquire from PHC, and PHC desires to
sell to Buyer, all of the Shares.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and covenants herein contained, and for
other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
THE TRANSACTION
1.1 On the terms and subject to the conditions set forth
herein, at the closing (the "Closing") on the Closing Date (as
hereinafter defined):
(a) PHC shall sell, transfer and assign to Buyer, and Buyer
shall purchase from PHC, the Shares for a purchase price
(the "Purchase Price") of Five Million Dollars
($5,800,000) and the warrants (the "Warrants") described
in the forms of the Warrant Certificates attached as
Exhibits A-1 and A-2 hereto (the "Warrant Certificates").
(b) Buyer shall pay the Purchase Price as follows:
(i) Buyer shall pay to PHC Five Million Dollars
($5,800,000) in the form of a wire transfer to a
bank account designated by PHC of readily available
U.S. funds,
(ii) Buyer shall (A) issue to PHC the Warrants, (B)
execute and deliver to PHC the Warrant Certificates,
and (C) thereafter perform its obligations under the
Warrant Certificates fully and in a timely manner.
(c) The parties shall deliver the documents and instruments
and take the actions referred to in Article VII hereof.
(d) The closing shall be held at the offices of Buyer at 2:00
p.m., local time, on October 23, 1996 or at such other
date, time and place as the parties may agree in writing
(the "Closing Date"); however, the transactions
contemplated herein shall be deemed for all purposes to
have taken place, and to be effective, as of September
30, 1996.
1.2 On the terms, and subject to the conditions set forth
herein, immediately following the Closing:
(a) PFS and NHS shall enter into the Services Agreement.
(b) NGL and NHS shall enter into the Lease.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PHC
Except as may otherwise be set forth in a letter (the "PHC
DISCLOSURE LETTER") delivered to Buyer concurrently with the
execution and delivery of this Agreement and initialed for
identification purposes by Buyer and PHC, PHC hereby represents and
warrants to Buyer, its successors and assigns as follows:
2.1 Organization and Qualification. Paragraph 2.1 of the
PHC Disclosure Letter lists the name and jurisdiction of
incorporation of NHS, HRC and each of NHS' other direct and
indirect Subsidiaries (the subsidiaries listed in paragraph 2.1 of
the PHC Disclosure Letter are herein referred to collectively as
the "Subsidiaries" and individually as a "Subsidiary"). PHC, NHS
and each Subsidiary is a corporation and in good standing as a
domestic corporation under the laws of the state of its
incorporation, and, to the knowledge of PFS, is duly qualified to
do business as a foreign corporation and is in good standing in
each other jurisdiction in which the character of its properties or
the nature of its business makes such qualification necessary,
except in jurisdictions, if any, where the failure to be so
qualified would not prevent PHC from fulfilling its obligations
hereunder or constitute or would result in a Material Adverse
Event with respect to NHS. As used in this Agreement, the term
"MATERIAL ADVERSE EVENT" when used in reference to NHS and/or its
Subsidiaries shall mean any event, circumstance, condition,
development or occurrence causing, resulting in or having (or, with
the passage of time, reasonably likely to cause, result in or have)
a material adverse effect on the condition (financial or
otherwise), business, properties, business relationships, prospects
or results of operations of NHS and its Subsidiaries taken as a
whole. NHS and each Subsidiary has the requisite corporate power
and authority to own, use or lease its respective properties and to
carry on its respective business as now being conducted.
2.2 Capitalization of NHS. The authorized, issued and
outstanding capital stock of NHS and each Subsidiary are as set
forth in paragraph 2.2 of the NHS Disclosure Letter. All of the
issued and outstanding shares of capital stock of NHS and each
Subsidiary have been duly authorized and validly issued and are
fully paid, nonassessable and free of preemptive rights (whether
created by statute or otherwise). Except as disclosed in paragraph
2.2 of the NHS Disclosure Letter, there are no options, warrants or
other rights, commitments or agreements of any character which call
for the issuance of shares of capital stock of NHS or any
Subsidiary or any securities, instruments or rights convertible
into or exchangeable for shares of capital stock or other
securities of NHS or any Subsidiary. Neither NHS nor any
Subsidiary has any obligation, contingent or otherwise, to register
any securities of NHS or any Subsidiary under the federal
securities laws.
2.3 Title to Shares. All of the issued and outstanding
shares of capital stock of NHS are, and immediately prior to the
Closing Date will be, owned of record and beneficially by PHC, free
and clear of all liens, charges, pledges, encumbrances, equities,
rights of first refusal, options or other claims of any nature,
except liens for current taxes not yet delinquent. All of the
issued and outstanding shares of capital stock of each Subsidiary
are, and immediately prior to the Closing Date will be, owned of
record and beneficially by NHS, free and clear of all liens,
charges, pledges, encumbrances, equities, rights of first refusal,
options or other claims of any nature, except liens for current
taxes not yet delinquent.
2.4 Authority.
(a) PHC has the requisite corporate power and authority to
execute and deliver this Agreement and to fulfill its
obligations hereunder. The execution and delivery of
this Agreement by PHC and the performance of its
obligations hereunder have been duly and validly
authorized by the Board of Directors and sole shareholder
of PHC, and no other corporate proceedings on the part of
PHC are necessary, as a matter of law or otherwise, in
connection therewith. This Agreement has been duly and
validly executed and delivered by PHC and, assuming this
Agreement constitutes the valid and binding obligations
of Buyer, this Agreement constitutes a valid and binding
agreement of PHC, enforceable against PHC in accordance
with its terms, except (a) as such enforcement may be
subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in
effect relating to creditors' rights, and (b) as the
remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which
any proceeding therefore may be brought. All corporate
action on the part of PHC, its Board of Directors and its
sole shareholder which is necessary, as a matter of law
or otherwise, for the execution, delivery and performance
of this Agreement by PHC has been duly and validly taken.
(b) PFS has the requisite corporate power and authority to
execute and deliver the Services Agreement and to fulfill
its obligations thereunder. The execution and delivery
of the Services Agreement by PFS and the performance of
its obligations thereunder have been duly and validly
authorized by the Executive Committee of the Board of
Directors of PFS, and no other corporate proceedings on
the part of PFS are necessary, as a matter of law or
otherwise, in connection therewith. When executed and
delivered by PFS as provided herein, the Services
Agreement will have been duly and validly executed and
delivered by PFS and, assuming the Services Agreement has
been duly and validly executed by NHS, will constitute a
valid and binding agreement of PFS, enforceable against
PFS in accordance with its terms, except (a) as such
enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights, and
(b) as the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court
before which any proceeding therefore may be brought. All
corporate action on the part of PFS, and its Board of
Directors which is necessary, as a matter of law or
otherwise, for the execution, delivery and performance of
the Services Agreement by PFS has been duly and validly
taken.
(c) NGL has the requisite corporate power and authority to
execute and deliver the Lease and to fulfill its
obligations thereunder. The execution and delivery of
the Lease by NGL and the performance of its obligations
thereunder have been duly and validly authorized by the
Board of Directors of NGL, and no other corporate
proceedings on the part of NGL are necessary, as a matter
of law or otherwise, in connection therewith. When
executed and delivered by NGL as provided herein, the
Lease will have been duly and validly executed and
delivered by NGL and, assuming the Lease constitutes the
binding obligations of NHS, the Lease will constitute a
valid and binding agreement of NGL, enforceable against
NGL in accordance with its terms, except (a) as such
enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights, and
(b) as the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court
before which any proceeding therefore may be brought. All
corporate action on the part of NGL and its Board of
Directors which is necessary, as a matter of law or
otherwise, for the execution, delivery and performance of
this Agreement by NGL has been duly and validly taken.
2.5 No Other Investments or Subsidiaries. NHS has no equity
interest or investment in any entity other than the Subsidiaries.
2.6 Financial Statements. PHC has furnished to Buyer true and
complete copies of its consolidated balance sheet dated August 31,
1996 and its consolidated statement of operations for the eight
month period ended August 31, 1996. Such financial statements are
in accordance with the books and records of the entities covered
thereby, and have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis and
present fairly the consolidated financial position of NHS and its
Subsidiaries as of the end of the period covered and the
consolidated results of operations for the period covered in
conformity with generally accepted accounting principles. As used
in this Agreement, the "Latest NHS Balance Sheet" shall mean the
August 31, 1996 consolidated balance sheet of NHS attached as
Schedule 1 to paragraph 2.6 of the PHC Disclosure Letter.
2.7 Absence of Certain Changes. Except as contemplated by
this Agreement or disclosed in the PHC Disclosure Letter, since the
date of the Latest NHS Balance Sheet, NHS and each Subsidiary has
conducted its respective business only in, and has not engaged in
any transaction other than according to, the ordinary and usual
course of such business consistent with prior practices, and, since
such date, there has not been (a) any Material Adverse Event with
respect to NHS or its Subsidiaries: (b) any declaration, setting
aside or payment of any dividend or other distribution with respect
to the capital stock of NHS or any Subsidiary; (c) any change in
the accounting principles, practices or methods of NHS or any
Subsidiary; (d) any labor dispute or difficulty which is reasonably
likely to result in any Material Adverse Event with respect to NHS
or any Subsidiary; (e) any asset of NHS or any Subsidiary having a
value of $50,000 or more sold or disposed of, subjected to any
lien, charge or other encumbrance; (f) any amendment or termination
of any contract or agreement to which NHS or any Subsidiary is a
party which involves the payment (in any form) by or to NHS or such
Subsidiary of $100,000 or more in any twelve-month period; (g) any
repurchase of, issuances or other changes to the outstanding
capital stock of NHS or any Subsidiary; or (h) any increase in the
compensation payable or which could become payable by NHS or any
Subsidiary to any of their respective directors, officers,
employees or consultants, or any amendment of any employee benefit
plan.
2.8 Absence of Undisclosed Liabilities. To the knowledge of
PHC, except and to the extent reserved against or reflected in the
Latest NHS Balance Sheet or disclosed in the PHC Disclosure Letter:
(a) neither NHS nor any Subsidiary had, at such date, any
liabilities or obligations (contingent or otherwise) in excess of
$50,000 in the aggregate which were required by generally accepted
accounting principles, consistently applied, to be reserved against
or reflected therein, and (b) since the date of the Latest NHS
Balance Sheet, except in the ordinary course of its business,
neither NHS nor any Subsidiary has incurred any liabilities or
obligations in excess of $50,000 in the aggregate which, had they
been incurred prior to such date, would have been required by such
principles, so applied, to have been reserved against or reflected
in the Latest NHS Balance Sheet.
