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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(MARK ONE) FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3401 West End Ave. Nashville, Tennessee 37203
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 383-0376
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $ .01
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of voting and non-voting stock held by non-affiliates
of the Company as of September 17, 1998 was $37,637,696 and $-0-, respectively.
The number of shares outstanding of the issuer's common stock, par value $ .01
per share, as of September 17, 1998 was 7,340,608.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of shareholders to be
held November 11, 1998 are incorporated by reference into Part III of this Form
10-K. Index to Exhibits is Found on Sequentially Numbered Page 68
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PART I
ITEM 1. BUSINESS
GENERAL
Children's Comprehensive Services, Inc., a Tennessee corporation formed
in 1985, and subsidiaries (the "Company") is one of the largest for-profit
providers of education, treatment and juvenile justice services for at risk and
troubled youth in the United States. The Company's programs include a
comprehensive continuum of services provided in both residential and
non-residential settings for youth who have severe psychiatric disorders or who
are emotionally disturbed, behaviorally disordered, developmentally delayed,
learning disabled, medically fragile or autistic. The Company also provides a
limited range of adult behavioral services at certain of its locations in
response to community demand. The Company provides its services at facilities
located in Alabama, Arkansas, California, Florida, Kentucky, Louisiana,
Michigan, Montana, Tennessee, Texas and Utah. As of June 30, 1998, the Company
was providing education, treatment and juvenile justice services, either
directly or through its management contract with Helicon Incorporated
("Helicon"), to over 2,900 youth and 100 adults. In addition, the Company
provides management services to Community Mental Health Centers, behavioral
units in medical facilities and third parties.
RECENT DEVELOPMENTS
On August 3, 1998, the Company announced that its Board of Directors
had authorized the repurchase of up to 500,000 shares of the Company's Common
Stock and on August 19, 1998, the Board of Directors authorized the repurchase
of up to 500,000 additional shares of the Company's Common Stock. As of
September 17, 1998, 700,000 shares of the Company's Common Stock had been
repurchased.
In August 1998, the Company began providing management services to a 16
bed residential treatment facility in El Paso, Texas. Expansion of this facility
to 40 beds is expected to be completed during the second quarter of fiscal 1999.
The Company has signed a management contract for a 24 bed residential
treatment facility in Hawaii. In addition, the Company has signed contracts with
three school districts in Kentucky to provide an alternative school. Both of
these programs are expected to be operational in the second quarter of fiscal
1999.
In September 1998, the Company announced its acquisition of Ameris
Health Systems ("Ameris") for net consideration of approximately $12.5 million
in cash. Ameris, through its wholly owned subsidiary, American Clinical Schools,
Inc., operates residential juvenile sex offender programs in Tennessee and
Alabama with an aggregate capacity of 168 licensed beds. In addition, Ameris has
60 beds under development in Pennsylvania, a state in which CCS has not
previously operated.
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THE MARKET FOR THE COMPANY'S SERVICES
The Company believes the market for its services for at risk and
troubled youth is large and growing. The population of at risk and troubled
youth ranges from youth who have been abused and neglected to those who are
seriously emotionally disturbed. At one end of the spectrum are at risk youth.
These are youth who are not functioning well in school or at home, exhibit such
behavior as aggressive noncompliance with parents and authority figures, chronic
truancy, fighting, running away and alcohol or drug abuse. Children classified
as requiring special education services comprise a large subset of the at-risk
youth population. Of the 5.8 million children in special education programs
during the 1996-97 school year, 2.7 million were diagnosed as having specific
learning disabilities and over 447,000 were considered seriously emotionally
disturbed. At the other end of the spectrum are troubled youth. These are youth
who have committed serious and/or violent crimes, such as sex offenses,
robberies, assaults and drug trafficking. In 1996, there were 2.9 million
arrests of juveniles under 18 years of age, accounting for 19% of all violent
crime, 37% of all burglary arrests, 24% of all weapons arrests and 15% of murder
and aggravated assault arrests. Juveniles were involved in 14% of all drug
arrests in 1996. Between 1992 and 1996, juvenile arrests for drug abuse
violations increased 120%. The Company believes that factors contributing to the
high rate of youth crime include the ready availability of firearms, the
prevalence of drug addiction, violence portrayed in the media and the increase
in the number of single parent homes. In addition, a recent census projection
stated that the juvenile population in the United States is expected to reach 74
million by the year 2010. At certain of its facilities, the Company provides
adult programming and treatment in response to community demand and the need for
such services. The Company also provides management services to other entities
providing services to both youth and adults.
The federal Individuals with Disabilities Education Act mandates that
all children with disabilities be provided a free and appropriate education
which emphasizes special education and related services designed to meet their
unique needs. Governmental agencies traditionally have provided education,
treatment and juvenile justice services for at risk and troubled youth either
directly or through private providers of these services. The Company believes
that the increasing number of youth in the United States and the increasing
prevalence of juvenile crime have resulted in a growing demand for these
services for at risk and troubled youth, which will make it increasingly less
likely that governmental entities will be able to provide the necessary services
directly. As a result, there is a growing trend throughout the United States
toward privatization of education, treatment and juvenile justice services, as
governments of all types face continuing pressure to control costs and improve
the quality of services. Furthermore, the Company believes that, as juvenile
crime and the demand for special education services for at risk and troubled
youth continues to grow and receive increasing levels of attention from
lawmakers and the general public, government funding for juvenile services will
continue to increase. Although the number and scope of privatized services for
at risk and troubled youth has increased dramatically in recent years, the
Company estimates that a relatively small percentage of these services are
currently privately managed. Based on the combination of the current demographic
and societal factors affecting at risk and troubled youth, the Company believes
that the demand for its services for these youth will continue to escalate and,
increasingly, the private sector will be called upon to meet the growing demands
for these services.
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SERVICES PROVIDED BY THE COMPANY
The Company, directly and through programs managed for Helicon,
educates and treats at risk and troubled youth through a comprehensive continuum
of services that are designed to address the specific needs of each youth and to
return the youth to their schools or communities. Additionally, at certain of
its facilities, the Company provides treatment services for adults. The
Company's programs, ranging from non-residential family preservation programs to
24-hour secure facilities, are based predominantly on models designed to achieve
behavior modification through therapy, counseling and, when necessary,
pharmaceuticals. The Company's programs include computer-based
educational/vocational training and comprehensive programs for behavior change,
including individual, group and family counseling, social and independent living
skills training, empathy development, critical thinking and problem solving,
anger management, substance abuse treatment and relapse prevention. These
programs are designed to increase self-control and effective problem-solving; to
teach youth how to understand and consider other people's values, behaviors and
feelings; to show youth how to recognize how their behavior affects other people
and why others respond to them as they do; and to teach them alternative,
responsible, interpersonal behaviors. Although certain youth in the Company's
programs require both drug treatment and therapy, the Company's goal is to
minimize or eliminate the use of drugs whenever possible over the course of its
involvement with the youth. When drug treatment is appropriate, drugs are
prescribed by licensed physicians and may be administered by Company personnel.
The Company also provides education to medically fragile youth and pre-school
autistic children. The Company believes that the breadth of its services makes
the Company attractive to members of the community and a broad spectrum of
payors, as well as to local, state and federal governmental agencies. As of June
30, 1998, the Company was providing services directly and through management
contracts with Helicon to approximately 1,900 youth and 60 adults in its
non-residential programs and 1,000 youth and 40 adults in its residential
programs.
Comprehensive Continuum of Services. The Company offers a comprehensive
continuum of services ranging from non-restrictive programs, such as family
preservation and non-residential special education programs, to acute
psychiatric programs and secure residential facilities. The Company believes its
primary emphasis on education, treatment and juvenile justice, as well as
consistency and flexibility in the delivery of its services, are critical to the
success of its programs. Accordingly, the Company's programs are tailored to the
specific needs of each locality, each client agency, each population and, most
importantly, to the unique needs of each student or resident. The Company
believes that this continuum of services allows it to address the specific needs
of each segment of the at risk and troubled youth population and to satisfy the
demands for such services by a community. Through its relationship with Helicon,
the Company also is able to deliver services to governmental agencies who are
required or elect to contract with not-for-profit entities for the services
offered by the Company.
Non-Residential Programs. The Company's non-residential youth services programs
are designed to meet the special needs of at risk and troubled youth and their
families, while enabling each youth to remain in his or her home and community.
As described below, non-residential services provided by the Company include
behavioral day treatment programs, educational day treatment programs,
alternative education programs, diversionary education programs, family
preservation programs, homebound education programs and on-site education
programs in emergency shelters and diagnostic centers. Adult programs provide
primarily behavioral day treatment.
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Behavioral Day Treatment Programs. The Company's behavioral day treatment
programs provide therapeutic treatment services to individuals with clinically
definable emotional disorders, including those with severe psychiatric disorders
who are transitioning from acute psychiatric treatment programs to other day
treatment programs, as well as treatment for chemical dependency. Treatment
under these programs includes individual and group therapy, counseling and, in
certain cases, may include pharmaceutical treatment. Each behavioral day
treatment program is overseen by a licensed physician and staffed by one or more
counselors or therapists and registered nurses.
Educational Day Treatment Programs. The Company's educational day treatment
programs provide specialized educational services for youth with clinically
definable emotional disorders. The Company also provides educational services to
medically fragile youth and to autistic pre-school children. These programs
provide the opportunity to remedy deficits in a student's education and foster
the development of responsible social behaviors. For these students, traditional
public school programs have not been able to sustain motivation or cooperation
or have not provided needed specialized education services. The Company's
educational day treatment programs are staffed with teachers and counselors with
expertise in behavioral management to provide high quality special education
services, including specialized teaching methods, individual and group therapy
provided by licensed clinicians, computer-based curriculum and instructional
delivery and designs.
Alternative Education Programs. The Company's alternative education programs
provide educational services to youth who cannot or who are not permitted to
attend public school. These programs are designed to educate at risk youth in a
manner that promotes public safety by reducing disruptive and delinquent
behaviors of students. The principal components of the alternative education
programs include daily computer assisted learning, behavioral counseling, job
placement, transition into public schools, family services and community
service. These programs are designed to provide youth with the education,
credentials and job skills required to be successful adults. Sites for these
programs can vary from an office complex to a national forest.
Diversionary Education Programs. The Company's diversionary education programs
provide educational and therapeutic day treatment services to youth whose social
function in school and society has been unsatisfactory, as well as delinquent
and status offending youth and youthful sex offenders. These programs, typically
provided in lieu of incarceration, are designed to break the cycle of repeated
teen delinquency and to strengthen the youth's ties and relationships with his
or her family and community. In addition to individually tailored academic
programs, these programs are designed to provide intensive supervision,
individualized education and counseling, vocational counseling and job placement
and independent living skills in an effort to remotivate the student's interest
in school, develop self-discipline and improve social skills, self-esteem and
cooperation with others.
Family Preservation Programs. The Company's family preservation programs provide
a blend of home-based, intensive crisis intervention services to at risk and
troubled youth and their families. These programs are designed to help the youth
improve their coping and living skills and strengthen and maintain the integrity
of the family, while promoting the healthy growth and development of the at risk
and troubled youth. The objectives of these programs are to improve family
functioning and to keep the youth in the family.
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Homebound Education Programs. The Company's homebound education programs provide
educational services to students who are pregnant or who have medical problems
that prevent them from attending school as well as to suspended special
education students. Students in these programs receive focused one-on-one
instruction and continue with the curriculum of the school normally attended by
the student.
On-Site Education Programs in Shelters and Diagnostic Centers. The Company's
shelter education program provides on-site educational services at multiple
locations to at risk and troubled youth who have been removed from their homes
and are in residence at emergency shelters and diagnostic centers. The objective
of this program is to provide continuity in a student's education in a safe and
secure environment while the youth awaits permanent placement.
Residential Programs. The Company's residential programs provide highly
structured therapeutic environments and comprehensive treatment for at risk and
troubled youth when structured observation is necessary, when severe behavior
management needs are present or when containment and safety are required. As
described below, the Company's residential services include secure residential
programs, detention programs, acute psychiatric treatment programs, residential
psychiatric treatment programs, residential treatment programs, diagnostic and
evaluation services, therapeutic wilderness programs, and group homes. Adult
programs provide primarily acute psychiatric treatment.
Secure Residential Programs. The Company's secure residential programs house
youth that are placed in such programs by the courts or state agencies. While in
the programs, the youth are provided with a wide range of services designed to
change negative behavior including substance abuse education, group counseling,
physical training, education, a student work program and social skills classes.
Each student receives an individualized service plan tailored to meet his or her
particular needs for the duration of the placement.
Detention Programs. The Company's detention programs house youth awaiting
disposition of their court cases. While in detention, the emotional condition
and educational needs of the youth are assessed by the Company to help the
courts determine the appropriate permanent placement following adjudication. In
addition, residents at the Company's detention centers receive educational and
treatment services, such as substance abuse and individual and group counseling,
to provide these youth with a meaningful start towards their rehabilitation.
Acute Psychiatric Treatment Programs. The Company's acute psychiatric treatment
programs provide evaluation and stabilization of individuals with severe
psychiatric disorders. Programs are based on a medical model and consist of
structured and intensive medical and/or behavioral treatments including therapy,
counseling and pharmaceuticals. The programs are supervised by licensed
physicians and represent the first step in treating severe psychiatric
disorders.
Residential Psychiatric Treatment Programs. The Company's residential
psychiatric treatment programs provide medical and behavioral treatment to
behaviorally and emotionally disturbed youth who suffer from depression,
chemical dependency and other psychiatric disorders. These treatment programs
are based on a medical model and are designed to achieve behavior modification
through the use of therapy and medical treatment, including pharmaceuticals.
Medical treatment services are provided by licensed physicians who contract with
the Company to provide such services. Services offered at these programs include
therapy groups, drug education and 12-step recovery meetings. A primary goal of
the Company's residential psychiatric programs is to develop positive support
systems for the adolescents to allow for discharge to a less structured
environment.
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Residential Treatment Programs. The Company's residential treatment programs
serve behaviorally and emotionally disturbed youth, such as youth who have
substance abuse problems, youth suffering from depression and youthful sex
offenders. While in the Company's residential treatment centers, youth
participate in individual, group and family therapy, recreation therapy and
educational programs. These programs focus on teaching more appropriate behavior
through cognitive restructuring, behavior management and counseling.
Diagnostic and Evaluation Services. The Company's diagnostic and evaluation
services are designed for youth who are in state custody and require diagnostic
services or behavioral observation. While in the Company's diagnostic and
evaluation programs, youth receive an educational workup in addition to
psychological evaluations.
Therapeutic Wilderness Programs. The Company's short-term therapeutic wilderness
programs are designed for relatively low-risk youth who have failed or performed
below expectations in community-based settings. These programs include
educational and counseling services, and a regimen of structured physical
activity, including drill and ceremony training and work projects. The Company's
wilderness programs are designed to educate youth and teach the discipline and
self-respect necessary to prevent a youth from repeating or engaging in more
serious delinquent behavior.
Group Homes. The Company's group home programs provide shelter care,
transitional services and independent living programs for youth in a family-like
setting in residential neighborhoods. These programs focus on teaching family
living and social skills, and include both individual and group counseling.
Management Services. In addition to management services provided to Helicon, the
Company provides management services to Community Mental Health Centers
("CMHCs"), behavioral units in medical/surgical facilities and to third parties.
Contract terms vary in length from one to three years with reimbursement based
on the services being provided. Services are provided in both residential and
non-residential settings.
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The table below sets forth certain information regarding the Company's
non-residential programs operated by the Company directly or through management
contracts with Helicon:
NON-RESIDENTIAL PROGRAMS
<TABLE>
<CAPTION>
Average
Population Commencement
Location Program Type FY 6/30/98 of Operations
-------- ------------ ---------- -------------
<S> <C> <C> <C>
COMPANY PROGRAMS
Alabama:
Dothan Behavioral day treatment 15 June 1997
Arkansas:
Benton Alternative education 9 September 1997
Bryant Alternative education 8 September 1997
Little Rock Alternative education 22 June 1997
North Little Rock Alternative education 23 June 1997
California:
San Bernardino Educational day treatment 38 January l980
Grand Terrace Educational day treatment 169 May l985
Beaumont Educational day treatment 42 September l985
Banning Educational day treatment 35 September l985
Victorville Educational day treatment 36 September l987
Van-Nuys Educational day treatment 77 June l988
Ramona Educational day treatment 39 September 1990
Quail Valley Educational day treatment 41 October 1990
Riverside-1 Educational day treatment 113 August 1992
Desert Hot Springs Educational day treatment 5 September 1992
Barstow Educational day treatment 21 April 1994
Chula Vista Educational day treatment 75 February 1994
Steele Canyon Educational day treatment 46 September 1994
Riverside-2 Educational day treatment 30 May 1996
Joshua Tree Educational day treatment 25 September 1996
Riverside-3 Educational day treatment 49 April 1997
Hemet Educational day treatment 20 April 1997
Ontario Educational day treatment 11 December 1997
Rancho del Ray Educational day treatment 13 March 1998
Florida:
Crestview Behavioral day treatment 6 April 1998
Jacksonville Diversionary education 20 September 1995
Jacksonville Alternative education 11 November 1997
Highlands County Diversionary education 28 November 1996
Ft. Walton Behavioral day treatment 17 June 1997
Pensacola Behavioral day treatment 21 June 1997
Panama City Behavioral day treatment 20 June 1997
Kentucky:
Bowling Green Behavioral day treatment 11 June 1997
Louisiana:
New Orleans Diversionary education 30 November 1991
New Orleans Family preservation 8 February 1994
Montana:
Anaconda Alternative education 8 January 1998
Bozeman Alternative education 8 January 1998
Bozeman Behavioral day treatment 12 June 1997
Butte Behavioral day treatment 18 June 1997
Billings Behavioral day treatment 24 June 1997
Great Falls Behavioral day treatment 17 June 1997
Polson Behavioral day treatment 17 June 1997
</TABLE>
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NON-RESIDENTIAL PROGRAMS (CONTINUED)
<TABLE>
<CAPTION>
Average
Population Commencement
Location Program Type FY 6/30/98 of Operations
-------- ------------ ---------- -------------
<S> <C> <C> <C>
Tennessee:
Nashville Homebound education 96 November 1991
Texas:
San Antonio Alternative education 130 September 1996
Corpus Christi Alternative education 14 October 1996
Houston Educational day treatment 32 June 1997
Ft. Worth Alternative education 23 December 1997
HELICON PROGRAMS
Tennessee:
Murfreesboro Family preservation 22 July 1988
Murfreesboro Educational day treatment 19 September 1990
Murfreesboro Diversionary education 40 February 1994
Nashville Diversionary education 40 October 1990
Various On-site educational services in
emergency shelters and diagnostic
centers 347 September 1993
Covington Diversionary education 31 August 1994
Clarksville Diversionary education 40 September 1994
</TABLE>
The table below sets forth certain information regarding residential
programs operated by the Company directly or through management contracts with
Helicon:
RESIDENTIAL PROGRAMS
<TABLE>
<CAPTION>
Average
Licensed Population Commencement
Location Program Type Capacity FY 6/30/98 of Operations
-------- ------------ -------- ---------- -------------
<S> <C> <C> <C> <C>
COMPANY PROGRAMS
Alabama:
Tuscaloosa Detention program 27 25 September 1989
Tuscumbia Detention program 25 20 October 1992
Jasper Therapeutic wilderness program 20 20 November 1994
Selma Therapeutic wilderness program 26 12 February 1996
Eufaula Secure residential program 90 89 August 1996
Arkansas:
Benton Acute psychiatric and residential
psychiatric treatment 77 71 June 1997
Florida:
Panama City Acute psychiatric and residential
psychiatric treatment 80 34 June 1997
Kentucky:
Bowling Green Acute psychiatric and residential
treatment 72 54 June 1997
Michigan:
St. Johns Acute psychiatric and secure
residential program 63 39 June 1997
Montana:
Butte Acute psychiatric and residential
psychiatric treatment and detention
program 52 43 June 1997
</TABLE>
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RESIDENTIAL PROGRAMS (CONTINUED)
<TABLE>
<CAPTION>
Average
Licensed Population Commencement
Location Program Type Capacity FY 6/30/98 of Operations
-------- ------------ -------- ---------- -------------
<S> <C> <C> <C> <C>
Tennessee:
Murfreesboro Residential treatment 34 34 July l989
Newbern Residential treatment 32 37 July 1990
Clarksville Diagnostic and evaluation services 25 25 May 1992
Johnson City Detention program 12 8 November 1985
Jackson Residential treatment 54 44 December 1996
Ashland City Residential psychiatric treatment 46 23 February 1998
Texas:
Longview Acute psychiatric and residential
psychiatric treatment 84 29 March 1998
Bexar County Secure residential program 96 75 October 1997
Utah:
West Jordan Acute psychiatric and residential
treatment 80 35 June 1997
HELICON PROGRAMS
California:
Van-Nuys Residential treatment 84 78 June l988
Ramona Residential psychiatric treatment 40 37 November 1984
Riverside Residential treatment 120 114 August 1992
Various 6-Bed group homes 36 29 November 1994
Riverside Secure residential program 30 30 May 1996
</TABLE>
In addition to the programs described above, at June 30, 1998, the
Company had management contracts with medical facilities and third parties at
seven locations in Arkansas, Tennessee and Florida. Three of the Company's
contracts were residential based. Each of the contracts have original terms of
from one to three years. These contracts typically provide for a fixed monthly
fee and reimbursement of expenses.
OPERATIONAL PROCEDURES
The Company's programs are designed to provide a range of consistent,
high quality and cost-effective education, treatment and juvenile justice
services to meet a wide variety of needs for the various segments of the at risk
and troubled youth population as well as, at some facilities, adult populations.
All acute and certain other facilities of the Company admit patients 24 hours
per day, seven days a week. The Company generally is responsible for the overall
operation of its own and Helicon's facilities and programs, including staff
recruitment, general administration and security and supervision of the youth in
their programs.
Staff Recruitment and Training. The Company has assembled an experienced team of
managers, counselors and staff that blends program expertise with significant
business and financial experience in each area of the Company's operations. The
Company believes that its recruitment, selection and training programs provide
quality personnel experienced in the Company's approach to providing its
programs. The Company's direct care staff includes teachers, counselors, mental
health professionals (including psychiatrists and psychologists), juvenile
justice administrators and licensed clinicians. The Company prefers to recruit
direct care staff who have pursued undergraduate or graduate studies in
education and in the behavioral or social sciences. Physician members of the
direct care staff are generally independent contractors who also maintain a
private practice. In the case of physicians who relocate their practices near
Company facilities, the Company may guarantee a minimum income to such
physicians for a limited period, such as one year.
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The Company's internal training policies require the Company's
teachers, counselors, security and other direct care staff to complete extensive
training. Core training includes courses in the major Company program components
such as behavior change education, positive peer culture, discipline and limit
setting, anger management and the teaching of social skills. Annual continuing
education also is required for all direct care staff. The Company demonstrates
its commitment to its employees' professional development by offering lectures,
classes and training programs, as well as tuition reimbursement benefits.
Quality Assessment. The Company strives to enhance the quality of its program
offerings and the quality of its highly trained and dedicated staff to improve
the positive impact that its programs have on the individuals they serve. The
Company has developed a model of ongoing program evaluation and quality
management which the Company believes provides critical feedback to measure the
quality of its various programs. The Company has implemented its Mastery
Achievement Program ("MAP") at the majority of its facilities and expects to
continue the implementation process during fiscal 1999. The MAP provides regular
feedback on percentage achievement of standards to measure whether a program is
achieving its performance objectives. The quality of care standard data is
computer scanned on a weekly or monthly basis and graphs are developed which
show ongoing visual representations of progress towards meeting standards.
Feedback is then provided to the Company's administrators, corporate managers
and all staff so that each team member is aware on a timely basis of compliance
with program standards. The Company believes the MAP is a vital management tool
to evaluate the quality of its programs, and has been useful as a marketing tool
to promote the Company's programs since it provides more meaningful and
significant data than is usually provided by routine contract licensing
monitoring of programs. To expand the scope of the MAP, the Company is
attempting to develop a computer-based program which correlates client
characteristics and program achievements with recidivism data after youth are
released from the Company's various programs.
In addition to measuring performance objectives, the Company has
corporate compliance policies, including an integrity hotline, formulated as a
guide to the ethical and legal conduct of its employees in force at its
principal behavioral residential treatment centers. The Company anticipates
implementing such policies in its remaining facilities during fiscal 1999.
Security. The Company realizes that, in the operation of programs for at risk
and troubled youth, a primary mission is to insure the safety of the community
within a facility, as well as the community outside. Thus, the Company's
programs emphasize security, risk assessment and close supervision by
responsible and well-trained staff.
MARKETING
The Company's marketing activities are directed primarily toward local
and state governmental entities responsible for juvenile justice, social
services providers, education and mental health providers, as well as school
districts and juvenile courts responsible for special programs for at risk and
troubled youth. The Company markets to behavioral health managed care providers,
physicians, businesses and parents for certain behavioral health services. The
Company also markets certain of its programs to the general public in an effort
to increase community awareness of the Company's facilities. In addition, the
Company markets its management services to Community Mental Health Centers,
medical/surgical hospitals and other smaller behavioral health providers.
Marketing efforts are conducted and coordinated by the Company's Vice President
of Business Development and other senior management personnel, individual
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<PAGE> 12
facility personnel, and with the aid, where appropriate, of certain independent
consultants.
Marketing to Governmental Agencies. The Company believes that it is able to
design, develop and operate its facilities and programs at a lower cost than
governmental agencies that are responsible for performing such services. The
Company focuses on adherence to proven policies and procedures and efficient
application of financial resources to provide an attractive, cost-effective
alternative to programs operated directly by governmental entities. The Company
generally pursues its governmental business opportunities in one of three ways.
The Company follows the traditional competitive process where a Request for
Proposals ("RFP") or a Request for Qualifications ("RFQ") is issued by a
government agency, with a number of companies responding, or receives
unsolicited requests, generally from local school districts, for the operation
of special education programs, or submits unsolicited proposals for new or
revised services. When the Company receives inquiries from or on behalf of
governmental agencies or local school districts, the Company determines whether
there is an existing need for the Company's services, assesses the legal and
political climate and the availability of funding and competition, and then
conducts an initial cost analysis to further determine program feasibility.
Generally, governmental agencies responsible for juvenile justice or
youth education and treatment services procure services through RFPs or RFQs. As
part of the Company's process of responding to RFPs, management meets with
appropriate personnel from the agency making the request to best determine the
agency's distinct needs. If the project fits within the Company's strategy, the
Company will then submit a written response to the RFP. A typical RFP requires
bidders to provide detailed information, including the service to be provided by
the bidder, its experience and qualification and the price at which the bidder
is willing to provide the services. The Company engages independent consultants
to assist it in responding to RFPs. Based on the proposals received in response
to an RFP, the agency will award a contract to the successful bidder. In
addition to issuing formal RFPs, local jurisdictions may issue an RFQ. In the
RFQ process, the requesting agency selects a firm believed to be most qualified
to provide the requested services and then negotiates the terms of the contract
with that firm, including the price at which its services are to be provided.
The Company also attends and promotes its services at key conferences
throughout the United States where potential government clients are present. Key
management staff are on occasion requested by governmental agencies to make
presentations at such conferences or to provide professional training.
Marketing to Referral Sources and the General Public. In marketing its services
to the general public, referral sources and payors, the Company first undertakes
market research to determine the specific behavioral care needs of the
communities served by its facilities. The Company then modifies or develops
programs and services to address those needs and promotes the availability of
those programs and services through the use of community education programs,
local talk shows and newspaper articles, media advertising and yellow pages
advertisements.
In addition, Company employees in each facility meet regularly with
potential referral sources, including psychiatrists and other private
physicians, social workers and other community professionals. These
representatives also meet with businesses, managed care organizations and other
referral sources, all in an effort to educate these sources as to the breadth
and quality of the Company's programs.
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<PAGE> 13
Marketing of Management Services. The Company markets management services to
Community Mental Health Centers, behavioral units in medical/surgical facilities
and to third parties. Services under these agreements are provided in both
residential and non-residential settings.
RELATIONSHIP WITH HELICON
The Company conducts a portion of its business through its relationship
with Helicon, a Section 501(c)(3) not-for-profit corporation. As of June 30,
1998, the Company was providing consulting, management and marketing services to
Helicon at 12 programs. The Company leases three facilities to Helicon for the
operation of certain of its programs. Services provided to Helicon by the
Company include operational, management, marketing, program design, financial
and other support services, including payroll, budgeting and accounting. The
Company is entitled to receive management fees for these services in an amount
equal to 6% of the monthly gross revenues of Helicon's programs. The payment of
these management fees, however, is subordinated in right of payment to amounts
payable by Helicon to fund its programs. For the fiscal years ended June 30,
1998 and 1997, and for the three months ended June 30, 1996, the Company
recognized all of the management fee income to which it was entitled. However,
for the fiscal year ended March 31, 1996, the Company did not recognize all the
management fee income to which it was entitled due to Helicon's inability to pay
these amounts. There can be no assurance that the Company will recognize all
management fee income to which it is entitled in the future. As of June 30,
1998, unpaid management fees, lease payments and advances, plus interest, due to
the Company from Helicon totaled $7,447,000. Based on the current level of
operations being maintained by Helicon, the Company does not anticipate
collecting any of, and has fully reserved, this amount. The Helicon Agreement
expires September 1, 1999. The Company also has guaranteed Helicon's obligations
under a bank line of credit in the amount of $1,000,000.
MAJOR CUSTOMERS
During the fiscal year ended June 30, 1998, the Company had no
customers which generated 10% or more of its consolidated revenues.
SOURCES OF REVENUE
The Company's residential centers and day treatment centers receive
payments from (i) the federal government and state and local governments,
pursuant to contracts with such entities, as well as payments under Medicaid
Under 21, Medicare, CHAMPUS and other governmental programs, (ii) Blue Cross and
other private indemnity carriers, health maintenance organizations, preferred
provider organizations and other managed care programs, (iii) self-insured
employers and (iv) patients directly. In addition, the Company receives
management fees from entities, including Helicon, to which management services
are provided.
REIMBURSEMENT
In addition to receiving revenues pursuant to contracts with state and
local governments, the Company receives payment for services from insurance
companies, HMO's, PPO's, Medicare, Medicaid, CHAMPUS and directly from patients.
Medicaid. The Medicaid program, created by the Social Security Amendments of
1965, is designed to provide medical assistance to welfare recipients, indigent
individuals who meet state eligibility standards, and certain individuals who
meet federally specified poverty guidelines. Medicaid is a joint federal and
state program. Each Medicaid program is financed with federal and state funds
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<PAGE> 14
and is operated by the state within federal guidelines requiring coverage of
certain individuals and services and allowing wide latitude in covering
additional individuals and services. Reimbursement rates under the Medicaid
program are set by each participating state, and rates and covered services may
vary from state to state according to a federally approved state plan. The
federal government and many states are currently considering ways to limit the
increase in the level of Medicaid funding which, in turn, could adversely affect
future levels of Medicaid reimbursement received by the Company.
Certain states in which the Company's facilities operate levy taxes on
provider costs or revenues, in part, to fund a portion of the Medicaid program.
The Omnibus Budget Reconciliation Act of 1990 (the "1990 Budget Act") directs
that such provider specific taxes and voluntary contributions must be excluded
from the provider's cost base for Medicaid reimbursement purposes. The Company
currently pays provider specific taxes in two states. The Company cannot predict
how these programs might be modified in the future or how the states would
respond to such modification.
In addition to the standard reimbursement rates paid to the Company
under Medicaid programs, several state programs include a financial benefit for
facilities that treat a disproportionately large volume of Medicaid patients as
a percentage of the total patient population of the facility. These
"disproportionate share" benefits, as they are often called, are subject to
annual review and revision by the particular state governments and could be
substantially reduced or eliminated at any point. The likelihood of such
reductions was substantially increased with the enactment of the Balanced Budget
Act of 1997, Public Law 105-33 ("BBA"). The BBA substantially reduces the level
of disproportionate share funding provided to states from 1998 to 2002. The
savings for the federal government as a result of such reductions are valued at
$10.4 billion. Such reductions in payments will likely result in either
increased state budgetary requirements for furnishing Medicaid services or
further reductions in state payments to providers.
The Company participates in Medicaid Under 21 programs in six states in
which it operates residential facilities. Additionally, the Company may, but is
not likely to, receive disproportionate share payments under the Medicaid
program in two states.
Some states have been granted Medicaid waivers from the federal
government. These waivers allow the state to implement alternative programs and
still receive federal funding. States implementing such programs typically shift
Medicaid beneficiaries to managed care. Several states in which the Company
operates have been granted a Medicaid waiver. In those states, the Company
contracts with a managed care organization to provide services to enrollees who
are covered under the state Medicaid waiver program.
Medicare. Medicare is the federally funded and administered health insurance
program for the aged (individuals age 65 or older) and disabled. The Medicare
program consists of Part A and Part B. Part A generally covers inpatient
services and services furnished by other institutional health care providers.
Part B generally covers the services of doctors, suppliers of medical items and
outpatient services.
While most short term acute care health care facilities receive
Medicare Part A reimbursement on a prospective basis based on the patient's
diagnosis, psychiatric facilities are exempt (PPS Exempt) from the Medicare
prospective payment system and continue to be reimbursed on a cost-based system.
The 1990 Budget Act, however, directs the Secretary of Health and Human Services
("HHS") to develop a new prospective payment methodology for PPS-exempt
facilities and to
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<PAGE> 15
report to Congress on this matter. As of August 31, 1998, regulations have not
been proposed to include psychiatric facilities in such prospective payment
programs.
PPS-exempt facilities are subject to inpatient payment limitations and
incentives established by the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"). Under TEFRA, the target rate of permitted increases in cost per case
is established each year by the increase in the cost of a market basket of
hospital goods and services (the "Target Rate"). Facilities with costs less than
the Target Rate per discharge receive their costs plus an additional payment.