2.9 Consents and Approvals; No Violation. Except as disclosed
in the PHC Disclosure Letter, the execution and delivery of this
Agreement, the Services Agreement and the Lease do not and the
consummation of the transactions contemplated hereby will not:
(a) conflict with any provision of the articles of
incorporation or bylaws of PLI, NGL, PHC, NHS or any
Subsidiary;
(b) require PLI, NGL, PHC, NHS or any Subsidiary to obtain
any consent, approval, authorization or permit of or
from, or filing with or notification to, any governmental
or regulatory authority except as contemplated herein;
(c) conflict with, result in the breach of or constitute a
default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms,
conditions or provisions of any note, lease, mortgage,
license, agreement or other instrument or obligation to
which NHS or any Subsidiary is a party or by which NHS or
any Subsidiary or any of their respective assets may be
bound which are required to be disclosed in paragraphs
2.11, 2.14 or 2.15 of the PHC Disclosure Letter; or
(d) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to PLI, NGL, PHC, NHS or
any Subsidiary.
2.10 Certain Fees and Expenses. No person or entity has been
authorized by PHC, NHS or any Subsidiary to act for PHC, NHS or any
Subsidiary in connection with the transactions provided for in this
Agreement in a way which would entitle such person to receive from
NHS or any Subsidiary any broker's fees, commissions, finder's
fees, investment banking or financial advisory fees in connection
with this Agreement (or for reimbursement of any expenses related
thereto).
2.11 Employment and Similar Agreements. Paragraph 2.11 of the
PHC Disclosure Letter sets forth (a) all written employment,
severance, bonus, consulting or indemnification arrangements,
agreements, understandings or plans between NHS or any Subsidiary
and any of their respective directors, officers or employees
(including without limitation any such arrangements, agreements,
understandings or plans which are conditioned upon a change of
control involving NHS or any Subsidiary); (b) all written
compensatory arrangements, agreements, understandings or plans
between NHS or any Subsidiary and any consultant (including without
limitation any such arrangements, agreements, understandings or
plans which are conditioned upon a change of control involving
NHS); and (c) a list of current employees of NHS and each
Subsidiary which reflects, among other things, the current
compensation of each such employee.
2.12 Litigation. Except as disclosed in paragraph 2.12 of the
PHC Disclosure Letter, as of the date hereof, there is no claim,
action or proceeding, including without limitation any claim of
indemnification, pending or, to the knowledge of PHC, NHS or any
Subsidiary, threatened against or relating to NHS or any
Subsidiary. Neither NHS nor any Subsidiary or any of their
respective officers, directors or employees has been permanently or
temporarily enjoined by any order, judgment or decree of any court
or any other governmental or regulatory authority from engaging in
or continuing any conduct or practice in connection with the
business, assets, properties or affairs of NHS or any Subsidiary.
There is not in existence on the date hereof any order, judgment or
decree of any court or other tribunal or other governmental or
regulatory authority enjoining or requiring NHS or any Subsidiary
to take any action of any kind with respect to its business,
assets, properties or affairs.
2.13 Taxes. Except as disclosed in paragraph 2.13 of the PHC
Disclosure Letter: NHS and each Subsidiary, either on their own or
as part of a consolidated group of corporations, have timely filed
accurate, true and complete copies of all income, franchise,
license, sales, payroll and property tax returns and reports that
are or have been required to be filed with the United States and
with the jurisdictions in which they are qualified to do business
or are required to file tax returns or reports and have paid in
full all taxes, interest, penalties, assessments or deficiencies
that are or have been due or payable or are or have been claimed by
any taxing authority to be due and payable (whether or not it is
currently known that such taxes are or have been due and payable).
NHS and each Subsidiary have, to the extent required, made
estimated payments against all taxes that have not yet become due
and payable and have withheld or collected, and, to the extent
required, paid over to the proper governmental authorities, all
taxes, assessments and fees required by law to have been withheld
or collected. NHS and each Subsidiary have duly paid or provided
for all taxes with respect to any period prior to the date of this
representation and warranty. There are no liens for taxes,
assessments, fees or other governmental charges upon any of the
assets or properties of NHS and each Subsidiary. Neither NHS nor
any Subsidiary has waived or been granted an extension which is
still effective, for any applicable limitation period for the
assertion of any tax liability for any federal income tax year.
2.14 Benefit Plans. Each employee benefit plan covering
employees of NHS or any Subsidiary which is maintained or
contributed to by NHS or any Subsidiary conforms in all material
respects to, and its administration is in conformity in all
material respects with, all applicable laws and regulations; no
liability or penalty under the Employment Retirement Income
Security Act of 1974, as amended, has been or will be incurred by
NHS or any Subsidiary with respect to any such plan; full payment
has been made of all amounts which NHS or any Subsidiary is
required to have paid as contributions to such plans; there is not
in the aggregate any accumulated funding deficiency with respect to
such plans; and the current value of accrued benefits of each such
plan does not exceed the current value of such plan's assets.
2.15 Contracts. Paragraph 2.15 of the PHC Disclosure Letter
lists all agreements, contracts, licenses, leases, and
understandings, whether written or oral, which either (a) involve
payment (in any form) by or to NHS or any Subsidiary of $100,000 or
more in any twelve-month period or (b) are material to NHS (except
that such list may exclude agreements which are listed elsewhere in
the PHC Disclosure Letter). All such agreements, contracts,
licenses, leases and understandings are in full force and effect
and no party thereto has given any notice of termination with
respect thereto (except notices of termination which have been
withdrawn). Neither NHS nor any Subsidiary is in material breach of
any agreement, contract, license, lease or understanding which is
described or required to be described in the PHC Disclosure Letter,
nor does any event exist which, with notice or passing of time or
both, would constitute or result in a material breach by NHS or any
Subsidiary of any such agreement, contract, license, lease or
understanding. To the knowledge of PHC, NHS and each Subsidiary,
the other party or parties to each such agreement, contract,
license, lease or understanding has complied with all material
commitments and obligations on its or their part.
2.16 Intellectual Property Rights.
(a) As used in this Agreement, "INTELLECTUAL PROPERTY RIGHTS"
includes United States and foreign inventions, invention
disclosures, patents, inventors' certificates, utility
models, trademarks, service marks, trade names,
copyrights, trade secrets (including processes and
software programs), registrations and applications
therefor, and past, present and future causes of action
and remedies therefor. To the knowledge of PHC, NHS and
each Subsidiary, NHS and each Subsidiary has full right,
title and interest in or to use (as currently used) all
Intellectual Property Rights which are material to the
conduct of its business as now conducted, and the
consummation of the transactions contemplated hereby will
not alter or impair in an adverse manner such
Intellectual Property Rights. Paragraph 2.16 of the PHC
Disclosure Letter lists all Intellectual Property Rights,
including computer software (whether owned by or licensed
to NHS or any Subsidiary) which is material to the
conduct of the business of NHS as now conducted.
(b) To the knowledge of PHC, NHS and each Subsidiary, neither
NHS nor any Subsidiary is in default under any material
agreement pursuant to which it is licensing Intellectual
Property Rights of a third party or granting licenses to
its own Intellectual Property Rights. Neither NHS nor any
Subsidiary has notified any other party of an alleged
default of any such agreement. Neither PHC, NHS nor any
Subsidiary has received any communications alleging that
NHS or any Subsidiary has violated any other person' s
Intellectual Property Rights or has engaged in unfair
competition against such person.
(c) To the knowledge of PHC, NHS and each Subsidiary, NHS and
each Subsidiary do not infringe (nor has it
misappropriated) any third party's Intellectual Property
Rights and neither NHS nor any Subsidiary has any
material liability for any past infringement or
misappropriation. No material dispute or disagreement
involving NHS or any Subsidiary exists or is, to the
knowledge of NHS or any Subsidiary, threatened with
regard to any third party Intellectual Property Right,
including any allegation of Intellectual Property Rights
infringement or misappropriation or of any breach or
default of an Intellectual Property Rights license or
similar agreement.
2.17 Properties, Liens. Except for statutory mechanics and
materialmen's liens and liens for current taxes not yet delinquent,
NHS and each Subsidiary own or lease, free and clear of any liens,
claims, charges, options or other encumbrances (it being understood
that, with respect to leased properties, such representation
regarding the absence of liens, claims, charges, options or other
encumbrances relates only to the leasehold interest of NHS or any
Subsidiary, as applicable), all tangible and intangible properties,
real and personal, material to the operation of their respective
businesses as now conducted whether or not reflected in the Latest
NHS Balance Sheet (except property sold or disposed of in the
ordinary course of business since the date of the Latest NHS
Balance Sheet) and all such property acquired or used since such
date, and to the knowledge of NHS or any Subsidiary, there has not
been any violation of any law, regulation or ordinance (including
without limitation laws, regulations and ordinances relating to
health, fire, safety, zoning, environmental, building, city
planning or similar issues) relating to such properties or
businesses which may reasonably be expected to result in a Material
Adverse Event. There are no proceedings affecting any of such
properties pending or threatened which may reasonably be expected
to, materially and adversely, curtail the use of such property for
the purpose for which it was acquired or the purpose for which it
is now used. Paragraph 2.17 of the PHC Disclosure Letter lists all
real property owned or leased by NHS or any Subsidiary.
2.18 Compliance with Applicable Laws. To the knowledge of
PFS, NHS and each Subsidiary holds all licenses, permits and
authorizations necessary for the lawful conduct of its business, as
now conducted, except for such licenses, permits and authorizations
the absence of which will not result in a Material Adverse Event;
and neither PHC, NHS nor any Subsidiary has received any notice
from any authority or person which asserts that NHS or any
Subsidiary lacks any license, permit or authorization necessary for
the lawful conduct of its business, or that NHS or any Subsidiary
is in violation of any material law, ordinance or regulation of
material significance to NHS or any subsidiary.
2.19 Environmental Liability. To the knowledge of PHC, NHS or
any Subsidiary:
(a) The businesses of NHS and each Subsidiary has been and is
operated in material compliance with all applicable
statutory or regulatory requirements of all federal,
state and local governmental authorities with
jurisdiction over the environment or over workplace
health and safety, and neither NHS nor any Subsidiary has
caused or allowed the generation, treatment, storage,
release or disposal of hazardous substances except in
accordance with such statutes and regulations as they
existed at the time of such generation, treatment,
storage, release or disposal.
(b) Neither PHC, NHS nor any Subsidiary has received any
written notice or, to the best knowledge of PHC, NHS or
any Subsidiary, any other communication, from any
governmental authority alleging or concerning any
violation by NHS or any Subsidiary of, or responsibility
or liability of NHS or any Subsidiary, any statute or
regulation relating to the environment. There are no
pending or threatened, claims, suits, proceedings or
investigations with respect to the businesses or
operations of NHS or any Subsidiary alleging or
concerning any violation of or responsibility or
liability under any statutes or regulations relating to
the environment, nor does PHC, NHS or any Subsidiary have
any knowledge of any fact or condition which might
reasonably be expected to give rise to such a claim,
suit, proceeding or investigation.
(c) There are no pending or threatened actions, proceedings
or investigations seeking to revoke or deny renewal of
any of such approvals, permits and licenses; nor does
PHC, NHS or any Subsidiary have knowledge of any fact or
condition which might reasonably be expected to give rise
to any action, proceeding or investigation to revoke or
deny renewal of such approvals, permits or licenses if
such revocation or denial would constitute a Material
Adverse Event.
2.20 Insurance. NHS and each Subsidiary has in place
insurance coverage of the types, in the coverage amounts and
subject to retention, deductible or other similar terms as
described in paragraph 2.20 of the PHC Disclosure Letter. PFS
management reasonably believes such coverage to be appropriate and
adequate.
2.21 Service Agreements. To the knowledge of PHC, NHS and each
Subsidiary, all charges made to customers of NHS or any Subsidiary
have been properly computed and billed in material compliance with
applicable agreements and procedures in place with respect to such
customers, and no such customer has any right to any material
refund, price or fee adjustments offset or similar right with
respect to any such charges.
2.22 Minute Books and Stock Records. PHC has delivered or made
available to Buyer true and complete copies of the minute books and
stock records of NHS and each Subsidiary, which contain a complete
and correct records of all stock transactions of each such company
and of all meetings of the Boards of Directors of each such
company (and committees thereof) and all meetings of their
stockholders and all actions by written consent without a meeting
by such Boards of Directors (and committees) and their stockholders
since the date of incorporation and reflect accurately in all
material respects all actions by such directors and by stockholders
with respect to all transactions referred to in such minutes.
2.23 Certain Relationships. Neither PHC, NHS nor any
Subsidiary has any knowledge that any material customer of NHS or
any Subsidiary currently plans to terminate its relationship with
any such company.
2.24 Affiliated Transactions. Section 2.24 of the PHC
Disclosure Letter lists all transactions which are now in effect
between NHS or any Subsidiary, on the one hand, and any person or
entity affiliated with NHS or any Subsidiary (other than NHS or a
Subsidiary), on the other hand, including without limitation any
charge for services (administrative or otherwise).
2.25 Full Disclosure. PHC has delivered, or made available to
Buyer, copies of all written instruments, agreements and other
documents referred to in the PHC Disclosure Letter except as
otherwise indicated. All instruments, agreements, schedules and
other documents referred to in the PHC Disclosure Letter delivered
or to be delivered, or made available, to Buyer pursuant to this
Agreement are true and complete in all material respects. No
representation or warranty made in this Article II as supplemented
by the PHC Disclosure Letter contains or will contain any untrue
statement of a material fact or omits or will omit to state a
material fact required to be stated herein or therein or necessary
to make such representation or warranty in light of the
circumstances in which it is made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as may otherwise be set forth in a letter ("BUYER
DISCLOSURE LETTER") delivered to PHC concurrently with the
execution of this Agreement and initialed for identification
purposes by PHC and Buyer, Buyer hereby represents and warrants to
PHC, its successors and assigns as follows:
3.1 Organization and Qualification. Buyer is a corporation
duly organized, validly existing and in good standing as a domestic
corporation under the laws of the state of Delaware, is duly
qualified to do business as a foreign corporation and is in good
standing in each other jurisdiction in which the character of its
properties or the nature of its business makes such qualification
necessary, except in jurisdictions, if any, where the failure to be
so qualified would not constitute or result in a Material Adverse
Event or result in a Material Adverse Event. As used in this
Agreement, the term "MATERIAL ADVERSE EVENT" when used in reference
to Buyer shall mean any event, circumstance, condition, development
or occurrence causing, resulting in or having a material adverse
effect on the condition (financial or otherwise), business,
properties, business relationships, prospects or results of
operations of Buyer taken as a whole. Buyer has the requisite
corporate power and authority to own, use or lease its respective
properties and to carry on its respective business as now being
conducted.
3.2 Capitalization of Buyer.
(a) The authorized, issued and outstanding capital stock of
Buyer is as set forth in paragraph 3.2 of the Buyer Disclosure
Letter. All of the issued and outstanding shares of capital stock
of Buyer have been duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights (whether created
by statute or otherwise). Except as disclosed in paragraph 3.2 of
the Buyer Disclosure Letter, there are no options, warrants or
other rights, commitments or agreements of any character which call
for the issuance of shares of capital stock of Buyer or any
securities, instruments or rights convertible into or exchangeable
for shares of capital stock or other securities of Buyer. Neither
Buyer nor any affiliate thereof has any obligation, contingent or
otherwise, to register any securities of Buyer under the federal
securities laws.
(b) The Warrants have been duly authorized, and when issued
as contemplated herein, will be duly and validly issued; and the
capital stock of Buyer to be issued to the holder or holders of the
Warrants upon the exercise of the Warrants will, when so issued, be
duly authorized, validly issued and nonassessable and will not be
subject to preemptive rights.
3.3 Authority Relative to this Agreement.
(a) Buyer has the requisite corporate power and authority to
execute and deliver this Agreement and the Warrant
Certificates and to fulfill its obligations hereunder and
thereunder. The execution and delivery of this Agreement
and the Warrant Certificates by Buyer and the performance
of its obligations hereunder and thereunder have been
duly and validly authorized by the Executive Committee of
the Board of Directors of Buyer, and no other corporate
proceedings on the part of Buyer are necessary, as a
matter of law or otherwise, in connection therewith. This
Agreement has been, and the Warrant Certificates when
executed and delivered as provided herein, shall have
been, duly and validly executed and delivered by Buyer
and, assuming this Agreement, constitutes the valid and
binding obligations of PHC, this Agreement constitutes,
and the Warrant Certificates will constitute, valid and
binding agreements of Buyer, enforceable against Buyer in
accordance with their respective terms, except (a) as
such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors'
rights, and (b) as the remedy of specific performance and
injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be
brought.
(b) When executed and delivered as provided herein, the
Services Agreement and the Lease will have been duly and
validly authorized, executed and delivered by NHS and,
assuming the Services Agreement and the Lease constitute
the valid and binding obligations of the other parties
thereto, the Services Agreement and the Lease will
constitute valid and biding agreements of NHS,
enforceable against NHS in accordance with their
respective terms, except (a) as such enforcement may be
subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in
effect relating to creditors' rights, and (b) as the
remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which
any proceeding therefor may be brought.
3.4 Financial Statements. Buyer has furnished to PHC the
consolidated balance sheets of Buyer as of December 31, 1995 and
June 30, 1996 and the consolidated statements of operations and
cash flows of Buyer for the year ended December 31, 1995 and the
six month periods ended June 30, 1995 and June 30, 1996. Such
financial statements, with the notes thereto, are, and, except as
disclosed in paragraph 3.4 of the Buyer Disclosure Letter will be,
in accordance with the books and records of Buyer and have been, or
will be, prepared in accordance with generally accepted accounting
principles applied on a consistent basis and present fairly the
financial condition of Buyer as of the end of each period covered
and the results of its operations and cash flows for each of the
periods in accordance with generally accepted accounting
principles. As used in this Agreement, the "LATEST BUYER BALANCE
SHEET" shall mean the June 30, 1996 balance sheet of Buyer
attached as Schedule 1 to paragraph 3.4 of the Buyer Disclosure
Letter.
3.5 Absence of Certain Changes. Except as contemplated by
this Agreement or disclosed in paragraph 3.5 of the Buyer
Disclosure Letter, since the date of the Latest Buyer Balance
Sheet, Buyer has conducted its business only in, and has not
engaged in any transaction other than according to, the ordinary
and usual course of such business consistent with prior practices,
and, since such date, there has not been (a) any Material Adverse
Event with respect to Buyer; (b) any declaration, setting aside or
payment of any dividend or other distribution with respect to the
capital stock of Buyer; (c) any change in the accounting
principles, practices or methods of Buyer; (d) any labor dispute or
difficulty which is reasonably likely to result in any Material
Adverse Event with respect to Buyer; (e) any asset of Buyer
having a value of $100,000 or more sold or disposed of, subjected
to any lien, charge or other encumbrance; (f) any amendment or
termination of any contract or agreement to which Buyer is party
which involves the payment (in any form) by or to Buyer of $250,000
or more in any twelve-month period; or (g) any repurchase of,
issuances or other changes to the outstanding capital stock of
Buyer.
3.6 Absence of Undisclosed Liabilities. To the knowledge of
Buyer, except and to the extent reserved against or reflected in
the Latest Buyer Balance Sheet: (a) Buyer had, at such date, no
material liabilities or obligations (contingent or otherwise) which
were required by generally accepted accounting principles,
consistently applied, to be reserved against or reflected therein,
and (b) since the date of the Latest Buyer Balance Sheet, except in
the ordinary course of its business, Buyer has not incurred any
material liabilities or obligations which, had they been incurred
prior to such date, would have been required by such principles, so
applied, to have been reserved against or reflected in the Latest
Buyer Balance Sheet.
3.7 Financial Capability. Buyer has, and on and after the
Closing Date will have, the financial capability to effect the
consummation of the transactions contemplated in this Agreement
and, the Warrant Certificates.
3.8 Consents and Approvals; No Violation. Except as disclosed
in paragraph 3.5 of the Buyer Disclosure Letter, the execution and
delivery of this Agreement and the Warrant Certificates, and the
execution and delivery of the Services Agreement and the Lease by
NHS do not, and the consummation of the transactions contemplated
hereby and thereby will not:
(a) conflict with any provision of the articles or
certificate of incorporation or bylaws of Buyer;
(b) require Buyer to obtain any consent, approval,
authorization or permit of or from, or make any filing
with or notification to, any governmental or regulatory
authority;
(c) conflict with, result in the breach of or constitute a
default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms,
conditions or provisions of any note, lease, mortgage,
license, agreement or other instrument or obligation to
which Buyer is a party or by which Buyer or any of its
assets may be bound; or
(d) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to Buyer.
3.9 Certain Fees and Expenses. No person or entity has been
authorized by Buyer to act for Buyer in connection with the
transactions provided for in this Agreement in a way which would
entitle such person to receive from PHC (or NHS or any Subsidiary
prior to the Closing) any broker's fees, commissions, finder's
fees, investment banking or financial advisory fees in connection
with this Agreement (or for reimbursement of any expenses related
thereto).
3.10 Litigation. Except as disclosed in paragraph 3.10 of the
Buyer Disclosure Letter, as of the date hereof, there is no claim,
action or proceeding, including without limitation any claim of
indemnification, pending or, to the best knowledge of Buyer,
threatened against or relating to Buyer which if adversely decided
would result in a Material Adverse Event with respect to Buyer.