The Health Care Financing Administration ("HCFA"), the agency responsible for
administering the Medicare program, issued a final rule with comment period on
August 29, 1997 which affects PPS-exempt facilities. In addition, other
reductions in reimbursement to PPS-exempt facilities occurred, namely reductions
in capital reimbursement and Medicare bad debts. There are various effective
dates of the rule changes included in the final rule. In addition, the BBA
includes cost containment provisions limiting the annual increase in payment
rates for PPS-exempt facilities. Under the BBA, PPS-exempt hospitals get a 0%
payment update for fiscal year 1998, then a variable payment update in fiscal
years 1999-2002. The BBA of 1997 also significantly reduced the incentive
payments to PPS exempt facilities which have costs below their target amount and
also reduced the amount of costs reimbursed when a facility's costs exceeds its
target amount. In addition, the BBA established an additional national median
limit applicable to PPS exempt facilities. As of June 30, 1998, three Company
facilities had Medicare inpatient utilization and were, therefore, subject to
TEFRA payment limitations, the national median limits, as well as other BBA
provisions and vulnerable to any decrease in Medicare reimbursement.
Annual Cost Reports. In order to receive reimbursement under the Medicare and
Medicaid programs, the Company is required to submit cost reports detailing the
costs incurred by its facilities in providing care to Medicare and Medicaid
enrollees. These cost reports are subject to government audits which may result
in adjustments to the amounts ultimately determined to be due the Company under
these reimbursement programs. These audits often do not result in a final
determination of amounts due to providers under the programs based on costs
until several years have passed. The Company believes that adequate provision
has been made for any material adjustments that might result from all of such
audits and that final resolution of all cost reports will not have a material
adverse effect upon the Company's financial position or results of operations.
Blue Cross and Commercial Insurance. The Company's facilities provide services
to individuals covered by health care insurance offered by private commercial
insurance carriers, and non-profit hospital service corporations such as Blue
Cross. Blue Cross generally pays facilities covered services at (i) their
established hospital charges, (ii) a percentage thereof, or (iii) rates
negotiated between Blue Cross and the individual facility. Other private
insurance carriers also reimburse their policyholders, or make direct payments
to facilities, for covered services at established charges or a percentage
thereof. Except for patients covered under cost-based Blue Cross plans, as is
the case in Michigan, the privately-insured patient generally is responsible to
the facility for any difference between the amount the insurer paid for covered
items or services and the facility's total charges for the covered items or
services. Private commercial insurance carriers have, over the past few years,
tended toward minimizing lengths of stay in facilities and lowering costs, the
continuation of which could adversely affect the Company and its operations.
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<PAGE> 16
GOVERNMENT REGULATION AND HOSPITAL ACCREDITATION
Licensing and Certification. The industry in which the Company operates is
subject to substantial federal, state and local government regulations. Health
care facilities are subject to periodic state licensing inspections and
Medicare, Medicaid and CHAMPUS compliance inspections to determine compliance
with their respective conditions of participation, including standards of care,
staffing, equipment, and cleanliness necessary for continued licensing or
participation in these programs. Contracts entered into between the Company and
federal, state and local governments typically contain substantial reporting
obligations and may require supervision, on-site monitoring and periodic
inspections by representatives of such governmental agencies. In addition, there
are specific laws regulating the civil commitment of psychiatric patients and
the disclosure of information regarding patients being treated for chemical
dependency or behavioral disorders. Many states have adopted a "patient's bill
of rights" which sets forth standards dealing with issues such as using the
least restrictive treatments, insuring patient confidentiality, allowing patient
access to the telephone and mail, allowing the patient to see a lawyer and
requiring the patient to be treated with dignity. The Company believes, but
cannot assure, that its facilities are in substantial compliance with all
applicable laws and regulations governing its operations.
Certificate of Need. Five of the states in which the Company operates have in
effect Certificate of Need ("CON") laws applicable to the services provided by
the Company. Under those laws, a hospital generally must obtain state approval
prior to (i) making capital expenditures in excess of certain threshold amounts,
(ii) expanding or relocating bed capacity or facilities, (iii) acquiring certain
medical equipment, or (iv) instituting certain new services. The general effect
of these laws is to increase the difficulty associated with establishing new or
expanding existing facilities or services. The Company may, however, experience
other adverse effects from state CON requirements or changes in such
requirements, including the possibility that the Company experiences adverse
financial affects because it is unable to expand or modify services in a state
with CON requirements.
Utilization Review. Federal law contains numerous provisions designed to ensure
that services rendered by healthcare facilities to Medicare and Medicaid
patients meet recognized professional standards and are medically necessary, as
well as to ensure that claims for reimbursement are properly filed. These
provisions include a requirement that a sampling of admissions of Medicare and
Medicaid patients must be reviewed by peer review organizations ("PROs") in a
timely manner to determine the medical necessity of the admissions. In addition,
under the Peer Review Improvement Act of 1982 (the "Peer Review Act"), PROs may
deny payment for services provided and, in more extreme cases, have the
authority to recommend to HHS that the provider be fined or excluded from the
Medicare and Medicaid programs.
Each of the Company's acute psychiatric residential facilities has
developed and implemented a quality assurance and improvement program and
implemented procedures for utilization review to meet its obligations under the
Peer Review Act. In the past, PROs have not denied significant amounts of the
Company's charges. Nevertheless, the activities of PROs and other public and
private utilization review agencies will likely continue to have the effect of
causing physicians who practice at the Company's acute psychiatric residential
facilities to reduce the number of patient admissions or their overall length of
stay. The Company believes that compliance with regulations overseen by PROs has
reduced the number of patient admissions and the length of stays of Medicare and
Medicaid patients.
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<PAGE> 17
Fraud and Abuse. Various state and federal laws regulate the relationships
between providers of health care services and their referral sources, including
physicians. Among these laws are the provisions of the Social Security Act
addressing illegal remuneration (the "Anti-Kickback Statute"). The Anti-Kickback
Statute prohibits providers from soliciting, receiving, offering or paying,
directly or indirectly, any remuneration in order to induce or arrange for
referrals for items or services reimbursed under the Medicare or Medicaid
programs. A provider that violates the Anti-Kickback Statute may be subjected to
felony criminal penalties and substantial civil sanctions, including possible
exclusion from the Medicare or Medicaid programs.
In order to provide guidance to health care providers with respect to
the Anti-Kickback Statute, the Office of Inspector General ("OIG"), in July 1991
and November 1992, issued final regulations creating certain "safe harbors."
These "safe harbors" set out requirements which, if met by an individual or
entity, insulate that individual or entity from an enforcement action under the
Anti-Kickback Statute. New proposed safe harbors were issued in September 1993,
with additional clarifications being issued in July 1994. Compliance with the
Anti-Kickback safe harbors is not required by law. However, failure to comply
means that a provider is not assured of protection from investigation or
prosecution under this statute.
The Company and its subsidiaries have entered into various types of
agreements with physicians and other health care providers in the ordinary
course of operating its facilities, many of which provide for payments to such
persons by the Company as compensation for their services. The most common of
these include medical director and provider agreements with physicians. In
addition, the Company and its subsidiaries have entered into various leases,
management contracts and managed care contracts. Although all of these contracts
do not satisfy all the applicable requirements (one of which, for example,
includes a requirement that contracts with physicians to set the aggregate
amount of physician compensation in advance) contained in the Anti-Kickback
Statute safe harbor regulations that relate to such arrangements, the Company
believes that such contracts do not violate the Anti-Kickback Statute because
all of such arrangements (i) are intended to achieve legitimate business
purposes, (ii) provide compensation that is based on fair market value for items
or services that are actually provided, and (iii) are not dependent on the
volume or value of referrals. However, there can be no assurance that (i)
government enforcement agencies will not assert that certain of these
arrangements are in violation of the Anti-Kickback Statute or (ii) the
Anti-Kickback Statute will ultimately be interpreted by the courts in a manner
consistent with the Company's practices. Additional proposed safe harbors are
expected to be published in the near future by the OIG, including a safe harbor
for physician recruitment. The Company is unable to predict whether its
recruitment arrangements with physicians will comply with any safe harbor
regarding physician recruitment, if adopted.
In 1989, Congress passed the legislation commonly referred to as the
Stark Bill ("Stark I") as part of the Omnibus Budget Reconciliation Act of 1989.
Stark I went into effect on January 1, 1992. Stark I prohibited certain
physician referrals to clinical laboratories in which the physician or close
family member has a "financial relationship." In 1993, Congress passed an
amendment to Stark I which became effective on January 1, 1995. This amendment
is commonly referred to as "Stark II" (collectively "Stark") and expanded the
scope of the referral prohibition to cover referrals for any of 12 "designated
health services." "Designated health services" includes both inpatient and
outpatient hospital services. Thus, Stark prohibits a physician from referring
Medicare patients to an entity in which that physician or a member of the
physician's immediate family has a "financial relationship" for the provision of
inpatient and outpatient hospital services. "Financial relationship" is defined
to include both direct
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<PAGE> 18
and indirect "ownership interests in" and "compensation arrangements with" the
entity. Stark provides certain exceptions that exempt certain compensation
arrangements and ownership interests from the statute's prohibitions including
the rental of space and equipment, and certain personal services and management
contracts. In January 1998, HCFA issued proposed regulations implementing Stark
II. HCFA is currently reviewing comments to the proposed regulations and final
regulations are not expected for some time.
The Company has attempted to tailor its financial relationships with
physicians in such a way as not to violate Stark II and similar state statutes.
However, there can be no assurance that (i) government enforcement agencies will
not contend that certain of these financial relationships are in violation of
the Stark legislation, (ii) that the Stark legislation will ultimately be
interpreted by the courts in a manner consistent with the Company's practices,
or (iii) the regulations when issued in final form will result in an
interpretation by the courts in a manner consistent with the Company's
practices.
The federal government has made investigating, prosecuting and pursuing
other enforcement activities of these federal laws a major priority and the
government scrutiny of health care providers' compliance with these laws is
expected to increase during the foreseeable future. Such prosecutions and
investigations are expensive to defend and injurious to a provider's reputation,
even when no illegal conduct is ultimately found. If the federal government were
to undertake an investigation or prosecution of the Company, it would likely
have a material effect on the Company and its operations.
State Legislation. In addition to the statutes mentioned above, some of the
states in which the Company operates also have laws (i) that prohibit
corporations and other entities from employing physicians and practicing
medicine, (ii) that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers, and (iii) that
prohibit conduct similar to that prohibited by the Anti-Kickback Statute and
Stark II. In addition, some states restrict certain business relationships
between physicians and pharmacies. Possible sanctions for violation of these
restrictions include loss of licensure and civil and criminal penalties. The
specific content and scope of these statutes vary from state to state, are often
vague and have received infrequent interpretation by the state courts and
regulatory agencies. Although the Company exercises care in an effort to
structure its arrangements with health care providers to comply with the
relevant state statutes, and although management believes that the Company is in
compliance with these laws, there can be no assurance that (i) governmental
officials charged with responsibility for enforcing these laws will not assert
that the Company or certain transactions in which it is involved are in
violation of such laws, and (ii) such state laws will ultimately be interpreted
by the courts in a manner consistent with the practices of the Company, either
of which could have a material adverse effect on the Company.
Effective July 1, 1998 the State of California implemented new legislation which
eliminated reimbursement to school districts for excused student absences. The
legislation is designed to incentivize school districts that have low absentee
rates, and to encourage improvement in school attendance throughout the state.
While written for public school districts, this legislation may impact the
Company's California educational day treatment programs, which historically have
been compensated for excused student absences. The Company is monitoring the
implementation of this legislation, and cannot currently quantify the potential
impact, if any, on the Company.
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<PAGE> 19
Other Fraud and Abuse Laws. Various federal statutes impose severe criminal and
civil liability on health care providers that make false statements relating to
claims for payments under the Medicare, Medicaid and other government health
care programs. One of the primary statutes utilized by the government and
private citizens ("whistleblowers") has been the Federal False Claims Act
("FCA"). The FCA imposes liability on individuals or entities that knowingly
present or cause to be presented a false or fraudulent claim for payment to the
United States government. Knowingly includes not only having actual knowledge of
the falsity of the claim but also acting in reckless disregard of the truth or
falsity of the claim. This statute allows for the imposition of a civil penalty
of up to $10,000 for each false claim submitted or caused to be submitted to the
government and three times the amount of the damage to the government. A number
of states have adopted similar laws that impose criminal and civil liability for
the submission of false claims.
In August, 1996, Congress enacted the Health Insurance Portability and
Accountability Act ("HIPAA"), which generally became effective January 1, 1997.
HIPAA strengthens federal health care fraud and abuse law enforcement efforts.
Among other things, the new legislation (i) adds several new offenses, (ii)
expands the scope of certain existing laws by including private health insurance
plans as well as the Medicare and Medicaid programs, (iii) increases penalties
for certain existing offenses, and (iv) significantly increases funding for
health care fraud and abuse detection and prosecution efforts, including
authorizing informants to share in recoveries and establishing a national health
care fraud and abuse data bank.
Among other things, HIPAA prohibits submitting a claim for
reimbursement based on a code that the person knows or "should know" will result
in a greater payment than the code "the person knows or should know" is
applicable to the item or service actually provided. HIPAA also prohibits
offering any inducements to beneficiaries in order to influence them to order or
receive Medicare or Medicaid covered items or services from a particular
provider or practitioner.
The new offenses created by HIPAA and the substantial increase in
funding devoted to health care fraud and abuse enforcement which resulted from
HIPAA, will significantly increase the likelihood that any particular health
care company will be scrutinized and investigated by federal, state and/or local
law enforcement officials. In addition, the increased penalties will strengthen
the ability of enforcement agencies to effect more numerous and larger monetary
settlements with health care providers and businesses than was previously the
case.
Healthcare Reform Initiatives. The Clinton Administration and Congress continue
to focus on health care, including Medicare, with an emphasis on curtailing and
lowering the costs of health care in this country. The BBA represents a
significant step on the part of the President and Congress on this front. The
BBA includes substantial cost-containment measures, allows for the further
expansion of managed care in the Medicare environment and increases several
fraud and abuse penalties. At this time, it is uncertain if any other
significant legislation will be enacted during the upcoming sessions of
Congress. The Company cannot predict which, if any, legislative proposals will
be adopted and, if adopted, the effect such legislation would have on the
Company's business.
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Accreditation. All of the Company's facilities providing acute psychiatric
treatment programs have been accredited by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO"). The JCAHO is a voluntary national
organization which undertakes a comprehensive review for purposes of
accreditation of health care facilities. In general, hospitals and certain other
health care facilities are initially surveyed by JCAHO within 12 months after
the commencement of operations and resurveyed at triennial intervals thereafter.
JCAHO accreditation is important to maintaining relationships with both public
and private insurers, including Medicare, Medicaid, Blue Cross and other private
insurers. The Company believes that all of its facilities providing acute
psychiatric treatment programs are presently in material compliance with all
JCAHO standards of accreditation. The JCAHO review process is subjective to some
degree, however, and there can be no assurance that the Company's facilities
will be able to maintain their accreditation. Failure to maintain JCAHO
accreditation at the company's facilities may have a material adverse effect on
the Company's operations.
COMPETITION
The youth education, treatment and juvenile justice market is highly
fragmented, with no single company or entity holding a dominant market share.
The Company competes with other for-profit companies, not-for-profit entities,
for-profit and not-for-profit hospitals and governmental agencies that are
responsible for juvenile justice and youth education and treatment. The Company
competes primarily on the basis of the quality, range and price of services
offered, its experience in operating facilities and programs and the reputation
of its personnel. Competitors of the Company may initiate programs similar to
those provided by the Company without substantial capital investment or
experience in management of education, treatment or juvenile justice programs.
Many of the Company's competitors have greater resources than the Company.
Although the Company believes that its facilities compete favorably within local
markets on the basis of, among other things, the range and variety of clinical
programs offered, its expertise in child and adolescent programs, its methods of
managing its operations and utilization of case management systems, and its
commitment to continuous quality improvement and customer service, the Company
also competes in some markets with smaller local companies that may have a
better understanding of the local conditions and may be better able to gain
political and public acceptance. Certain not-for-profit entities may offer youth
programs at a lower cost than the Company due in part to government subsidies,
foundation grants, tax deductible contributions or other financial resources not
available to for-profit companies.
EMPLOYEES
At June 30, 1998, the Company had 1,545 full-time employees and 842
part-time employees. Of these 2,387 employees, 80 were corporate or regional
administrative staff and 2,307 were involved in program and facility operation
and management. Approximately 95 of the Company's employees are covered by a
Collective Bargaining Agreement between the Company's Butte, Montana facility
and the Rivendell Federation of Health Care Employees, MFT, AFT, AFL-CIO, which
agreement was ratified in January 1998 by the employees who are part of the
Collective Bargaining Unit. The term of the contract expires in December 2000.
The Company believes that its relations with its employees are good.
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INSURANCE
The Company maintains a $21 million general liability insurance policy
for all of its operations. The Company also maintains insurance in amounts it
deems adequate to cover property and casualty risks, workers' compensation and
director and officer liability. The Company requires that physicians practicing
at its facilities carry medical malpractice insurance to cover their respective
individual professional liabilities. There can be no assurance that the
aggregate amount and kinds of the Company's insurance are adequate to cover all
risks it may incur or that insurance will be available in the future.
Each of the Company's contracts and the statutes of certain states
require the maintenance of insurance by the Company. The Company's contracts
provide that in the event the Company does not maintain such insurance, the
contracting agency may terminate its agreement with the Company. The Company
believes it is in compliance in all material respects with respect to these
requirements.
RISK FACTORS
In order for the Company to utilize the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, investors are hereby cautioned that
forward looking statements in this report based upon current expectations
involve a number of risks and uncertainties that could cause the Company's
actual results to differ materially from those projected. Accordingly, investors
should consider the following important factors, among others, in reviewing this
report: the Company's exposure to the Year 2000 issue, both from internal and
external sources; potential termination or non-renewal of the Company's
contracts with Riverside County, California and the State of Tennessee, upon
which the Company was dependent for an aggregate of approximately 14% of its
revenues in fiscal 1998; changes in funding mechanisms in the State of
California that might reduce or eliminate payment to the Company for excused
student absences; failure of governments and governmental agencies that contract
with the Company to meet their payment obligations to the Company or to refer
youth to the Company's programs; decreases in the levels of Medicaid and
Medicare funding, which would likely decrease the Medicaid and Medicare
reimbursements received by the Company's facilities; termination of, or the
Company's inability to renew, contracts on an annual basis; the dependence of
the Company's future growth on the number of youth programs available for
privatization and the ability to obtain awards for such contracts; the Company's
inability to integrate the operations of any future acquired entities, into the
operations of the Company; the inability of the Company to make additional
attractive acquisitions on favorable terms; future changes in governmental laws,
rules and regulations that could adversely affect the Company's operations; the
Company's failure to fully comply with federal and state laws and other
governmental rules and regulations and any resulting investigations,
prosecutions or settlements; reductions in reimbursements by third party payors
and increasing managed care penetration; increasingly stringent length of stay
and admissions criteria; public resistance to privatization of youth education,
treatment and juvenile justice services; negative publicity generated by
opposition to the Company's facilities by residents in areas surrounding
proposed sites; potential claims or litigation by participants in the Company's
programs arising from contact with the Company's facilities, programs, personnel
or participants, including claims related to suicides at the Company's
facilities; Helicon's inability to pay future management fees or lease payments;
dependence on certain key personnel and the ability to attract and retain
additional qualified personnel; competition with for-profit and not-for-profit
entities and governmental agencies responsible for youth education, treatment
and juvenile justice services; seasonality and quarterly fluctuations in
revenues; and the effect of certain anti-takeover provisions in the Company's
charter and bylaws and under Tennessee law. The
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<PAGE> 22
Company undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
ITEM 2. PROPERTIES
The table below sets forth certain information regarding the Company's
properties:
<TABLE>
<CAPTION>
Number of
State Nature of Occupation Facilities
----- -------------------- ----------
<S> <C> <C>
Non-Residential:
Alabama Lease 1
Arkansas Lease 4
California Own 5
California Lease 14
Florida Lease 6
Kentucky Own 1
Louisiana Lease 1
Montana Lease 6
Tennessee Lease 1
Texas Lease 3
Texas Right to occupy (1) 1
Residential:
Alabama Right to occupy (1) 6
Arkansas Own 1
Florida Own 1
Kentucky Own 1
Michigan Own 1
Montana Own 1
Tennessee Own 3
Tennessee Right to occupy (1) 2
Tennessee Lease 1
Texas Own 1
Texas Right to occupy (1) 1
Utah Own 1
</TABLE>
- ----------
(1) The Company acquired a right to occupy the facilities indicated
rent-free for the duration of the Company's contracts to provide these
programs.
The Company owns its non-residential office and educational treatment
center in Grand Terrace, California, its educational treatment centers in
Victorville, Hemet and Riverside, California, its residential treatment centers
in Murfreesboro and Newbern, Tennessee, and its behavioral treatment centers in
Arkansas, Florida, Kentucky, Michigan, Montana, Tennessee, Texas and Utah. The
Company leases all other facilities on a short-term basis (generally one to five
years) in the particular locality where it conducts its programs. For the fiscal
year ended June 30, 1998, the Company's total rental expense for property was
approximately $1,627,000. In addition, the Company also has obtained a right to
occupy certain facilities rent-free during the effective period of the Company's
contracts to provide education and treatment programs in Alabama, Tennessee and
Texas. The Company owns real estate and improvements in Riverside and Ramona,
California, and Murfreesboro, Tennessee which it leases to Helicon
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<PAGE> 23
pursuant to lease agreements which expire July 31, 2019, December 31, 2002 and
January 31, 1999, respectively.
The Company owns a corporate office building located in Murfreesboro,
Tennessee. This office building contains approximately 8,800 square feet of
office space. The Company also leases corporate office space in Nashville,
Tennessee of approximately 14,000 square feet. The Company believes its
facilities are suitable for its current operations and programs.
ITEM 3. LEGAL PROCEEDINGS
In December 1992, the Company received an audit report from the
California Department of Social Services alleging overpayments of approximately
$315,000 at its 6-bed group homes for the years 1991 and 1992. The Company is
contesting this determination and filed a rate protest with the Department of
Social Services in February 1993. An Informal Hearing was concluded in October
1995. The Hearing Auditors' Report of Findings was issued in March 1996, and in
April 1996, the Company filed a Request for Formal Hearing. The Formal Hearing
has been completed, and the final briefing to the Judge was filed in June 1998.
The Company is currently awaiting the Judge's Report of Findings. A provision
for liability of approximately $201,000 is included in accrued other expenses at
June 30, 1998.
In March 1998, a petition was filed in the District Court of Harris
County, Texas against the Company primarily alleging negligence in connection
with a suicide at the Company's former Houston facility and is seeking
unspecified damages. While the Company intends to defend the litigation
vigorously, management is unable, at this time, to estimate the effect of any
settlement or advance judgement on the results of operation or financial
condition of the Company. The Company has insurance coverage which it
anticipates will limit any potential exposure. During fiscal 1998, the Company
also experienced two suicides at its Montana facility. No claims have been filed
with respect to either suicide.
The Company is involved in various other legal proceedings, none of
which are expected to have a material effect on the Company's financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of the
fiscal year.
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<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock trades on The NASDAQ Stock Market's National
Market under the symbol "KIDS". The following table sets forth the high and low
sale prices for each full quarter within the Company's past two fiscal years.
<TABLE>
<CAPTION>
Year Ended June 30, 1998 High Low
------------------------ ---- ---
<S> <C> <C>
Quarter Ended: June 30 20 1/2 13 1/2
March 31 22 1/2 17
December 31 21 7/8 16
September 30 21 7/8 13 5/8
Year Ended June 30, 1997 High Low
------------------------ ---- ---
Quarter Ended: June 30 15 7/8 10 1/2
March 31 14 10 3/4
December 31 19 12
September 30 25 1/4 15 1/2
</TABLE>
HOLDERS
As of September 17, 1998 the Company had approximately 271 shareholders
of record of its Common Stock.
DIVIDENDS
The Company has never declared or paid a cash dividend on its Common
Stock. It is the present policy of the Company's Board of Directors to retain
all available earnings to support operations; therefore, the Company does not
anticipate declaring or paying cash dividends on its Common Stock for the
foreseeable future. The declaration and payment of cash dividends in the future
will be determined based on a number of factors, including the Company's
earnings, financial condition, liquidity requirements, restrictions in financing
agreements and other factors deemed relevant by the Board of Directors. The
Company's current revolving credit agreement prohibits the Company from
declaring dividends in excess of 25% of the Company's net income during any
fiscal year.
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<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information for the years ended June
30, 1998 and 1997, the three months ended June 30, 1996, (pursuant to the
Company's change in its fiscal year end from March 31 to June 30) and the years
ended March 31, 1996, 1995 and 1994 has been derived from the financial
statements of the Company and should be read in conjunction with the financial
statements, the related notes thereto and other financial information included
elsewhere herein. All amounts for periods prior to fiscal 1998 have been
restated to reflect the pooling of interests transaction with Ventures that was
consummated during fiscal 1998.
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended March 31,
June 30, June 30, June 30, -------------------------------------
1998(1) 1997 1996 1996 1995 1994
-------- -------- ------- ------- -------- --------
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue:
Operating revenue $ 90,266 $ 34,812 $ 6,482 $23,630 $ 20,575 $ 18,849
Management fee income 3,733 2,481 566 1,710 906 166
-------- -------- ------- ------- -------- --------
Total revenue 93,999 37,293 7,048 25,340 21,481 19,015
-------- -------- ------- ------- -------- --------
Operating Expenses:
Employee compensation and benefits 55,367 22,656 4,139 15,224 12,817 11,677
Purchased services and other
expenses 26,610 7,872 1,307 5,095 4,535 3,840
Depreciation and amortization 2,142 1,013 191 1,025 1,080 1,277
Other operating expenses 115 101 25 101 101 193
-------- -------- ------- ------- -------- --------
Total operating expenses 84,234 31,642 5,662 21,445 18,533 16,987
-------- -------- ------- ------- -------- --------
Income from operations 9,765 5,651 1,386 3,895 2,948 2,028
Interest (income) expense, net 195 (616) 178 869 1,223 1,407
Other (income) expense, net (1,740)(2) (15) -0- -0- (44)(3) 455(4)
-------- -------- ------- ------- -------- --------
Income before income taxes
and extraordinary item 11,310 6,282 1,208 3,026 1,769 166
Provision (benefit) for income taxes 4,357 (8) 311 491 69 -0-
-------- -------- ------- ------- -------- --------
Income before extraordinary item 6,953 6,290 897 2,535 1,700 166
Extraordinary item, net of tax -0- 377 -0- 54 -0- -0-
-------- -------- ------- ------- -------- --------
Net income $ 6,953 $ 5,913 $ 897 $ 2,481 $ 1,700 $ 166
======== ======== ======= ======= ======== ========
Net income per share:
Diluted(5) $ .84 $ .81 $ .15 $ .43 $ .33 $ .04
Dividends declared per share -- -- -- -- -- --
Balance Sheet Data:
Working capital (deficit) $ 29,867 $ 23,853 $ 4,663 $ 3,488 $ 1,041 $ (9,853)
Total assets 80,201 69,768 22,832 22,406 19,674 20,212
Long term debt and capital
lease obligations 11,611 11,655 6,000 6,052 6,924 8
Shareholders' equity 57,832 49,695 12,779 11,665 9,132 5,728
</TABLE>
(1) Fiscal 1998 reflects a full year of results from the Vendell
Transaction which was effective June 1997.
(2) Amount consists of gain on exchange of Texas properties of $1,530 and
gain on repayment by Helicon of $217 of amounts due for prior years
management fees, which had been fully reserved.
(3) Amount consists of write down of property of $122, net of other income
of $166.
(4) Amount consists of write off of advances to Helicon of $1,024, net of
other income of $569.
(5) Net income per share--diluted--for fiscal 1995 and 1994 has been
adjusted to reflect the 1 for 2 reverse split of the Company's Common
Stock effected March 21, 1996.
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<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and this Annual Report on Form 10-K contains
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth above under
"Business--Risk Factors." The Company undertakes no obligation to publicly
release any revisions to any forward-looking statements contained herein to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.
GENERAL
As of June 30, 1998, the Company was providing education, treatment and
juvenile justice services, either directly or through management contracts with
Helicon, to approximately 2,900 youth and 100 adults. Revenues under the
Company's programs are recognized as services are rendered. The Company's
programs are delivered in both non-residential and residential settings. The
Company's nonresidential programs, which historically have generated higher
operating margins than the Company's residential facilities, generally receive
revenues based on per diem rates. The Company's residential facilities generally
receive revenues at per diem rates or under fixed fee contracts. The Company
also receives revenues from management consulting contracts with other entities,
including Helicon.
In June 1997, the Company acquired substantially all the assets of
Vendell Healthcare, Inc. and its subsidiaries ("Vendell") for approximately
$19,477,000 in cash ($18,768,000 of which was paid at closing and $709,000 of
which was paid in September 1997) and the issuance of 642,978 shares of the
Company's Common Stock valued at approximately $7,600,000. Pursuant to this
acquisition, the Company acquired seven residential treatment facilities and 12
non-residential treatment facilities. The assets purchased generated
approximately $48,000,000 or approximately 51% of the Company's consolidated
revenues in fiscal 1998.
In January 1998, the Company effected a merger with Ventures Healthcare
of Gainesville, Inc. ("Ventures"). The merger was accounted for as a pooling of
interests. The Company's financial statements have been restated to reflect the
merger which was consummated effective January 1, 1998. The Company issued
146,580 shares of Common Stock pursuant to this transaction.
In February 1998, the Company acquired Chad Youth Enhancement Center,
Inc. ("Chad"), a 46 bed residential treatment center, for $1.2 million in cash
and $1.1 million, (58,000 shares) of the company's Common Stock. This
transaction has been accounted for as a purchase.
The Company receives management fee income from Helicon for consulting,
management and marketing services rendered pursuant to the Helicon Agreement. As
of June 30, 1998, the Company was providing consulting, management and marketing
services to Helicon at 12 programs. In addition, Helicon also leases three
facilities owned by the Company to operate certain of its programs. Pursuant to
the Helicon Agreement, the Company is entitled to receive for these services
management fee income in an amount equal to 6% of the monthly gross revenues of
-26-
<PAGE> 27
Helicon's programs. The payment of these management fees, however, is
subordinated in right of payment to amounts payable by Helicon to fund its
programs. For the fiscal years ended June 30, 1998 and 1997, and for the three
months ended June 30, 1996, the Company recognized all of the management fee
income to which it was entitled. However, for the fiscal year ended March 31,
1996, the Company did not recognize all of the management fee income to which it
was entitled due to Helicon's inability to pay. The Helicon Agreement expires
September 1, 1999. At June 30, 1998, unpaid management fees, lease payments and
advances, plus interest, due the Company from Helicon totaled $7,447,000. The
Company has fully reserved this amount. Future payments received from Helicon on
these amounts, if any, will be recognized by the Company on the cash basis. The
Company has also guaranteed Helicon's obligations under a bank line of credit in
the amount of $1,000,000. See "--Liquidity and Capital Resources."
Employee compensation and benefits include facility and program
payrolls and related taxes, as well as employee benefits, including insurance
and worker's compensation coverage. Employee compensation and benefits also
includes general and administrative payroll and related benefit costs, including
salaries and supplemental compensation of officers.
Purchased services and other expenses include all expenses not
otherwise presented separately in the Company's statements of income.
Significant components of these expenses at the operating level include items
such as food, utilities, supplies, rent and insurance. Significant components of
these expenses at the administrative level include legal, accounting, investor
relations, marketing, consulting and travel expense.
The Company's quarterly results may fluctuate significantly as a result
of a variety of factors, including the timing of the opening of new programs.
When the Company opens a new program, the program may be unprofitable until the
program's population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in
anticipation of achieving such levels. The Company's quarterly results may also
be impacted by seasonality, as revenues generated by youth education and
treatment services are generally seasonal in nature, fluctuating with the
academic school year.
RESULTS OF OPERATIONS
Due to the change in fiscal year end, the presentations of the Company's
financial position and results of operations for the year ended June 30, 1997
are not comparable to the presentations of its financial position and results of
operations for the year ended March 31, 1996.
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<PAGE> 28
The following table sets forth, for the periods indicated, the
percentage relationship to total revenues of certain items in the Company's
statements of income:
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating revenues 96.0% 93.3% 92.0% 93.3%
Management fee income 4.0 6.7 8.0 6.7
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
------ ------ ------ ------
Employee compensation
and benefits 58.9 60.8 58.7 60.1
Purchased services and
other expenses 28.3 21.0 18.5 20.1
Depreciation and
amortization 2.3 2.7 2.7 4.0
Related party rent .1 .3 .4 .4
------ ------ ------ ------
TOTAL OPERATING EXPENSES 89.6 84.8 80.3 84.6
------ ------ ------ ------
Income from operations 10.4 15.2 19.7 15.4
Other (income) expense:
Interest expense 1.0 1.0 3.0 3.6
Interest income (.7) (2.7) (.4) (.1)
Other income (1.9) -- -- --
Provision for income
taxes 4.6 -- 4.4 1.9
Extraordinary item,
net of tax -- 1.0 -- .2
------ ------ ------ ------
NET INCOME 7.4% 15.9% 12.7% 9.8%
====== ====== ====== ======
</TABLE>
FISCAL 1998 (YEAR ENDED JUNE 30, 1998) VERSUS FISCAL 1997 (YEAR ENDED JUNE 30,
1997)
Total revenues for fiscal 1998 increased by $56,706,000 or 152.1% to
$93,999,000, as compared to $37,293,000 for fiscal 1997. Operating revenues for
fiscal 1998 increased by $55,454,000 or 159.3% to $90,266,000, as compared to
$34,812,000 for fiscal 1997. The increase in operating revenues results
primarily from the Vendell acquisition which was effective in June 1997. The
opening of new programs during fiscal 1998, including programs utilizing the
Vendell assets, and increases in student enrollment at several of the Company's
programs also contributed to the increase in revenues. Approximately $48,000,000
of the increase in operating revenues over the prior fiscal year is attributable
to the Vendell assets purchased in June 1997.
Management fee income recognized under the Helicon Agreement for fiscal
1998 was relatively constant at $1,293,000, as compared to $1,289,000 for fiscal
1997. Management fee income from other sources, including management fees earned
by Ventures, increased 104.7%, from $1,192,000 in fiscal 1997 to $2,440,000 in
fiscal 1998.
Employee compensation and benefits for fiscal 1998 increased $32,711,000,
or 144.4%, to $55,367,000, as compared to $22,656,000 for fiscal 1997. As a
percentage of total revenues, employee compensation and benefits decreased to
58.9% for fiscal 1998 from 60.8% for fiscal 1997. The increase in employee
compensation and benefits over the prior year is primarily the result of the
Company's growth, both from new programs and the Vendell asset purchase. The
decrease in employee compensation and benefits as a percent of revenues over the
prior year results primarily from the acquired Vendell facilities, which utilize
employee compensation less than the Company's historical programs.
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<PAGE> 29
Purchased services and other expenses for fiscal 1998 increased
$18,743,000, or 238.1%, to $26,615,000, as compared to $7,872,000 for fiscal
1997. As a percentage of total revenues, purchased services and other expenses
increased to 28.3% for fiscal 1998 from 21.0% for fiscal 1997. The increase in
purchased services and other expenses over the prior year results primarily from
the Company's growth, both from new programs and from the Vendell asset
purchase. The increase in purchased services and other expenses as a percentage
of revenues is primarily the result of the acquired Vendell facilities. The
acquired Vendell facilities utilize purchased services, primarily contract
medical services (psychiatrists, psychologists, etc.), to a greater extent than
the Company's historical programs.
Depreciation and amortization increased $1,129,000, or 111.5%, to
$2,142,000 for fiscal 1998 from $1,013,000 for fiscal 1997. The increase in
depreciation and amortization over the prior fiscal year is attributable
primarily to the depreciation associated with the Vendell asset purchase and the
depreciation of tangible assets plus goodwill amortization associated with the
Chad transaction.
Income from operations increased $4,114,000, or 72.8%, to $9,765,000 for
fiscal 1998 from $5,651,000 for fiscal 1997, and decreased as a percentage of
total revenues to 10.4% for fiscal 1998 from 15.2% for fiscal 1997, as a result
of the factors described above.
Interest expense increased $613,000, or 170.8%, to $972,000 for fiscal
1998 from $359,000 for fiscal 1997. The increase in interest expense over the
prior fiscal year is attributable principally to interest on the debt incurred
in June 1997 pursuant to the Vendell asset purchase.
Interest income for fiscal 1998 decreased $198,000 to $777,000, as
compared to $975,000 for fiscal 1997. The decrease in interest income over the
prior year is attributable primarily to the decrease in cash available for
investment following the Vendell asset purchase, offset by cash generated from
operations.
Other income increased from $15,000 in fiscal 1997 to $1,740,000 in fiscal
1998. Other income for fiscal 1998 is primarily attributable to a recognized
gain in the amount of $1,530,000 arising from an exchange of properties and a
one-time payment from Helicon of management fees, for which a reserve had
previously been established, in the amount of $217,000.
Provision for income taxes for fiscal 1998 increased to $4,357,000 from
$(8,000) for fiscal 1997. The increase results primarily from a fiscal 1997
nonrecurring credit to income tax expense of $1,783,000, related to the reversal
of a portion of the valuation allowance against the Company's deferred tax
assets, combined with an increase in the Company's pre-tax income.
Loss on early extinguishment of debt for fiscal 1997 of $612,000, before
the related income tax benefit of $235,000, resulted from the prepayment of the
Company's outstanding indebtedness to National Health Investors, Inc. As a
result of the prepayment of this debt, the Company incurred a prepayment penalty
of approximately $493,000, and wrote off deferred loan costs totaling $119,000.
-29-
<PAGE> 30
FISCAL 1997 (YEAR ENDED JUNE 30, 1997) VERSUS FISCAL 1996 (YEAR ENDED MARCH 31,
1996)
Total revenues for fiscal 1997 increased by $11,953,000 or 47.2% to
$37,293,000, as compared to $25,340,000 for fiscal 1996. Total operating
revenues for fiscal 1997 increased by $11,182,000 or 47.3% to $34,812,000, as
compared to $23,630,000 for fiscal 1996. The increase in operating revenues
results primarily from the opening of eight new programs during fiscal 1997 and
from significant increases in student enrollment at seven of the Company's
programs. Additionally, approximately $3,300,000 of the increase in operating
revenues over the prior fiscal year is attributable to the Company's June 1997
purchase of substantially all the assets of Vendell.
Management fee income recognized under the Helicon Agreement for fiscal
1997 increased $253,000, or 24.4%, to $1,289,000, as compared to $1,036,000 for
fiscal 1996. Additional management fee income of $87,000 was recognized under
management contracts acquired pursuant to the Vendell asset purchase. Management
fee income of $217,000 for fiscal 1996 was not recognized by the Company due to
the inability of Helicon to pay those amounts. Management fees earned by
Ventures increased to $1,105,000 for fiscal 1997 from $674,000 for fiscal 1996.
Employee compensation and benefits for fiscal 1997 increased
$7,432,000, or 48.8%, to $22,656,000, as compared to $15,224,000 for fiscal
1996. As a percentage of total revenues, employee compensation and benefits
increased to 60.8% for fiscal 1997 from 60.1% for fiscal 1996. The increase in
employee compensation and benefits over the prior year results primarily from
the addition of employees to support the growth in the number and scope of the
Company's programs, from the Vendell asset purchase, and from inefficiencies
experienced during the early stages of certain programs.
Purchased services and other expenses for fiscal 1997 increased
$2,777,000, or 54.5%, to $7,872,000, as compared to $5,095,000 for fiscal 1996.
As a percentage of total revenues, purchased services and other expenses
increased to 21.0% for fiscal 1997 from 20.1% for fiscal 1996. The increase in
purchased services and other expenses over the prior year results primarily from
the Company's growth, both from new programs and from the Vendell asset
purchase, as well as from increases in consulting, investor relations, legal and
travel expenses.
Depreciation and amortization decreased $12,000, or 1.2%, to $1,013,000
for fiscal 1997 from $1,025,000 for fiscal 1996. The decrease in depreciation
and amortization over the prior fiscal year is attributable primarily to the
reduction in amortization of non-competition agreements from approximately
$250,000 in fiscal 1996 to $-0- in fiscal 1997, net of depreciation and
amortization incurred at one of the Company's programs opened during fiscal 1997
and from depreciation associated with the Vendell asset purchase.
Income from operations increased $1,756,000, or 45.1%, to $5,651,000
for fiscal 1997 from $3,895,000 for fiscal 1996, and decreased as a percentage
of total revenues to 15.2% for fiscal 1997 from 15.4% for fiscal 1996, as a
result of the factors described above.
Interest expense decreased $546,000, or 60.3%, to $359,000 for fiscal
1997 from $905,000 for fiscal 1996. The decrease in interest expense over the
prior fiscal year is attributed principally to the prepayment of the Company's
long-term debt on October 1, 1996 and the related elimination of deferred loan
cost amortization, net of interest incurred in June 1997 pursuant to the Vendell
asset purchase.
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<PAGE> 31
Interest income for fiscal 1997 increased $939,000 to $975,000, as
compared to $36,000 for fiscal 1996. The increase in interest income over the
prior year is attributable primarily to the increase in cash available for
investment from operations and from the Company's public offering of stock
completed in August 1996.
Provision for income taxes for fiscal 1997 decreased $499,000 to
$(8,000) from $491,000 for fiscal 1996. The decrease in provision for income
taxes compared to the prior year results primarily from a nonrecurring credit to
income tax expense of $1,783,000, related to the reversal of a portion of the
valuation allowance against the Company's deferred tax assets during fiscal
1997, net of the impact of an increase in the Company's effective tax rate.
Loss on early extinguishment of debt for fiscal 1997 of $612,000,
before the related income tax benefit of $235,000, resulted from the prepayment
of the Company's outstanding indebtedness to National Health Investors, Inc. As
a result of the prepayment of this debt, the Company incurred a prepayment
penalty of approximately $493,000, and wrote off deferred loan costs totaling
$119,000. Loss on early extinguishment of debt for fiscal 1996 of $64,000,
before the related income tax benefit of $10,000, resulted from the write off of
deferred loan costs associated with the Company's term loan with T. Rowe Price
Strategic Partners Fund II, L.P. ("Strategic Partners") which was repaid.
THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE MONTHS ENDED JUNE 30, 1995
Total revenues for the three months ended June 30, 1996 increased
$1,295,000, or 22.5%, to $7,048,000, as compared to $5,753,000 for the three
months ended June 30, 1995. Operating revenues for the three months ended June
30, 1996 increased $964,000, or 17.5%, to $6,482,000, as compared to $5,518,000
for the three months ended June 30, 1995. The increase in operating revenues
resulted primarily from the opening of three new programs during fiscal 1996
which were in operation throughout the entire three months ended June 30, 1996,
and from significant increases in student enrollment at four of the Company's
programs.
Management fee income increased from $235,000 for the three months
ended June 30, 1995 to $566,000 for the three months ended June 30, 1996.
Management fee income recognized under the Helicon Agreement increased $205,000
to $311,000 for the three months ended June 30, 1996 as compared to $106,000 for
the three months ended June 30, 1995. Additional management fee income of
$217,000 for the three months ended June 30, 1995 was not recognized by the
Company due to the inability of Helicon to pay those amounts. Management fees
attributable to Ventures increased $126,000 versus the same period in the prior
year.
Employee compensation and benefits for the three months ended June 30,
1996 increased $680,000, or 19.7%, to $4,139,000 as compared to $3,459,000 for
the three months ended June 30, 1995. As a percentage of total revenues,
employee compensation and benefits decreased to 58.7% for the three months ended
June 30, 1996 from 60.1% for the three months ended June 30, 1995. The increase
in employee compensation and benefits over the same period in the prior year
results primarily from the opening of three new programs during fiscal 1996
which were in operation throughout the entire three months ended June 30, 1996,
from significant expansion at two of the Company's programs, an increase in the
Ventures programs and from an increase in the amounts accrued under the
Company's incentive compensation plans.
Purchased services and other expenses for the three months ended June
30, 1996 increased $98,000, or 8.1%, to $1,307,000 as compared to $1,209,000 for
the three months ended June 30, 1995. As a percentage of total revenues,
purchased
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<PAGE> 32
services and other expenses decreased to 18.5% for the three months ended June
30, 1996 from 21.1% for the three months ended June 30, 1995. The increase in
purchased services and other expenses over the same period in the prior year is
attributable primarily to the opening of three new programs during fiscal 1996
which were in operation throughout the entire three months ended June 30, 1996,
and from increases in consulting, audit and travel expenses, net of a reduction
in legal expense.
Depreciation and amortization for the three months ended June 30, 1996
decreased $73,000, or 27.7%, to $191,000 as compared to $264,000 for the three
months ended June 30, 1995. The decrease in depreciation and amortization
compared to the same period in the prior year is attributable primarily to the
reduction in amortization of non-competition agreements from approximately
$62,000 for the three months ended June 30, 1995 to $-0- for the three months
ended June 30, 1996.
Income from operations for the three months ended June 30, 1996
increased $590,000, or 74.1%, to $1,386,000 as compared to $796,000 for the
three months ended June 30, 1995, and increased as a percentage of total
revenues to 19.7% for the three months ended June 30, 1996 from 13.8% for the
three months ended June 30, 1995 as a result of the factors described above,
including the increase attributable to Ventures.
Interest expense for the three months ended June 30, 1996 decreased
$39,000, or 15.7%, to $210,000 as compared to $249,000 for the three months
ended June 30, 1995. The decrease in interest expense is attributed primarily to
a reduction in the average balance of debt outstanding and to a decrease in the
amortization of deferred loan costs.
Interest income increased $30,000 to $32,000 for the three months ended
June 30, 1996 as compared to $2,000 for the three months ended June 30, 1995.
The increase in interest income over the same period in the prior year is
attributable primarily to the increase in cash available for investment.
Provision for income taxes for the three months ended June 30, 1996
increased $222,000 to $311,000 as compared to $89,000 for the three months ended
June 30, 1995. The Company's effective tax rate is less than the statutory tax
rate because of the utilization of tax net operating loss carryforwards during
the 1995 period for which no tax benefit had previously been recognized.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for fiscal 1998 was $10,069,000
on net income of $6,953,000 as compared to $4,496,000 for fiscal 1997 on net
income of $5,913,000. Working capital at June 30, 1998 was $29,867,000, as
compared to $23,853,000 at June 30, 1997, and the current ratio at June 30, 1998
was 3.8:1, as compared to 3.9:1 at June 30, 1997.
Cash used by investing activities was $3,729,000 for fiscal 1998 as
compared to $23,061,000 for fiscal 1997. The decrease in fiscal 1998 as compared
to fiscal 1997 is due primarily to the purchase of the Vendell assets in fiscal
1997. Cash provided by financing activities was $78,000 for fiscal 1998 as
compared to $28,893,000 for fiscal 1997, due primarily to the receipt of net
proceeds of $23,359,000 from the issuance of shares of the Company's Common
Stock in its public offering of Common Stock completed in August 1996.
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<PAGE> 33
The Company has entered into a loan and security agreement with First
American National Bank ("FANB"). Under the terms of this agreement, FANB has
made available to the Company, for acquisition financing and working capital
requirements, a revolving line of credit for up to $13,000,000. The initial term
of the agreement extends through November 1, 1999. The credit facility bears
interest at either (i) the one, two or three month LIBOR rate plus an applicable
margin, which ranges between 1.35% and 2.10% and is dependent on the ratio of
funded debt to operating earnings or (ii) FANB's index rate, at the Company's
option. The line of credit is secured primarily by the Company's accounts
receivable and equipment. The balance outstanding under the line of credit at
June 30, 1998, $11,450,000, was advanced in June 1997 to fund the cash portion
of the Vendell asset purchase.
The Company has also agreed to guarantee Helicon's performance under
a $1 million line of credit from FANB. At June 30, 1998, there was $12,000
outstanding under Helicon's line of credit.
In September 1998, availability under the Company's line of credit was
expanded to $23,000,000. The $10,000,000 expansion matures in January 1999.
The Company's line of credit requires the Company to comply with
certain restrictive covenants with respect to its business and operations and to
maintain certain financial ratios. The restrictive covenants prohibit the
Company, without the prior consent of its lender, from entering into major
corporate transactions, such as a merger, tender offer or sale of its assets,
and from incurring additional indebtedness in excess of $1,000,000. The
agreement also prohibits the Company from declaring dividends in excess of 25%
of net income during any fiscal year.
Capital expenditures during fiscal 1999 are expected to include the
replacement of existing capital assets as necessary, as well as the expenditures
associated with the opening of new programs and facilities, including the
possible purchase of certain real estate and improvements. The Company also may
consider possible strategic acquisitions, including acquisitions of existing
programs and other companies engaged in the youth services business.
Current obligations, typically due within thirty days or less, are
expected to be funded with cash flow from operations and borrowings under the
Company's line of credit. Management believes that operations, cash on hand,
amounts available under its line of credit and outside financing sources will
provide sufficient cash flow for the next twelve months and that long-term
liquidity requirements will be met from cash flow from operations and outside
financing sources.
INFLATION
Inflation has not had a significant impact on the Company's results of
operations since inception. Certain of the Company's existing contracts provide
for annual price increases based upon changes in the Consumer Price Index.
IMPACT OF ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and display
of comprehensive income and its components. This Statement requires that all
items that are income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This Statement is
effective for financial statements for fiscal years beginning after December 15,
1997. The Company does not believe the impact of adoption on its disclosure
requirements will be material.
-33-
<PAGE> 34
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. The Company has
not yet determined the impact of adoption on its disclosure requirements.
In April 1998, the AcSEC issued Statement of Position ("SOP") 98-5,
"Reporting on Costs of Start-Up Activities" which changes the way in which
public companies account for start-up costs. The SOP requires most entities,
upon adoption, to write off as a cumulative effect of a change in accounting
principle any previously capitalized start-up or organizational costs. This SOP
is effective for financial statements for fiscal years beginning after December
15, 1998. Adoption of the SOP is not expected to have a material impact on the
Company's financial statements.
YEAR 2000
The Year 2000 ("Y2K") issue involves the inability of some computers or
microprocessors to correctly handle the century change that will occur at
midnight, December 31, 1999. The Y2K issue, which also includes a number of
related problems, affects nearly every business in the world. The Company's
assessment of potential Y2K problems has focused on three areas: (i) the
Company's information technology ("IT") systems, (ii) its non-IT systems, and
(iii) its relationships with third parties. The Company has substantially
completed an initial assessment of its IT systems' exposure to the Y2K-related
problems, and currently believes that its main IT systems, which include
billing, accounting, and payroll systems, are Y2K compliant. Although the
Company has not tested the Y2K compliance of such systems, such systems have
been represented as Y2K compliant by the vendors thereof. Certain less-critical
IT systems as well as certain individual computers and associated software are
not currently Y2K compliant, however, the Company expects to replace these
systems or make them Y2K compliant as needed.
The Company has also assessed the exposure of its non-IT systems (such
as time clocks) to Y2K problems, and does not believe that Y2K issues related to
non-IT systems will have a material adverse effect on the Company's results of
operations, financial position or cash flows.
The Company has recently begun an initial assessment of the Y2K
readiness of its payors and other third parties with whom it does business, and
expects to more fully focus on this aspect of its Y2K compliance during fiscal
1999. The Company expects to contact all material payors and other third parties
during calendar 1998 in an attempt to minimize the effect of any Y2K issues that
may arise. Despite efforts that the Company may make in this regard, there can
be no assurance that the systems of other companies with whom it does business
will be compliant.
To date, the Company has incurred no material expenses related to
the Y2K compliance of its IT and non-IT systems. The Company believes that the
costs associated with finalizing the Y2K compliance of such systems will not
materially increase the Company's future capital expenditures.
The Company believes that its most likely worst case Y2K scenario is
that some of its material third party payors will not be Y2K compliant and will
have difficulty processing and paying the Company's bills, which could affect
the Company's cash flows. The Company intends to develop a contingency plan to
address this scenario, and expects that such a plan would involve assuring the
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<PAGE> 35
Company's access to additional capital through, for example, a line of credit.
The Company expects to develop this contingency plan during fiscal 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
At June 30, 1998, the Company had only cash equivalents, invested in
high grade, very short term securities, which are not typically subject to
material market risk.
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<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-36-
<PAGE> 37
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Children's Comprehensive Services, Inc.
We have audited the accompanying consolidated balance sheets of Children's
Comprehensive Services, Inc. and subsidiaries as of June 30, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the years ended June 30, 1998 and June 30, 1997, the three months
ended June 30, 1996, and the year ended March 31, 1996. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Children's Comprehensive Services, Inc. and subsidiaries at June 30, 1998 and
1997, and the consolidated results of their operations and their cash flows for
the years ended June 30, 1998 and June 30, 1997, the three months ended June 30,
1996, and the year ended March 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Nashville, Tennessee
August 19, 1998,
except for Note R,
as to which the date is September 17, 1998
-37-
<PAGE> 38
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
(dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 20,067 $ 13,649
Accounts receivable, net of allowance
for doubtful accounts of $1,865
in 1998 and $2,361 in 1997 17,809 16,252
Prepaid expenses 634 606
Deferred income taxes 525 362
Other current assets 1,577 1,137
-------- --------
TOTAL CURRENT ASSETS 40,612 32,006
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $7,831 in 1998 and $5,919
in 1997 37,162 36,345
DEFERRED INCOME TAXES, net of valuation
allowance of $150 in 1998 and 1997 785 614
NOTE RECEIVABLE -- 217
COST IN EXCESS OF NET ASSETS ACQUIRED,
at cost, net of accumulated
amortization of $53 in 1998 and
$4 in 1997 1,180 372
OTHER ASSETS AND DEFERRED CHARGES, at cost,
net of accumulated amortization of
$150 in 1998 and $91 in 1997 462 214
-------- --------
TOTAL ASSETS $ 80,201 $ 69,768
======== ========
</TABLE>
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<PAGE> 39
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,901 $ 1,658
Current portion - capital leases 44 40
Income taxes payable 136 143
Accrued employee compensation 5,192 3,062
Accrued other expenses 3,300 3,082
Deferred revenue 172 168
-------- --------
TOTAL CURRENT LIABILITIES 10,745 8,153
LONG TERM DEBT 11,450 11,450
OBLIGATION UNDER CAPITAL LEASES 161 205
OTHER LIABILITIES 13 265
-------- --------
TOTAL LIABILITIES 22,369 20,073
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per
share--10,000,000 shares authorized -0- -0-
Common stock, par value $ .01 per share
--50,000,000 shares authorized; issued
and outstanding 8,038,783 shares in 1998
and 7,916,236 shares in 1997 80 79
Additional paid-in capital 57,820 56,637
Accumulated (deficit) (68) (7,021)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 57,832 49,695
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $80,201 $69,768
======= =======
</TABLE>
See notes to consolidated financial statements.
-39-
<PAGE> 40
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
-------- -------- ------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Operating revenues $ 90,266 $ 34,812 $ 6,482 $ 23,630
Management fee income 3,733 2,481 566 1,710
-------- -------- ------- --------
TOTAL REVENUES 93,999 37,293 7,048 25,340
-------- -------- ------- --------
Operating expenses:
Employee compensation and benefits 55,367 22,656 4,139 15,224
Purchased services and other expenses 26,610 7,872 1,307 5,095
Depreciation and amortization 2,142 1,013 191 1,025
Related party rent 115 101 25 101
-------- -------- ------- --------
TOTAL OPERATING EXPENSES 84,234 31,642 5,662 21,445
-------- -------- ------- --------
Income from operations 9,765 5,651 1,386 3,895
Other (income) expense:
Interest expense 972 359 210 905
Interest income (777) (975) (32) (36)
Other income (1,740) (15) -0- -0-
-------- -------- ------- --------
TOTAL OTHER (INCOME) EXPENSE, NET (1,545) (631) 178 869
-------- -------- ------- --------
Income before income taxes and
extraordinary item 11,310 6,282 1,208 3,026
Provision (benefit) for income taxes 4,357 (8) 311 491
-------- -------- ------- --------
Income (loss) before extraordinary item 6,953 6,290 897 2,535
Extraordinary item:
Loss on early extinguishment of debt,
net of income tax benefit of $235
in 1997 and $10 in 1996 -0- 377 -0- 54
-------- -------- ------- --------
NET INCOME $ 6,953 $ 5,913 $ 897 $ 2,481
======== ======== ======= ========
Basic earnings per common share:
Income before extraordinary item $ .87 $ .88 $ .16 $ .46
Extraordinary item -0- (.05) -0- (.01)
-------- -------- ------- --------
NET INCOME $ .87 $ .83 $ .16 $ .45
======== ======== ======= ========
Diluted earnings per common share:
Income before extraordinary item $ .84 $ .86 $ .15 $ .44
Extraordinary item -0- (.05) -0- (.01)
-------- -------- ------- --------
NET INCOME $ .84 $ .81 $ .15 $ .43
======== ======== ======= ========
Weighted average shares outstanding:
Basic 7,983 7,096 5,565 5,515
Diluted 8,233 7,322 5,910 5,743
</TABLE>
See notes to consolidated financial statements.
-40-
<PAGE> 41
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock,
$.01 par value Additional Total
----------------------- Paid-In Accumulated Shareholders'
Shares Amount Capital (Deficit) Equity
---------- ------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1995 5,502,471 $ 55 $25,389 $(16,312) $ 9,132
Stock issued:
Exercise of options 22,875 -0- 63 63
Stock redeemed:
Fractional shares redeemed from
one for two reverse split (40) -0- -0- -0-
Warrant adjustment 16 16
Stock registration costs (27) (27)
Net income for the year 2,481 2,481
---------- ------- ------- -------- -------
Balance at March 31, 1996 5,525,306 55 25,441 (13,831) 11,665
Stock issued:
Exercise of warrant 50,000 -0- 100 100
Exercise of options 66,059 1 116 117
Net income for the period 897 897
---------- ------- ------- -------- -------
Balance at June 30, 1996 5,641,365 56 25,657 (12,934) 12,779
Stock issued:
Exercise of options 56,893 1 63 64
Public offering,
net of issue costs of $1,841 1,575,000 16 23,343 23,359
Acquisition of assets of
Vendell Healthcare, Inc. 642,978 6 7,593 7,599
Stock registration costs (19) (19)
Net income for the year 5,913 5,913
---------- ------- ------- -------- -------
Balance at June 30, 1997 7,916,236 79 56,637 (7,021) 49,695
Stock issued:
Exercise of options 58,789 -0- 98 98
Exercise of warrant 5,758 -0- 30 30
Acquisition of Chad 58,000 1 1,065 1,066
Stock registration costs (10) (10)
Net income for the year 6,953 6,953
---------- ------- ------- -------- -------
Balance at June 30, 1998 8,038,783 $ 80 $57,820 $ (68) $57,832
========== ======= ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
-41-
<PAGE> 42
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
-------- -------- ----- -------
<S> <C> <C> <C> <C>
(in thousands)
OPERATING ACTIVITIES
Net income $ 6,953 $ 5,913 $ 897 $ 2,481
Adjustments to reconcile net income to
net cash provided by operating
activities:
Deferred income taxes (334) (1,101) -0- -0-
Depreciation 1,973 935 191 775
Amortization 169 78 -0- 250
Amortization of deferred loan costs 33 31 14 74
Provision for bad debts 1,329 (155) -0- 38
Other -0- (7) -0- 19
Loss on early extinguishment of debt -0- 119 -0- 64
Changes in operating assets and
liabilities, net of effects from
purchase of assets of Vendell
Healthcare, AR&D and Chad:
Accounts receivable (2,732) (1,928) 451 (1,113)
Prepaid expenses 18 224 3 (37)
Other current assets (223) (509) (150) (120)
Accounts payable 207 16 (118) -0-
Accrued employee compensation 2,063 (72) (573) 854
Accrued other expenses 884 1,591 (53) (25)
Income taxes payable (7) (349) 181 242
Deferred revenue 3 8 -0- (23)
Other liabilities (267) (298) (78) 2
-------- -------- ----- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 10,069 4,496 765 3,481
-------- -------- ----- -------
INVESTING ACTIVITIES
Purchase of assets of Vendell
Healthcare, Inc. (709) (19,477) -0- -0-
Purchase of assets of AR&D, Inc. -0- (999) -0- -0-
Purchase of property and equipment (2,217) (2,458) (68) (252)
Proceeds from sale of property and
Equipment 866 11 -0- 38
Other assets (467) (138) (2) (18)
Purchase of Chad Youth Center (1,202) -0- -0- -0-
-------- -------- ----- -------
NET CASH (USED) BY
INVESTING ACTIVITIES $ (3,729) $(23,061) $ (70) $ (232)
-------- -------- ----- -------
</TABLE>
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<PAGE> 43
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
-------- -------- ------- -------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from revolving lines
of credit, long-term
borrowings and capital lease
obligations $ -0- $ 11,695 $ -0- $ 3,436
Principal payments on revolving
lines of credit, long-term
borrowings and capital lease
obligations (40) (6,206) (47) (3,612)
Principal payments on notes
payable and long-term
borrowings - related parties -0- -0- -0- (731)
Proceeds from issuance of Common
Stock, net 128 23,423 217 63
Stock registration costs (10) (19) -0- (27)
-------- -------- ------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 78 28,893 170 (871)
-------- -------- ------- -------
INCREASE IN CASH AND CASH
EQUIVALENTS 6,418 10,328 865 2,378
Cash and cash equivalents at
beginning of period 13,649 3,321 2,456 78
-------- -------- ------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 20,067 $ 13,649 $ 3,321 $ 2,456
======== ======== ======= =======
SUPPLEMENTAL INFORMATION
Income taxes paid $ 4,569 $ 1,107 $ -0- $ 239
Interest paid 963 309 1,183 829
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 44
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -- Children's Comprehensive Services, Inc. and its
subsidiaries (the Company) provide a broad range of services, with emphasis on
education, treatment and juvenile justice services for at risk and troubled
youth, primarily to federal, state and local governmental entities charged with
the responsibility for providing such services. The Company offers these
services through the operation and management of education and treatment
programs and both open and secured residential treatment centers in Alabama,
Arkansas, California, Florida, Kentucky, Louisiana, Michigan, Montana,
Tennessee, Texas and Utah. The Company also provides consulting, management and
marketing services to other entities, including a not-for-profit corporation
which provides similar services.
Basis of Consolidation -- The consolidated financial statements include
the accounts of Children's Comprehensive Services, Inc. and its subsidiaries.
All significant intercompany transactions and balances have been eliminated.
Change in Fiscal Year End -- In March 1997, the Board of Directors
voted to change the Company's fiscal year end from March 31 to June 30,
effective with the three month period ended June 30, 1996.
Cash Equivalents -- The Company considers all highly liquid investments
with a maturity of four months or less when purchased to be cash equivalents.
Property and Equipment -- Property and equipment are recorded at cost
and depreciated using the straight-line method over the following estimated
useful lives:
Land improvements 30 years
Buildings and improvements 2 - 30 years
Furniture and equipment 3 - 7 years
Other Assets and Deferred Charges -- Contract pre-opening costs
(incremental direct costs incurred to open facilities in new market areas) are
amortized using the straight-line method over the lesser of the initial contract
term or one year. Deferred loan costs are amortized over the term of the related
loans. Amortization of deferred loan costs is included in interest expense.
Cost in Excess of Net Assets Acquired -- The cost in excess of net
assets acquired is amortized using the straight-line method over fifteen years.
Revenue Recognition -- Revenues from youth education, treatment and
juvenile justice contracts with governmental entities are recognized as services
are rendered. Revenues from acute psychiatric and behavioral day treatment
services are recognized as such services are rendered, at the Company's
estimated net realizable amounts from the recipient, third party payors and
others for the service rendered. The receivables arising from such contracts or
services are unsecured and generally are due within thirty days.
Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
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<PAGE> 45
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments -- The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for the following financial instruments:
Cash and Cash Equivalents -- The carrying amounts reported
approximate fair value.
Accounts Receivable and Accounts Payable -- The carrying
amounts reported approximate fair value.
Long Term Debt and Capital Leases -- The carrying amounts
reported approximate fair value. The fair value of the
Company's long term debt and capital leases are estimated
using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of
borrowing arrangements.
Long-Lived Assets -- Financial Accounting Standards Board Statement
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Accordingly, when indicators
of impairment are present, the Company periodically evaluates the carrying value
of property and equipment and intangibles.
Stock Based Compensation -- The Company grants stock options for a
fixed number of shares to employees and directors with an exercise price equal
to the fair value of the shares at the date of grant. The Company accounts for
stock option grants in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants.
Net Income Per Common Share -- Effective December 31, 1997, the Company
adopted SFAS No. 128, "Earnings per Share". Pursuant to this adoption, the
company has restated earnings per share for all prior periods. The computation
of basic net income per common share is based on the weighted average number of
shares outstanding. Diluted net income per common share includes the effect of
common stock equivalents, consisting of dilutive stock options and warrants.
Income Taxes -- Income taxes are accounted for under the provisions of
SFAS No. 109, "Accounting for Income Taxes". Deferred income tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rate
and laws that will be in effect when the differences are expected to reverse.
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<PAGE> 46
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--ACQUISITIONS AND MERGERS
In April 1997, the Company acquired substantially all the assets of
AR&D, Inc. ("ARD"). Based in Riverside, California, ARD operated two schools for
special education children. The acquisition has been accounted for as a
purchase. The total consideration paid was approximately $999,000. Cost in
excess of net assets acquired of approximately $376,000 will be amortized over
fifteen years. Operations of ARD have been included in the consolidated income
statements since April 1997.
In June 1997, the Company acquired substantially all the assets of
Vendell Healthcare, Inc. and its subsidiaries ("Vendell"). Based in Nashville,
Tennessee, Vendell operated residential facilities for adolescents and adults.
The residential facilities are located in seven states. The Vendell asset
acquisition was accounted for as a purchase. The total consideration paid
consisted of approximately $19,477,000 in cash and $7,600,000 (642,978 shares)
in shares of the Company's Common Stock. The $19,477,000 in cash included
approximately $7,077,000 used by the Company to purchase the net working capital
of Vendell. The difference of $709,000 between the final net working capital of
Vendell and the amount which was estimated at closing is included in accrued
other expenses at June 30, 1997.
The Company's financial statements for the year ended June 30, 1997,
for the three months ended June 30, 1996 and for the year ended March 31, 1996
do not include the results of operations for Vendell for the periods prior to
June 2, 1997, the effective date of the acquisition. The following summarizes
the unaudited consolidated pro forma results of operations, assuming the
acquisition had occurred at the beginning of the fiscal year ended June 30,
1997:
<TABLE>
<CAPTION>
Year Ended Twelve Months Ended
June 30, 1997 June 30, 1996
------------- ---------------
<S> <C> <C>
Revenue $85,451,000 $ 83,486,000
Income before
extraordinary item 9,804,000 (24,732,000)
Net income 9,356,000 (24,786,000)
Net income per
common share $ 1.18 $ (3.77)
</TABLE>
In January 1998, the Company effected a merger with Ventures Healthcare
of Gainesville, Inc. ("Ventures"). Ventures provides management services to
Community Mental Health Centers and other not for profit entities. The merger
was accounted for as a pooling of interests. The Company's financial statements
have been restated for all periods presented to reflect the merger. The Company
issued 146,580 shares of common stock pursuant to this transaction.
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<PAGE> 47
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--ACQUISITIONS AND MERGERS (continued)
The following is a summary of results of operations of the separate
pooled entities for the merger effected in fiscal 1998 for periods prior to the
business combination.
<TABLE>
<CAPTION>
Six Months Three Months
Ended Year Ended Ended Year Ended
December 31, June 30, June 30, March 31,
1997 1997 1996 1996
------ ------ ----- ------
<S> <C> <C> <C> <C>
Net revenue
As reported $43,180 $36,188 $6,793 $24,666
Ventures 590 1,105 255 674
------- ------- ------ -------
Combined $43,770 $37,293 $7,048 $25,340
======= ======= ====== =======
Extraordinary items
As reported $ 377 $ 54
Net income
As reported $ 2,043 $ 5,646 $ 853 $ 2,524
Ventures 137 267 44 (43)
------- ------- ------ -------
Combined $ 2,180 $ 5,913 $ 897 $ 2,481
======= ======= ====== =======
</TABLE>
In February 1998, the Company acquired Chad Youth Enhancement Center,
Inc. ("Chad"), a 46 bed residential treatment center located in Ashland City,
Tennessee for $1.2 million in cash and $1.1 million (58,000 shares) of the
Company's Common Stock. This transaction has been accounted for as a purchase.