Neither Buyer nor any of its respective officers, directors or
employees has been permanently or temporarily enjoined by any
order, judgment or decree of any court or any other governmental or
regulatory authority from engaging in or continuing any conduct or
practice in connection with the business, assets, properties or
affairs of Buyer. There is not in existence on the date hereof any
order, judgment or decree of any court or other tribunal or other
governmental or regulatory authority enjoining or requiring Buyer
to take any action of any kind with respect to its business,
assets, properties or affairs.
3.11 Taxes. Buyer, either on its own or as part of a
consolidated group of corporations, has timely filed accurate, true
and complete copies of all income, franchise, license, sales,
payroll and property tax returns and reports that are or have been
required to be filed with the United States and with the
jurisdictions in which it is qualified to do business or is
required to file tax returns or reports and has paid in full all
taxes, interest, penalties, assessments or deficiencies that are or
have been due or payable or are or have been claimed by any taxing
authority to be due and payable (whether or not it is currently
known that such taxes are or have been due and payable). Buyer
has, to the extent required, made estimated payments against all
taxes that have not yet become due and payable and has withheld or
collected, and, to the extent required, paid over to the proper
governmental authorities, all taxes, assessments and fees required
by law to have been withheld or collected. Buyer has duly paid or
provided for all taxes with respect to any period prior to the date
of this representation and warranty. There are no liens for taxes,
assessments, fees or other governmental charges upon any of the
assets or properties of Buyer. Buyer has not waived or been
granted an extension which is still effective, for applicable
limitation period for the assertion of any tax liability for any
federal income tax year.
3.12 Benefit Plans. Each employee benefit plan covering
employees of Buyer which is maintained or contributed to by Buyer
conforms in all material respects to, and its administration is in
conformity in all material respects with, all applicable laws and
regulations; no liability or penalty under the Employment
Retirement Income Security Act of 1974, as amended, has been or
will be incurred by Buyer with respect to any such plan; full
payment has been made of all amounts which Buyer is required to
have paid as contributions to such plans; there is not in the
aggregate any accumulated funding deficiency with respect to such
plans; and the current value of accrued benefits of each such plan
does not exceed the current value of such plan's assets.
3.13 Intellectual Property Rights.
(a) As used in this Agreement, "INTELLECTUAL PROPERTY RIGHTS"
includes United States and foreign inventions, invention
disclosures, patents, inventors' certificates, utility
models, trademarks, service marks, trade names,
copyrights, trade secrets (including processes and
software programs), registrations and applications
therefor, and past, present and future causes of action
and remedies therefor. To the knowledge of Buyer, Buyer
has full right, title and interest in or to use (as
currently used) all Intellectual Property Rights which
are material to the conduct of its business as now
conducted, and the consummation of the transactions
contemplated hereby will not alter or impair in an
adverse manner such Intellectual Property Rights.
(b) To the knowledge of Buyer, Buyer is not in default under
any material agreement pursuant to which it is licensing
Intellectual Property Rights of a third party or granting
licenses to its own Intellectual Property Rights. Buyer
has not notified any other party of an alleged default of
any such agreement. Buyer has not received any
communications alleging that Buyer has violated any other
person's Intellectual Property Rights or has engaged in
unfair competition against such person.
(c) To the best knowledge of Buyer, Buyer is not infringing
(nor has it misappropriated) any third party's
Intellectual Property Rights and does not have any
material liability for any past infringement or
misappropriation. No material dispute or disagreement
involving Buyer exists or is, to the knowledge of Buyer,
threatened with regard to any third party Intellectual
Property Right, including any allegation of Intellectual
Property Rights infringement or misappropriation by Buyer
or of any breach or default by Buyer of an Intellectual
Property Rights license or similar agreement.
3.14 Properties, Liens. Except for statutory mechanics and
materialmen's liens and liens for current taxes not yet delinquent,
Buyer owns or leases, free and clear of any liens, claims, charges,
options or other encumbrance (it being understood that, with
respect to leased properties, such representation regarding the
absence of liens, claims, charges, options or other encumbrances
relates only to the leasehold interest of Buyer), all tangible and
intangible properties, real and personal, material for the
operation of its business as currently conducted whether or not
reflected in the Latest Buyer Balance Sheet (except property sold
or disposed of in the ordinary course of business since the date of
the Latest Buyer Balance Sheet) and all such property acquired or
used since such date, and, to the knowledge of Buyer, there has not
been any violation of any law, regulation or ordinance (including
without limitation laws, regulations and ordinances relating to
health, fire, safety, zoning, environmental, building, city
planning or similar issues) relating to such properties or
businesses which may reasonably be expected to result in a Material
Adverse Event. There are no proceedings affecting any of such
properties pending or threatened which may reasonably be expected
to, materially and adversely, curtail the use of such property for
the purpose for which it was acquired or the purpose for which it
is now used.
3.15 Compliance with Applicable Laws. Except as disclosed in
paragraph 3.10 of the Buyer Disclosure Letter, Buyer has not
received any notice from any authority or person which asserts that
Buyer lacks any license, permit or authorization necessary for the
lawful conduct of its business, or that Buyer is in violation of
any material law, ordinance or regulation of material significance
to Buyer.
3.16 Environmental Liability. To the knowledge of Buyer:
(a) The business of Buyer has been and is operated in
material compliance with all applicable statutory or
regulatory requirements of all federal, state and local
governmental authorities with jurisdiction over the
environment or over workplace health and safety. Buyer
has not caused or allowed the generation, treatment,
storage, release or disposal of hazardous substances
except in accordance with such statutes and regulations
as they existed at the time of such generation,
treatment, storage, release or disposal.
(b) Buyer has not received any written notice or, to the
knowledge of Buyer, any other communication, from any
governmental authority alleging or concerning any
violation by Buyer of, or responsibility or liability of
Buyer under, any statute or regulation relating to the
environment. There are no pending or threatened claims,
suits, proceedings or investigations with respect to the
business or operations of Buyer alleging or concerning
any violation of or responsibility or liability under any
statutes or regulations relating to the environment, nor
does Buyer have any knowledge of any fact or condition
which might reasonably be expected to give rise to such a
claim, suit, proceeding or investigation.
(c) There are no pending or threatened, actions, proceedings
or investigations seeking to revoke or deny renewal of
any of such approvals, permits and licenses; nor does
Buyer have knowledge of any fact or condition which might
reasonably be expected to give rise to any action,
proceeding or investigation to revoke or deny renewal of
such approvals, permits or licenses if such revocation or
denial would constitute a Material Adverse Event with
respect to Buyer.
3.17 Insurance. Buyer has in place insurance coverage of such
types, in such coverage amounts and subject to such retention,
deductible or other terms as management reasonably believes to be
appropriate.
3.18 Service Agreements. To the knowledge of Buyer, all
charges made to customers of Buyer have been properly computed and
billed in material compliance with applicable agreements and
procedures in place with respect to such customers, and no such
customer has any right to any material refund, price or fee
adjustments offset or similar right with respect to any such
charges.
3.19 Minute Books and Stock Records. Buyer has made available
to PHC true and complete copies of the minute books of Buyer, which
contain a complete and correct record of all stock transactions of
Buyer and all meetings of the Boards of Directors of Buyer (and
committees thereof) and all meetings of its stockholders and all
actions by written consent without a meeting by such Boards of
Directors (and committees) and its stockholders since the date of
incorporation and reflect accurately in all material respects all
actions by such directors and by stockholders with respect to all
transactions referred to in such minutes.
3.20 Certain Relationships. Buyer has no knowledge that any
material customer of Buyer currently plans to terminate or alter in
any manner materially detrimental to Buyer its relationship with
Buyer.
3.21 Full Disclosure. Buyer has delivered, made available to
PHC, copies of all written instruments, agreements and other
documents referred to in the Buyer Disclosure Letter except as
otherwise indicated. All instruments, agreements, schedules and
other documents delivered or to be delivered, or made available, to
PHC pursuant to this Agreement are true and complete in all
material respects. No representation or warranty made in this
Article III as supplemented by the Buyer Disclosure Letter contains
or will contain any untrue statement of a material fact or omits or
will omit to state a material fact required to be stated herein or
therein or necessary to make such representation or warranty, in
light of the circumstances in which it is made, not misleading.
ARTICLE IV
CONDUCT OF BUSINESS OF NHS AND EACH SUBSIDIARY PRIOR TO CLOSING
During the period from the date of this Agreement until the
Closing, PHC agrees (except as expressly contemplated by this
Agreement or the PHC Disclosure Letter or to the extent that Buyer
shall otherwise consent in writing, such consent not to be
unreasonably withheld or delayed) to take such actions or refrain
from taking such actions, as the case may be, which are necessary
to maintain compliance with the following covenants:
4.1 Ordinary Course. NHS and each Subsidiary shall carry on
their respective businesses in the usual, regular and ordinary
course, in substantially the same manner as heretofore conducted
and use all reasonable efforts consistent with past practice and
policies to preserve intact their present business organizations,
keep available the services of their employees and preserve their
relationships with customers, suppliers, licensor, lessors, lessees
and others having business dealings with them to the end that their
goodwill and ongoing businesses shall be unimpaired at the Closing.
NHS and each Subsidiary will continue to maintain a standard system
of accounting established and administered in accordance with
generally accepted accounting principles. Neither NHS nor any
Subsidiary will prepay any costs, fees or charges to NHS or any
Subsidiary, or incur any new liability for any costs, fees or
charges to NHS or any Subsidiary except in the ordinary course.
4.2 Dividends: Changes in Stock. Neither NHS nor any
Subsidiary will (a) declare or pay any dividends on or make other
distributions in respect of any shares of its capital stock, (b)
split, combine or reclassify any shares of its capital stock or
issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for any shares of its capital
stock or (c) propose to do any of the foregoing.
4.3 Issuance or Repurchase of Securities. Neither NHS nor any
Subsidiary will issue, pledge, deliver or sell or authorize or
propose the issuance, pledge, delivery or sale of, or repurchase or
propose the repurchase of, any shares of its capital stock, or any
options, warrants or other rights to purchase or acquire, or
securities convertible into or exchangeable for, any such shares.
4.4 Governing Documents. Neither NHS nor any Subsidiary will
propose or adopt any amendment to their respective charter
documents.
4.5 Acquisitions. Neither NHS nor any Subsidiary will acquire
or agree to acquire (a) any business or any corporation,
partnership, association or other business organization or division
thereof (whether by merger, stock purchase, asset acquisition or
otherwise); (b) any capital stock of any person or entity; or (c)
any asset having a value of $50,000 or more.
4.6 Dispositions. Neither NHS nor any Subsidiary will sell,
lease or otherwise dispose of any asset having a value of $50,000
or more.
4.7 Incurrence of Indebtedness. Neither NHS nor any
Subsidiary will incur, guarantee, become subject to, or agree to
incur, guarantee or become subject to any obligation or liability
(absolute or contingent), except current liabilities incurred, and
obligations under contracts entered into, in the ordinary course of
business consistent with prior practice; provided, however, that
neither NHS nor any Subsidiary shall enter into any material lease
or extension of any material lease with respect to any real or
personal property or issue or sell, or guaranty the repayment of,
any debt securities or otherwise incur any indebtedness for
borrowed money.