Cost in excess of net assets acquired of approximately $857,000 will be
amortized over fifteen years. Pro forma results of operations for fiscal 1998
and 1997 as if the acquisition had occurred on July 1, 1996 would not differ
materially from reported amounts.
In March 1998, the Company exchanged its Houston, Texas facility for a
similar facility located in Longview, Texas plus $3 million in cash. The Company
realized a gain on the exchange in the amount of $1,530,000.
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
June 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land and improvements $ 3,516,000 $ 3,387,000
Buildings and improvements 34,810,000 33,613,000
Furniture and equipment 6,661,000 4,942,000
Construction in progress 6,000 322,000
----------- -----------
44,993,000 42,264,000
Less accumulated depreciation (7,831,000) (5,919,000)
----------- -----------
$37,162,000 $36,345,000
=========== ===========
</TABLE>
-47-
<PAGE> 48
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--CAPITAL LEASE OBLIGATIONS
Equipment under capital leases of $205,000 and $245,000 has been
included in property and equipment as of June 30, 1998 and 1997. The related
accumulated amortization balances totaled $40,000 and $-0-, respectively.
Future minimum payments, by fiscal year and in the aggregate, under the
capital leases are as follows:
<TABLE>
<S> <C>
1999 $ 62,000
2000 62,000
2001 62,000
2002 63,000
--------
Total minimum lease payments 249,000
Amount representing interest (44,000)
--------
Present value of minimum lease payments
(including $44,000 classified as
current) $205,000
========
</TABLE>
NOTE E--NOTE RECEIVABLE
In September 1995, the Company sold its idle residential treatment
center in Ramona, California for $255,000, receiving cash and a note receivable
of $217,000 bearing interest at 7% per annum. The note receivable is due in
September 1998. The Company realized a gain of $67,000 on the sale of this
property. Of this amount, $10,000 was recognized as income during the year ended
March 31, 1996. The balance, $57,000, will be recognized as income upon
collection of the underlying note receivable.
NOTE F--HELICON INCORPORATED
Helicon, Inc. ("Helicon"), a 501(c)(3) tax exempt corporation not
affiliated with the Company, operates youth treatment programs in California and
youth education programs in Tennessee. The majority of youth in Helicon youth
treatment programs are also involved in the Company's educational treatment
programs.
The Company provides management and marketing services to Helicon for
which it is entitled to a management fee in the amount of 6% of the monthly
gross revenue of Helicon's programs. The management agreement expires September
1, 1999. Management fee income totaled $1,293,000, $1,289,000 and $1,036,000 for
the years ended June 30, 1998, June 30, 1997, and March 31, 1996, respectively,
and $311,000 for the three months ended June 30, 1996. Additional management fee
income of $217,000 for the year ended March 31, 1996 was not recognized due to
the inability of Helicon to pay this amount. During fiscal 1998, Helicon paid
the $217,000, receipt of which was recorded in other income.
-48-
<PAGE> 49
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--HELICON INCORPORATED (continued)
The Company also leases real property to Helicon. Real estate and
improvements with a cost of $10,290,000 and a carrying value of $8,444,000 were
leased, under operating lease arrangements, to Helicon at June 30, 1998. Future
minimum rental income due under these operating leases as of June 30, 1998 is as
follows:
<TABLE>
<S> <C>
Year ending June 30:
1999 $ 921,000
2000 857,000
2001 857,000
2002 857,000
2003 and thereafter 12,369,000
-----------
Total $15,861,000
===========
</TABLE>
Lease income totaled $946,000, $892,000 and $857,000 for the years
ended June 30, 1998, June 30, 1997 and March 31, 1996 , respectively, and
$214,000 for the three months ended June 30, 1996.
Prior to fiscal 1995, Helicon was unable to pay either management fees
or lease payments. Additionally, the Company advanced Helicon $1,024,000 during
fiscal 1994 and $1,145,000 during fiscal 1993. At June 30, 1998, unpaid
management fees, lease payments and advances due the Company totaled $5,371,000.
Additionally, interest due but not recognized on these past due obligations
totaled $2,076,000. The total amount due, $7,447,000, has been fully reserved by
the Company. Based on the current level of operations being maintained by
Helicon, management does not anticipate collecting any of these amounts. Future
payments received on these amounts, if any, will be recognized by the Company on
the cash basis.
Helicon has obtained through First American National Bank ("FANB") a $1
million revolving line of credit. This line of credit bears interest at prime +
3/4% (9.25% at June 30, 1998) and matures in October 1998. The Company
facilitated Helicon in this process by agreeing to guarantee Helicon's
performance under the line of credit. At June 30, 1998, the balance outstanding
under Helicon's line of credit was $12,000.
NOTE G--LINE OF CREDIT
In November 1996, the Company entered into a loan and security
agreement with FANB. Under the terms of this agreement, FANB has made available
to the Company, for acquisition financing and working capital requirements, a
revolving line of credit for up to $13,000,000. The initial term of the
agreement extends through November 1, 1999. The credit facility bears interest
at either (i) the one, two or three month LIBOR rate plus an applicable margin,
which ranges between 1.35% and 2.10% and is dependent on the ratio of funded
debt to operating earnings or (ii) FANB's index rate, at the Company's option.
The line of credit is secured primarily by the Company's accounts receivable and
equipment.
-49-
<PAGE> 50
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--LINE OF CREDIT (continued)
The Company's line of credit with FANB requires the Company to comply
with certain restrictive covenants with respect to its business and operations
and to maintain certain financial ratios. The restrictive covenants under this
agreement prohibit the Company, without the prior consent of its lender, from
entering into major corporate transactions, such as a merger, tender offer or
sale of its assets, and from incurring additional indebtedness in excess of
$1,000,000. The agreement also prohibits the Company from declaring dividends in
excess of 25% of the Company's net income during any fiscal year.
NOTE H--LONG TERM DEBT
During fiscal 1997, the Company used approximately $6,158,000 of the
net proceeds from its public offering of stock (See Note J) to prepay all of the
Company's outstanding indebtedness to National Health Investors, Inc. ("NHI").
The Company incurred a prepayment penalty of approximately $493,000, and wrote
off deferred loan costs of approximately $119,000, in connection with the early
extinguishment of the NHI loan. During fiscal 1996, the Company made unscheduled
principal payments of approximately $708,000 towards the T. Rowe Price Strategic
Partners Fund II, L.P.("Strategic Partners") loan, resulting in the retirement
of the remaining obligation under that loan. The Company wrote off deferred loan
costs of approximately $64,000 in connection with the early extinguishment of
the Strategic Partners loan.
In June 1997, the Company borrowed $11,450,000 under its line of credit
with FANB (See Note G) to partially fund the cash portion of the Vendell asset
purchase. (See Note B.) This amount bears interest at LIBOR plus the applicable
margin (7.31% at June 30, 1998).
Future principal maturities of long-term debt are as follows at June 30, 1997:
<TABLE>
<S> <C>
Year Ending June 30:
1999 $ -0-
2000 11,450,000
-----------
Total 11,450,000
Less current portion -0-
-----------
Total long-term $11,450,000
===========
</TABLE>
-50-
<PAGE> 51
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of June 30,
1998 and June 30, 1997 are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $ 93,000 $ 421,000
Other 125,000 125,000
----------- -----------
Total deferred tax liabilities 218,000 546,000
----------- -----------
Deferred tax assets:
Net operating loss and credit
carryforwards 1,130,000 1,289,000
Accrued expenses 526,000 361,000
Other 22,000 22,000
----------- -----------
Total deferred tax assets 1,678,000 1,672,000
Valuation allowance for deferred
tax assets (150,000) (150,000)
----------- -----------
Net deferred tax assets 1,528,000 1,522,000
----------- -----------
Net deferred tax liabilities (assets) $(1,310,000) $ (976,000)
=========== ===========
</TABLE>
Management has evaluated the need for a valuation allowance for all or
a portion of the deferred tax assets. Based upon taxable income in prior
carryback years and from the forecast of future pretax book income, management
believes that $1,528,000 of the deferred tax assets will be realized.
Accordingly, a valuation allowance of $150,000 has been recorded for certain net
operating loss carryforwards which will not likely be realized.
-51-
<PAGE> 52
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES (continued)
Income tax expense (benefit) is allocated in the financial statements as
follows:
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Income before extraordinary
item $4,357,000 $ (8,000) $311,000 $ 491,000
Extraordinary item -0- (235,000) -0- (10,000)
---------- --------- -------- ---------
Total $4,357,000 $(243,000) $311,000 $ 481,000
========== ========= ======== =========
</TABLE>
The provision (benefit) for income taxes applicable to income before
extraordinary item is as follows:
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Current:
Federal $3,808,000 $ 718,000 $283,000 $ 364,000
State 883,000 375,000 28,000 127,000
---------- --------- -------- ---------
4,691,000 1,093,000 311,000 491,000
---------- --------- -------- ---------
Deferred:
Federal (247,000) (1,100,000) -0- -0-
State (87,000) (1,000) -0- -0-
---------- --------- -------- ---------
(334,000) (1,101,000) -0- -0-
---------- --------- -------- ---------
Provision (benefit) for
income taxes $4,357,000 $ (8,000) $311,000 $ 491,000
========== ========= ======== =========
</TABLE>
The reconciliation of income tax attributable to income before the
extraordinary item computed at the federal statutory tax rate of 35% for the
year ended June 30, 1998 and 34% for the year ended June 30, 1997, the three
months ended June 30, 1996, and the year ended March 31, 1996 to income tax
expense benefit) is as follows:
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
---------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Income tax expense at
federal statutory rate $3,959,000 $2,045,000 $396,000 $ 1,043,000
Change in valuation
allowance -0- (1,877,000) (363,000) (648,000)
Provision for (reversal
of) previously recorded
tax accruals (141,000) (478,000) 259,000 -0-
State income tax, net of
federal benefit 517,000 258,000 19,000 84,000
Nondeductible expenses 22,000 44,000 -0- 12,000
---------- ---------- -------- -----------
Provision (benefit) for
income taxes $4,357,000 $ (8,000) $311,000 $ 491,000
========== ========== ======== ===========
</TABLE>
-52-
<PAGE> 53
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES (continued)
At June 30, 1998, the Company had regular tax net operating loss
carryforwards of $2,449,000 which expire from 2002 through 2010. Utilization of
$1,799,000 of the net operating loss carryforwards is subject to an annual
limitation of $1,463,000 pursuant to Internal Revenue Code Section 382.
Utilization of $650,000 of the net operating loss carryforwards is subject to an
annual limitation of $40,000 pursuant to Internal Revenue Code Section 382.
NOTE J--SHAREHOLDERS' EQUITY
Public Offering of Stock -- On August 22, 1996, the Company completed a public
offering of 2,645,000 shares of Common Stock, 1,575,000 shares of which were
sold by the Company and 1,070,000 shares of which were sold by certain
shareholders of the Company. Net proceeds to the Company, after underwriting
discount and offering expenses, were approximately $23,359,000.
Reverse Stock Split -- Effective March 21, 1996, the Company effected a 1 for 2
reverse stock split, whereby each two shares of the Company's $.01 par value
Common Stock were exchanged for one share. The number of shares and per share
amounts in the consolidated financial statements for the year ended March 31,
1996 reflect the reverse stock split.
Warrants -- The following table sets forth outstanding warrants as of June 30,
1998, June 30, 1997, June 30, 1996 and March 31, 1996 for the purchase of the
Company's Common Stock:
<TABLE>
<CAPTION>
Weighted Average
Exercise Exercise
Warrants Shares Prices Price
-------- ------ ------ -----
<S> <C> <C> <C>
Outstanding at March 31, 1996 59,616 $2.00-5.20 $ 2.52
Granted -- -- --
Exercised (50,000) 2.00 2.00
Expired/Exchanged -- -- --
------- ---------- --------
Outstanding at June 30, 1996 9,616 5.20 5.20
Granted -- -- --
Exercised -- -- --
Expired/Exchanged -- -- --
------- ---------- --------
Outstanding at June 30, 1997 9,616 5.20 $ 5.20
Granted -- -- --
Exercised 5,758 5.20 5.20
Expired/Exchanged -- -- --
------- ---------- --------
Outstanding at June 30, 1998 3,858 $ 5.20 $ 5.20
======= ---------- --------
</TABLE>
-53-
<PAGE> 54
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--SHAREHOLDERS' EQUITY (continued)
Stock Options -- The following table sets forth outstanding stock options under
the Company's stock option plans as of June 30, 1998, June 30, 1997, June 30,
1996, and March 31, 1996 for the purchase of the Company's Common Stock:
<TABLE>
<CAPTION>
Weighted Average
Exercise Exercise
Options Shares Prices Price
------- ------ ------ -----
<S> <C> <C> <C>
Outstanding at March 31, 1995 395,175 $ .62-8.00 $ 4.99
Granted 89,250 5.25 5.25
Exercised (22,875) 1.125-5.75 2.77
Forfeited (47,500) 7.00-8.00 7.05
-------- ------------- ---------
Outstanding at March 31, 1996 414,050 .62-7.00 3.38
Granted 64,500 15.38 15.38
Exercised (66,059) .62-5.25 1.92
Forfeited -- -- --
-------- ------------- ---------
Outstanding at June 30, 1996 412,491 .62-15.38 5.49
Granted 235,250 12.00-18.00 13.18
Exercised (56,893) .62-5.25 .96
Forfeited (2,398) 5.25-15.38 7.78
-------- ------------- ---------
Outstanding at June 30, 1997 588,450 $ .62-18.00 $ 8.99
Granted 170,500 17.64-18.25 17.72
Exercised (58,789) .62-15.38 1.67
Forfeited (5,874) 5.25-15.38 13.96
-------- ------------- ---------
Outstanding at June 30, 1998 694,287 $ 1.50-18.25 $ 11.72
======== ------------- ---------
</TABLE>
Options exercisable and shares available for future grant are as follows:
<TABLE>
<CAPTION>
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Options exercisable 371,091 295,785 295,009 336,050
Shares available for
grant 767,825 338,848 506,700 571,200
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------- --------------------------------
Number Number
Outstanding at Weighted Weighted Exercisable at Weighted
Range of June 30, Average Remaining Average Exercise June 30, Average
Exercise Prices 1998 Contractual Life Price 1998 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.50-3.25 92,275 5 $ 3.22 92,275 $ 3.22
5.25-7.00 138,739 4 5.94 137,739 5.94
12.00-18.25 463,273 8 15.15 141,077 14.60
------------ ------- -------
$ 1.50-18.25 694,287 371,091
======= =======
</TABLE>
Options exercisable at June 30, 1997, June 30, 1996 and March 31, 1996
had weighted average exercise prices of $5.41, $3.37 and $2.95 respectively.
The Company's 1987 Employee Stock Option Plan expired June 2, 1997, and
no additional options will be awarded under that plan. The Company's 1997 Stock
Incentive Plan was approved by the Company's shareholders at the 1997 Annual
Meeting.
-54-
<PAGE> 55
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--SHAREHOLDERS' EQUITY (continued)
The following table summarizes common shares reserved at June 30, 1998:
<TABLE>
<S> <C>
Warrants 3,858
1987 Employee Stock Option Plan 432,112
l989 Stock Option Plan for Non-Employee Directors 30,000
1997 Stock Incentive Plan 1,000,000
---------
Total common shares reserved 1,465,970
=========
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation." This new standard defines a
fair value based method of accounting for an employee stock option or similar
equity instrument. This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to continue to
measure compensation using the intrinsic value approach under Accounting
Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to
Employees," the former standard. The Company has elected to follow APB No. 25
and related Interpretations in accounting for its stock compensation plans
because, as discussed below, the alternative fair value accounting provided for
under SFAS No. 123 requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to March 31, 1995 under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended June 30, 1998, June 30, 1997, March 31, 1996 and
the three months ended June 30, 1996: risk-free interest rate of 7.50%; no
annual dividend yield; volatility factor of .477 based on daily closing prices
for the year; and an expected option life of 6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Three Months Ended Year Ended
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
---------- ---------- ----------------- ---------
<S> <C> <C> <C> <C>
Pro forma net income $5,745 $5,531 $ 845 $2,386
Pro forma earnings per share
Basic $ .72 $ .78 $ .15 $ .43
Diluted .70 .76 .14 .42
</TABLE>
-55-
<PAGE> 56
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--SHAREHOLDERS' EQUITY (continued)
Because SFAS No. 123 is applicable only to options granted subsequent
to March 31, 1995, its pro forma effect was not fully reflected until 1998. The
weighted average fair value per share for options granted during the years ended
June 30, 1998, June 30, 1997, and March 31, 1996, and the three months ended
June 30, 1996 totaled $9.94, $8.79, $10.45 and $3.02, respectively. The
estimated remaining contractual life of options outstanding is 8 years.
Preferred Stock -- The shareholders of the Company have authorized the issuance
of up to 10 million shares of preferred stock, $1.00 par value, on such terms as
the directors of the Company may determine, with full authority in the Board of
Directors to fix series, conversion rights and other provisions applicable to
such preferred stock. No specific terms or provisions have been set, and no
preferred shares have been issued.
Dividends -- The Company's revolving credit agreement (see Note G) prohibits the
Company from declaring dividends in excess of 25% of the Company's net income
during any fiscal year.
NOTE K--EARNINGS PER COMMON SHARE
Effective October 1, 1997, the Company adopted SFAS No. 128, "Earnings per
Share". Pursuant to this adoption, the Company has restated earnings per share
for all prior periods.
Pursuant to the company effecting a merger with Ventures effective January 1,
1998 which was accounted for as a pooling of interests, the Company has restated
earnings per share for all prior periods.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator
Numerator for basic and
diluted income per share
Income before extra-
ordinary items $6,953,000 $6,290,000 $ 897,000 $2,535,000
Extraordinary item 0 377,000 0 54,000
---------- ---------- ---------- ----------
Net income $6,953,000 $5,913,000 $ 897,000 $2,481,000
========== ========== ========== ==========
Denominator
Denominator for basic
income per share-weighted-
-average shares 7,982,624 7,096,436 5,565,105 5,514,889
Effect of dilutive
stock options and
warrants 250,618 225,417 344,844 227,758
---------- ---------- ---------- ----------
Denominator for diluted
income per share-adjusted
weighted-average shares 8,233,242 7,321,853 5,909,949 5,742,647
========== ========== ========== ==========
</TABLE>
-56-
<PAGE> 57
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K--EARNINGS PER COMMON SHARE (continued)
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
1998 1997 1996 1996
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Income per share-basic
Income before extra-
ordinary item $ 0.87 $ 0.88 $ 0.16 $ 0.46
Extraordinary item 0.00 (0.05) 0.00 (0.01)
---------- --------- -------- ---------
Net income $ 0.87 $ 0.83 $ 0.16 $ 0.45
========== ========= ======== =========
Income per share-diluted
Income before extra-
ordinary item $ 0.84 $ 0.86 $ 0.15 $ 0.44
Extraordinary item 0.00 (0.05) 0.00 (0.01)
---------- --------- -------- ---------
Net income $ 0.84 $ 0.81 $ 0.15 $ 0.43
========== ========= ======== =========
</TABLE>
Securities that could potentially dilute basic income per share in the future
that were not included in the computation of diluted income per share because to
do so would have been antidilutive for fiscal 1998 were 44,250 shares.
NOTE L--EMPLOYEE BENEFIT PLAN
The Company has a Salary Reduction Plan under section 401(k) of the
Internal Revenue Code. Under this plan, employees paid on a salary only basis
may defer not less than 1% and not more than 20% of pre-tax compensation each
year, subject to Internal Revenue Service limitations, through contributions to
a designated investment fund. Under the provisions of the plan, the Company may
contribute a discretionary amount to be determined each year. No discretionary
contributions have been made under the plan. Administrative costs under the plan
totaled $25,000, $25,000 and $17,000 for the years ended June 30, 1998, June 30,
1997, and March 31, 1996, respectively, and $1,000 for the three months ended
June 30, 1996.
NOTE M--COMMITMENTS
The following is a schedule, by year, of future minimum rental payments
required under operating leases that have initial or remaining terms in excess
of one year as of June 30, 1998:
<TABLE>
<S> <C>
Year ending June 30:
1999 $1,467,000
2000 1,100,000
2001 765,000
2002 665,000
2003 and thereafter 339,000
----------
TOTAL $4,336,000
==========
</TABLE>
Certain of the leases have renewal options of up to 5 years. Total
rental expense for all operating leases and other rental arrangements for the
years ended June 30, 1998, June 30, 1997 and March 31, 1996 was $2,301,000,
$896,000 and $587,000, respectively, and $167,000 for the three months ended
June 30, 1996. Aggregate future minimum rentals to be received under
noncancelable subleases totaled approximately $136,000 at June 30, 1998.
-57-
<PAGE> 58
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N--CONTINGENCIES
California Department of Social Services Audit -- In December 1992, the Company
received an audit report from the California Department of Social Services
alleging overpayments of approximately $315,000 at its 6-bed group homes for the
years 1991 and 1992. The Company is contesting this determination and filed a
rate protest with the Department of Social Services in February 1993. An
Informal Hearing was concluded in October 1995. The Hearing Auditors' Report of
Findings was issued in March 1996, and in April 1996, the Company filed a
Request for Formal Hearing. The Formal Hearing has been completed, and the final
briefing to the Judge was filed in June 1998. The Company is currently awaiting
the Judge's Report of Findings. A provision for liability of approximately
$201,000 is included in accrued other expenses at June 30, 1998 and 1997.
Texas Litigation -- In March 1998, a petition was filed in the District Court of
Harris County, Texas against the Company primarily alleging negligence in
connection with a suicide at the Company's former Houston facility and is
seeking unspecified damages. While the Company intends to defend the litigation
vigorously, management is unable, at this time, to estimate the effect of any
settlement or advance judgement on the results of operation or financial
condition of the Company. The Company has insurance coverage which it
anticipates will limit any potential exposure. During fiscal 1998, the Company
also experienced two suicides at its Montana facility. No claims have been filed
with respect to either suicide.
Other Litigation -- The Company is involved in various other legal proceedings,
none of which are expected to have a material effect on the Company's financial
position or results of operations.
NOTE O--RELATED PARTY TRANSACTIONS
In September 1994, Strategic Partners renewed, for a term of five
years, the $1,000,000 balance outstanding under a 12%, one-year term loan made
to the Company in September 1993. During fiscal 1996, the Company made
unscheduled principal payments of approximately $708,000 that retired the
outstanding balance under this loan. The Company wrote off deferred loan costs
of approximately $64,000 in connection with the early extinguishment of the
Strategic Partners loan. David L. Warnock, a director of the Company, served as
a consultant to Strategic Partners until December 31, 1997 and formerly was
President of T. Rowe Price Strategic Partners II, L.P., the general partner of
Strategic Partners.
During fiscal 1995 the Company entered into a one-year agreement with
School Improvement Services, Inc. ("SIS") for marketing and consulting services;
Joseph A. Fernandez, Ed.D. ("Dr. Fernandez"), a director of the Company,
formerly served as President and Chief Executive Officer of School Improvement
Services, Inc. Compensation under this agreement consisted of a fee of $50,000
and warrants for 8,000 shares of the Company's Common Stock, exercisable at
$6.25 per share. Pursuant to certain provisions of this agreement, the number of
shares issuable under this warrant was, during fiscal 1996, adjusted to 9,616,
at a purchase price of $5.20 per share. The Company recognized consulting
expense of approximately $16,000 associated with this adjustment during fiscal
1996. During fiscal 1997, pursuant to the dissolution of SIS, the outstanding
warrant for 9,616 shares was allocated to the two principals of SIS. Pursuant to
this allocation, Dr. Fernandez was issued a warrant for 3,858 shares of the
Company's Common Stock, exercisable through September 30, 2004 at $5.20 per
share.
-58-
<PAGE> 59
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--RELATED PARTY TRANSACTIONS (continued)
This agreement was renewed during fiscal 1996 for the period of October
1, 1995 through June 30, 1996. Compensation under this agreement during the
renewal period consisted of monthly payments of approximately $4,000. Payments
under this agreement during fiscal 1996, including reimbursable expenses,
totaled $52,000 and $13,000 for the three months ended June 30, 1996.
In June 1996, the Company entered into a one-year agreement with Joseph
Fernandez and Associates, Inc. for marketing and consulting services. Dr.
Fernandez serves as President of Joseph Fernandez and Associates, Inc. This
agreement was continued on a month to month basis from July 1997 until its
termination in March 1998. Payments under this agreement during fiscal 1998 and
1997, including reimbursable expenses, totaled $33,000 and $50,000,
respectively.
The Company rents certain operating properties from Amy S. Harrison and
Martha A. Petrey, Ph.D., officers and directors of the Company. Payments under
these month-to-month rental arrangements totaled $115,000, $101,000 and $101,000
for the years ended June 30, 1998, June 30, 1997, and March 31, 1996,
respectively and $25,000 for the three months ended June 30, 1996.
NOTE P--SIGNIFICANT CUSTOMERS
Much of the Company's revenues are attributable to contracts with state
and local government and governmental agencies. Such contracts are typically
subject to renewal annually. Contract renewal is affected by the quality and
type of services provided by the Company.
The following summarizes those customers from which in excess of 10% of
the Company's youth services revenues were derived:
<TABLE>
<CAPTION>
% of Operating
Customer Revenue Revenue
-------- ------- -------
<S> <C> <C> <C>
Year Ended None
June 30, 1998
Year Ended Riverside County
June 30, 1997 Office of Education $5,822,000 17%
State of Tennessee 4,127,000 12
---------- --
$9,949,000 29%
========== ==
Three Months Riverside County
Ended Office of Education $1,244,000 19%
June 30, 1996 State of Tennessee 881,000 14
---------- --
$2,125,000 33%
========== ==
Year Ended Riverside County
March 31, 1996 Office of Education $5,360,000 23%
State of Tennessee 3,612,000 15
---------- --
$8,972,000 38%
========== ==
</TABLE>
-59-
<PAGE> 60
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q--UNAUDITED FINANCIAL INFORMATION
In March 1997, the Board of Directors voted to change the Company's
fiscal year end from March 31 to June 30, effective with the three month period
ended June 30, 1996. Unaudited financial information for the three month period
ended June 30, 1995 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
Statement of Income June 30, 1995
------------------- -------------
(dollars in thousands, except per
share amounts)
<S> <C>
Revenues:
Operating revenues $5,518
Management fee income 235
------
TOTAL REVENUES 5,753
------
Operating expenses:
Employee compensation and benefits 3,459
Purchased services and other expenses 1,209
Depreciation and amortization 264
Related party rent 25
------
TOTAL OPERATING EXPENSES 4,957
------
Income from operations 796
Other (income) expense:
Interest:
Banks and other 220
Related parties 29
Interest income (2)
------
TOTAL OTHER (INCOME) EXPENSE, NET 247
------
Income before income taxes 549
Provision for income taxes 89
------
NET INCOME $ 460
======
Weighted average shares outstanding 5,704
Earnings per common share:
Basic $ .08
======
Diluted $ .08
======
</TABLE>
-60-
<PAGE> 61
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q--UNAUDITED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Three Months Ended
Statement of Cash Flows June 30, 1995
----------------------- ----------------
(in thousands)
<S> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 540
INVESTING ACTIVITIES
Purchase of property and equipment (46)
-------
NET CASH (USED) BY INVESTING ACTIVITIES (46)
-------
FINANCING ACTIVITIES
Proceeds from revolving lines of
credit 1,417
Principal payments on revolving
lines of credit and long-term
borrowings (1,458)
Proceeds from other line of credit 214
Principal payments on long-term
borrowings - related parties (14)
Stock issue/registration costs (23)
-------
NET CASH PROVIDED BY FINANCING ACTIVITIES 136
-------
INCREASE IN CASH AND CASH EQUIVALENTS 630
Cash and cash equivalents at
beginning of period 69
-------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 699
=======
</TABLE>
NOTE R--SUBSEQUENT EVENTS
On August 3, 1998, the Company announced that its Board of Directors
had authorized the repurchase of up to 500,000 shares of the Company's Common
Stock and on August 19, 1998, the Board of Directors authorized the repurchase
of up to 500,000 additional shares of the Company's Common Stock. As of
September 17, 1998, 700,000 shares of the Company's Common Stock had been
repurchased.
In September 1998, the Company announced its acquisition of Ameris
Health Systems ("Ameris") for net consideration of approximately $12.5 million
in cash. Ameris, through its wholly owned subsidiary, American Clinical Schools,
Inc., operates residential juvenile sex offender programs in Tennessee and
Alabama with an aggregate capacity of 168 licensed beds. In addition, Ameris has
60 beds under development in Pennsylvania, a state in which CCS has not
previously operated.
In September 1998, availability under the Company's line of credit was
expanded to $23,000,000. The $10,000,000 expansion matures in January 1999.
-61-
<PAGE> 62
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE S--NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and display
of comprehensive income and its components. This Statement requires that all
items that are income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This Statement is
effective for financial statements for fiscal years beginning after December 15,
1997. The Company does not believe the impact of adoption on its disclosure
requirements will be material.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. The Company has
not yet determined the impact of adoption on its disclosure requirements.
In April 1998, the AcSEC issued Statement of Position ("SOP") 98-5,
"Reporting on Costs of Start-Up Activities" which changes the way in which
public companies account for start-up costs. The SOP requires most entities,
upon adoption, to write off as a cumulative effect of a change in accounting
principle any previously capitalized start-up or organizational costs. This SOP
is effective for financial statements for fiscal years beginning after December
15, 1998. Adoption of the SOP is not expected to have a material impact on the
Company's financial statements.
NOTE T--QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth selected quarterly operating data. All amounts
have been restated to reflect the pooling of interests transaction with
Ventures that was consummated during fiscal 1998:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ---------------------------------
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- -------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $20,641 $23,129 $24,980 $25,249 $6,692 $8,417 $9,026 $13,158
Income from operations 1,197 2,253 3,407 2,908 758 1,346 1,668 1,879
Net income before
extraordinary item 685 1,495 2,987 1,786 558 2,896 1,318 1,518
Net income 685 1,495 2,987 1,786 558 2,519 1,318 1,518
Income per share, diluted:
Before extraordinary
item 0.08 0.39 0.19 0.22 0.08 0.39 0.18 0.20
Net income 0.08 0.34 0.19 0.22 0.08 0.34 0.18 0.20
</TABLE>
*******
-62-
<PAGE> 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
INFORMATION REQUIRED BY ITEM 10 (DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT), ITEM 11 (EXECUTIVE COMPENSATION), ITEM 12 (SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT), AND ITEM 13 (CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS), will be included in the Company's Proxy Statement to
be filed within 120 days of June 30, 1998 and is incorporated herein by
reference.
-63-
<PAGE> 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements of Children's Comprehensive
Services, Inc. are included in Part II, Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets-June 30, 1998 and 1997 38
Consolidated Statements of Income for the Years Ended
June 30, 1998 and 1997 and March 31, 1996 and for
the Three Months Ended June 30, 1996 40
Consolidated Statements of Shareholders' Equity for the Years
Ended June 30, 1998 and 1997 and March 31, 1996 and for
the Three Months Ended June 30 1996 41
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998 and 1997 and March 31, 1996 and
for the Three Months Ended June 30, 1996 42
Notes to Consolidated Financial Statements 44
(2) Financial Statement Schedules
Schedule II - Valuation and qualifying accounts 67
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
applicable or not required under their related instructions or the
required information is included in the financial statements or notes
thereto.
(3) Management Contracts and Compensatory Plans or Arrangements
1987 Employee Stock Option Plan, as amended, (included herein as Exhibit
10.4.)
1989 Stock Option Plan for Non-Employee Directors, (included herein as
Exhibit 10.5.)
1997 Stock Incentive Plan, (included herein as Exhibit 10.14.)
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed in the accompanying index to exhibits on page 68 are
filed as part of this annual report on Form 10-K.
-64-
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
Date: September 28, 1998 By: /s/ William J Ballard
-----------------------------------
William J Ballard
Chairman, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: September 28, 1998 /s/ William J Ballard
-----------------------------------
William J Ballard
Chairman, Chief Executive Officer
and Director (Principal Executive
Officer)
Date: September 28, l998 /s/ Amy S. Harrison
-----------------------------------
Amy S. Harrison
Vice Chairman, President and
Director
Date: September 28, 1998 /s/ Martha A. Petrey, Ph.D.
-----------------------------------
Martha A. Petrey, Ph.D.
Executive Vice President and
Director
Date: September 28, 1998 /s/ Stephen H. Norris
-----------------------------------
Stephen H. Norris
Executive Vice President
Date: September 28, 1998 /s/ H. Neil Campbell
-----------------------------------
H. Neil Campbell
Executive Vice President
Date: September 28, 1998 /s/ Donald B. Whitfield
-----------------------------------
Donald B. Whitfield
Vice President - Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
-65-
<PAGE> 66
Date: September 28, 1998 /s/ John C. Edmunds
-----------------------------------
John C. Edmunds
Vice President - Secretary and
Treasurer
Date: September 28, 1998 /s/ Thomas B. Clark
-----------------------------------
Thomas B. Clark
Director
Date: September 28, 1998 /s/ Joseph A. Fernandez, Ed.D.
-----------------------------------
Joseph A. Fernandez, Ed.D.
Director
Date: September 28, 1998 /s/ David L. Warnock
-----------------------------------
David L. Warnock
Director
-66-
<PAGE> 67
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
<TABLE>
<CAPTION>
COL. C--ADDITIONS
- ---------------------------------------------------------------------------------------------------------------
COL. A COL. B COL D. COL E.
- ---------------------------------------------------------------------------------------------------------------
(1) (2)
Balance Charged to Charged to Balance
at Beginning Costs and Other Accounts- Deductions- at End
DESCRIPTION of Period Expenses Describe Describe of Period
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998:
Deducted from asset accounts:
Allowance for doubtful
accounts $2,361,000 $ 1,329,000 $ -0- $1,825,000(2) $1,865,000
---------- ----------- ----------- ---------- ----------
Totals $2,361,000 $ 1,329,000 $ -0- $1,825,000 $1,865,000
========== =========== =========== ========== ==========
Year ended June 30, 1997:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 143,000 $ (155,000) $ 2,373,000(1) $ -0- $2,361,000
---------- ----------- ----------- ---------- ----------
Totals $ 143,000 $ (155,000) $ 2,373,000 $ -0- $2,361,000
========== =========== =========== ========== ==========
Period ended June 30, 1996:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 146,000 $ -0- $ -0- $ 3,000(2) $ 143,000
---------- ----------- ----------- ---------- ----------
Totals $ 146,000 $ -0- $ -0- $ 3,000 $ 143,000
========== =========== =========== ========== ==========
Year ended March 31, 1996:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 133,000 $ 38,000 $ -0- $ 25,000(2) $ 146,000
---------- ----------- ----------- ---------- ----------
Totals $ 133,000 $ 38,000 $ -0- $ 25,000 $ 146,000
========== =========== =========== ========== ==========
</TABLE>
(1) Addition to allowance for doubtful accounts recognized in conjunction
with the Company's purchase of substantially all the assets of Vendell
Healthcare, Inc.
(2) Uncollectible accounts written off against allowance account.
-67-
<PAGE> 68
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
3.1 Restated Charter, as amended. (1)
3.2 By-Laws. (2)
4.1 Specimen Stock Certificate. (6)
10.1 Non-competition Agreement between Registrant and Amy S. Harrison. (3)
10.2 Non-Competition Agreement between Registrant and Martha A. Petrey. (3)
10.3 Registration Agreement between Registrant and Amy S. Harrison and
Martha A. Petrey. (3)
10.4 1987 Employee Stock Option Plan, as amended. (7)
10.5 1989 Stock Option Plan for Non-Employee Directors. (4)
10.6 Assignment and Sublease between Registrant and Helicon Incorporated.
(5)
10.7 Warrant Agreement dated October 1, 1996, between the Registrant and
Joseph A. Fernandez. (12)
10.8 Consulting and Marketing Agreement effective as of August 1, 1992,
dated September 22, 1994, by and between the Registrant and Helicon
Incorporated. (7)
10.9 Agreement dated as of August 8, 1997 between the Registrant and
Riverside County, California Superintendent of Schools for special
education services. (12)
10.10 Registration Rights Agreement, dated September 20, 1993, by and between
the Registrant and T. Rowe Price Strategic Partners Fund II, L.P. (8)
10.11 Guaranty and Suretyship Agreement dated January 29, 1996, by and
between First American National Bank, the Registrant and Helicon
Incorporated. (8)
10.12 Loan and Security Agreement between First American National Bank and
the Registrant, dated as of November 8, 1996. (9)
10.13 Asset Purchase Agreement by and among Vendell Healthcare, Inc., the
subsidiaries of Vendell Healthcare, Inc. and the Registrant, dated
February 27, 1997. (10)
10.14 1997 Employee Incentive Plan. (12)
10.15 Amendment to Asset Purchase Agreement by and among Vendell Healthcare,
Inc., the subsidiaries of Vendell Healthcare, Inc. and the Registrant.
(11)
10.16 Second Amendment to Asset Purchase Agreement by and among Vendell
Healthcare, Inc., the subsidiaries of Vendell Healthcare, Inc. and the
Registrant. (11)
10.17 Third Amendment to Asset Purchase Agreement by and among Vendell
Healthcare, Inc., the subsidiaries of Vendell Healthcare, Inc. and the
Registrant. (11)
10.18 Warrant Agreement dated October 1, 1996 between the Registrant and
Kenneth W. Miller. (12)
10.19 Lease Agreement dated September 26, 1989 between the Registrant and the
Equitable Life Assurance Society of the United States. (12)
10.20 First Amendment, dated February 21, 1990, to the lease between the
Registrant and the Equitable Life Assurance Society of the United
States. (12)
10.21 Second Amendment, dated March 1, 1993, to the lease between the
Registrant and the Equitable Life Assurance Society of the United
States. (12)
10.22 Third Amendment, dated October 26, 1993, to the lease between
Registrant and the Equitable Life Assurance Society of the United
States. (12)
10.23 Merger Agreement by and between Ventures Healthcare of Gainesville,
Inc. and the Registrant dated January 19, 1998
10.24 Merger Agreement by and between Chad Youth Enhancement Center, Inc. and
CLG Management Company, LLC and the Registrant dated February 12, 1998
</TABLE>
-68-
<PAGE> 69
INDEX TO EXHIBITS (Continued)
<TABLE>
<S> <C>
10.25 Asset Exchange Agreement by and between Meadow Pines Hospital, Inc. and
the Registrant dated February 23, 1998
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(1) Incorporated herein by reference from Registrant's Registration
Statement on Form S-2, filed August 15, 1996 (Reg. No. 333-8387).
(2) Incorporated herein by reference from Registrant's Registration
Statement on Form S-1, filed October 11, 1989 (Reg. No. 33-31527).
(3) Incorporated herein by reference from Registrant's Form 8-K, dated
April 12, 1988, reporting the acquisition of Advocate Schools (File No.
0-16162).
(4) Incorporated herein by reference from Registrant's Registration
Statement on Form S-8, filed February 14, 1990 (Reg. No. 2-33-33499).
(5) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1990, dated June 28, 1990 (File No.
0-16162).
(6) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1994, dated June 28, 1994 (File No.
0-16162).
(7) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1995, dated June 28, 1995 (File No.
0-16162).
(8) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1996, dated June 28, 1996 (File No.
0-16162).
(9) Incorporated herein by reference from Registrant's Form 10-Q for the
periods ended December 31, 1996, dated February 13, 1997 (File No.
0-16162).
(10) Incorporated herein by reference from Registrant's Form 10-Q for the
periods ended March 31, 1997, dated May 15, 1997 (File No. 0-16162).
(11) Incorporated herein by reference from Registrant's Form 8-K, dated June
2, 1997, reporting the acquisition of substantially all the assets of
Vendell Healthcare, Inc. (File No. 0-16162).
(12) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended June 30, 1997 dated September 29, 1997 (File No.
0-16162).
</TABLE>
-69-
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
AMONG
VENTURES HEALTHCARE OF GAINESVILLE, INC.,
A FLORIDA CORPORATION
"VENTURES",
WILLIAM A. PARSONS, JR., PH.D.
S. DALE MCNEESE
JOHN W. DARRAH
"SHAREHOLDERS",
AND
CHILDREN'S COMPREHENSIVE SERVICES OF GAINESVILLE, INC.,
A TENNESSEE CORPORATION,
"MERGER SUBSIDIARY",
AND
CHILDREN'S COMPREHENSIVE SERVICES, INC.,
A TENNESSEE CORPORATION,
"PARENT"
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I.
THE MERGER......................................................................................................1
1.1 Effect of the Merger...................................................................................1
1.2 Assets of Ventures at Closing; Properties Acquired in Merger...........................................2
1.3 Further Assurances.....................................................................................3
ARTICLE II.
CONVERSION AND EXCHANGE OF SHARES...............................................................................4
2.1 Conversion of Shares...................................................................................4
2.2 Shares Owned by Ventures...............................................................................4
2.3 Fractional Shares......................................................................................4
2.4 Exchange of Shares; Escrow of Shares...................................................................4
ARTICLE III.
MERGER CONSIDERATION............................................................................................5
3.1 Merger Consideration...................................................................................5
3.2 Adjustments to Merger Consideration....................................................................5
ARTICLE IV.
CERTIFICATE OF INCORPORATION; OFFICERS AND DIRECTORS............................................................6
ARTICLE V.
EFFECTIVE DATE OF MERGER; FILING OF MERGER DOCUMENTS............................................................6
5.1 Effective Date.........................................................................................6
5.2 Filing of Certificate of Merger........................................................................6
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS..................................................................6
6.1 Organization, Qualification and Authority..............................................................6
6.2 Capitalization and Stock Ownership.....................................................................7
6.3 Investments............................................................................................7
6.4 Absence of Default.....................................................................................7
6.5 Financial Statements...................................................................................8
6.6 Operations since October 31, 1997......................................................................8
6.7 Litigation.............................................................................................9
6.8 Licenses..............................................................................................10
6.9 Medicare and Medicaid Matters.........................................................................10
6.10 Title to and Condition of Assets......................................................................10
6.11 Contracts.............................................................................................11
6.12 Environmental Matters.................................................................................12
6.13 Ventures Employees. .................................................................................14
6.14 Employee Benefit Plans................................................................................14
6.15 Insurance.............................................................................................15
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.16 Conflicts of Interest.................................................................................15
6.17 Compliance with Laws..................................................................................15
6.18 WARN Act..............................................................................................15
6.19 Tax Returns; Taxes....................................................................................16
6.20 No Omissions or Misstatements.........................................................................16
6.21 Accredited Investor...................................................................................16
6.22 Purchase for Investment; Restrictions on Transfer.....................................................16
ARTICLE VII.
REPRESENTATIONS AND WARRANTIES OF
MERGER SUBSIDIARY AND PARENT...................................................................................17
7.1 Organization, Qualification and Authority.............................................................17
7.2 Absence of Default....................................................................................17
7.3 SEC Reports...........................................................................................18
7.4 Shares to be Issued...................................................................................18
7.5 Capitalization of Merger Subsidiary; Continuation of Ventures Business................................18
7.6 Securities Law Compliance.............................................................................18
ARTICLE VIII.
COVENANTS OF PARTIES...........................................................................................19
8.1 Certificate of Incorporation and Bylaws of Ventures; Capitalization...................................19
8.2 Approval by Shareholders..............................................................................19
8.3 Preservation of Business and Assets...................................................................19
8.4 Books and Records.....................................................................................19
8.5 Preserve Accuracy of Representations and Warranties...................................................20
8.6 Broker's or Finder's Fee..............................................................................20
8.7 Indebtedness; Liens...................................................................................20
8.8 Compliance with Laws and Regulatory Consents..........................................................21
8.9 Maintain Insurance Coverage...........................................................................21
ARTICLE IX.
VENTURES' AND SHAREHOLDERS' CONDITIONS TO CLOSE................................................................21
9.1 Representations and Warranties True at Closing; Compliance with Agreement.............................21
9.2 No Action/Proceeding..................................................................................21
9.3 Order Prohibiting Transaction.........................................................................22
9.4 Opinion of Parent's Counsel...........................................................................22
ARTICLE X.
PARENT'S AND MERGER SUBSIDIARY'S CONDITIONS TO CLOSE...........................................................22
10.1 Representations and Warranties True at Closing; Compliance with Agreement.............................22
10.2 No Action/Proceeding..................................................................................22
10.3 Due Diligence; Inspection of Assets; U.C.C. Searches, etc.............................................22
10.4 Absence of Adverse Change.............................................................................22
10.5 Order Prohibiting Transaction.........................................................................23
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
10.6 Noncompetition Agreements.............................................................................23
10.7 Licenses and Permits..................................................................................23
10.8 Consents..............................................................................................23
10.9 Opinion of Ventures' Counsel..........................................................................23
ARTICLE XI.
OBLIGATIONS OF VENTURES AND SHAREHOLDERS AT CLOSING............................................................24
11.1 Documents Effecting Closing...........................................................................24
11.2 Possession............................................................................................24
11.3 Opinion of Counsel....................................................................................24
11.4 Corporate Good Standing and Corporate Resolution......................................................24
11.5 Closing Certificate...................................................................................24
11.6 Third Party Consents..................................................................................24
11.7 Noncompetition Agreements.............................................................................25
11.8 Preliminary Closing Statement.........................................................................25
11.9 Additionally Requested Documents; Post-Closing Assistance.............................................25
ARTICLE XII.
OBLIGATIONS OF MERGER SUBSIDIARY AT CLOSING....................................................................25
12.1 Merger Consideration..................................................................................25
12.2 Corporate Good Standing and Certified Board Resolutions...............................................25
12.3 Closing Certificate...................................................................................25
12.4 Opinion of Merger Subsidiary's Counsel................................................................25
ARTICLE XIII.
TERMINATION....................................................................................................26
13.1 Circumstances of Termination..........................................................................26
13.2 Effect of Termination.................................................................................26
ARTICLE XIV.
SURVIVAL OF PROVISIONS AND INDEMNIFICATION.....................................................................26
14.1 Survival..............................................................................................26
14.2 Indemnification by Shareholders.......................................................................27
14.3 Indemnification by Merger Subsidiary and Parent.......................................................27
14.4 Rules Regarding Indemnification.......................................................................27
14.5 Exclusivity...........................................................................................28
ARTICLE XV.
MISCELLANEOUS..................................................................................................29
15.1 Assignment............................................................................................29
15.2 Other Expenses........................................................................................29
15.3 Notices...............................................................................................29
15.4 Confidentiality.......................................................................................30
15.5 Partial Invalidity; Waiver............................................................................30
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
15.6 Interpretation........................................................................................31
15.7 Entire Agreement; Counterparts........................................................................31
15.8 Further Assurance of Shareholders after Closing.......................................................31
15.9 Legal Fees and Costs..................................................................................31
15.10 Controlling Law.......................................................................................31
15.11 Parent Guarantee......................................................................................31
</TABLE>
iv
<PAGE> 6
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION RESPONSIBLE PARTY
- ------- ----------- -----------------
<S> <C> <C>
A Description of the Business Ventures
1.2(1) List and Description of Owned or Ventures
Leased Real Estate
1.2(2) Equipment & Furnishings Ventures
1.2(5) Bank Accounts and Related Information Ventures
1.2(9) Contract Rights; including Consultation Service Ventures
Agreements and Management Service Agreements
2.4 Form of Post Closing Escrow Agreement Ventures
3.1 Form of Pro Forma Balance Sheet Ventures
3.2 Form of Preliminary Closing Statement Ventures and
Merger Sub.
6.1 States of Foreign Qualification Ventures
6.2 Agreements Restricting Transferability Ventures
of Shares
6.3 Investments Ventures
6.5(1) Financial Statements; Contingent Liabilities Ventures
6.5(3) EBITDA by Location and Projected EBITDA Ventures
6.6 Operations since October 31, 1997 Ventures
6.7 Litigation Ventures
6.8 Copies of Licenses Ventures
6.10(5) Intellectual Property Ventures
6.11(1) Contracts; Consents required under Contracts Ventures
</TABLE>
v
<PAGE> 7
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION RESPONSIBLE PARTY
- ------- ----------- -----------------
<S> <C> <C>
6.11(4) Repair and Maintenance Obligations Ventures
6.13(1) Employees and Related Information Ventures
6.13(2) Employee Litigation Ventures
6.14 Employee Benefit Plans Ventures
6.15 Summary of Insurance Coverage Ventures
6.16 Conflicts of Interest Ventures
6.19 Pending Tax Audits and Investigations Ventures
8.3 Description of Payment Arrangements with CIC Ventures
10.6 Form of Noncompetition Agreement Ventures
10.8 Consents Ventures
</TABLE>
vi
<PAGE> 8
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER ("Agreement") is entered into on
January 19th, 1998 by and among VENTURES HEALTHCARE OF GAINESVILLE, INC., a
Florida corporation (referred to herein as "Ventures"), WILLIAM A. PARSONS, JR.,
PH.D., S. DALE MCNEESE and JOHN W. DARRAH (individually a "Shareholder" and
collectively, the "Shareholders"), CHILDREN'S COMPREHENSIVE SERVICES OF
GAINESVILLE, INC., a Tennessee corporation ("Merger Subsidiary") (the Merger
Subsidiary and Ventures sometimes collectively herein referred to as the
"Constituent Corporations"), and CHILDREN'S COMPREHENSIVE SERVICES, INC., a
Tennessee corporation ("Parent").
R E C I T A L S:
WHEREAS, Ventures owns and operates a business providing consultation
and management services to behavioral healthcare providers who operate partial
psychiatric programs, all as more particularly described on Exhibit "A" hereto
(the "Business"); and
WHEREAS, Shareholders own all of the issued and outstanding capital
stock of Ventures (the "Ventures Stock"); and
WHEREAS, Shareholders desire to transfer the Ventures Stock and Parent
desires to acquire the same from Shareholders in a reorganization under Section
368(a)(2)(D) of the Internal Revenue Code, subject to the terms and conditions
set forth in this Agreement; and
WHEREAS, Parent desires to guarantee performance by the Merger
Subsidiary under this Agreement of all of the representations, warranties,
covenants, conditions and agreements to be performed and observed by Merger
Subsidiary.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties, intending
to be legally bound hereby, agree that Ventures shall be merged (herein the
"Merger") into the Merger Subsidiary in accordance with the terms of this
Agreement.
ARTICLE I.
THE MERGER
1.1 EFFECT OF THE MERGER. On the Effective Date of the Merger (as such
date is defined in Section 5.1), Ventures shall be merged into Merger
Subsidiary, the separate legal existence of Ventures shall cease, and Merger
Subsidiary, as the surviving corporation, shall continue its corporate existence
under the laws of the State of Tennessee under the name of Ventures Healthcare
of Gainesville, Inc. (or
<PAGE> 9
such other name as Parent may subsequently elect). Subsequent to the Merger, the
Merger Subsidiary shall possess all the rights, privileges, powers, and
franchises of a public as well as of a private nature and be subject to all the
restrictions, disabilities, and duties of Ventures. All rights, privileges,
powers, and franchises of Ventures and all property, real, personal, and mixed,
belonging to Ventures shall be vested in Merger Subsidiary and all property,
rights, privileges, powers, and franchises and every other interest shall be
thereafter as effectually the property of Merger Subsidiary as they were of
Ventures. The title to real estate, if any, vested by deed or otherwise in
Ventures, shall not revert or be in any way impaired by reason of this Merger,
provided that all rights of creditors and all liens upon any property of
Ventures shall be preserved unimpaired and all debts, liabilities, and duties of
Ventures shall thenceforth attach to the Merger Subsidiary and may be enforced
against Merger Subsidiary to the same extent as if said debts, liabilities, and
duties had been incurred or contracted by Merger Subsidiary.
1.2 ASSETS OF VENTURES AT CLOSING; PROPERTIES ACQUIRED IN MERGER. At
the closing of the Merger (the "Closing"), Ventures will own or lease, as
applicable, all assets, tangible and intangible, real and personal, that are
currently used to operate the Business (the "Assets"), free and clear of all
encumbrances, mortgages, pledges, liens, and security interests, other than
Permitted Encumbrances. Permitted Encumbrances are defined as (i) mechanics,
materialmen's and similar liens with respect to any amounts not yet due and
payable or which are being contested in good faith through appropriate
proceedings, (ii) liens for taxes not yet due and payable or which are being
contested in good faith through appropriate proceedings, (iii) liens securing
rental payments under capital lease agreements and (iv) encumbrances and
restrictions on any real property owned or leased by Ventures (including
easements, covenants, rights of way and similar restrictions of record) that do
not materially interfere with the present uses of such real property. The Assets
will include, without limitation, the following:
(1) All right, title and interest in and to all of the real
property owned or leased by Ventures and used in connection with the Business,
if any, including, without limitation, the real property listed and described on
Exhibit 1.2.(1) attached hereto, and in and to all structures, improvements,
fixed assets and fixtures including fixed machinery and fixed equipment owned or
leased by Ventures and situated thereon or forming a part thereof and all
appurtenances, easements and rights-of-way related thereto (collectively, the
"Real Estate");
(2) All equipment, machinery, data processing hardware and
software, furniture, furnishings, appliances, vehicles and other tangible
personal property and all replacement parts therefor used in connection with the
Business including, without limitation, the equipment listed on Exhibit 1.2(2)
attached hereto (collectively, the "Equipment and Furnishings");
(3) All inventory of goods and supplies used or maintained in
connection with the Business reflected on the Financial Statements
(collectively, the "Inventory");
(4) Subject to the provisions of the agreement referenced in
Section 8.3, all accounts and notes receivables (the "Receivables") of Ventures
(it being understood by the parties that the Receivables shall not include
individual patient accounts collectible by Ventures, but not carried on the
books of Ventures as its own receivables, on behalf of owners of inpatient
psychiatric units managed by Ventures pursuant to management contracts);
2
<PAGE> 10
(5) All cash, including funds on hand, bank accounts
including, without limitation, those accounts listed by name and address of
banking institution, account name and account and routing numbers on Exhibit
1.2(5) attached hereto, money market accounts, other accounts, certificates of
deposit and other investments of Ventures (the "Cash and Cash Equivalents"), and
all prepaid expenses, any and all tax attributes and assets of Ventures as of
Closing, including without limitation, all net operating loss carryforwards;
(6) All personnel, corporate and other records related to the
Business, including both hard and microfiche copies, and all manuals, books and
records used in operating the Business, including, without limitation, personnel
policies and files and manuals, accounting records, and computer software;
(7) To the full extent not legally required to be reissued or
independently transferred as a consequence of the Merger, all federal, state and
local licenses, permits, registrations, certificates, consents, accreditations,
approvals and franchises, if any, held by Ventures in connection with the
Business as currently conducted (collectively, the "Licenses");
(8) All goodwill, and, to the extent assignable by Ventures,
all warranties express or implied and rights and claims related to the Assets or
the operation of the Business;
(9) Contract rights and interests held by Ventures arising out
of or related to the Business, including but not limited to those certain
consultation service agreements, management service agreements and other similar
contracts identified on Exhibit 1.2(9) hereto;
(10) All intangible or intellectual property owned, leased,
licensed or possessed by Ventures or any Shareholder and utilized in connection
with the Business, including without limitation, the name "Ventures Healthcare"
and all variations and derivations thereof, to the extent Ventures or any
Shareholder has rights in or to each such name;
(11) All of Ventures' right, title and interest in any
partnerships, joint ventures or similar arrangements.
1.3 FURTHER ASSURANCES. From time to time as and when requested by
Merger Subsidiary or its successors or assigns, the officers, directors and
shareholders of Ventures last in office shall execute and deliver such deeds and
other instruments and shall take or cause to be taken such other actions as
shall be necessary to vest or perfect in or to confirm of record or otherwise
Merger Subsidiary's title to, and possession of, all the property, interests,
assets, rights, privileges, immunities, powers, franchises, and authority of the
Ventures, and otherwise to carry out the purposes of this Agreement.
3
<PAGE> 11
ARTICLE II.
CONVERSION AND EXCHANGE OF SHARES
2.1 CONVERSION OF SHARES. The manner of converting or exchanging the
shares of each of the Constituent Corporations shall be as follows:
(1) The Merger shall effect no change in any of the shares of
Merger Subsidiary stock, and none of its shares shall be converted as a result
of the Merger.
(2) Each share of Ventures Stock issued and outstanding on the
Effective Date of the Merger (except shares of Ventures Stock issued and held in
the treasury of the Ventures) shall, by virtue of the Merger and on the
Effective Date of the Merger, be converted into and become, without action on
the part of the holder thereof, shares of fully paid and nonassessable Parent
Common Stock in an amount sufficient to comprise the Merger Consideration as set
forth in Article III below.
2.2 SHARES OWNED BY VENTURES. Each share of Ventures Stock issued and
held in the treasury of Ventures shall be canceled and retired, and no shares of
stock or other securities of Parent shall be issuable, and no cash shall be
exchangeable, with respect thereto.
2.3 FRACTIONAL SHARES. No fractional shares of Parent Common Stock
shall be issued pursuant to Section 2.1(2), but in lieu thereof, cash shall be
paid to the holder thereof in an amount based on the closing price of Parent
Common Stock on the NASDAQ Stock Market's NASDAQ National Market on the
Effective Date of the Merger, or if such shares were not traded on such date,
based on the closing price thereof on the next preceding day on which such
shares were traded.
2.4 EXCHANGE OF SHARES; ESCROW OF SHARES. Subject to the escrow
provisions set forth below, on and after the Effective Date of the Merger, each
holder of Ventures Stock shall be entitled to receive in exchange therefor a
certificate or certificates representing the number of shares of Parent Common
Stock to which he is entitled as provided in Section 2.1(2), and any cash to
which he maybe entitled on account of fractional shares (without interest
thereon) as provided in Section 2.3. Until so presented and surrendered in
exchange for a certificate representing Parent Common Stock, each certificate
which represented issued and outstanding shares of Ventures Stock on the
Effective Date of the Merger shall be deemed for all purposes to evidence
ownership of the number of shares of Parent Common Stock into which such shares
of Ventures Stock have been converted pursuant to the Merger. Until surrender of
such certificates in exchange for certificates representing Parent Common Stock,
the holder thereof shall not be entitled to vote at any meeting of Parent
stockholders or to receive any dividend or other distribution payable to holders
of shares of Parent Common Stock; provided, however, that upon surrender of such
certificates representing Ventures Stock in exchange for certificates
representing Parent Common Stock, there shall be paid to the record holder of
the certificate representing Parent Common Stock issued upon such surrender the
amount of dividends or other distributions (without interest) that theretofore
became payable with respect to the number of shares of Parent Common Stock
represented by the certificate issued upon such surrender.
4
<PAGE> 12
The parties acknowledge and agree that one-half (1/2) of the
Parent Common Stock to which each Shareholder shall be entitled to receive shall
be issued and held in escrow pursuant to the provisions of a Post Closing Escrow
Agreement of substantially the same form as Exhibit 2.4 hereto.
ARTICLE III.
MERGER CONSIDERATION
3.1 MERGER CONSIDERATION.
(1) The Parent Common Stock to be issued as merger
consideration ("Merger Consideration") shall have a value of Two Million Seven
Hundred Thousand and No/100 Dollars ($2,700,000.00), subject to adjustment as
set forth in this Article III. The Merger Consideration will be subject to
adjustment as follows: (i) the Merger Consideration shall be increased or
decreased, as appropriate, for additions or deletions of property, plant,
equipment or other non-current assets, if any, purchased or sold between June
30, 1997 and the Closing; (ii) the Merger Consideration shall also be adjusted
for any Seller employee benefits which are not accrued and reflected in net
working capital at Closing to the extent it causes a breach of (iii); and (iii)
Merger Consideration shall be adjusted to the extent that the working capital of
Ventures is less than Fifty Thousand and No/100 Dollars ($50,000.00) as of
Closing. Shareholders' equity of Ventures at Closing shall not be less than
Fifty Thousand and No/100 Dollars ($50,000.00). The Balance Sheet of Ventures as
of January 1, 1998 shall be substantially the same as the pro forma Balance
Sheet shown on Exhibit 3.1 hereto.
(2) The Merger Consideration will be One Hundred Forty-Six
Thousand Five Hundred Eighty (146,580) shares of Parent Common Stock which is
based upon a price of $18.42 per share. The Parent Common Stock will constitute
restricted securities the resale of which shall be subject to the requirements
of Rule 144. All aspects of the proposed transaction shall be subject to
applicable state and federal securities laws.
3.2 ADJUSTMENTS TO MERGER CONSIDERATION. The adjustments to the Merger
Consideration specified in Section 3.1(1) shall be estimated by the parties
hereto in good faith at the Closing to the extent reasonably possible based on
the most current interim financial statements with provisional adjustments as
shall be mutually agreed at Closing which shall be called the "Preliminary
Closing Statement". Attached as Exhibit 3.2 is the format of the Preliminary
Closing Statement. No later than sixty-five (65) days after the Closing, the
parties hereto shall prepare the "Final Closing Statement" reflecting the items
listed above prepared consistent with the past preparation of the internal
financial statements of Ventures on an accrual basis applied consistently with
prior periods. Adjustments made after the Closing based on the Final Closing
Statement shall be payable in cash not more than one (1) year after Closing,
with interest on any adjustments at an annual interest rate of eight and
one-half percent (8.5%) commencing at Closing. If Merger Subsidiary and
Shareholders are unable to agree on the Final Closing Statement within
sixty-five (65) days after delivery of the Final Closing Statement, they shall
appoint a firm of independent certified public accountants of recognized
national standing (excluding any firm regularly engaged by either party) (the
"Accountants") to make such determination which determination, shall be final
and binding on the parties hereto for the purpose of this Agreement, and Merger
Subsidiary and Shareholder shall each pay one-half (1/2) the cost of the
Accountants.
5
<PAGE> 13
ARTICLE IV.
CERTIFICATE OF INCORPORATION; OFFICERS AND DIRECTORS
The Certificate of Incorporation of Merger Subsidiary shall be amended,
effective on the Effective Date of the Merger, by changing Article I thereof so
as to read in its entirety as follows: "The name of the corporation is Ventures
Healthcare of Gainesville, Inc."
On the Effective Date of the Merger, the Certificate of Incorporation
of Merger Subsidiary, as amended above, shall be the Certificate of
Incorporation of the surviving corporation.
The officers and directors of the Merger Subsidiary on the Effective
Date shall from and after the Effective Date be the initial officers and
directors of the Merger Subsidiary after the Merger until their respective
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Certificate of
Incorporation and Bylaws of the Merger Subsidiary.
ARTICLE V.
EFFECTIVE DATE OF MERGER; FILING OF MERGER DOCUMENTS
5.1 EFFECTIVE DATE. The Merger shall become effective on the filing of
this Agreement (or appropriate Certificate of Merger or Articles of Merger, as
applicable) (such documentation herein the "Certificate of Merger") in the
manner required by applicable law (the date of such filing being herein called
the "Effective Date of the Merger").
5.2 FILING OF CERTIFICATE OF MERGER. Unless this Agreement shall have
been terminated prior thereto under the provisions of Article XIII hereof, the
Certificate of Merger shall be so filed and recorded as promptly as possible
after Closing which shall occur upon satisfaction of the conditions precedent to
Closing and in no event later than the end of the next business day following
Closing.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS
As a material inducement to Parent and Merger Subsidiary to enter into
this Agreement and to consummate the Merger, Shareholders hereby jointly and
severally represent and warrant to Buyer, which representations and warranties
will be true and correct on the date of Closing, as follows:
6.1 ORGANIZATION, QUALIFICATION AND AUTHORITY. Ventures is a
corporation duly organized and validly existing under the laws of the State of
Florida and is in good standing and duly qualified to do business as a foreign
corporation in all states required by its Business as set forth on Exhibit 6.1,
except where the failure to be so qualified would not have a material adverse
effect on the business or results of operations of Ventures. Ventures has full
corporate power and authority to own, lease and operate its facilities and
assets as presently owned, leased and operated, and to carry on its business as
6
<PAGE> 14
it is now being conducted. Ventures and Shareholders each have the full right,
power and authority to execute, deliver and carry out the terms of this
Agreement and all documents and agreements executed and delivered in connection
with this Agreement, to consummate the Merger and other transactions
contemplated on the part of each such party hereby, and to take all actions
necessary, in their respective capacities, to permit or approve the actions of
each of Ventures and Shareholders. The execution, delivery and consummation of
this Agreement, and all other agreements and documents executed in connection
herewith by each of Ventures and Shareholders, have been duly authorized by all
necessary action on the part of such parties. No other action, consent or
approval on the part of any of Ventures, Shareholders or any other person or
entity is necessary to authorize due and valid execution, delivery and
consummation, of this Agreement and all other agreements and documents executed
in connection herewith. This Agreement and all other agreements executed in
connection herewith by Ventures and/or Shareholders, upon due execution and
delivery thereof, will constitute the valid and binding obligations of Ventures
and/or Shareholders, as the case may be, enforceable in accordance with their
respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights generally
and by general principles of equity.
6.2 CAPITALIZATION AND STOCK OWNERSHIP. Except for Shareholders, no
other person or entity owns or holds, has any interest in, whether legal,
equitable or beneficial, or has the right to purchase, any capital stock or
other security of Ventures. The Ventures Stock, being Two Hundred Twenty Five
(225) shares, $1.00 par value, of common stock, constitutes all of the issued
and outstanding securities of Ventures, is duly authorized, validly issued,
fully paid and nonassessable, and is owned free and clear of any liens, charges,
security interests, pledges or other encumbrances. At Closing, Ventures will not
have any outstanding subscriptions, options, warrants, calls, contracts,
convertible securities or other instruments, agreements or arrangements of any
nature whatsoever under which Ventures is or may be obligated or compelled to
issue any capital stock, security or interest of any kind, or to transfer or
modify any right with respect to any capital stock, security or other interest,
and, as of the Closing, no one will have any preemptive rights, right of first
refusal or similar rights with respect to the Ventures Stock or any equity
interest in Ventures. Except as set forth on Exhibit 6.2, neither Ventures nor
any of the Shareholders is a party to any, and there exist no, voting trusts,
stockholder agreements, pledge agreements or other agreements relating to or
restricting the transferability of any shares of the Ventures Stock or equity
interests of Ventures and any such agreements listed on Exhibit 6.2, if any,
shall not preclude the Merger or other transactions contemplated by this
Agreement.
6.3 INVESTMENTS. Except as set forth on Exhibit 6.3, Ventures owns no
capital stock, securities, interest or other right or any option or warrant
convertible into the same, of any corporation, partnership, limited liability
company, joint venture or other business enterprise.
6.4 ABSENCE OF DEFAULT. The execution, delivery and consummation of
this Agreement, and all other agreements and documents executed in connection
herewith by Ventures and Shareholders will not constitute a violation of, or be
in conflict with, and will not, with or without the giving of notice or the
passage of time, or both, result in a breach of, constitute a default under,
create or cause the acceleration of the maturity of, any debt, indenture,
obligation or liability affecting either Ventures, the Shareholders, the
Business or Assets or rights in the Ventures Stock, or result in the creation or
imposition of any security interest, lien, charge or other encumbrance upon any
of the Ventures Stock
7
<PAGE> 15
or the Assets under: (a) any term or provision of the Charter or Bylaws of
Ventures; (b) any contract, lease, purchase order, agreement, document,
instrument, indenture, mortgage, pledge, assignment, permit, license, approval
or other commitment to which Ventures and/or any Shareholder is a party or by
which either Ventures, any Shareholder, the Ventures Stock or the Assets are
bound; (c) any judgment, decree, order, regulation or rule of any court or
regulatory authority; or (d) any law, statute, rule, regulation, order, writ,
injunction, judgment or decree of any court or governmental authority or
arbitration tribunal to which Ventures, any Shareholder, the Ventures Stock
and/or the Assets are subject.