4.8 Employees. Neither NHS nor any Subsidiary will make any
change in the compensation payable or to become payable to any of
its officers, directors, employees, agents or consultants (other
than increases in compensation called for by the terms of any
employment or other agreement currently in effect which are in the
ordinary course of business and consistent with prior practice), or
enter into to or amend any employment, severance, termination or
other agreement with or make any loans to any of its officers,
directors, employees, agents or consultants or make any change in
its existing borrowing or lending arrangements for or on behalf of
any of such persons, whether contingent on consummation of the
transactions contemplated hereby or otherwise.
4.9 Benefit Plans. Neither NHS nor any Subsidiary will (a)
pay, agree to pay or make any accrual or arrangement for payment of
any employee benefit pursuant to any existing plan, agreement or
arrangement to any officer, director or employee except in the
ordinary course of business and consistent with past practice; (b)
pay or agree to pay or make any accrual or arrangement for payment
to employees of any amount relating to unused vacation or sick
days, except in the ordinary course of business and consistent with
past practice; (c) adopt or commit itself to adopt or agree to, or
pay, grant, issue or accrue salary or benefits pursuant to, any
additional pension, profit-sharing, bonus, extra compensation,
incentive, deferred compensation, stock purchase, stock option,
stock appreciation right, group insurance, severance pay,
retirement or other employee benefit plan, agreement or
arrangement, or any employment or consulting agreement with or for
the benefit of any director, officer, employee, agent or
consultant, whether past or present; or (d) amend in any material
respect any such existing plan, agreement or arrangement.
4.10 Additional Matters. Neither NHS nor any Subsidiary will:
(a) enter into any new agreements, commitments or contracts
which either (i) involve payment by NHS of $50,000 or
more in any twelve-month period or (ii) are outside the
ordinary course of business;
(b) pay any obligation or liability (absolute or contingent)
other than current liabilities in the ordinary course of
business;
(c) cancel or agree to cancel any material debts or claims;
(d) waive or relinquish any rights of substantial value;
(e) otherwise make any material change in the conduct of its
business or operations;
(f) settle any litigation or other claims involving the
payment by NHS of more than $25,000 in any one instance
and $100,000 in the aggregate;
(g) make any investment in any third person or entity; or
(h) agree in writing or otherwise to take any of the
foregoing actions or to take any action which NHS
reasonably believe would constitute a Material Adverse
Event with respect to NHS or any Subsidiary.
ARTICLE V
CONDUCT OF BUSINESS OF BUYER PRIOR TO CLOSING
During the period from the date of this Agreement until the
Closing, Buyer agrees (except as expressly contemplated by this
Agreement or the Buyer Disclosure Letter or to the extent that PHC
shall otherwise consent in writing, such consent not to be
unreasonably withheld or delayed) to take such actions or refrain
from taking such actions, as the case may be, which are necessary
to maintain compliance with the following covenants:
5.1 Ordinary Course. Buyer shall carry on its business in the
usual, regular and ordinary course, in substantially the same
manner as heretofore conducted and use all reasonable efforts
consistent with past practice and policies to preserve intact its
present business, keep available the services of its key employees
and preserve its relationships with material customers, suppliers,
licensors, lessors, lessees and others having business dealings
with it to the end that its goodwill and ongoing business shall be
unimpaired at Closing. Buyer will continue to maintain a standard
system of accounting established and administered in accordance
with generally accepted accounting principles.
5.2 Dividends: Changes in Stock. Buyer will not (a) declare
or pay any dividends on or make other distributions in respect of
any shares of its capital stock, (b) split, combine or reclassify
any shares of its capital stock or issue or authorize the issuance
of any other securities in respect of, in lieu of or in
substitution for any shares of its capital stock or (c) propose to
do any of the foregoing.
5.3 Issuance or Repurchase of Securities. Buyer will not
issue, pledge, deliver or sell or authorize or propose the
issuance, pledge, delivery or sale of, or repurchase, or propose
the repurchase of, any shares of its capital stock, or any options,
warrants or other rights to purchase or acquire, or securities
convertible into or exchangeable for, any such shares.
5.4 Governing Documents. Buyer will not propose or adopt any
amendment to its charter documents.
5.5 Other Extraordinary Transactions. Buyer will not enter
into or consummate any other transaction or agreement which would
have the effect of preventing consummation of the transactions
contemplated hereby or which would result in a Material Adverse
Effect with respect to Buyer.
ARTICLE VI
ADDITIONAL COVENANTS
6.1 Access to Information.
(a) Between the date of this Agreement and the Closing, PHC
shall (i) give Buyer and its authorized representatives
full access, during normal business hours and upon
reasonable notice, to all plants, offices, warehouses and
other facilities and to all contracts, internal reports,
data processing files and records, federal, state, local
and foreign tax returns and records, commitments, books,
records and affairs of NHS and each Subsidiary, whether
located on the premises of NHS or at another location,
(ii) permit Buyer and its authorized representatives to
make such inspections as Buyer may reasonably require,
(iii) furnish Buyer such financial, operating, technical
and product data and other information with respect to
the business, properties and operations of NHS and each
Subsidiary as Buyer from time to time may reasonably
request, including without limitation financial
statements and schedules, (iv) provide Buyer and their
authorized representatives the opportunity, during normal
business hours and upon reasonable notice, to interview
employees, vendors, customers, sales representatives,
distributors and other personnel of NHS and its
Subsidiaries; and (v) assist and cooperate with Buyer and
its authorized representatives in the development of
integration plans for implementation by Buyer following
the Closing.
(b) Between the date of this Agreement and the Closing, Buyer
shall furnish PHC and its authorized representatives such
financial and other information with respect to the
business as PHC from time to time may reasonably request,
including without limitation financial statements and
schedules.
(c) All information and documents obtained pursuant to this
Section 6.1, shall be subject to the terms of the
Confidentiality Agreement between the parties dated
September 1, 1996, which remains in full force and effect
and shall survive any termination of this Agreement. From
and after the Closing Date, the provisions of such
Confidentiality Agreement shall in no way limit the right
of Buyer or any of its affiliates to make use of any
information concerning NHS or any Subsidiary.
6.2 Governmental Filings. PHC and Buyer shall, as promptly as
reasonably practicable, make all filings necessary under any
applicable federal, state, local and foreign laws and to obtain any
required regulatory approvals, clearances or expirations of waiting
periods in connection with the transactions contemplated by this
Agreement. Each party shall use all reasonable efforts to
cooperate with the other party in preparing its respective
governmental filings and in obtaining all required regulatory
approvals, clearances and expirations of waiting periods.
6.3 Notice of Defaults.
(a) PHC will give prompt notice to Buyer of (i) any written
notice of default received by NHS or any Subsidiary
subsequent to the date of this Agreement and prior to the
Closing under any instrument or agreement to which NHS or
any Subsidiary is a party or by which either of them or
any of their properties is bound, and (ii) any suit,
action or proceeding instituted or, to the best knowledge
of NHS or any Subsidiary, threatened against or affecting
NHS or any Subsidiary subsequent to the date of this
Agreement and prior to the Closing.
(b) Buyer will give prompt notice to NHS of any suit, action
or proceeding instituted or, to the best knowledge of
Buyer threatened against or affecting Buyer subsequent to
the date of this Agreement and prior to the Closing which
might adversely affect Buyer's ability to consummate the
transactions contemplated hereunder.
6.4 Communications. No party will furnish any written
communications to the public generally if the subject matter
thereof relates to the transactions contemplated by this Agreement
without the prior written approval of the other parties as to the
content thereof, which approval shall be provided promptly and
shall not be unreasonably withheld. Nothing in this Section 5.4,
however, shall be deemed (a) to prohibit any disclosure reasonably
required by any applicable law or by any competent governmental or
regulatory authority or (b) to prevent either party from disclosing
the general nature of the transactions contemplated hereby without
identifying the other party or any of its affiliates. Immediately
following the Closing, Buyer shall notify all employees of NHS and
the Subsidiaries of the purchase of NHS by Buyer in a manner and in
form and substance reasonably satisfactory to PHC.
6.5 Expenses. Whether or not the transactions contemplated
hereby are consummated, all costs and expenses (including without
limitation, fees and expenses of counsel and accountants) incurred
in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expense except as
otherwise specifically set forth herein; provided, however, that
Buyer shall bear all expenses relating to the obtaining of all
regulatory approvals required in connection with the consummation
of the transactions hereunder.
6.6 Brokers or Finders. Neither Buyer nor PHC nor any of
their respective affiliates shall enter into any agreement or
arrangement with any agent, broker, investment banker or other firm
or person pursuant to which such person shall be entitled to any
broker or finder's fee or any other commission or similar fee from
any other party in connection with any of the transactions
contemplated by this Agreement.
6.7 Additional Actions. Subject to the terms and conditions
of this Agreement, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all reasonable
action and to do, or cause to be done, all things reasonably
necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions
contemplated by this Agreement as promptly as reasonably
practicable. In case at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this
Agreement, each party to this Agreement, to the extent within such
party's reasonable control, shall take all such necessary action.
6.8 Interim Financial Statements.
(a) As promptly as practicable following the end of each
month prior to the Closing, and at the Closing, PHC shall
deliver to Buyer monthly financial statements of NHS and
its Subsidiaries in a format consistent with its past
practices which is reasonably acceptable to Buyer.
(b) As promptly as practicable following the end of each
month prior to the Closing, and at the Closing, Buyer
shall deliver to PHC monthly financial statements of
Buyer and its subsidiaries in a format consistent with
its past practices which is reasonably acceptable to PHC.
6.9 Warrant Certificates, Services Agreement and Lease.
Buyer shall perform fully and in a timely manner its obligations
under the Warrant Certificates and shall cause NHS to perform fully
and in a timely manner its obligations under the Services Agreement
and the Lease.
6.10 Employee Benefit Plan Contributions. PHC shall, on a
timely basis, make all contributions to, and pay all costs and
expenses related to, all employee benefit plans covering employees
of NHS insofar as such contributions, costs or expenses have
historically been at the expense of PHC and are attributable to any
period through the Closing Date (whether the obligation to fund
such contributions, costs or expenses becomes fixed prior to or
after the Closing Date).
6.11 Tax Matters. The following Tax provisions shall
apply after the Effective Date:
(a) Section 338(h)(10) Election. At the request of the
Buyer, PHC or its affiliates, if applicable, will join
with PHC in making an election under Section 338(h)(10)
of the Internal Revenue Code of 1986, as amended (the
"IRC") (and any corresponding elections under state or
local law) (collectively, a "Section 338(h)(10)
Election") with respect to the acquisition of the stock
of NHS hereunder. In the event the Section 338(h)(10)
Election is made, the parties shall timely comply with
the election requirements, allocation of purchase price
requirements, tax return filing requirements and other
applicable provisions of Treas. Reg. 1.338(h)(10) and
applicable provisions cross-referenced therein. The
parties shall bear their respective administrative
expenses of complying with the requirements of the
Section 338(h)(10) Election. Buyer shall reimburse PHC
within 15 days after request therefor for up to $50,000
in the aggregate of any financial loss or detriment
incurred by PHC or its affiliates as a result of the
Section 338(h)(10) Election.
(b) Cooperation on Tax Matters.
(i) PHC and Buyer shall cooperate fully, as and to the
extent reasonably requested by the other party, in
connection with the filing of tax returns and any
audit, litigation or other proceeding with respect
to taxes. Such cooperation shall include the
retention and (upon the other party's request) the
provision of records and information which are
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 material provided
hereunder. PHC and the Buyer agree (A) to retain
all books and records with respect to tax matters
pertinent to NHS relating to any taxable period
beginning before the Closing Date until the
expiration of the statute of limitations (and, to
the extent notified by PHC or the Buyer, any
extensions thereof) of the respective tax periods,
and to abide by all record retention agreements
entered into with any taxing authority, and (B) to
give the other party reasonable written notice prior
to transferring, destroying or discarding any such
books and records and, if the other party so
requests, PHC or Buyer, as the case may be, shall
allow the other party to take possession of such
books and records.
(ii) PHC and Buyer further agree, upon request, to use
their best efforts to obtain any certificate or
other document from any governmental authority or
any other person or entity as may be necessary to
mitigate, reduce or eliminate any tax that could be
imposed (including, but not limited to, with respect
to the transactions contemplated hereby).
(iii) Except as otherwise stated herein, PHC and
Buyer shall each have the right to control any
and all disputes and proceedings with tax
authorities arising in respect of taxes for
which it may be the subject of an
indemnification claim under this Agreement or
under which it may be entitled to a tax
reimbursement, refund or credit.
6.12 Reimbursement of Intercompany Amounts. Within fifteen
(15) days after request therefor, supported by appropriate
documentation:
(a) Buyer shall, or shall cause NHS or its Subsidiaries,
to pay (to the extent unpaid) (x) all amounts
payable by NHS or its Subsidiaries to PFS or its
subsidiaries which are reflected on the Closing
Balance Sheet, and (y) all amounts advanced,
allocated or to be allocated, or otherwise owed to
PFS or its subsidiaries by NHS or its Subsidiaries
for or with respect to the period from September 30,
1996 through the Closing Date.
(b) PHC shall, or shall cause PFS and its Subsidiaries
to pay (to the extent unpaid) (x) all amounts
payable by PFS and its subsidiaries to NHS or its
Subsidiaries which are reflected on the Closing
Balance Sheet, and (y) all amounts owed by PFS or
its subsidiaries to NHS or its Subsidiaries for or
with respect to the period from September 30, 1996
through the Closing Date.
ARTICLE VII
CONDITIONS PRECEDENT TO CONSUMMATION OF THE
TRANSACTION
7.1 Conditions to the Obligations of Both Parties. The
respective obligations of PHC and Buyer to effect the transactions
contemplated to occur at the Closing hereunder shall be subject to
the satisfaction on or prior to the Closing of the following
conditions:
(a) Governmental Approvals. All material authorizations,
consents, orders or approvals of, or declarations or
filings with, or expiration of waiting periods imposed
by, any competent federal, state, local or foreign
governmental or regulatory authority necessary for the
consummation of the transactions contemplated by this
Agreement shall have been filed, occurred or been
obtained.
(b) Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order
preventing the consummation of the transactions
contemplated hereby shall have been issued by any
federal, state or foreign court or other competent
governmental or regulatory authority and remain in
effect, and no litigation seeking the issuance of such an
order or injunction, or seeking substantial damages
against any party hereto if the transactions contemplated
hereby are consummated, shall be pending which, in the
good faith judgment of the President of PHC or NHS
(acting upon advice of their respective counsel) has a
reasonable probability of resulting in such order,
injunction or substantial damages. In the event any such
order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such
injunction lifted.
(c) Statutes. No federal, state, local or foreign statute,
rule or regulation shall have been enacted which would
make the consummation of the transactions contemplated
hereby illegal.
7.2 Further Conditions to the Obligations of Buyer. The
obligations of Buyer to effect the transactions contemplated hereby
are subject to the satisfaction on or prior to the Closing of the
following conditions, unless waived by Buyer:
(a) Representations and Warranties. The representations and
warranties of PHC set forth in this Agreement shall be
true and correct in all material respects as of the
Closing as though made at and as of the Closing, and
Buyer shall have received a certificate (the "PHC
Bring-Down Certificate"), dated the date of Closing to
the foregoing effect signed by an authorized officer of
PHC. The PHC Bring-Down Certificate will also include
certified copies of resolutions of the Board of Directors
and sole shareholder of PHC approving the transactions
contemplated by this Agreement.
(b) Performance of Obligations of PHC. PHC shall have
performed in all material respects all obligations
required to be performed by it under this Agreement prior
to the Closing, and the PHC Bring-Down Certificate shall
include a statement to such effect.
(c) No Litigation. There shall not have been instituted and
be continuing or, to the knowledge of PHC, NHS or any
Subsidiary threatened, against NHS or any Subsidiary any
claim, action or proceeding the result of which could
reasonably be expected to result in a Material Adverse
Event with respect to NHS or any Subsidiary (except such
matters, if any, as were disclosed in the PHC Disclosure
Letter).
(d) No Material Adverse Event. No Material Adverse Event with
respect to NHS or any Subsidiary (except such matters, if
any, as were described in the NHS Disclosure Letter)
shall have occurred.
(e) Resignations of Officers and Directors. There shall have
been tendered to Buyer the written resignation of each
officer and each member of the Board of Directors of NHS
and each Subsidiary from their capacities as officers or
directors, effective at the Closing.
(f) Third-Party Approvals. Any and all consents (or
novations) from third parties relating to contracts,
licenses, leases and other agreements and instruments
disclosed or required to be disclosed, pursuant to
Section 2.15 hereof, to the extent reasonably required to
preserve the benefits of such contracts, licenses, leases
and other agreements and instruments following the
Closing, shall have been obtained.
(g) Delivery of Share Certificates. The stock certificate(s)
representing all issued and outstanding Shares shall have
been delivered to Buyer, duly assigned to Buyer, in form
and substance reasonably satisfactory to Buyer and its
counsel.
(h) Employment. Anthony J. Pino shall have entered into an
employment agreement with Buyer or NHS.
(i) PHC shall have received from A. Clark Waid III, counsel
to PHC, PFS and NGL, a signed legal opinion to the
following effects: (i) NHS and each Subsidiary is a
corporation duly organized, validly existing and in good
standing as a domestic corporation under the laws of the
jurisdiction of its incorporation; (ii) this Agreement,
has been, and, when executed and delivered by PFS and
NGL, respectively, as contemplated herein, the Services
Agreement and the Lease will have been duly executed and
delivered by PHC, PFS or NGL, as the case may be, and,
assuming this Agreement, the Services Agreement and the
Lease constitute binding obligations of the other parties
thereof, constitute, or will constitute, as the case may
be, valid and binding obligations of PHC, PFS or NGL, as
the case may be, enforceable against PHC, PFS or NGL, as
the case may be, in accordance with the respective terms
of such agreements, except (A) as such enforcement may be
subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in
effect relating to creditors' rights, (B) as the remedy
of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and
to the discretion of the court before which any
proceeding therefor may be brought, and (C) insofar as
the enforceability of indemnification provisions
contained in any of such agreements may be limited by
public policy considerations; (iii) all of the issued and
outstanding shares of capital stock of NHS and each
Subsidiary are owned of record as set forth in paragraph
2.2 of the PHC Disclosure Letter; (iv) the execution and
delivery of this Agreement, the Services Agreement and
the Lease by PHC, PFS or NGL, as the case may be, and the
performance of their respective obligations hereunder and
thereunder have been duly and validly authorized by all
requisite corporate action on the part of PHC, PFS or
NGL, as the case may be; and (v) such counsel is not
aware of any pending or threatened litigation involving
NHS or any Subsidiary except for such matters, if any, as
are listed in the PHC Disclosure Letter.
7.3 Further Conditions to the Obligations of PHC. The
obligations of PHC to effect the transactions contemplated hereby
are subject to the satisfaction on or prior to the Closing of the
following conditions, unless waived by PHC.
(a) Representations and Warranties. The representations and
warranties of Buyer set forth in this Agreement shall be
true and correct in all material respects as of the
Closing as though made at and as of the Closing, and PHC
shall have received a certificate to the foregoing effect
signed by an authorized officer of Buyer (the "Buyer
Bring-Down Certificate"). The Buyer Bring-Down
Certificate will also include certified copies of
resolutions of the Board of Directors of Buyer approving
the transactions contemplated by this Agreement.
(b) Performance of Obligations of Buyer. Buyer shall have
performed in all material respects all obligations
required to be performed by Buyer under this Agreement
prior to the Closing, and the Buyer Bring-Down
Certificate shall include a statement to such effect.
(c) Delivery of Closing Consideration. Buyer shall have
delivered to PHC the cash and the Warrant Certificates
referred to in Section 1.1(b) above.
(d) No Litigation. There shall not have been instituted and
be continuing or, to the knowledge of Buyer threatened,
against Buyer any claim, action, or proceeding which
materially and adversely affects Buyer's ability to
fulfill its obligations hereunder or which could
reasonably be expected to result in a Material Adverse
Event with respect to Buyer (except such matters, if any,
as were described in of the Buyer Disclosure Letter).
(e) No Material Adverse Event. No Material Adverse Event with
respect to Buyer (except such matters, if any, as were
described in the Buyer Disclosure Letter) shall have
occurred.
(f) Third-Party Approvals. Any and all consents (or
novations) required from third parties relating to
contracts, licenses, leases and other agreements and
instruments material to NHS and the Subsidiary, taken as
a whole, to the extent reasonably required to preserve
the benefits of such contracts, licenses, leases and
other agreements and instruments following the Closing,
shall have been obtained.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) By Mutual Consent. By mutual consent of PHC and Buyer;
(b) By PHC or Buyer. By either PHC, on the one hand, or
Buyer, on the other hand:
(i) if the Closing shall not have occurred on or before
October 25, 1996; provided the failure of the
transactions to be consummated by the applicable
date is not caused by any breach of this Agreement
by the party seeking such termination;
(ii) if a court of competent jurisdiction or other
competent governmental or regulatory authority shall
have issued an order, decree or ruling, or taken any
other action, permanently restraining, enjoining or
otherwise prohibiting the consummation of the
transactions contemplated hereby and such order,
decree, ruling or other action shall have become
final and not appealable; or
(iii) if any statute, rule or regulation is enacted,
promulgated or deemed applicable to the
consummation of the transactions contemplated
hereby by any competent governmental or
regulatory authority which makes the
consummation of such transactions illegal.