6.5 FINANCIAL STATEMENTS.
(1) Attached hereto as Exhibit 6.5(1) are true and correct
copies of Ventures' unaudited balance sheets and income statements for the year
ended December 31, 1996 (the "Fiscal Year Financial Statements"), and the
interim unaudited balance sheet and income statement of Ventures for the eleven
(11) month period ended November 30, 1997 (the "Interim Financial Statements,"
which, with the Fiscal Year Financial Statements, will be referred to as the
"Financial Statements"). The Financial Statements are based on the books and
records of Ventures and present fairly, in compliance with generally accepted
accounting principles applied on a consistent basis, the financial position of
Ventures as of, and the results of its operations for, the periods specified,
except, in the case of the Interim Financial Statements, for year end
adjustments and accruals for income taxes. Except as set forth in the Interim
Financial Statements or on Exhibit 6.5(1), Ventures has, and as of the Closing
will have, no contingent liabilities or obligations.
(2) The books and records of Ventures are in such order and
completeness so that an unqualified audit may be performed for any period prior
to Closing not already audited. The Shareholders will cooperate in all
reasonable respects with the Merger Subsidiary in attempting to perform an audit
of Ventures for any period prior to Closing not already audited at Merger
Subsidiary's expense.
(3) Attached as Exhibit 6.5(3) is a schedule setting forth
EBITDA derived by Ventures from each of its various managements or similar
contracts on a location-by-location basis and a schedule setting forth the
projected annual EBITDA of new management contracts, if any, expected to be
added on or after January 1, 1998, it being understood that the Shareholders are
making no representations or warranties regarding such projections
6.6 OPERATIONS SINCE OCTOBER 31, 1997. Except as set forth in Exhibit
6.6, since November 30, 1997 there has been no:
(1) change in the condition of Ventures, financial or
otherwise, which has, or could reasonably be expected to have, a material
adverse effect on any of the Assets, the Business or on the results of the
operations of Ventures as a whole, including any circumstance or event which the
Shareholders reasonably believe may lead to a termination, cancellation or
non-renewal of Ventures' existing contracts;
8
<PAGE> 16
(2) material loss, damage or destruction of or to any of the
Assets, whether or not covered by insurance;
(3) sale, lease, transfer or other disposition by Ventures of,
or mortgages or pledges of or the imposition of any lien, charge or encumbrance
on, any portion of the Assets, except inventory and equipment held for use in
the ordinary course of business;
(4) increase in the compensation payable by Ventures to any of
the Shareholders, officers, directors or any other employees, independent
contractors or agents, or increase in, or institution of, any bonus, insurance,
pension, profit-sharing or other employee benefit plan or arrangements made to,
for or with the employees, independent contractors or agents of Ventures outside
the ordinary course of business;
(5) subject to the provisions of the agreement referenced in
Section 8.3, adjustment or write-off of Receivables or reduction in reserves for
Receivables outside of the ordinary course of business, or change in the
accounting methods or practices employed by Ventures or change in adopted
depreciation or amortization policies;
(6) issuance or sale by Ventures, or contract or other
commitment entered into by Ventures or any Shareholder for the issuance or sale,
of any shares of capital stock or securities convertible into or exchangeable
for capital stock of Ventures;
(7) payment by Ventures of any dividend, distribution or
extraordinary or unusual disbursement or expenditure or intercompany payable,
except for the settlement of Ventures' obligations to Capital Investment Corp.
pursuant to the agreement referenced in Section 8.3;
(8) merger, consolidation or similar transaction; or
solicitation therefor;
(9) security interest, guarantee or other encumbrance, other
than in the ordinary course of business, obligation or liability, in each case
whether absolute, accrued, contingent or otherwise, or whether due or to become
due, incurred or paid by Ventures to any person or entity; or the making by
Ventures of any loan or advance to, or an investment in, any person or entity;
(10) federal, state, or local statute, rule, regulation, or
order adopted, promulgated or decided that, to the knowledge of Ventures or any
of the Shareholders, materially and adversely affects Ventures, the Ventures
Stock, the Business or the Assets;
(11) strike, work stoppage or other labor dispute adversely
affecting the Business; or
(12) termination, waiver or cancellation of any material
rights or claims of Ventures, under any contract of Ventures or otherwise.
6.7 LITIGATION. Except as disclosed in Exhibit 6.7, no person or party
including, without limitation, any governmental agency has asserted, or, to the
knowledge of Ventures or any of the Shareholders, has threatened to assert, any
claim for any action or proceeding, against Ventures (or any
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officer, director, employee, agent or Shareholder of Ventures) arising out of
any statute, ordinance or regulation relating to wages, collective bargaining,
discrimination in employment or employment practices or occupational safety and
health standards (including, without limitation, the Fair Labor Standards Act,
Title VII of the Civil Rights Act of 1964, as amended, the Occupational Safety
and Health Act, the Age Discrimination in Employment Act of 1967, or the
Americans With Disabilities Act or the Family Medical Leave Act of 1993).
Neither Ventures nor any of the Shareholders has received notice of any
violation of any law, rule, regulation, ordinance or order of any court or
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality (including, without limitation, legislation
and regulations applicable to environmental protection, civil rights, public
health and safety and occupational health). Except as set forth in Exhibit 6.6,
there are no lawsuits, proceedings, actions, arbitrations, governmental
investigations, claims, inquiries or proceedings pending or threatened involving
Ventures, any of the Shareholders, the Ventures Stock, any of the Assets or the
Business.
6.8 LICENSES. Ventures has all Licenses necessary for Ventures to
operate and conduct the Business, and there does not exist any waivers or
exemptions relating thereto, except where the failure to hold such licenses
would not have a material adverse effect. There is no material default on the
part of Ventures or any other party under any of the Licenses. There exists no
grounds for revocation, suspension or limitation of any of the Licenses. Copies
of each of the Licenses are attached hereto and are listed on Exhibit 6.8. No
notices have been received by Ventures or any of the Shareholders with respect
to any threatened, pending, or possible revocation, termination, suspension or
limitation of the Licenses.
6.9 MEDICARE AND MEDICAID MATTERS. To the extent applicable to
Ventures, Ventures has complied, and, to Ventures' knowledge, each of the
providers with which Ventures contracts (herein a "Ventures Provider") has
complied with all laws, rules and regulations of the Medicare, Medicaid and
other governmental healthcare programs, and has filed all claims, invoices,
returns, cost reports and other forms in the manner prescribed. All cost
reports, claims, invoices, filings and other forms made or filed by Ventures, if
applicable, and, to Ventures' knowledge, made or filed by each Ventures Provider
with Medicare, Medicaid or any other governmental health or welfare related
entity or any third party payor since the inception of the Business, are in all
material respects true, complete, correct and accurate and do not claim
reimbursement for any expenses which are not properly reimbursable. No
deficiency, either individually or in the aggregate, in any such cost reports,
claims, invoices and other filings, including claims for over-payments or
deficiencies for late filings, has been asserted or threatened by any federal or
state agency or instrumentality or other provider reimbursement entities
relating to Medicare or Medicaid claims or any other third party payor, and
there is no basis for any claims or requests for reimbursement. Neither Ventures
nor, to its knowledge, any Ventures Provider has been subject to any audit
relating to fraudulent procedures or practices. To the best of Shareholders'
knowledge, there is no basis for any claim or request for recoupment or
reimbursement from Ventures or, to its knowledge, from any Ventures Provider, of
any federal or state agency or instrumentality or other provider reimbursement
entities.
6.10 TITLE TO AND CONDITION OF ASSETS.
(1) Ventures is the sole legal and beneficial owner of the
personal property included in the Assets, free and clear of all mortgages,
security interests, liens, leases, covenants, assessments,
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easements, options, rights of refusal, restrictions, reservations, defects in
the title, encroachments, and other encumbrances, except for Permitted
Encumbrances. Subject to the provisions of the agreement referenced in Section
8.3, the Assets are all the assets set forth on the Interim Financial Statements
or currently used in the operation of the Business.
(2) The descriptions of the Real Estate, if any, contained in
Exhibit 1.3(1) are accurate and include all real property leased by Ventures and
used in connection with the Business or set forth on the Interim Financial
Statements. Ventures is in lawful possession of all of the Real Estate, if any,
that is owned or leased including, without limitation, the buildings, structures
and improvements situated thereon and appurtenances thereto, in each case free
and clear of all mortgages, liens and other encumbrances or restrictions, except
for Permitted Encumbrances.
(3) The Equipment and Furnishings are all of the "Equipment"
reflected on the Interim Financial Statements, other than those items sold and
replaced in the ordinary course of business. All components of all of the
Equipment and Furnishings in all material respects (a) operate in accordance
with their respective specifications, (b) perform the functions they are
supposed to perform, (c) are free of structural, installation, engineering, or
mechanical defects or problems, and (d) are otherwise in good working order,
subject, in each case above, to reasonable wear and tear. Ventures has received
no written recommendation from any insurer to repair or replace any of the
material Assets with which Ventures has not complied.
(4) All motor vehicles used in the Business, whether owned or
leased, are listed in Exhibit 1.3(2) attached hereto, are properly licensed and
are registered in accordance with applicable law. If such vehicles are leased,
the leases are in full force and effect, and Ventures has complied with all
terms of such leases.
(5) All trademarks, service marks, trade names, patents,
inventions, processes, copyrights and applications therefor, whether registered
or at common law (collectively, the "Intellectual Property"), owned or used by
Ventures are listed and described in Exhibit 6.10(5) attached hereto. No
proceedings have been instituted or are pending or, to the knowledge of Ventures
or any of the Shareholders, threatened that challenge the validity of the
ownership by Ventures of any such Intellectual Property. Ventures has licensed
no one to use any such Intellectual Property, and neither Ventures nor any of
the Shareholders has any knowledge of the use or the infringement of any of such
Intellectual Property by any other person. Ventures owns or possesses adequate
and enforceable licenses or other rights to use all Intellectual Property now
used in the conduct of the Business.
6.11 CONTRACTS.
(1) Exhibit 6.11(1) sets forth a complete and accurate list of
all consultation services agreements, management service agreements or other
similar agreements comprising the Business, together with all contracts, leases,
subleases, options and commitments, oral or written, and all assignments and
amendments thereof, affecting or relating to the Business, the Ventures Stock or
any Asset or any interest therein, to which either Ventures and/or any of the
Shareholders is a party or by which Ventures, the Assets or the Business is
bound (collectively, the "Contracts"). Exhibit 6.11(1), but not the definition
of Contracts, may exclude Contracts involving annual amounts of $5,000.00 or
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less. Accurate, complete and unredacted copies of all written Contracts have
been supplied, or will be prior to the Closing to Merger Subsidiary. Exhibit
6.11(1) includes written summaries of key terms of all oral Contracts including
any oral agreements with J.D. Investments, Inc. ("JDI"). The employee leasing
arrangement covered by the Client Service Agreement between Landrum Staff
Leasing, Inc. and JDI and the oral agreements between JDI and Ventures are all
cancelable by Ventures at will or with thirty (30) days prior notice without any
penalty, premium or other charge or expense to Ventures. The Shareholders know
of no reason that the persons subject to the employee leasing arrangement may
not be hired by the Merger Subsidiary immediately following Closing.
(2) Except as reflected in Exhibit 6.11(1), and except for
consents required as a result of the Merger and other transactions contemplated
herein, a list of which consents is included in Exhibit 6.11(1), none of the
Contracts has been modified, amended, assigned or transferred and, to the best
of Shareholders' knowledge, each is in full force and effect and is valid,
binding and enforceable in accordance with its respective terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally and by general principles of equity.
To the best of Shareholders' knowledge, no event or condition has happened or
presently exists which constitutes a default or breach or, after notice or lapse
of time or both, would constitute a default or breach by any party under any of
the Contracts. To the knowledge of Shareholders, there are no counterclaims or
offsets under any of the Contracts.
(3) There does not exist any security interest, lien,
encumbrance or claim of others created or suffered to exist on any interest
created under any of the Contracts. No purchase commitment by Ventures is in
excess of Ventures' ordinary business requirements.
(4) Exhibit 6.11(4) lists every repair and maintenance
obligation of Ventures pursuant to the Contracts over $10,000.00 required to be
performed on or before the Closing but which will remain unperformed at the
Closing.
6.12 ENVIRONMENTAL MATTERS.
(1) Hazardous Substances. As used in this Section 6.12(1), the
term "Hazardous Substances" means any hazardous or toxic substances, materials
or wastes, including but not limited to those substances, materials, and wastes
defined in Paragraph 101 of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), listed in the
United States Department of Transportation Table (49 CFR 172.101) or by the
Environmental Protection Agency as hazardous substances pursuant to 40 CFR Part
302, or which are regulated under any other Environmental Law (as such term is
defined herein), and any of the following: hydrocarbons, petroleum and petroleum
products (except as they exist in the ordinary course of business and in
material compliance with Environmental Law, asbestos, polychlorinated biphenyls,
formaldehyde, radioactive substances (other than naturally occurring materials
in place), flammables and explosives.
(2) Compliance with Laws and Regulations. All operations or
activities on, and any use or occupancy of any property owned leased or managed
by Ventures, any Affiliates of Ventures (wherein the term "Affiliates" will mean
any person or entity controlling, controlled by or under common control at any
time with Ventures, and the term "control" will mean the power, directly or
indirectly to direct the management or policies of such person or entity), and
any agent, contractor or employee of any agent or contractor of Ventures or its
Affiliates ("Agents"), or to the knowledge of any
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of the Shareholders (including any tenant or subtenant of Ventures) is and has
been in compliance with any and all laws, regulations, orders, codes, judicial
decisions, decrees, licenses, permits and other applicable requirements of
governmental authorities with respect to Hazardous Substances, pollution or
protection of human health and safety (collectively, "Environmental Laws"),
including but not limited to the release, emission, discharge, storage and
removal of Hazardous Substances. Ventures, Affiliates and Agents have kept the
property owned or managed by Ventures free of any lien imposed pursuant to
Environmental Laws. To the knowledge of Ventures and each of the Shareholders,
all prior owners, operators, managers and other occupants of such premises have
complied with Environmental Law. Except for uses and storage or presence of
Hazardous Substances reasonably necessary or incidental to the customary
operation of a business similar to the Business, as appropriate which, if
required, was stored or present in material compliance with Environmental Law:
(a) Neither Ventures nor any Affiliates or Agents
have used, generated, treated, handled, manufactured, voluntary transmitted or
stored any Hazardous Substances, nor, to the knowledge of Ventures or any of the
Shareholders, has any premises owned, leased or managed by Ventures ever been
used for any of the foregoing.
(b) Neither Ventures nor any Affiliates or Agents
have installed on any premises owned, leased or managed by Ventures friable
asbestos or any substance containing asbestos in condition or amount deemed
hazardous by Environmental Law.
(c) Ventures has not at any time engaged in any
dumping, discharge, disposal, spillage or leakage (whether legal or illegal,
accidental or intentional) of such Hazardous Substances that would subject
Ventures, any of the Shareholders or Merger Subsidiary to clean-up obligations
imposed by governmental authorities.
(d) To the knowledge of Shareholders, neither
Ventures nor the owners (present or former) of any premises owned, leased or
managed by Ventures (i) has either received or been issued a notice, demand,
request for information, citations, summons or complaint regarding an alleged
failure to comply with Environmental Law, or (ii) is subject to any existing,
pending, or, to the knowledge of Ventures or any of the Shareholders, threatened
investigation or inquiry by any governmental authority for noncompliance with,
or any remedial obligations under Environmental Law, and there are no
circumstances known to Ventures or any Shareholders which would likely serve as
a basis therefor. Ventures has not assumed any liability of a third party for
clean-up under or noncompliance with Environmental Law.
(e) Ventures, their Affiliates or Agents have not
transported or arranged for the transportation of any Hazardous Substances to
any location which is listed or, to the knowledge of Ventures and any of the
Shareholders, proposed for listing under Environmental Law or is the subject of
any enforcement action, investigation or other inquiry under Environmental Law.
(3) Other Environmental Matters. Ventures has furnished to
Merger Subsidiary a copy of any environmental audit, study, report or other
analysis which such Ventures or its Affiliates obtained or were furnished.
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(4) Disclaimer. Notwithstanding the foregoing, neither
Ventures nor the Shareholders make any representation or warranty regarding the
compliance with Environmental Laws at the medical facilities in which Ventures
conducts business, except for matters within Ventures' control or matters about
which they have actual knowledge.
6.13 VENTURES EMPLOYEES.
(1) Exhibit 6.13(1) attached hereto sets forth: (a) a complete
list of all of Ventures' employees, (b) their respective rates of pay, (c) the
employment dates and job titles of each such person, (d) categorization of each
such person as a full-time or part-time employee of Ventures, (e) the amount of
accrued vacation with respect to such person, and (f) the amount of accrued sick
pay with respect to such person. For purposes of this paragraph, "part-time
employee" means an employee who is employed for an average of fewer than twenty
(20) hours per week or who has been employed for fewer than six (6) of the
twelve (12) months preceding the date on which notice is required pursuant to
the "Worker Adjustment and Retraining Notification Act" ("WARN"), 29 U.S.C.
ss.2102, et seq. Except as provided in Exhibit 6.11(1), Ventures has no
employment agreements with its employees and all such employees are employed on
an "at will" basis. Exhibit 6.13(1) also (a) lists, and has attached copies of
all employee fringe benefits and personnel policies, and (b) lists all
ex-employees of Ventures utilizing or eligible to utilize COBRA. Ventures will
have adequately accrued and included in the Final Closing Statement, all
salaries and wages, related payroll taxes and all sick leave, holiday, vacation
benefits, retirement and other fringe benefits that will have accrued to
Ventures' employees through the Closing Date, including related payroll taxes.
(2) Ventures is not a party to any labor contract, collective
bargaining agreement, contract, letter of understanding, or any other
arrangement, formal or informal, with any labor union or organization that
obligates Ventures to compensate employees at prevailing rates or union scale,
nor are any of its employees represented by any labor union or organization.
There is no pending or, to the knowledge of Ventures or any of the Shareholders,
threatened labor dispute, work stoppage, unfair labor practice complaint,
strike, administrative or court proceeding or order between Ventures and any
present or former employee(s) of Ventures. Except as provided in Exhibit
6.13(2), there is no pending or, to the knowledge of Ventures and any of the
Shareholders, threatened suit, action, investigation or claim between Ventures
and any present or former employee(s) of Ventures. To the knowledge of
Shareholders, there has not been any labor union organizing activity with
respect to Ventures' employees.
6.14 EMPLOYEE BENEFIT PLANS.
(1) Exhibit 6.14 attached hereto contains a true, accurate and
complete list of each (a) "employee welfare benefit plan" (as defined in
Paragraph 3(1) of the Employee Retirement Income Security Act of 1974 as amended
("ERISA")) maintained by Ventures or to which Ventures contributes or is
required to contribute, and (b) "employee pension benefit plan" (as defined in
Paragraph 3(2) of ERISA) maintained by Ventures, to which Ventures contributes
or is required to contribute, or which covers employees of Ventures during the
period of their employment with any predecessor of Ventures, including any
multi-employer pension plan as defined under Internal Revenue Code of 1986,
Paragraph 414(f) (such employee welfare benefit plans and pension benefit plans
being hereinafter collectively
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referred to as the "Benefit Plans"). Copies of all Benefit Plans have previously
been provided to Merger Subsidiary.
(2) Liabilities. There are no unfunded liabilities under any
Benefit Plan.
(3) Termination of Participation. Shareholders will, at their
cost, take all necessary action so that Ventures, by Closing, will cease to be a
participating employer under all Benefit Plans, provided that the Merger
Subsidiary will provide coverage for employees of Ventures under the benefit
plans provided to similar employees of Parent and will waive waiting periods,
pre-existing conditions and similar restrictions on coverage.
6.15 INSURANCE. Ventures has in effect and has for at least five (5)
years continuously maintained insurance coverage for all of its operations,
personnel and assets, and for the Assets and the Business. A complete and
accurate list of all current insurance policies is included in Exhibit 6.11(1).
Exhibit 6.15 attached hereto sets forth a summary of Ventures' current insurance
coverage (listing type, carrier and limits), includes a list of any pending
insurance claims relating to Ventures or the Business, and includes a recent
three (3)-year claims history relating to Ventures and the Business as prepared
by the applicable insurance carrier(s). Ventures is not in default or breach
with respect to any provision contained in any such insurance policies, nor has
Ventures failed to give any notice or to present any claim thereunder in due and
timely fashion.
6.16 CONFLICTS OF INTEREST. Except as set forth on Exhibit 6.16, none
of the following is either a supplier of goods or services to Ventures, or
directly or indirectly controls or is a director, officer, employee or agent of
any corporation, firm, association, partnership or other business entity that is
a supplier of goods or services to Ventures: (a) any Shareholder, (b) any
director or officer of Ventures, or (c) any entity under common control with
Ventures or controlled by or related to any of the Shareholders.
6.17 COMPLIANCE WITH LAWS. Neither Ventures nor any of the Shareholders
have made any kickback or bribe to any person or entity, directly or indirectly,
for referring, recommending or arranging business with, to or for Ventures.
Neither WARN nor any similar state law applies to such transactions, and such
transactions comply with applicable state antitrust and similar laws. Ventures
is in compliance (without obtaining waivers, variances or extensions) with all
federal, state and local laws, rules and regulations that relate to the
operations of the Business, except where the failure to be in compliance would
not have a material adverse effect on the Business. All tax and other returns,
reports, plans and filings of any nature required to be or otherwise filed by
Ventures or any of the Shareholders with any governmental authorities have been
properly completed, except where the failure to be so completed or filed could
not have a material adverse effect on the Business, and timely filed in
compliance with all applicable requirements. Each return, report, plan and
filing contains no materially untrue or misleading statements and does not omit
anything which would cause it to be misleading or inaccurate in any material
respect.
6.18 WARN ACT. Since ninety (90) days prior to Effective Date, Ventures
has not temporarily or permanently closed or shut down any single site of
employment or any facility or any
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operating unit, department or service within a single site of employment, as
such terms are used in WARN.
6.19 TAX RETURNS; TAXES. Ventures and each of Shareholders have filed
all federal, state and local tax returns and tax reports required by such
authorities to be filed as of the time of Closing. Ventures and each of the
Shareholders, as applicable, have paid all taxes, assessments, governmental
charges, penalties, interest and fines due as of the time of Closing (including,
without limitation, taxes on properties, income, franchises, licenses, sales and
payrolls) by any governmental authority. Additionally, the reserves for taxes,
if any, shown in the Final Closing Statement are and will be adequate to
accurately reflect all tax liabilities accrued or owing as of the Closing.
Except as set forth on Exhibit 6.19, there is no pending tax examination or
audit of, nor any action, suit, investigation or claim asserted or, to the
knowledge of Ventures and each of the Shareholders, threatened against Ventures
or any of the Shareholders by any governmental authority; and neither Ventures
nor any of the Shareholders has been granted any extension of the limitation
period applicable to any tax claims.
6.20 NO OMISSIONS OR MISSTATEMENTS. No representation or warranty or
statement contained in this Agreement or any certificate furnished in connection
with this Agreement contains any untrue statement of a material fact or omits to
state any material fact necessary in order to make any of the statements herein
or therein not misleading in light of the circumstances in which they were made.
6.21 ACCREDITED INVESTOR. Each of the Shareholders hereby represents
and warrants to the Parent and Merger Subsidiary that he is an "Accredited
Investor" as such term is defined in Rule 501(a) of Regulation D promulgated
under the Securities Act of 1933. Each such Shareholder represents that he has
the requisite experience, knowledge and sophistication necessary to evaluate and
make an informed decision about the investment being made by such Shareholder in
the Merger by virtue of the receipt of the Parent Common Stock. Each Shareholder
acknowledges he has been given the opportunity to have complete access to all
records of the Parent, as well as its properties and executive employees. In
addition to the information and disclosures of the SEC Reports (as defined in
Section 7.3), each Shareholder acknowledges that he has had the opportunity to
ask questions and receive answers from executive employees of the Parent about
the Parent, its business and his investment in the Parent Common Stock.
6.22 PURCHASE FOR INVESTMENT; RESTRICTIONS ON TRANSFER. Each of the
Shareholders acknowledges that he is acquiring the Parent Common Stock for his
own account and not with a view to or present intention of distribution thereof
in violation of the Securities Act of 1933, as amended, or any state securities
or blue sky laws. The Parent Common Stock will not be disposed of in
contravention of any such laws. Each of the Shareholders also acknowledges that,
although there exists a public market for registered shares of the Parent Common
Stock, the Parent Common Stock being received by such Shareholders as Merger
Consideration has not been registered under any securities laws and, therefore,
cannot be sold and must be held indefinitely, unless subsequently registered
under applicable securities laws or unless an exemption from such registration
is available. The Shareholders acknowledge and agree that certificates
representing the Parent Common Stock issued as Merger Consideration will contain
a legend substantially similar to the following:
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The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or any state securities
laws. The securities have been acquired without a view to distribution
and may not be offered, sold, transferred, pledged or hypothecated,
whether or not for consideration, in the absence of registration under
the Securities Act of 1933, as amended, and applicable state securities
laws or written opinion of counsel reasonably satisfactory to
Children's Comprehensive Services, Inc. that registration is not
required.
ARTICLE VII.
REPRESENTATIONS AND WARRANTIES OF
MERGER SUBSIDIARY AND PARENT
As an inducement to Shareholders and Ventures to enter into this
Agreement and to consummate the transactions contemplated hereunder, Merger
Subsidiary and Parent hereby represent and warrant to Shareholders and Ventures,
which representations and warranties will be true and correct on the date of
Closing, as follows:
7.1 ORGANIZATION, QUALIFICATION AND AUTHORITY. Merger Subsidiary and
Parent are corporations duly organized, validly existing and in good standing
under the laws of the State of Tennessee. Merger Subsidiary has the full
corporate power and authority to own, lease and operate its properties and
assets as presently owned, leased and operated and to carry on its business as
it is now being conducted. Merger Subsidiary and Parent have the full right,
power and authority to execute, deliver and carry out the terms of this
Agreement and all documents and agreements necessary to give effect to the
provisions of this Agreement and to consummate the Merger and other transactions
contemplated on the part of Merger Subsidiary and Parent hereunder. The
execution, delivery and consummation of this Agreement and all other agreements
and documents executed in connection herewith by Merger Subsidiary and Parent
have been duly authorized by all necessary corporate action on the part of
Merger Subsidiary and Parent. No other action on the part of Merger Subsidiary
or Parent or any other person or entity is necessary to authorize the execution,
delivery and consummation of this Agreement and all other agreements and
documents executed in connection herewith. This Agreement, and all other
agreements and documents executed in connection herewith by Merger Subsidiary
and Parent, upon due execution and delivery thereof, will constitute the valid
and binding obligations of Merger Subsidiary and Parent, enforceable in
accordance with their respective terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally and by general principles of equity.
7.2 ABSENCE OF DEFAULT. The execution, delivery and consummation of
this Agreement and all other agreements and documents executed in connection
herewith by Merger Subsidiary and Parent will not constitute a violation of, be
in conflict with, or, with or without the giving of notice or the passage of
time, or both, result in a breach of, constitute a default under, or cause the
acceleration of the maturity of, any debt, indenture, obligation or liability
affecting Merger Subsidiary or Parent or result in the creation or imposition of
any security interest, lien, charge or other encumbrance upon any of the Assets
(except in the ordinary course pursuant to the credit agreement, if any, of the
Parent) under: (a) any term or provision of the Charter or Bylaws of Merger
Subsidiary or Parent; (b) any
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contract, lease, agreement, indenture, mortgage, pledge, assignment, permit,
license, approval or other commitment to which Merger Subsidiary or Parent is a
party or by which Merger Subsidiary or Parent is bound; (c) any judgment,
decree, order, regulation or rule of any court or regulatory authority, or (d)
any law, statute, rule, regulation, order, writ, injunction, judgment or decree
of any court or governmental authority or arbitration tribunal to which Merger
Subsidiary or Parent is subject.
7.3 SEC REPORTS. The Merger Subsidiary has furnished to the
Shareholders true and complete copies of Parent's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, its Quarterly Reports on Form 10-Q for
each of the fiscal quarters ended March 31, 1997, June 30, 1997 and September
30, 1997 and its proxy materials for the most recently held annual meeting of
shareholders (collectively, the "SEC Reports") as such reports were filed with
the Securities and Exchange Commission. The SEC Reports, at the time they were
filed, did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and since then, Parent and its affiliates have not suffered any
material adverse change in their business.
7.4 SHARES TO BE ISSUED. The Shares of Parent Common Stock to be issued
and delivered pursuant to this Agreement will be duly and validly issued, fully
paid and non-assessable.
7.5 CAPITALIZATION OF MERGER SUBSIDIARY; CONTINUATION OF VENTURES
BUSINESS. Prior to the transaction, Parent will be in control of Merger
Subsidiary within the meaning of Section 368(c)(1) of the Code. Following the
transaction, Merger Subsidiary will not issue additional shares of its stock
that would result in Parent losing control of Merger Subsidiary within the
meaning of Section 368(c)(1) of the Code. Parent has no plan or intention to
reacquire any of its stock issued in the transaction. Parent has no plan or
intention to liquidate Merger Subsidiary; to merge Merger Subsidiary with and
into another corporation; to sell or otherwise dispose of the stock of Merger
Subsidiary; or to cause Merger Subsidiary to sell or otherwise dispose of any of
the assets of Ventures acquired in the transaction, except for dispositions made
in the ordinary course of business or transfers described in Section
368(a)(2)(C) of the Code. Following the transaction, Merger Subsidiary will
continue the historic business of Ventures or use a significant portion of
Ventures' business assets in the business.
7.6 SECURITIES LAW COMPLIANCE. For a period of at least two (2) years
after Closing, Parent will timely file periodic reports and other documents
required under the Securities Act of 1933 and the Securities Exchange Act of
1934 so that the Shareholders will have access to public information about the
Parent to comply with informational requirements relating to sale of the Parent
Common Stock received in the Merger under Rule 144 promulgated under the
Securities Act of 1933.
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ARTICLE VIII.
COVENANTS OF PARTIES
8.1 CERTIFICATE OF INCORPORATION AND BYLAWS OF VENTURES;
CAPITALIZATION. From the date of this Agreement until Closing, the Certificate
of Incorporation and Bylaws of Ventures shall not be changed. Ventures shall not
change its authorized or issued capital stock, declare or pay any dividend, or
issue, encumber, purchase, or otherwise acquire, any of its capital stock.
8.2 APPROVAL BY SHAREHOLDERS. Ventures will submit this Agreement for
approval by its shareholders with a favorable recommendation by its board of
directors and will use its best efforts to obtain requisite shareholder
approval.
8.3 PRESERVATION OF BUSINESS AND ASSETS. From the date of this
Agreement until Closing, Ventures and each of the Shareholders will use their
best efforts and will do or cause to be done all such acts and things as may be
reasonably necessary to preserve, protect and maintain intact the operation of
the Business and Assets as a going concern consistent with prior practice and
not other than in the ordinary course of business, to preserve, protect and
maintain for Merger Subsidiary the goodwill of the suppliers, employees,
clientele and others having business relations with Ventures or the Business.
Ventures will use its reasonable commercial efforts to retain its employees in
their current positions up to Closing. Except as provided herein, until
termination of this Agreement, neither Ventures nor any of the Shareholders will
sell, transfer or pledge, or negotiate the sale, transfer or pledge of, either
any of the Assets or Ventures Stock or other security of Ventures, nor merge or
consolidate with any other entity; neither Ventures nor any of the Shareholders
will solicit any inquiries, proposals or offers relating to any such
transactions; and such parties will promptly notify Merger Subsidiary orally,
and confirm in writing, of all relevant details relating to inquiries, proposals
or offers that any may receive relating to any such matters. Ventures will pay
no dividend, and will make no distribution or extraordinary payment to
Shareholders or any third party or pay any intercompany payable and, other than
in the ordinary course of business, Ventures will not sell, discard or dispose
of any of the Assets, except as set forth in that certain agreement settling
Ventures' obligation to Capital Investment Corp. of Panama City, Florida, a copy
of which is attached as Exhibit 8.3. None of the Contracts will be amended in
any material respect, other than to obtain consents to the exchange of the
Ventures Stock contemplated in the Merger between the date hereof and Closing
without the prior written consent of Merger Subsidiary, and Ventures will not
enter into any new material contract, commitment or other transaction with
respect to the Business or the Assets without the prior written consent of
Merger Subsidiary. From the Effective Date until Closing, Ventures will maintain
and keep the Assets in a well-maintained condition and in good order and repair.
8.4 BOOKS AND RECORDS.
(1) From the date hereof until the Closing, Ventures will
maintain its books of account in the usual, regular and ordinary manner on a
basis consistent with prior years and will make no change in its accounting
methods or practices.
(2) Subject to the terms of the Letter of Intent dated
December 1, 1997 and the confidentiality provisions in that certain letter dated
August 4, 1997 from Al J. Smith to William
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Parsons, Ph.D. until Closing, Ventures and each of the Shareholders will give to
Merger Subsidiary full access to all of Ventures' offices, properties, books,
contracts, commitments, records and affairs relating to the Ventures Stock,
Assets or the Business so that Merger Subsidiary or Parent may inspect and audit
them and will furnish to Merger Subsidiary a copy of all documents and
information concerning the properties and affairs of Ventures, the Business, the
Ventures Stock or the Assets as Merger Subsidiary may request. If any such
books, records and materials are in the custody of third parties, Ventures and
each of the Shareholders will direct such third parties to promptly provide them
to Merger Subsidiary.
(3) Following the Closing, Parent will permit Shareholders,
during normal business hours, to have reasonable access to, and examine and make
copies of, all books and records of the Business that relate to transactions or
events occurring prior to the Closing. All out-of-pocket costs associated with
the delivery of the requested documents will be paid by Shareholders.
(4) The Shareholders will use reasonable efforts to cause
Ventures' accounting firm to consent to the inclusion of the Financial
Statements in any registration statements, private placement memoranda, and
periodic reports, if any, necessary or appropriate in order to enable Parent or
its affiliates to comply with any applicable registration or reporting
requirements of federal or state securities laws.