(c) By PHC. By PHC, if a material default under or a material
breach of this Agreement by Buyer shall have occurred and
be continuing thirty (30) days after receipt of written
notice thereof from PHC;
(d) By Buyer. By Buyer if a material default under or a
material breach of this Agreement by PHC shall have
occurred and be continuing thirty (30) days after receipt
of written notice thereof from Buyer.
8.2 Effect of Termination. In the event of termination of
this Agreement as provided in Section 8.1 above, this Agreement
shall forthwith terminate and there shall be no liability or
obligation on the part of either party hereto or their respective
officers, directors, employees or agents, except that (a) nothing
set forth herein shall relieve a party hereto from liability for
its breach of this Agreement and (b) the confidentiality provisions
referred to in Section 6. l(c) shall survive any such termination.
8.3 Amendment. This Agreement may not be amended except by an
instrument in writing signed by or on behalf of each of the parties
hereto.
8.4 Extension: Waiver. At any time prior to the Closing, to
the extent legally allowed, PHC, on the one hand, and Buyer, on the
other hand, (a) may extend the time for the performance of any of
the obligations or other acts of the other party hereto, (b) may
waive any inaccuracies in the representations and warranties made
by the other party contained herein or in any document delivered
pursuant hereto and (c) may waive the other party's compliance with
any of the agreements or conditions contained herein. Any such
extension or waiver shall be valid only if set forth in an
instrument in writing signed by or on behalf of PHC or Buyer (as
applicable) and shall be effective only to the extent set forth in
such instrument. No extension or waiver of any single condition,
covenant, agreement, representation, warranty, breach, default or
other matter hereunder shall be deemed an extension or waiver of
any other condition, covenant, agreement, representation, warranty,
breach, default or other matter theretofore or thereafter
occurring.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification By PHC. Subject to the limitations
contained in this Section 9.1, PHC shall, from and after the
Closing Date, jointly and severally, indemnify, defend and hold
harmless Buyer and NHS, and their respective officers, directors,
agents, employees and representatives, successors and assigns
(collectively, "Buyer Indemnified Parties") from and against any
and all claims, actions, suits, proceedings, demands, assessments,
judgments, losses, expenses, liabilities, damages, recoveries and
deficiencies, including without limitation interest, penalties and
reasonable attorneys' fees, expert witness fees, costs and other
expenses (collectively, "Losses") borne by or asserted against any
of such indemnified parties in any way relating to, arising out of
or resulting from:
(a) any misrepresentation or breach of warranty made by PHC
in this Agreement;
(b) any breach by PHC of any covenant or agreement contained
in this Agreement; and
(c) the matters referred to in paragraph 2.12 of the PHC
Disclosure Letter; and
(d) no Buyer Indemnified Party shall have the right to
recover from PHC based on claims for indemnification made
under Section 9.1(a) or 9.1(b) or for breach of the
representations or warranties of PHC in Article II of
this Agreement: (i) unless and until the aggregate
Losses on a cumulative basis attributable to such claims
exceed $300,000, and then only to the extent of such
excess, and (ii) if such claim is asserted with respect
to claims under Section 9.1(a) or with respect to the
representations and warranties of PHC in Article II of
this Agreement, such claim is asserted prior to the date
such representations and warranties terminate pursuant to
Section 10.1 below.
9.2 Indemnification By Buyer.
(a) Buyer shall, from and after the Closing Date, jointly and
severally, indemnify, defend and hold harmless PHC, its
officers, directors, agents, employees and
representatives, successors and assigns (collectively,
"PHC Indemnified Parties") from and against any and all
claims, actions, suits, proceedings, demands,
assessments, judgments, losses, expenses, liabilities,
damages, recoveries and deficiencies, including without
limitation interest, penalties and reasonable attorneys'
fees, expert witness fees, costs and other expenses
(collectively, "Losses") borne by or asserted against any
of such indemnified parties in any way relating to,
arising out of or resulting from:
(i) misrepresentation or breach of warranty made by
Buyer in this Agreement, the Warrant Certificates;
and
(ii) any breach by Buyer of any covenant or agreement
contained in this Agreement, or the Warrant
Certificates.
(b) No PHC Indemnified Party shall have the right to recover
from Buyer based on claims for indemnification made under
Section 9.2(a) or for breach of the representations or
warranties of Buyer in Article III of this Agreement if
such claim is asserted with respect to claims under
Section 9.2(a) or the representations and warranties of
Buyer in Article III of this Agreement, such claim is
asserted prior to the date such representations and
warranties terminate pursuant to Section 10.1 below.
9.3 Third Party Claims. Notice and Opportunity to Settle. The
following provisions shall be applicable in the event that any
Buyer or PHC Indemnified Party asserts indemnity rights pursuant to
this Article VIII relating to any third party claim:
(a) Within 30 days after the receipt by the party entitled to
indemnity hereunder (the "Indemnified Party") of any
claim or demand (including but not limited to, notice of
any action, suit or proceeding) by any third party
against an Indemnified Party which gives rise to a right
to claim of indemnification hereunder, the affected
Indemnified Party shall give the other (collectively, the
"Indemnifying Party") written notice of such claim or
demand; provided, however, that the failure to give such
notice shall not relieve the Indemnifying Party of its
obligations hereunder except to the extent that such
failure is materially prejudicial to the Indemnifying
Party.
(b) The Indemnifying Party shall have the right (without
prejudice to the right of any Indemnified Party to
participate at its own expense through counsel of its own
choosing), to defend against such claim or demand at its
expense and through counsel of its own choosing (the
choice of such counsel to be subject to the reasonable
consent of the affected Indemnified Parties) and to
control such defense if it gives written notice of its
intention to do so within 15 days of the receipt of the
notice referred to in Section 9.3(a) above. If the
Indemnifying Party shall decline or fail to assume the
defense of such claim or demand, the affected Indemnified
Parties shall have the right to assume control of such
defense at the expense of the Indemnifying Party. The
Indemnified Parties shall cooperate fully in the defense
of such claim or demand and shall make available to the
Indemnifying Party or its counsel all pertinent
information under their control relating thereto. The
Indemnifying Party agrees to cooperate with the
Indemnified Parties in order to enable their counsel to
participate in the defense and to deliver to the
Indemnified Parties copies of all pleadings and other
information within the Indemnifying Party's knowledge or
possession reasonably requested by the Indemnified
Parties that is relevant to the defense of any such claim
or demand. The Indemnifying Party and the Indemnified
Parties and their respective counsel shall maintain
confidentiality with respect to all such information
consistent with the conduct of a defense hereunder.
(c) The Indemnifying Party shall have the right to elect to
settle any such claim or demand for monetary damages only
at its sole expense and provided the settlement includes
an unconditional release of all Indemnified Parties,
subject to the consent of the affected Indemnified
Parties; provided, further, that if the affected
Indemnified Parties fail to give such consent within 20
days of being requested to do so, the affected
Indemnified Parties shall, at their expense, assume the
defense of such claim or demand and regardless of the
outcome of such matter, the Indemnifying Party' s
liability hereunder shall be limited to the amount of any
such proposed settlement plus costs and expenses incident
to the defense and settlement of such claim or demand.
(d) In the event the Indemnifying Party assumes the defense
of a claim or demand, the Indemnified Parties shall have
the right thereafter to take over control of the defense
of any claim or demand from the Indemnifying Party at any
time and to elect to settle such claim or demand;
provided, however, that in such case, unless Otherwise
agreed by the Indemnifying Party, the Indemnifying Party
shall have no indemnification obligations with respect to
such claim, demand or settlement except for the costs and
expenses of such Indemnifying Party incurred in the
defense of the claim or demand.
(e) With respect to claims or demands arising under Section
9.1(a), 9.1(b) or the representations and warranties of
PHC in Article II above, the provisions of this Section
9.3 are subject to the $300,000 deductible set forth in
Section 9.l(d) hereof. Until such deductible has been
exhausted, Buyer and PHC shall cooperate with each other
in the handling and/or settlement of any claim of
indemnification covered by this Section 9.3 such that
Losses attributable to such claim will be properly
allocated to PHC up to the amount of any unused portion
of such deductible.
ARTICLE X
GENERAL PROVISIONS
10.1 Investigation Will Not Affect Representations and
Warranties; Survival. No investigation made by or for any party
hereto prior to the Closing shall affect or modify any
representations and warranties made to that party by another party.
All representations and warranties of the parties made herein shall
survive the Closing and shall expire 18 months after the Closing
Date except that Sections 2.1, 2.2, 2.3, 2.4, 2.9, 2.25, 3.1, 3.2,
3.3, 3.8 and 3.21 (only to the extent Sections 2.25 or 3.21 relate
one or more such other listed Sections) shall survive indefinitely.
Except as otherwise expressly provided herein, all covenants and
obligations of the respective parties hereunder shall survive the
Closing indefinitely until fully satisfied in accordance with this
Agreement.
10.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given upon personal
delivery, facsimile transmissions (with written or facsimile
confirmation of receipt), telex or delivery by an overnight express
courier service (delivery, postage or freight charges prepaid), or
on the fourth day following deposit in the United States mail (if
sent by registered or certified mail, return receipt requested,
delivery postage or freight charges prepaid), addressed to the
parties at the following addresses (or at such other address for a
party as shall be specified by like notice):
(a) if to Buyer, to: Mr. S. Joseph Bruno
United Payors & United Providers,
Inc.
2275 Research Boulevard, 6th Floor
Rockville, Maryland 20850
(b) if to PHC, to: Billy B. Hill, Jr.
Preferred Health Choice, Inc.
1750 East Golf Road
Schaumburg, IL 60173
FAX: (847) 413-7194
with a copy to: A. Clark Waid III
Pioneer Financial Services, Inc.
1750 East Golf Road, Suite 1100
Schaumburg, IL 60173
FAX: (847) 413-7193
10.3 Interpretation. When a reference is made in this
Agreement to an Article, Section, Exhibit or Schedule, such
reference shall be to an Article, Section, Exhibit or Schedule to
this Agreement unless otherwise indicated. All Exhibits referred to
herein are hereby incorporated by reference herein. The words
"include," "includes" and "including" when used herein shall be
deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement. Whenever a
representation or warranty herein is made to the "knowledge," "best
knowledge" or awareness of a party, it shall refer to facts within
the actual knowledge of such party and such party's officers,
provided that, in the case of each party, such references shall be
deemed to impose upon such party a duty to conduct a reasonable
investigation concerning the existence of such facts, as well as an
investigation of reasonably available corporate records concerning
such facts.
10.4 Counterparts. This Agreement may be executed in two
counterparts, each of which shall be considered one and the same
document and shall become effective when the counterparts have been
signed by each of the parties and delivered to the other party, it
being understood that each party need not sign the same
counterpart.
10.5 Miscellaneous. This Agreement and the Exhibits,
Schedules, documents, instruments and other agreements specifically
referred to herein (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all
prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof; (b) are not
intended to confer upon any other person any rights or remedies
hereunder (except indemnification rights conferred upon Indemnified
Parties in Article VIII of this Agreement); and (c) shall not be
assigned by operation of law or otherwise except as otherwise
specifically set forth herein; provided, however, any party hereto
may assign any of its rights and obligations hereunder to any
wholly-owned, direct or indirect subsidiary, but no such assignment
shall relieve such party of its obligations hereunder. Each party
hereby acknowledges and agrees that it has not replied upon any
statement, representation or warranty relating to the matters
covered by this Agreement other than those contained herein..
10.6 Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the
laws of the State of Illinois, without giving effect to its
conflict of law provisions.
10.7 Severability. In case any provision in this Agreement
shall be found by a court of competent jurisdiction to be invalid,
illegal or unenforceable, such provision shall be construed and
enforced as if it had been narrowly drawn so as not to be invalid,
illegal or unenforceable, and the validity, legality and
enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
10.8 Successors and Assigns. This Agreement shall be binding
upon the parties hereto and their respective successors and
permitted assigns and shall inure to the benefit of the parties
hereto and their respective permitted successors and assigns.
10.9 Time of the Essence. The parties agree that time is of
the essence of each provision of this Agreement.
10.10 Attorneys' Fees. In the event of any dispute with
respect to the subject matter of this Agreement, the prevailing
party shall be entitled to such party's reasonable attorneys' fees
and court costs incurred in resolving or settling the dispute, in
addition to any and all other damages to which such party may be
entitled.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.
PREFERRED HEALTH CHOICE, INC.
By:
Its:
UNITED PAYORS & UNITED PROVIDERS, INC.
By:
Its:
lit\p\phc\agreemen\untdpy58.23
EXHIBIT 3.3
TERMINATION AND RELEASE AGREEMENT
This Termination and Release Agreement (this "Agreement") is made as of October
24, 1996, by and among Pioneer Financial Service, Inc., a Delaware corporation
("PFS"), and Anthony J. Pino ("Pino").
Recitals:
Preferred Health Choice, Inc., an Illinois corporation and a subsidiary of PFS
("PHC"), and United Payors & United Providers, Inc., a Delaware corporation
("Buyer"), have entered into that certain Stock Purchase Agreement, dated
October 22, 1996, but effective as of September 30, 1996 (the "Stock Purchase
Agreement"), providing generally for the sale of PHC s equity interest in
National Health Services, Inc, a Wisconsin corporation ("NHS"), to Buyer.
PFS and Pino are parties to that certain Employment Agreement, dated as of
January 1, 1996 (the "Employment Agreement"), and that certain related letter
agreement, dated as of September 7, 1995, from PFS to Pino, which provides,
among other things, for certain compensation to be payable to Pino in the event
of the sale of Preferred Health Choice, Inc. (the "Letter Agreement").
Pino has executed and delivered to PFS that certain Promissory Note, dated
July 1, 1994, in the principal amount of $75,000 (the "Note").
In connection with the sale of NHS to Buyer, the parties hereto desire to
(x) terminate the Employment Agreement, the Letter Agreement and the Note, and
(y) release each other from certain obligations and liabilities.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Termination of the Employment Agreement. Effective as of the date
hereof, the Employment Agreement is hereby terminated pursuant to Section 7(c)
thereof; Pino acknowledges and agrees that (x) such termination is not for
"good reason" as defined in the Employment Agreement, and (y) that he is not
entitled to any compensation other than for services rendered thereunder prior
to the date hereof as provided in said Section 7(c); and both parties
acknowledge and agree that neither party has any right, obligation or liability
thereunder except that Pino s obligations under Sections 10, 11 and 12 survive
termination of the Employment Agreement.
2. Termination of the Letter Agreement. Effective as of the date hereof,
the Letter Agreement is hereby terminated; and neither party thereto shall have
any right, obligation or liability thereunder.
3. Forgiveness of Note. Effective as of September 30, 1996, PFS hereby
forgives or will cause to be forgiven all outstanding indebtedness owed by Pino
under the Note.
4. Vesting of Options. All options heretofore issued by PFS to Pino
shall be fully vested effective as of the date hereof.
5. Releases.
(a) PFS, on behalf of itself and its affiliates and their respective
successors and assigns, (collectively, the "PFS Releasing Parties"), hereby
fully and forever release, discharge, disclaim and renounce any and all claims,
demands, actions, causes of action and or suits in law or equity now or
hereafter existing, whether known or unknown ("Claims") against Pino and his
respective assigns and legal representatives (herein collectively referred to as
the "Pino Released Parties"), including without limitation any Claims arising
under the Employment Agreement, the Letter Agreement and the Note except for (x)
Claims arising hereunder, (y) Claims arising under Sections 10, 11 or 12 of the
Employment Agreement, and (z) Claims arising under that certain affidavit, dated
as of October 23, 1996, delivered by Pino in connection with the transactions
contemplated in the Stock Purchase Agreement. PFS, on behalf of itself and its
affiliates, hereby represents and warrants that they have not assigned or
otherwise transferred any claim, demand, action or cause of action released by
this Section 5(a).
(b) Pino, on behalf of himself and his legal representatives and
assigns (collectively, the "Pino Releasing Parties"), hereby fully and forever
releases, discharges, disclaims and renounces any and all claims, demands,
actions, causes of action and or suits in law or equity now or hereafter
existing, whether known or unknown ("Claims") against PFS and its affiliates,
directors, officers, shareholders, agents and employees and their respective
successors, assigns and legal representatives (herein collectively referred to
as the "PFS Released Parties"), including without limitation any Claims arising
under the Employment Agreement or the Letter Agreement, except for Claims
arising hereunder. Pino represents and warrants, on behalf of himself and his
successors and personal representatives, that he has not assigned or otherwise
transferred any claim, demand, action or cause of action released by this
Section 4(b).
5. Condition to Effectiveness. Notwithstanding anything in the foregoing
to the contrary, this Termination and Release Agreement is conditioned upon, and
shall be effective only upon, the closing of the Stock Purchase Agreement.
6. Miscellaneous.
(a) Neither this Agreement nor any of the rights, interest or
obligations hereunder shall be assigned by any party hereto without the prior
written consent of each other party hereto.
(b) The descriptive headings of the sections of this Agreement are
for convenience only and do not constitute a part of this Agreement.
(c) The parties acknowledge that each has had the benefit of counsel
of its own choice and has been afforded an opportunity to review this Agreement
with chosen counsel. The parties further acknowledge that they have, through
their respective counsel, participated in the preparation of this Agreement, and
it is understood that no provision of this Agreement shall be construed against
any of the parties or their attorneys because of their participation in the
preparation of this Agreement.
(d) This Agreement, together with Sections 10, 11 and 12 of the
Employment Agreement and the affidavit referred to above, constitute the entire
agreement between the parties hereto and supersede all prior written and oral
agreements with respect to the matters covered by this Agreement. This
Agreement may not be amended except by an instrument in writing signed by each
of the parties hereto.
(e) The parties hereto acknowledge and agree that irreparable damage
would occur in the event any of the provisions of this agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this agreement, and shall
be entitled to enforce specifically the provisions of this agreement, in
addition to any other remedy to which the parties may be entitled under this
agreement or at law or in equity.
IN WITNESS WHEREOF, THE PARTIES HAVE EXECUTED THIS AGREEMENT AS OF THE DATE
FIRST SET FORTH ABOVE.
___________________________________
Anthony J. Pino
PIONEER FINANCIAL SERVICES, INC.
By: ________________________________
p\pinoterm.21
EXHIBIT 11
PIONEER FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1995
Net income $ 7,269 $ 3,316 $20,024 $13,631
Average shares outstanding 11,206 8,443 10,574 6,764
Common Stock equivalents from
dilutive stock options,
based on the treasury stock
method using average market
price 338 422 366 314
TOTAL-PRIMARY 11,544 8,865 10,940 7,078
Additional Common Stock equivalents
from dilutive stock options,
based on the treasury stock
method using closing market price 33 31 6 140
Additional shares assuming
conversion of
Preferred Stock - 1,358 681 1,358
Additional shares assuming
conversion of
Subordinated Debentures and Notes 4,600 2,395 3,562 4,047
TOTAL-FULLY DILUTED 16,177 12,649 15,189 12,623
Net income per share-
Primary* $ .63 $ .32 $ 1.78 $ 1.74
Net income per share-
Fully Diluted** $ .52 $ .30 $ 1.48 $ 1.25
</TABLE>
* Primary net income per share was calculated after deducting dividends
on Preferred Stock of $451,000 for the three month period ended
September 30, 1995 and $592,000 and $1,354,000 for the nine month
periods ended September 30, 1996 and 1995, respectively.
** Fully diluted net income per share was calculated after adding tax
effected interest and amortization of offering costs on Subordinated
Debentures and Notes of $1,059,000 and $441,000 for the three month
periods and $2,410,000 and $747,000 for the nine month periods ended
September 30, 1996 and 1995, respectively.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 671,810
<DEBT-CARRYING-VALUE> 258,002
<DEBT-MARKET-VALUE> 255,841
<EQUITIES> 29,755
<MORTGAGE> 6,866
<REAL-ESTATE> 17,555
<TOTAL-INVEST> 1,079,526
<CASH> 41,845
<RECOVER-REINSURE> 4,683
<DEFERRED-ACQUISITION> 228,731
<TOTAL-ASSETS> 1,674,018
<POLICY-LOSSES> 970,347
<UNEARNED-PREMIUMS> 74,698
<POLICY-OTHER> 188,196
<POLICY-HOLDER-FUNDS> 17,377
<NOTES-PAYABLE> 115,321<F1>
0
0
<COMMON> 12,639<F2>
<OTHER-SE> 160,539<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,674,018
556,656
<INVESTMENT-INCOME> 55,181
<INVESTMENT-GAINS> 956
<OTHER-INCOME> 31,156
<BENEFITS> 391,780
<UNDERWRITING-AMORTIZATION> 54,821
<UNDERWRITING-OTHER> 167,237
<INCOME-PRETAX> 30,111
<INCOME-TAX> 10,087
<INCOME-CONTINUING> 20,024
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,024
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.48
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes short-term and long-term borrowings and convertible subordinated
debentures and notes.
<F2>Common stock at par value.
<F3>Includes additional paid in capital and retained earnings less unrealized
depreciation and treasury stock.
</FN>
</TABLE>