8.5 PRESERVE ACCURACY OF REPRESENTATIONS AND WARRANTIES. Shareholders
and Ventures will refrain from taking any action which would render any
representation and warranty contained in this Agreement untrue, inaccurate or
misleading in any material respect as of Closing. Each Shareholder and Ventures
will promptly notify Merger Subsidiary of any lawsuit, claim, audit,
investigation, administrative action or other proceeding asserted or commenced
against Ventures or its directors, officers, or any of the Shareholders, that
may involve or relate in any way to Ventures, the Assets, the Ventures Stock,
any of the Shareholders or the operation of the Business. Each Shareholder and
Ventures will promptly notify Merger Subsidiary of any facts or circumstances
that come to his, her or its attention and that cause, or through the passage of
time may cause, any of Shareholders' or Ventures' representations, warranties or
covenants to be untrue or misleading in any material respect at any time from
the date hereof through Closing.
8.6 BROKER'S OR FINDER'S FEE. None of Parent, Merger Subsidiary,
Ventures or any Shareholder has employed or is liable for the payment of any fee
to any finder, broker, government official or similar person in connection with
the transactions contemplated under this Agreement.
8.7 INDEBTEDNESS; LIENS. Other than in the ordinary course of business,
from the date of this Agreement through Closing, Ventures will not create,
incur, assume, guarantee or otherwise become liable or obligated with respect to
any indebtedness for borrowed money, nor make any loan or advance to, or any
investment in, any person or entity, nor create any lien, security interest,
mortgage, right or other encumbrance in any of the Assets, without Merger
Subsidiary's prior written approval. At Closing, the Assets will be free and
clear of all mortgages, security interests, liens, leases, covenants,
assessments, easements, options, rights of first refusal, restrictions,
reservations, defects in title, encroachments or other encumbrances, except for
Permitted Encumbrances, and Shareholders will
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deliver to Merger Subsidiary such pay-off letters, releases, U.C.C. termination
statements and other documents as Merger Subsidiary may reasonably request to
evidence the same.
8.8 COMPLIANCE WITH LAWS AND REGULATORY CONSENTS. From the date hereof
through Closing, (a) Ventures will comply with all applicable statutes, laws,
ordinances and regulations, where the failure to comply would likely have a
material adverse effect upon Ventures, (b) Ventures will keep, hold and maintain
all material Licenses necessary for the Business and operation of the Assets,
(c) the Shareholders and Ventures will use their reasonable efforts to obtain
all consents, approvals, exemptions and authorizations of third parties, whether
governmental or private, necessary to consummate the transactions contemplated
by this Agreement, and (d) the Shareholders and Ventures and Merger Subsidiary
will make and cause to be made all filings and give and cause to be given all
notices which may be necessary on their parts, respectively, under all
applicable laws and under their respective contracts, agreements and commitments
in order to consummate the transactions contemplated under this Agreement.
8.9 MAINTAIN INSURANCE COVERAGE. From the date hereof through Closing,
Shareholders will cause Ventures to maintain in full force and effect the
existing insurance on the Assets and the operations of the Business and will
provide at Closing written evidence satisfactory to Merger Subsidiary that such
insurance continues to be in effect, that all premiums due have been paid, and
that Merger Subsidiary has been named additional insured since the Effective
Date. Shareholders will cancel Ventures' worker's compensation policy effective
as of the date of Closing, and Merger Subsidiary will obtain worker's
compensation for Ventures beginning as of the Closing.
ARTICLE IX.
VENTURES' AND SHAREHOLDERS' CONDITIONS TO CLOSE
The obligations of Ventures and Shareholders under this Agreement are
subject to the satisfaction on or prior to Closing, of the following conditions
(which may be waived in writing by Ventures or Shareholders, in whole or in
part):
9.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING; COMPLIANCE WITH
AGREEMENT. The representations and warranties of Merger Subsidiary and Parent
contained in this Agreement and in any certificate or document delivered
pursuant hereto will be deemed to have been made again at the Closing and will
then be true in all material respects. Merger Subsidiary and Parent will have
performed and complied with all covenants, agreements and conditions required by
this Agreement to be performed or complied with by it prior to or at Closing.
9.2 NO ACTION/PROCEEDING. No action or proceeding before a court or any
other governmental agency or body will have been instituted or threatened to
restrain or prohibit the transactions hereunder contemplated, and no
governmental agency or body or other entity will have taken any other action or
made any request of Ventures, any of the Shareholders or Merger Subsidiary as a
result of which Ventures or the Shareholders reasonably and in good faith deem
that to proceed with the transactions hereunder may constitute a violation of
law.
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9.3 ORDER PROHIBITING TRANSACTION. No order will have been entered in
any action or proceeding before any court or governmental agency, and no
preliminary or permanent injunction by any court will have been issued which
would have the effect of (a) making the transactions contemplated under this
Agreement illegal, or (b) otherwise preventing consummation of such
transactions. There will have been no United States federal or state statute,
rule or regulations enacted or promulgated after the date of this Agreement that
would reasonably, directly or indirectly, result in any of the consequences
referred to in this Section 9.3.
9.4 OPINION OF PARENT'S COUNSEL. The Shareholders shall have received
an opinion dated as of the Closing from counsel for the Parent in form and
substance satisfactory to the Shareholders and their counsel covering those
matters described in Section 12.4 as Shareholders may reasonably request.
ARTICLE X.
PARENT'S AND MERGER SUBSIDIARY'S CONDITIONS TO CLOSE
The obligations of Parent and Merger Subsidiary under this Agreement
are subject to the satisfaction, on or prior to Closing, of the following
conditions (which may be waived in writing by Parent and/or Merger Subsidiary,
as applicable, in whole or in part):
10.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING; COMPLIANCE WITH
AGREEMENT. The representations and warranties of each of Shareholders and
Ventures contained in this Agreement (including the Exhibits hereto) and in any
certificate or document delivered pursuant hereto will be deemed to have been
made again at the Closing and will then be true in all material respects.
Ventures and each of the Shareholders will have performed and complied with all
covenants, agreements and conditions required by this Agreement to be performed
or complied with by them prior to or at Closing.
10.2 NO ACTION/PROCEEDING. No action or proceeding before a court or
any other governmental agency or body will have been instituted or threatened to
restrain or prohibit the transactions hereunder contemplated, and no
governmental agency or body or other entity will have taken any other action or
made any request of Ventures, any of the Shareholders or Merger Subsidiary as a
result of which Merger Subsidiary reasonably and in good faith deems that to
proceed with the transactions hereunder may constitute a violation of law.
10.3 DUE DILIGENCE; INSPECTION OF ASSETS; U.C.C. SEARCHES, ETC. Merger
Subsidiary and its representatives will have had and continue to have reasonable
rights of inspection of the Business in connection with Merger Subsidiary's due
diligence review as provided herein. Merger Subsidiary shall have received all
U.C.C. financing statement, local and central, and federal and state pending
litigation, tax lien and judgment searches, with respect to Ventures, including
all "DBA's," tradenames and fictitious names of Ventures, with the results
disclosing no material liens except Permitted Encumbrances and those that are
released as of the Closing.
10.4 ABSENCE OF ADVERSE CHANGE. The Merger Subsidiary shall have
verified the absence of the material adverse change in the Business and Assets
of Ventures, and Ventures shall not have
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entered into any significant contracts or transactions prior to Closing without
the prior written approval of the Merger Subsidiary.
10.5 ORDER PROHIBITING TRANSACTION. No order will have been entered in
any action or proceeding before any court or governmental agency, and no
preliminary or permanent injunction by any court will have been issued which
would have the effect of (a) making the transactions contemplated under this
Agreement illegal, or (b) otherwise preventing consummation of such
transactions. There will have been no federal or state statute, rule or
regulations enacted or promulgated after the date of this Agreement that would
reasonably result, directly or indirectly, in any of the consequences referred
to in this Section 10.5.
10.6 NONCOMPETITION AGREEMENTS. Each of the Shareholders will have
entered into a noncompetition agreement in the form attached hereto as Exhibit
10.6 in which each such Shareholder shall agree not to compete with the Merger
Subsidiary for a period of five (5) years from the date of Closing.
10.7 LICENSES AND PERMITS. The Merger Subsidiary shall have obtained
all necessary health care or other licenses, permits and approvals, if any,
necessary for the continued operation of the Business of Ventures as operated
prior to Closing or shall have otherwise procured assurances acceptable to the
Merger Subsidiary that such licenses and permits will be issued in due course
following Closing.
10.8 CONSENTS. Prior to Closing, Shareholders shall have obtained the
consents required to consummate the Merger and the other transactions
contemplated herein and involving the agreements listed on Exhibit 6.11(1);
provided, however, that the Parent and the Merger Subsidiary shall waive any
consent required for the transfer of Ventures' agreements with Bridgewater
Center in Ft. Walton, Florida.
10.9 OPINION OF VENTURES' COUNSEL. Parent and Merger Subsidiary shall
have received a favorable opinion, dated as of the Closing, of counsel for
Ventures, in form and substance satisfactory to Parent and its counsel, to the
effect that:
(1) All proceedings, other than the filing and recording of
this Agreement (or a Certificate of Merger) in the States of Florida and
Tennessee, necessary to effectuate the merger of Ventures into Merger Subsidiary
have been duly taken by Ventures in accordance with law, and, upon such filing
and recording of this Agreement (or the Certificate of Merger), Ventures will be
duly merged with and into Merger Subsidiary;
(2) The shares of Common Stock of Ventures outstanding
immediately prior to the Closing of the Merger are validly authorized and issued
and duly paid and non-assessable; and
(3) Neither the execution and delivery of this Agreement, nor
performance hereunder, will conflict with, or result in a breach of the terms,
conditions, or provisions of, or constitute a default under, Ventures'
Certificate of Incorporation or Bylaws or any agreement, instrument, judgment,
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decree, regulation or other restriction known to such counsel to which Ventures
is a party or by which it is bound.
ARTICLE XI.
OBLIGATIONS OF VENTURES AND SHAREHOLDERS AT CLOSING
At Closing, Ventures and the Shareholders will deliver or cause to be
delivered to Merger Subsidiary the following in form and substance reasonably
satisfactory to Merger Subsidiary:
11.1 DOCUMENTS EFFECTING CLOSING. The Shareholders will execute,
acknowledge, deliver and cause to be executed, acknowledged and delivered to
Merger Subsidiary resignations of each member of the Board of Directors and each
officer of Ventures effective as of the Closing together with any and all other
documents, certificates or other instruments necessary or desirable to effect
Closing.
11.2 POSSESSION. Ventures will deliver to Merger Subsidiary full
possession and control Business and Assets.
11.3 OPINION OF COUNSEL. The Shareholders will cause to be delivered to
Merger Subsidiary an opinion of counsel, dated as of Closing, in the form
described in Section 10.9 hereof.
11.4 CORPORATE GOOD STANDING AND CORPORATE RESOLUTION. Shareholders
will deliver to Merger Subsidiary certificates of good standing from the
Secretary of State of Florida, and from each jurisdiction in which Ventures is
qualified to do business, certified copies of the Bylaws and Charter of
Ventures, and a certified copy of the resolutions of the Board of Directors and
Shareholders of Ventures authorizing the execution, delivery and consummation of
this Agreement and the execution, delivery and consummation of all other
agreements and documents executed in connection herewith by them, sufficient in
form and content to meet the requirements of the law of the State of Florida
relevant to such transactions and certified by officers of Ventures to be
validly adopted and in full force and effect and unamended as of Closing.
11.5 CLOSING CERTIFICATE. Ventures will deliver to Merger Subsidiary a
certificate of an officer of Ventures and of the Shareholders, dated as of
Closing, certifying that (a) each covenant and obligation of Ventures and the
Shareholders has been complied with and (b) each representation and warranty of
Ventures and the Shareholders is true and correct in all material respects at
the Closing as if made on and as of the Closing.
11.6 THIRD PARTY CONSENTS. The Shareholders will deliver to Merger
Subsidiary by Closing all consents, including those listed on Exhibit 6.11(1),
as provided in Section 10.8, estoppels, approvals, releases, pay-off letters,
U.C.C. termination statements and other filings, and authorizations of third
parties that are required for the legal and proper execution, delivery and
consummation of this Agreement, and the transactions contemplated hereunder,
including but not limited to releases of all mortgages, security interests,
liens, pledges, restrictions or other encumbrances on or applicable to the Stock
or Assets.
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11.7 NONCOMPETITION AGREEMENTS. The Shareholders will deliver to Merger
Subsidiary each of the agreements described in Section 10.6.
11.8 PRELIMINARY CLOSING STATEMENT. The Shareholders and Ventures will,
along with Merger Subsidiary, execute a Preliminary Closing Statement setting
forth the Merger Consideration and various adjustments thereto.
11.9 ADDITIONALLY REQUESTED DOCUMENTS; POST-CLOSING ASSISTANCE. At the
reasonable request of Merger Subsidiary at Closing, and at any time or from time
to time thereafter, Shareholders will (a) cooperate with Merger Subsidiary to
put Merger Subsidiary in actual possession and operating control of the Business
and Assets, (b) execute and deliver such further instruments of sale,
conveyance, transfer and assignment effectively to sell, convey, transfer and
assign the same to Merger Subsidiary, and (c) execute and deliver such further
instruments and to cooperate with Merger Subsidiary as Merger Subsidiary may
reasonably request or to enable Merger Subsidiary and Ventures to obtain all
necessary regulatory certifications, approvals, consents and licenses,
accreditation or permits.
ARTICLE XII.
OBLIGATIONS OF MERGER SUBSIDIARY AT CLOSING
At Closing, the Merger Subsidiary will deliver or cause to be delivered
to Shareholders the following in a form and substance reasonably satisfactory to
Shareholders:
12.1 MERGER CONSIDERATION. The Merger Subsidiary will deliver to
Shareholders the Merger Consideration upon the terms specified in this
Agreement.
12.2 CORPORATE GOOD STANDING AND CERTIFIED BOARD RESOLUTIONS. The
Merger Subsidiary will deliver to Shareholders a certificate of existence from
the Secretary of State of Tennessee, dated the most recent practical date prior
to Closing, together with a certified copy of the resolutions of the Board of
Directors of each of the Merger Subsidiary and Parent authorizing the execution,
delivery and consummation of this Agreement and the consummation of the
transactions contemplated hereunder.
12.3 CLOSING CERTIFICATE. The Merger Subsidiary and Parent will deliver
to Shareholders a certificate of officers of each of the Merger Subsidiary and
Parent, dated as of Closing, certifying that (a) each covenant and obligation of
Merger Subsidiary and Parent has been complied with, and (b) each representation
and warranty of Merger Subsidiary and Parent is true and correct at the Closing
as if made on and as of the Closing.
12.4 OPINION OF MERGER SUBSIDIARY'S COUNSEL. The Merger Subsidiary will
deliver to Shareholders an opinion of Harwell Howard Hyne Gabbert & Manner, P.C.
dated the date of the Closing to the effect that:
(1) All proceedings, other than the filing and recording of
the Agreement (or an appropriate Certificate of Merger) in the States of
Tennessee and Florida necessary to effectuate the Merger of Ventures into the
Merger Subsidiary have been duly taken by Parent and Merger Subsidiary
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in accordance with applicable law and upon such filing and recording of said
Agreement, Ventures will be duly merged with and into Merger Subsidiary;
(2) The shares of Parent Common Stock that are to be issued
and delivered to the stockholders of Ventures upon consummation of the Merger
are validly authorized and, when so issued, will be validly issued, fully paid
and non-assessable; and
(3) Neither the execution and delivery of this Agreement nor
performance hereunder will conflict with or result in a breach of the terms,
conditions or provisions of or constitute a default under Articles of
Incorporation or Bylaws of either the Parent or the Merger Subsidiary or any
judgment, decree, regulation or similar restriction of which such counsel has
knowledge and to which Parent or Merger Subsidiary is a party or by which either
is bound.
ARTICLE XIII.
TERMINATION
13.1 CIRCUMSTANCES OF TERMINATION. This Agreement may be terminated as
follows:
(1) By the mutual consent in writing of the boards of
directors of Ventures and Parent.
(2) By the board of directors of Ventures if any condition
provided in Article IX hereof has not been satisfied of waived on or before the
Effective Date.
(3) By the board of directors of Parent if any condition
provided in Article X hereof has not been satisfied or waived on or before the
Effective Date.
(4) By the board of directors of either Ventures or Parent if
the Effective Date has not occurred by January 31, 1998.
13.2 EFFECT OF TERMINATION. In the event of a termination of this
Agreement pursuant to Section 13.1 hereof, each party shall pay the costs and
expenses incurred by it in connection with this Agreement and no party (or any
of its officers, directors and shareholders) shall be liable to any other party
for any costs, expenses, damage, or loss of anticipated profits hereunder.
ARTICLE XIV.
SURVIVAL OF PROVISIONS AND INDEMNIFICATION
14.1 SURVIVAL. The representations and warranties of Merger Subsidiary,
Parent, Ventures and each of the Shareholders contained in this Agreement, or in
any certificate or document delivered pursuant to this Agreement, will survive
the date of Closing for a period of thirty-six (36) months. The obligations of
Shareholders, on the one hand, or Merger Subsidiary and Parent, on the other
hand, under this Article XIV will not begin until the indemnified party incurs
one or more claims that equal,
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in the aggregate, Fifty Thousand and No/100 Dollars ($50,000.00) (the "Basket")
in which case the indemnified party shall be indemnified for all such claims.
The parties acknowledge and agree that any information discovered by Merger
Subsidiary or Parent that is not otherwise disclosed herein or in writing by
Ventures or the Shareholders will provide no limitation on obligations of an
indemnifying party. All claims sought by any party hereunder shall be net of any
insurance proceeds received by such party with respect to such claim. In no
event shall the aggregate liability of each Shareholder exceed one-half (1/2)
the lesser of Purchase Price received by such Shareholder or the fair market
value of the Parent Common Stock received by him in the Merger valued at the
average closing price of such stock on the National Association of Securities
Dealers' Automated Quotation System National Market System for the twenty (20)
trading days immediately preceding the date of satisfaction of a particular
claim for indemnification.
14.2 INDEMNIFICATION BY SHAREHOLDERS. Subject to the provisions of
Section 14.1, Shareholders will, jointly and severally, promptly indemnify,
defend, and hold harmless Merger Subsidiary and its directors, officers,
stockholders, employees and agents against any and all losses, costs, and
expenses (including reasonable cost of investigation, court costs and legal fees
actually incurred) and other damages resulting from (i) any breach by Ventures
or the Shareholders of any of the covenants, obligations, representations or
warranties of this Agreement or any certificate or document of Ventures and/or
Shareholders delivered pursuant to this Agreement, and (ii) any claim (whether
or not disclosed herein) that is brought or asserted by any third party(ies)
against Merger Subsidiary or Ventures arising out of the ownership, licensing,
operation or conduct of the Business or Assets or related to the Ventures Stock
or the conduct of any of Ventures' employees, agents or independent contractors,
relating to all periods of time prior to the Closing, except to the extent
disclosed in the Final Closing Statement.
14.3 INDEMNIFICATION BY MERGER SUBSIDIARY AND PARENT. Subject to the
provisions of Section 14.3, Merger Subsidiary and Parent will promptly
indemnify, defend, and hold Shareholders harmless against any and all losses,
costs, and expenses (including reasonable cost of investigation, court costs and
legal fees) and other damages resulting from (i) any breach by Merger Subsidiary
and Parent of any of its covenants, obligations, representations or warranties
contained in this Agreement or any certificate or document of Merger Subsidiary
delivered pursuant to this Agreement and (ii) any claim that is brought or
asserted by any third party(ies) against Shareholders arising out of the
ownership, licensing, operation or conduct of the Business or the conduct of
Ventures' employees, agents or independent contractors, relating to periods of
time subsequent to the Closing.
14.4 RULES REGARDING INDEMNIFICATION. The obligations and liabilities
of each party that may be subject to indemnification liability hereunder (such
claims the "Indemnified Claims") (such party the "Indemnifying Party") to the
other party (the "Indemnified Party") will be subject to the following terms and
conditions:
(1) Claims by Non-Parties. The Indemnified Party will give
written notice to the Indemnifying Party, within such time as not to prejudice
unduly the Indemnifying Party's ability to defend against the underlying claim,
of any written claim by a third party which is likely to give rise to a claim by
the Indemnified Party against the Indemnifying Party based on the indemnity
agreements contained in this Article XIV, stating the nature of said claim and
the amount thereof, to the extent
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known. The Indemnified Party will give notice to the Indemnifying Party that
pursuant to the indemnity, the Indemnified Party is asserting against the
Indemnifying Party a claim with respect to a potential loss from the third party
claim, and such notice will constitute the assertion of a claim for indemnity by
the Indemnified Party. If, within thirty (30) days after receiving such notice,
the Indemnifying Party advises the Indemnified Party that it will provide
indemnification and assume the defense at its expense, then so long as such
defense is being conducted, the Indemnified Party will not settle or admit
liability with respect to the claim and will afford to the Indemnifying Party
and defending counsel reasonable assistance in defending against the claim. If
the Indemnifying Party assumes the defense, counsel will be selected by such
party and if the Indemnified Party then retains its own counsel, it will do so
at its own expense. If the Indemnified Party does not receive a written
objection to the notice from the Indemnifying Party within ten (10) days after
the Indemnifying Party's receipt of such notice, the claim for indemnity will be
conclusively presumed to have been assented to and approved, and in such case
the Indemnified Party may control the defense of the matter or case and, at its
sole discretion, settle or admit liability. If within the aforesaid ten (10) day
period the Indemnified Party will have received written objection to a claim
(which written objection will briefly describe the basis of the objection to the
claim or the amount thereof, all in good faith), then for a period of sixty (60)
days after receipt of such objection the parties will attempt to settle the
dispute as between the indemnified and indemnifying parties. If they are unable
to settle the dispute, the unresolved issue or issues will be settled by
arbitration in a location mutually acceptable to each party, in accordance with
the rules and procedures of the American Arbitration Association; and
(2) Claims by a Party. The determination of a claim asserted
by a party hereunder (other than as set forth in subparagraph 14.4(1) above)
pursuant to this Article XIV will be made as follows: The Indemnified Party will
give written notice to the Indemnifying Party, within such time as not to
prejudice unduly the Indemnifying Party's ability to defend against the
underlying claim, of any claim by the Indemnified Party which has not been made
pursuant to subparagraph (1) above, stating the nature and basis of such claim
and the amount thereof, to the extent known. The claim will be deemed to have
resulted in a determination in favor of the Indemnified Party and to have
resulted in a liability of the Indemnifying Party in an amount equal to the
amount of such claim estimated pursuant to this paragraph if within thirty (30)
days after the Indemnifying Party's receipt of the claim the Indemnified Party
will not have received written objection to the claim. In such event, the claim
will be conclusively presumed to have been assented to and approved. If within
the aforesaid thirty (30) day period the Indemnified Party will have received
written objection to a claim (which written objection will briefly describe the
basis of the objection to the claim or the amount thereof, all in good faith),
then for a period of sixty (60) days after receipt of such objection the parties
will attempt to settle the disputed claim as between the indemnified and
indemnifying parties. If they are unable to settle the disputed claim, the
unresolved issue or issues will be settled by arbitration in a location mutually
acceptable to each party, in accordance with the rules and procedures of the
American Arbitration Association.
14.5 EXCLUSIVITY. Each of the parties to this Agreement acknowledges
and agrees that its sole and exclusive remedy subsequent to Closing with respect
to any and all claims for all losses, costs, and expenses covered by the
indemnification provisions in Sections 14.2 and 14.3, as the case may be, shall
be pursuant to the indemnification provisions set forth in this Article XIV.
Each of the parties also to this Agreement also acknowledges and agrees that
Parent may satisfy any claim against Shareholders
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by resort to shares of Parent Common Stock held in that certain Post Closing
Escrow establish pursuant to Section 2.4; provided, however, that Parent shall
be free to pursue its indemnification rights against Shareholders to the extent
the escrow is exhausted. Subject to Section 14.1, in furtherance of the
foregoing, each of the Shareholders, Ventures, the Merger Subsidiary and Parent
hereby waive, to the fullest extent permitted under applicable law, any and all
rights, claims and causes of actions it or any of its respective subsidiaries or
its affiliates may have against the other party or such other party's
subsidiaries or its affiliates, as the case may be, arising under or based upon
any federal, state or local statute, law, ordinance, rule, regulation or common
law or at equity but only to the extent they relate to the matters described in
the immediately proceeding sentence.
ARTICLE XV.
MISCELLANEOUS
15.1 ASSIGNMENT. Following Closing, Merger Subsidiary may assign any or
all of its respective rights or delegate any or all of its respective
obligations under this Agreement with the express written consent of
Shareholders, which consent shall not be unreasonably withheld. No Shareholder
or Ventures may assign any rights or delegate any obligations under this
Agreement without the prior written consent of Merger Subsidiary, and any
prohibited assignment or delegation will be null and void. Subject to the
foregoing, this Agreement will be binding upon and inure to the exclusive
benefit of the parties hereto and their respective heirs, legal representatives,
successors and assigns. This Agreement is not intended to nor will it, create
any rights in any other party.
15.2 OTHER EXPENSES. Except as otherwise provided in this Agreement,
Shareholders will jointly and severally pay all of their and Ventures' expenses
in connection with the negotiation, execution, and implementation of the
transactions contemplated under this Agreement and Merger Subsidiary will pay
all of its expenses in connection with the negotiation, execution, and
implementation of the transactions contemplated under this Agreement. All sales
and use taxes, recording fees and transfer fees and taxes incurred in connection
under the transactions contemplated within this Agreement will be jointly and
severally borne by Shareholders and paid at Closing.
15.3 NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement will be in
writing and will be deemed to have been duly given: (a) if delivered personally
or sent by facsimile, on the date received, (b) if delivered by overnight
courier, on the day after mailing, and (c) if mailed, five days after mailing
with postage prepaid. Any such notice will be sent as follows:
To Shareholders and, prior to Closing, Ventures:
c/o Ventures Healthcare of Gainesville, Inc.
227 Harrison Avenue
Panama City, Florida 32401
Phone: (850) 784-3900
Fax: (850) 784-3902
29
<PAGE> 37
with a copy to:
David Waterman, Esq.
Shumaker, Loop & Kendrick, LLP
North Courthouse Square
1000 Jackson Street
Toledo, Ohio 43624
Phone: (419) 241-9000
Fax: (419) 241-6894
To Merger Subsidiary, Parent and, after Closing, to Ventures:
H. Neil Campbell
Children's Comprehensive Services, Inc.
3401 West End Avenue
Suite 500
Nashville, TN 37203
Phone: (615) 383-0376
Fax: (615) 269-7525
with a copy to:
Glen Allen Civitts, Esq.
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238-1800
Phone: (615) 256-0500
Fax: (615) 251-1059
15.4 CONFIDENTIALITY. Except for press releases issued by Merger
Subsidiary or Parent in the ordinary course following the execution of this
Agreement, the content of which press releases shall be agreed upon by Parent
and Shareholders, all parties agree to maintain the confidentiality of the
existence of this Agreement and the transactions contemplated hereunder, unless
disclosure is required by law.
15.5 PARTIAL INVALIDITY; WAIVER. The invalidity or unenforceability of
any particular provision of this Agreement will not affect the other provisions
hereof, and this Agreement will be construed in all respects as if such invalid
or unenforceable provisions were omitted. Further, there will be automatically
substituted for such invalid or unenforceable provision a provision as similar
as possible which is valid and enforceable. Neither the failure nor any delay on
the part of any party hereto in exercising any rights, power or remedy hereunder
will operate as a waiver thereof, or of any other right, power or remedy; nor
will any single or partial exercise of any right, power or remedy preclude any
further or other exercise thereof, or the exercise of any other right, power or
remedy. No waiver of any of the provisions of this Agreement will be valid,
unless it is in writing and signed by the party against which it is sought to be
enforced.
30
<PAGE> 38
15.6 INTERPRETATION. All pronouns and any variation thereof will be
deemed to refer to the masculine, feminine, neuter, singular or plural as the
identity of the person or entity, or the context, may require. Further, it is
acknowledged by the parties that this Agreement has undergone several drafts
with the negotiated suggestions of both; and, therefore, no presumptions will
arise favoring either party by virtue of the authorship of any of its provisions
or the changes made through revisions. Any table of contents and paragraph
headings in this Agreement are for convenience of reference only and will not be
considered or referred to in resolving questions of interpretation.
15.7 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement, including the
Exhibits and any other attachments hereto, constitutes the entire agreement
between the parties hereto with regard to the matters contained herein and it is
understood and agreed that all previous undertakings, negotiations, letter of
intent and agreements between the parties are merged herein. This Agreement may
not be modified orally, but only by an agreement in writing signed by Merger
Subsidiary, Ventures and the Shareholders. This Agreement may be executed
simultaneously in two or more counterparts each of which will be deemed an
original and all of which together will constitute but one and the same
instrument.
15.8 FURTHER ASSURANCE OF SHAREHOLDERS AFTER CLOSING. Subsequent to the
Closing, Shareholders will, from time to time, at Merger Subsidiary's reasonable
request, execute and deliver such other instruments of conveyance and transfer,
and take such other action as Merger Subsidiary may reasonably request, in order
to sell, transfer, assign and deliver and vest in Merger Subsidiary the benefits
of, title to and possession of the Stock and Assets.
15.9 LEGAL FEES AND COSTS. In the event any party hereto incurs legal
expenses to enforce or interpret any provision of this Agreement, the prevailing
party will be entitled to recover such legal expenses, including, without
limitation, attorney's fees, costs and disbursements, in addition to any other
relief to which such party will be entitled.
15.10 CONTROLLING LAW. This Agreement will be construed, interpreted
and enforced in accordance with the substantive laws of the State of Tennessee,
without giving effect to its conflicts of laws provisions.
15.11 PARENT GUARANTEE. Parent agrees that it is executing this
Agreement to guarantee the obligation of Merger Subsidiary to pay the Merger
Consideration on the terms and conditions provided herein and to guarantee the
indemnification obligations of the Merger Subsidiary as set forth in Section
14.3 of this Agreement. Parent waives any right to require Shareholders to
proceed against Merger Subsidiary or pursue any other right or remedy available
to the Shareholders. Parent consents and agrees that the Shareholders, without
prejudice to any claim they may have against Parent, may extend or change any of
the obligations hereby guaranteed and settle or compromise any obligation hereby
guaranteed. Parent hereby waives all suretyship or other similar defenses.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
31
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
"VENTURES":
VENTURES HEALTHCARE OF
GAINESVILLE, INC.
By: William A. Parsons
---------------------------------------
Title: President
------------------------------------
"SHAREHOLDERS":
/s/ William A. Parsons, Jr.
-------------------------------------------
William A. Parsons, Jr., Ph.D.
/s/ S. Dale McNeese
-------------------------------------------
S. Dale McNeese
/s/ John W. Darrah
-------------------------------------------
John W. Darrah
"MERGER SUBSIDIARY":
CHILDREN'S COMPREHENSIVE SERVICES OF
GAINESVILLE, INC.
By: /s/ H. Neil Campbell
---------------------------------------
Title: President
------------------------------------
"PARENT":
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By: /s/ H. Neil Campbell
---------------------------------------
Title: Executive Vice President
------------------------------------
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
CHILDREN'S COMPREHENSIVE SERVICES MANAGEMENT COMPANY
AND
CHAD YOUTH ENHANCEMENT CENTER, INC.
AND
CLG MANAGEMENT COMPANY, LLC
FEBRUARY 12, 1998
<PAGE> 2
Table of Contents
<TABLE>
<S> <C> <C>
ARTICLE I.
MERGER OF CONSTITUENT CORPORATIONS............................................................2
1.1 Effect of the Merger.................................................................2
1.2 Assets of CHAD at Closing; Properties Acquired in the Merger.........................2
1.3 Further Assurances...................................................................4
1.4 Additional Parent Company Obligations................................................4
1.5 Additional Governing Provisions......................................................4
ARTICLE II.
CONVERSION AND EXCHANGE OF SHARES.............................................................5
2.1 Conversion of Shares.................................................................5
2.2 Shares Owned by CHAD.................................................................5
2.3 Fractional Shares....................................................................5
2.4 Exchange of Shares...................................................................5
ARTICLE III.
MERGER CONSIDERATION..........................................................................6
3.1 Merger Consideration.................................................................6
3.2 Closing Statements...................................................................7
ARTICLE IV.
CERTIFICATE OF INCORPORATION; OFFICERS AND
DIRECTORS FOLLOWING MERGER....................................................................8
ARTICLE V.
EFFECTIVE DATE OF MERGER; FILING OF MERGER DOCUMENTS..........................................8
5.1 Effective Date.......................................................................8
5.2 Filing of Certificate of Merger......................................................8
ARTICLE VI.
ASSET ACQUISITION OF REAL ESTATE ASSETS OF CLG................................................9
6.1 Real Estate Assets of CLG; Sale of Real Estate Assets to Merger Sub..................9
6.2 Retention of Irrevocable, Permanent Easement Rights..................................9
6.3 Consideration for Real Estate Assets and Easements...................................9
6.4 Conveyance of Real Estate Assets: Status of Title....................................9
6.5 Excluded Items......................................................................10
6.6 Restrictive Covenants...............................................................10
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE VII.
REPRESENTATIONS AND WARRANTIES OF SELLERS AND CLG............................................10
7.1 Organization, Qualification and Authority...........................................10
7.2 Capitalization and Stock Ownership; Membership Interest in CLG......................11
7.3 Investments.........................................................................12
7.4 Absence of Default..................................................................12
7.5 Financial Statements................................................................12
7.6 Operations since September 30, 1997.................................................13
7.7 Litigation..........................................................................14
7.8 Licenses............................................................................14
7.9 Medicare and Medicaid Matters.......................................................15
7.10 Title to and Condition of CHAD Assets...............................................15
7.11 Contracts...........................................................................16
7.12 Environmental Matters...............................................................17
7.13 CHAD Employees. ...................................................................19
7.14 Employee Benefit Plans..............................................................19
7.15 Insurance...........................................................................20
7.16 Conflicts of Interest...............................................................20
7.17 Compliance with Laws................................................................20
7.18 WARN................................................................................21
7.19 Tax Returns; Taxes..................................................................21
7.20 Accredited Investor.................................................................21
7.21 Purchase for Investment; Restrictions on Transfer...................................21
7.22 Solvency............................................................................22
ARTICLE VIII.
REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND PARENT......................................22
8.1 Organization, Qualification and Authority...........................................22
8.2 Absence of Default..................................................................23
8.3 SEC Reports.........................................................................23
8.4 Shares to be Issued.................................................................23
8.5 WARN................................................................................23
8.6 Solvency............................................................................23
8.7 Nature of Merger Transaction; Control of Merger Sub; Consideration for Merger.......24
ARTICLE IX.
COVENANTS OF PARTIES.........................................................................24
9.1 Certificate of Incorporation and Bylaws of CHAD; Capitalization.....................24
9.2 Approval by Shareholder.............................................................24
9.3 Approval by Members.................................................................24
9.4 Preservation of Business and CHAD Assets............................................24
</TABLE>
iii
<PAGE> 4
<TABLE>
<S> <C> <C>
9.5 Books and Records...................................................................25
9.6 Preserve Accuracy of Representations and Warranties.................................25
9.7 Broker's or Finder's Fee............................................................26
9.8 Indebtedness; Liens.................................................................26
9.9 Compliance with Laws and Regulatory Consents........................................26
9.10 Maintain Insurance Coverage.........................................................26
ARTICLE X.
CHAD'S AND SELLERS' CONDITIONS TO CLOSE......................................................27
10.1 Representations and Warranties True at Closing; Compliance with Agreement...........27
10.2 No Action/Proceeding................................................................27
10.3 Order Prohibiting Transaction.......................................................27
10.4 Employment Agreement................................................................27
10.5 Other Matters, Etc..................................................................27
ARTICLE XI.
CCSI COMPANIES' CONDITIONS TO CLOSE..........................................................28
11.1 Representations and Warranties True at Closing; Compliance with Agreement...........28
11.2 No Action/Proceeding................................................................28
11.3 Order Prohibiting Transaction.......................................................28
11.4 Other Matters, Etc..................................................................28
11.5 Due Diligence; Inspection of CHAD Assets; U.C.C. Searches, Etc......................28
11.6 Noncompetition Agreements...........................................................29
11.7 Licenses and Permits................................................................29
11.8 Consents............................................................................29
11.9 Opinion of CHAD's Counsel; Opinion of CLG's Counsel.................................29
ARTICLE XII.
OBLIGATIONS OF CHAD, CLG AND SHAREHOLDER AT CLOSING..........................................30
12.1 Documents Effecting Closing.........................................................30
12.2 Opinion of Counsel..................................................................30
12.3 Corporate Good Standing and Corporate Resolution....................................30
12.4 Closing Certificate.................................................................30
12.5 Third Party Consents................................................................30
12.6 Evidence of Repayment of the Peoples Bank Debt......................................30
12.7 CHAD Closing Statement..............................................................30
12.8 CLG Closing Statement...............................................................31
12.9 Additionally Requested Documents; Post-Closing Assistance...........................31
ARTICLE XIII.
OBLIGATIONS OF MERGER SUB AT CLOSING.........................................................31
</TABLE>
iv
<PAGE> 5
<TABLE>
<S> <C> <C>
13.1 Merger Consideration................................................................31
13.2 Real Estate Assets Consideration....................................................31
13.3 Corporate Good Standing and Certified Board Resolutions.............................31
13.4 Closing Certificate.................................................................31
13.5 Opinion of Merger Sub's Counsel.....................................................31
13.6 CHAD Closing Statement..............................................................32
13.7 CLG Closing Statement...............................................................32
ARTICLE XIV.
TERMINATION..................................................................................32
14.1 Circumstances of Termination........................................................32
14.2 Effect of Termination...............................................................33
ARTICLE XV.
SURVIVAL OF PROVISIONS, INDEMNIFICATION, AND DISPUTE RESOLUTION..............................33
15.1 Survival............................................................................33
15.2 Indemnification by Shareholder......................................................33
15.3 Indemnification by Merger Sub and Parent............................................33
15.4 Rules Regarding Indemnification.....................................................34
15.5 Exclusivity.........................................................................35
15.6 Mandatory Binding Arbitration.......................................................35
ARTICLE XVI.
MISCELLANEOUS................................................................................37
16.1 Assignment..........................................................................37
16.2 Other Expenses......................................................................37
16.3 Notices.............................................................................37
16.4 Confidentiality: Prohibition on Trading.............................................39
16.5 Confidential Information............................................................39
16.6 Partial Invalidity; Waiver..........................................................39
16.7 Interpretation; Knowledge...........................................................40
16.8 Limitation of Actions...............................................................40
16.9 Legal Fees and Costs................................................................40
16.10 Controlling Law.....................................................................40
16.11 Representatives.....................................................................40
16.12 Parent Guarantee....................................................................40
16.13 Entire Agreement; Counterparts......................................................40
</TABLE>
v
<PAGE> 6
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER ("Agreement") is entered into on
February 12, 1998 by and among CHAD YOUTH ENHANCEMENT CENTER, INC., a Tennessee
corporation ("CHAD"), CLG MANAGEMENT, LLC, a Tennessee limited liability company
("CLG"), ROBERT DUWAYNE GLASNER, Psy.D. ("Shareholder"), BECKYE LYNN GLASNER
("Member") (the Shareholder and the Member are referred to herein collectively
as the "Sellers" or the "Members"), CHILDREN'S COMPREHENSIVE SERVICES MANAGEMENT
COMPANY, a Tennessee corporation ("Merger Sub") (the Merger Subsidiary and CHAD
sometimes collectively herein referred to as the "Constituent Corporations"),
and CHILDREN'S COMPREHENSIVE SERVICES, INC., a Tennessee corporation ("Parent").
RECITALS:
WHEREAS, CHAD owns and operates a residential treatment center (the
"Facility") providing behavioral health care services to children and
adolescents (the "Business"); and
WHEREAS, the land, buildings and improvements comprising the Facility
and containing approximately twenty (20) acres (herein the "Real Estate Assets")
are owned by CLG and leased to CHAD; and
WHEREAS, Shareholder owns all of the issued and outstanding capital
stock of CHAD (the "CHAD Stock") and the Shareholder and the Member are the sole
members of CLG; and
WHEREAS, the Shareholder desires to transfer the CHAD Stock and Parent
desires to acquire the same from the Shareholder in a stock-for-stock
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"), subject to the terms and conditions set forth in this
Agreement; and
WHEREAS, Parent through the Merger Sub also desires to acquire and CLG
desires to sell the Real Estate Assets to the Merger Sub, subject to the terms
and conditions set forth in this Agreement; and
WHEREAS, Parent desires to guarantee performance by the Merger Sub
under this Agreement of all of the representations, warranties, covenants,
conditions and agreements to be performed and observed by each of them.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual agreements and covenants contained in this Agreement and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound hereby, agree (a) that
CHAD shall be merged (herein the "Merger") into the Merger Sub,
<PAGE> 7
and (b) Merger Sub shall acquire the Real Estate Assets contemporaneously with
the Merger, all in accordance with the terms of this Agreement.
ARTICLE I.
MERGER OF CONSTITUENT CORPORATIONS
1.1 EFFECT OF THE MERGER. On the Effective Date of the Merger (as such
date is defined in Section 5.1), CHAD shall be merged into Merger Sub, the
separate legal existence of CHAD shall cease, and Merger Sub, as the surviving
corporation, shall continue its corporate existence under the laws of the State
of Tennessee under the name of CHAD Youth Enhancement Center, Inc. (or such
other name as Parent may subsequently elect). Subsequent to the Merger, the
Merger Sub shall possess all the rights, privileges, powers, and franchises of a
public as well as of a private nature and be subject to all the restrictions,
disabilities, and duties of CHAD. All rights, privileges, powers, and franchises
of CHAD and all property, real, personal, and mixed, belonging to CHAD shall be
vested in Merger Sub and all property, rights, privileges, powers, and
franchises and every other interest shall be thereafter as effectually the
property of Merger Sub as they were of CHAD. The title to real estate, if any,
vested by deed or otherwise in CHAD, shall not revert or be in any way impaired
by reason of this Merger, provided that all rights of creditors and all liens
upon any property of CHAD shall be preserved unimpaired and all debts,
liabilities, and duties of CHAD shall thenceforth attach to the Merger Sub and
may be enforced against the Merger Sub to the same extent as if said debts,
liabilities, and duties had been incurred or contracted by the Merger Sub.
1.2 ASSETS OF CHAD AT CLOSING; PROPERTIES ACQUIRED IN THE MERGER. At
the closing of the Merger (the "Closing"), CHAD will own or lease, as
applicable, all assets, tangible and intangible, real and personal, that are
currently used to operate the Business (the "CHAD Assets"), free and clear of
all encumbrances, mortgages, pledges, liens, and security interests, other than
Permitted Encumbrances as herein defined. "Permitted Encumbrances" are defined
as (a) mechanic's, materialmen's and similar liens with respect to any amounts
not yet due and payable which are being contested in good faith through
appropriate proceedings, (b) liens for taxes not yet due and payable or for
taxes which are being contested in good faith through appropriate proceedings,
(c) liens securing rental payments under capital lease agreements, if any, (d)
the Easement described in Section 6.2, (e) to the extent constituting a lien or
claim on assets, current liabilities of CHAD as reflected on the Balance Sheet
(as defined herein) that is contained in Exhibit 7.5(1) ("Current Liabilities")
and (f) encumbrances and restrictions on any real property owned or leased by
CHAD (including easements, covenants, rights of way and similar restrictions of
record) which are reflected in the Title Commitment (as defined herein) and
approved by the Parent in accordance with the provisions of this Agreement and
which do not materially interfere with the present uses of such real property.
The CHAD Assets will include, without limitation, the following:
(1) All right, title and interest of CHAD as lessee in and to all of
the real property leased by CHAD from CLG and used in connection with the
Business, if any, including, without
2
<PAGE> 8
limitation, the real property listed and described on Exhibit 1.2(1) attached
hereto, and in and to all structures, improvements, fixed assets and fixtures
including fixed machinery and fixed equipment leased by CHAD and situated
thereon or forming a part thereof and all appurtenances, easements and
rights-of-way related thereto (collectively, the "Leased Real Estate");
(2) All equipment, machinery (including the copier leased by CHAD),
data processing hardware and software, furniture, furnishings, appliances,
vehicles (including the pick-up truck or van owned by CHAD) and other tangible
personal property and all replacement parts therefor used in connection with the
Business including, without limitation, the equipment listed on Exhibit 1.2(2)
attached hereto (collectively, the "Equipment and Furnishings");
(3) All inventory of goods and supplies used or maintained in
connection with the Business reflected on the Financial Statements
(collectively, the "Inventory");
(4) All accounts and notes receivables (the "Receivables") of CHAD;
(5) Subject to the provisions of Section 3.1 relative to payment of
CHAD's obligations to the Peoples Bank, Dickson, Tennessee ("Peoples Bank") all
cash, including funds on hand, bank accounts including, without limitation,
those accounts listed by name and address of banking institution, account name
and account and routing numbers on Exhibit 1.2(5) attached hereto, money market
accounts, other accounts, certificates of deposit and other investments of CHAD
(the "Cash and Cash Equivalents"), and all prepaid expenses, all prepaid taxes,
any and all tax attributes (as the term "tax attributes" is defined in Section
381 of the Code) and CHAD Assets as of Closing, including without limitation,
and all net operating loss carry forwards (if any, to the extent permitted by
Section 382 of the Code); [provided, that, all actual cash on hand at Closing
shall be deemed included in any computation of net working capital for the
purposes of this Agreement and all financial statements prepared in connection
herewith or referred to herein];
(6) All personnel, corporate and other records related to the Business,
including both hard and microfiche copies, and all manuals, books and records
used in operating the Business, including, without limitation, personnel
policies and files and manuals, accounting records, and computer software;
(7) To the full extent not legally required to be reissued or
transferred as a consequence of the Merger, all federal, state and local
licenses, permits, registrations, certificates, consents, accreditations,
approvals and franchises, if any, held by CHAD in connection with the Business
as currently conducted (collectively, the "Licenses");
(8) All goodwill, and, to the extent assignable by CHAD, all warranties
express or implied and rights and claims related to the CHAD Assets or the
operation of the Business;
(9) Contract rights and interests held by CHAD arising out of or
related to the Business, including but not limited to those certain consultation
service agreements, management service agreements and other similar contracts
identified on Exhibit 1.2(9) hereto;
3
<PAGE> 9
(10) All intangible or intellectual property owned, leased, licensed or
possessed by CHAD or the Shareholder and utilized in connection with the
Business, including without limitation, the name "CHAD Youth Enhancement Center,
Inc." and all variations and derivations thereof, to the extent CHAD or the
Shareholder has rights in or to each such name; and
(11) All of CHAD's right, title and interest in any partnerships, joint
ventures or similar arrangements (if any, but only to the extent transferable as
of right by CHAD).
1.3 FURTHER ASSURANCES. From time to time as and when requested in
writing by the Merger Sub or any other Parent Company Affiliate (as defined
herein), and at the expense of the requesting party, the officers, the directors
and the Shareholder of CHAD last in office shall execute and deliver such deeds
and other instruments and shall take or cause to be taken such other actions as
shall be necessary to vest or perfect in or to confirm of record or otherwise
the Merger Sub's title to, and possession of, all the property, interests,
assets, rights, privileges, immunities, powers, franchises, and authority of
CHAD described in Section 1.2, and otherwise necessary to carry out the purposes
of this Agreement.
1.4 ADDITIONAL PARENT COMPANY OBLIGATIONS. Parent Company shall do or
cause to be done all of the following:
(1) Obtain the release of Shareholder's obligations from all Contracts
(as defined herein) listed on Exhibit 1.4(1), but only to the extent such
obligations relate to or arise from periods after Closing or otherwise
constitute a current liability being assumed by Merger Sub as a consequence of
the Merger. In the event that Parent elects not to obtain the release of the
Shareholder, or is unable to obtain any one or more releases, then such
obligation shall be deemed to be covered by the indemnification obligations of
the Parent set forth in this Agreement;
(2) For at least three (3) from the Effective Date (as defined herein)
the Parent Company shall remain at all times current in its public reporting
requirements under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and maintain its registration under the Exchange Act. For at
least three (3) years from the Effective Date, the Parent Company also shall
continuously, without interruption, maintain its listing on the New York Stock
Exchange, the American Stock Exchange, or the National Association of Securities
Dealers, Inc. Automated Quotation System or other recognized securities exchange
(collectively, the "Stock Exchanges") reasonably acceptable to Shareholder.
(3) Provide to the person(s) receiving the Parent Company Shares as the
Merger Consideration the incidental ("piggy-back") registration rights specified
in Exhibit 1.4(3) and shall perform the obligations therein specified; and
(4) As to the copier and van acquired pursuant to Section 1.2(2), the
Merger Sub shall assume the related obligations, whether classified as a
long-term or short-term liability.
1.5 ADDITIONAL GOVERNING PROVISIONS. It is understood by the parties
hereto that the Real Estate Assets and the CHAD Assets are presently encumbered
by liens that secure certain
4
<PAGE> 10
obligations owed to Peoples Bank. The existence of such liens shall not
constitute violations of this Agreement so long as the Sellers arrange, prior to
or contemporaneously with the Closing hereof for the repayment in full of such
obligations to Peoples Bank and such liens are actually released by Peoples
Bank. The other terms of this Agreement shall be read in connection with this
Section 1.5.
ARTICLE II.
CONVERSION AND EXCHANGE OF SHARES
2.1 CONVERSION OF SHARES. The manner of converting or exchanging the
shares of each of the Constituent Corporations shall be as follows:
(1) The Merger shall effect no change in any of the shares of the
Merger Sub stock, and none of its shares shall be converted as a result of the
Merger.
(2) Each share of CHAD Stock issued and outstanding on the Effective
Date of the Merger (except shares of CHAD Stock issued and held in the treasury
of CHAD) shall, by virtue of the Merger and on the Effective Date of the Merger,
be converted into and become, without action on the part of the holder thereof,
shares of fully paid and nonassessable Parent Common Stock (as defined herein)
in an amount sufficient to comprise the Merger Consideration as set forth in
Article III below.
2.2 SHARES OWNED BY CHAD. Each share of CHAD Stock issued and held in
the treasury of CHAD (if any) shall be canceled and retired, and no shares of
stock or other securities of Parent shall be issuable, and no cash shall be
exchangeable, with respect thereto.
2.3 FRACTIONAL SHARES. No fractional shares of Parent Common Stock
shall be issued pursuant to Section 2.1(2), but in lieu thereof, cash shall be
paid to the holder thereof in an amount based on the closing price of Parent
Common Stock on the NASDAQ Stock Market's NASDAQ National Market on the
Effective Date of the Merger or, if such shares were not traded on such date,
based on the closing price thereof on the next preceding day on which such
shares were traded. Such amounts shall be paid within ten (10) days after the
Closing. No interest shall be payable thereon.
2.4 EXCHANGE OF SHARES. On and after the Effective Date of the Merger,
the Shareholder shall be entitled to receive in exchange for his shares of CHAD
Stock a certificate or certificates representing the number of shares of Parent
Common Stock (as defined herein) to which he is entitled as provided in Section
2.1(2), and any cash to which he maybe entitled on account of fractional shares
as provided in Section 2.3. The Shareholder may elect to have the shares of
Parent Common Stock issued to the Sellers as joint tenants with a right of
survivorship. Until so presented and surrendered in exchange for a certificate
representing Parent Common Stock, each certificate which represented issued and
outstanding shares of CHAD Stock on the Effective Date of the Merger shall be
deemed for all purposes to evidence ownership of the
5
<PAGE> 11
number of shares of Parent Common Stock into which such shares of CHAD Stock
have been converted pursuant to the Merger. Until surrender of such certificates
in exchange for certificates representing Parent Common Stock, the holder
thereof shall not be entitled to vote at any meeting of Parent stockholders or
to receive any dividend or other distribution payable to holders of shares of
Parent Common Stock; provided, however, that upon surrender of such certificates
representing CHAD Stock in exchange for certificates representing Parent Common
Stock, there shall be paid to the record holder of the certificate representing
Parent Common Stock issued upon such surrender the amount of dividends or other
distributions (without interest) that theretofore became payable with respect to
the number of shares of Parent Common Stock represented by the certificate
issued upon such surrender. Each of the parties obligated to deliver shares of
stock under this Agreement shall deliver such certificates, duly executed and/or
endorsed, as the case may be, at the Closing.
ARTICLE III.
MERGER CONSIDERATION
3.1 MERGER CONSIDERATION.
(1) The merger consideration ("Merger Consideration") shall be Fifty
Eight Thousand (58,000) shares of the common voting stock, $0.01 par value, of
the Parent (the "Parent Common Stock"), subject to adjustment as set forth in
this Article III. The Merger Consideration will be subject to adjustment as
follows:
(a) subject to the provisions of this Section 3.1 relative to
repaying Peoples Bank, the Merger Consideration shall be increased or decreased,
as appropriate, for any change in net working capital of CHAD between the amount
shown on the Balance Sheet of CHAD as of September 30, 1997 and the amount of
net working capital shown on the Balance Sheet of CHAD as of January 31, 1998;
(b) the Merger Consideration shall be increased or decreased,
as appropriate, to account for additions or deletions of property, plant,
equipment or other non-current assets, if any, purchased or sold between
September 30, 1997 and January 31, 1998, subject, however, to the prior written
consent of the Merger Sub for material (individually or in the aggregate)
transactions, which consent will not be unreasonably withheld;
(c) the Merger Consideration shall also be increased or
decreased, as appropriate, to account for any other Adjustments which are not
otherwise included in net working capital at Closing as of January 31, 1998; and
(d) the Merger Consideration shall be adjusted as necessary to
take into account the effects of any stock splits or stock dividends, or
comparable actions by either Parent or CHAD, prior to Closing. For purposes of
the preceding sentence, the term "Adjustment" shall mean financial statement
entries relative to salaries and wages, related payroll taxes, sick leave,
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holiday, vacation benefits, retirement and any other fringe benefits that will
have accrued or should be accrued to CHAD's employees through January 31, 1998.
In making the various adjustments called for in Section 3.1(1), the
parties acknowledge and agree that it is their mutual intention to make the
transaction have the same economic effect as if the Closing had actually
occurred on January 31, 1998 even though the Merger will not be legally
effective until the Effective Time (as herein defined). The parties agree that
the same kinds of Adjustments made to the January 31, 1998 financial statements
shall also be made to the September 30, 1997 financial statements.
Notwithstanding the provisions of Subsection 3.1(1)(a) above, CHAD is
specifically authorized to repay the existing term loan liability owed to
Peoples Bank as to which CHAD is an obligor in an amount not to exceed Three
Hundred Twenty Thousand and No/100 Dollars ($320,000.00) without causing a
reduction in the number of shares payable to the Shareholder as Merger
Consideration.
(2) The Parent Common Stock will constitute restricted securities the
resale of which shall be subject to the requirements of Rule 144 or any similar
exemption under federal or state securities laws in effect from time to time.
All aspects of the proposed transaction shall be subject to applicable state and
federal securities laws. Parent acknowledges and agrees that the Sellers are not
now and will not become, as a result of the transactions contemplated by this
Agreement, "affiliates," "controlling persons," or "principal shareholders" of
Parent within the meaning of the Securities Act of 1933, as amended, the
Exchange Act, or any applicable provision of the Tennessee Securities Act, as
amended.
3.2 CLOSING STATEMENTS. The adjustments to the Merger Consideration
specified in Section 3.1(1) shall be estimated by the parties hereto in good
faith at the Closing to the extent reasonably possible based on the most current
interim financial statements; and provisional adjustments as shall be mutually
agreed at Closing shall be reflected in one certain "Preliminary Closing
Statement". Attached as Exhibit 3.2(1) is the format of the Preliminary Closing
Statement. No later than sixty-five (65) days after the Closing, the parties
hereto shall prepare the "Final Closing Statement" reflecting the items listed
above prepared consistent with the past preparation of the internal financial
statements of CHAD on an accrual basis applied consistently with prior periods.
Adjustments made after the Closing based on the Final Closing Statement shall be
payable in cash by the Parent or, if to be paid by the Shareholder, in the
discretion of the Shareholder, in cash or by a combination of cash and shares of
Parent Common Stock received as Merger Consideration, on or before the tenth day
following the day the Final Closing Statement is agreed upon by the parties. If
Merger Sub and the Sellers are unable to agree on the Final Closing Statement
within sixty-five (65) days after delivery of the Final Closing Statement, they
shall appoint a firm of independent certified public accountants upon which the
parties mutually and in good faith agree (the "Accountants") to make such
determination, which determination, shall be final and binding on the parties
hereto for the purpose of this Agreement, and Merger Sub and Shareholder shall
each pay one-half the cost of the Accountants. The format of the Final Closing
Statement is attached hereto as Exhibit 3.2(2).
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ARTICLE IV.
CERTIFICATE OF INCORPORATION; OFFICERS AND
DIRECTORS FOLLOWING MERGER
The Certificate of Incorporation of Merger Sub is hereby amended,
effective on the Effective Date of the Merger, by changing Article I thereof so
as to read in its entirety as follows:
"The name of the corporation is "CHAD Youth Enhancement Center, Inc."
On the Effective Date of the Merger, the Certificate of Incorporation
of Merger Sub, as hereby amended, shall be the Certificate of Incorporation of
the surviving corporation.
The officers and directors of the Merger Sub on the Effective Date
shall, from and after the Effective Time (as defined herein), be the initial
officers and directors of the Merger Sub after the Merger until their respective
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Certificate of
Incorporation and Bylaws of the Merger Sub.
Neither CHAD, CLG nor either of the Sellers, officers, directors or
employees thereof immediately prior to the Effective Time of the Merger shall be
responsible for accomplishing such filing(s).
ARTICLE V.
EFFECTIVE DATE OF MERGER; FILING OF MERGER DOCUMENTS
5.1 EFFECTIVE DATE. The Merger shall become effective on the filing of
this Agreement (or appropriate Certificate(s) of Merger) (such documentation
herein the "Certificate of Merger") in the manner required by applicable law
(the date of such filing being herein called the "Effective Date of the Merger"
and the time of the filing thereof with the Tennessee Secretary of State shall
be called the "Effective Time of the Merger").
5.2 FILING OF CERTIFICATE OF MERGER. Unless this Agreement shall have
been terminated prior thereto under the provisions of Article XIV hereof, the
Certificate of Merger shall be so filed and recorded as promptly as possible
after Closing which shall occur upon satisfaction of the conditions precedent to
Closing and in no event later than the end of the next business day following
Closing.
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ARTICLE VI.
ASSET ACQUISITION OF REAL ESTATE ASSETS OF CLG
6.1 REAL ESTATE ASSETS OF CLG; SALE OF REAL ESTATE ASSETS TO MERGER
SUB. Simultaneously with closing of the Merger, the Merger Sub shall also
acquire, and CLG shall sell, transfer, convey and deliver to the Merger Sub all
of CLG's right, title and interest in fee to all of the Real Estate Assets. The
Real Estate Assets include all of the approximately twenty (20) acres of real
property, other than the Retained Real Estate, as shown on the survey (the
"Survey") dated January 21, 1998 and attached hereto as Exhibit 6.1(a). The Real
Estate Assets shall include CLG's right, title and interest in fee in and to all
structures, improvements, fixed assets, fixtures (including fixed machinery and
fixed equipment) owned in fee by CLG and situated at, on, or under the Real
Estate Assets, together with all existing appurtenances, easements and
rights-of-way related thereto. CLG shall provide a title insurance commitment
(the "Title Commitment") prior to Closing, and a title insurance policy (the
"Title Policy") consistent therewith promptly after Closing from a title issuer
reasonably acceptable to Merger Sub, and all of CLG's liability to any of the
CCSI Companies for representations and warranties concerning matters of title to
the Real Estate Assets herein and in the Deed shall be deemed to be limited to
the coverage of such Title Policy. The Title Commitment and the Title Policy
shall not contain any exceptions other than the Permitted Exceptions and other
exceptions (if any) agreed upon by the Parent or the Merger Sub in their sole
discretion at or before Closing as disclosed in the Title Commitment. The Title
Commitment shall become a part of this Agreement as Exhibit 6.1(b) and the Title
Policy shall become a part of this Agreement as Exhibit 6.1(c).
6.2 RETENTION OF IRREVOCABLE, PERMANENT EASEMENT RIGHTS. The Merger Sub
shall acquire all non-public roads located contiguous to the Real Estate Assets
that are owned by CLG from CLG. The Merger Sub agrees that CLG shall retain an
irrevocable, insurable, mortgageable easement (the "Easement") in respect of
such roads, which Easement shall entitle CLG to reasonable ingress and egress to
and from the Real Estate Assets on existing roads, to perpetual use of the
existing roads to and from the Facility, and to provide current and future
utility access mutually and reasonably acceptable to both parties to the
Retained Real Estate.
6.3 CONSIDERATION FOR REAL ESTATE ASSETS AND EASEMENTS. As
consideration for the conveyance by CLG of the Real Estate Assets, the Merger
Sub shall pay to CLG at Closing the sum of One Million Two Hundred Thousand and
No/100 Dollars (US$1,200,000.00) in cash in immediately available funds (the
"Cash Consideration"). The Cash Consideration shall be subject, however, to
adjustment at Closing for 1998 real estate taxes, which shall be pro-rated
between CLG and the Merger Sub through Closing.
6.4 CONVEYANCE OF REAL ESTATE ASSETS: STATUS OF TITLE. CLG shall convey
the Real Estate Assets and retain the Easement by execution and delivery of a
Special Warranty Deed (the "Deed") in the usual and customary form appropriate
for recording with the applicable Register of Deeds for the county in which the
Real Estate Assets are located. The Deed shall convey good and marketable title
to the Real Estate Assets to the Merger Sub free and clear of all encumbrances,
mortgage pledges, liens and security interests other than Permitted Encumbrances
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as defined in Section 1.3 hereof and as set forth in Section 6.1 hereof. The
form of the Deed is attached hereto as Exhibit 6.4. The Deed shall recite that
CLG retains the Easement for the benefit of CLG, Robert DuWayne Glasner, and all
of CLG's successors in title forever.
6.5 EXCLUDED ITEMS. Notwithstanding any other provision contained in
this Agreement to the contrary, CLG shall not sell, transfer, convey or deliver
to the Merger Sub, and the Merger Sub shall not acquire any interest in the real
estate and other property rights described in the Survey (Exhibit 6.1(a)) other
than that marked as part of the approximately twenty (20) acres used for the
Facility as described on the Survey and in the Deed. CLG is retaining all such
property (the "Retained Real Estate").
6.6 RESTRICTIVE COVENANTS. At Closing, the parties shall execute mutual
restrictive covenants that shall run with the land and be binding on their
respective successors until January 31, 2018 in the form of Exhibit 6.6. CLG
agrees that it shall not, as of the Closing or at any time thereafter, permit
the Retained Real Estate to be used for any Competitive Business (as defined
herein). Parent and Merger Sub agree that they shall not, as of the Closing or
at any time thereafter, permit the Real Estate Assets to be used for any purpose
that is toxic or hazardous to the use of the Retained Real Estate for
residential, commercial, or office purposes. "Competitive Business" means any
commercial or not-for-profit enterprise involving the use of the Retained Real
Estate as a group residential facility of any type including by way of example
and not by way of limitation a treatment center for delivery of behavioral
health services or a nursing home.
ARTICLE VII.
REPRESENTATIONS AND WARRANTIES OF SELLERS AND CLG
As a material inducement to Parent and Merger Sub to enter into this
Agreement, to consummate the Merger and to acquire the Real Estate Assets, CLG
and the Shareholder each hereby jointly and severally represent and warrant to
Parent and Merger Sub, which representations and warranties will be true and
correct on the date of Closing the matters set forth in this Article VII. In
addition, Beckye Lynn Glasner, individually, acknowledges and agrees that she
has read and carefully reviewed all of the representations and warranties set
forth in this Article VII, and, to her knowledge, such representations and
warranties are true, correct and accurate.
7.1 ORGANIZATION, QUALIFICATION AND AUTHORITY. CHAD is a corporation
duly organized and validly existing under the laws of the State of Tennessee and
is in good standing and duly qualified to do business as a foreign corporation
in all states required by its Business as set forth on Exhibit 7.1, except where
the failure to be so qualified would not have a material adverse effect on the
Business or results of operations of CHAD. CHAD has full corporate power and
authority to own, lease and operate its facilities and assets as presently
owned, leased and operated, and to carry on its business as it is now being
conducted. CHAD and Sellers each have the full right, power and authority to
execute, deliver and carry out the terms of this Agreement and all documents and
agreements executed and delivered in connection with this Agreement, to
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consummate the Merger and other transactions contemplated on the part of each
such party hereby, and to take all actions necessary, in their respective
capacities, to permit or approve the actions of each of CHAD and Sellers. The
execution, delivery and consummation of this Agreement, and all other agreements
and documents executed in connection herewith by each of CHAD and Sellers, have
been duly authorized by all necessary action on the part of such parties. No
other action, consent or approval on the part of any of CHAD, Sellers or any
other person or entity is necessary to authorize due and valid execution,
delivery and consummation, of this Agreement and all other agreements and
documents executed in connection herewith. This Agreement and all other
agreements executed in connection herewith by CHAD and/or Sellers, upon due
execution and delivery thereof, will constitute the valid and binding
obligations of CHAD and/or Sellers, as the case may be, enforceable in
accordance with their respective terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally and by general principles of equity.
CLG is a limited liability company duly organized and validly
existing under the laws of the State of Tennessee and is in good standing in the
State of Tennessee. CLG conducts no operations and has no property outside the
State of Tennessee. CLG has full authority and power to own, lease and operate
its facilities and assets as presently owned, leased and operated and to carry
on its Business as it is now being conducted. CLG has the full right, power and
authority to execute, deliver and carry out the terms of this Agreement and all
documents and agreements executed and delivered in connection with this
Agreement to consummate the sale of the Real Estate Assets contemplated herein
and to take all action necessary to effectuate the consummation of the sale of
the Real Estate Assets. The execution, delivery and consummation of this
Agreement, and all other agreements and documents executed in connection
herewith by CLG and/or its Members have been, or by the date of Closing, will
have been duly authorized by all necessary action on the part of such parties.
No other action, consent or approval on the part of CLG, its Members, or any
other person is necessary to authorize due and valid execution, delivery and
consummation, of this Agreement and all other agreements and documents executed
in connection with the sale of the Real Estate Assets to the Merger Sub. This
Agreement and all other agreements executed in connection herewith by CLG and/or
its Members, upon due execution and delivery thereof, will constitute the valid
and binding obligations of CLG enforceable in accordance with their respective
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and by
general principles of equity. A copy of each of the Articles of Organization and
the Certificate of Existence of CLG are attached to the opinion of counsel to be
supplied by the Sellers pursuant to Section 11.9.
7.2 CAPITALIZATION AND STOCK OWNERSHIP; MEMBERSHIP INTEREST IN CLG.
Except for the Shareholder, no other person or entity owns or holds, has any
interest in, whether legal, equitable or beneficial, or has the right to
purchase, any capital stock or other security of CHAD. CHAD has issued and
outstanding One Thousand (1,000) shares of its par value common stock which
constitute all the issued and outstanding securities of CHAD (the "CHAD Stock").
The CHAD Stock is duly authorized, validly issued, fully paid and nonassessable,
and is owned free and clear of any liens, charges, security interests, pledges
or other encumbrances other than the lien to Peoples Bank. At Closing, CHAD will
not have any outstanding subscriptions, options,
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warrants, calls, contracts, convertible securities or other instruments,
agreements or arrangements of any nature whatsoever under which CHAD is or may
be obligated or compelled to issue any capital stock, security or interest of
any kind, or to transfer or modify any right with respect to any capital stock,
security or other interest, and, as of the Closing, no one will have any
preemptive rights, right of first refusal or similar rights with respect to the
CHAD Stock or, other than the Shareholder, any equity interest in CHAD. Neither
CHAD nor Shareholder is a party to any, and there exist no, voting trusts,
stockholder agreements, pledge agreements or other agreements relating to or
restricting the transferability of any shares of the CHAD Stock or equity
interests of CHAD.
The Members are also the sole members of CLG.
7.3 INVESTMENTS. CHAD owns no capital stock, securities, interest or
other right or any option or warrant convertible into the same, of any
corporation, partnership, limited liability company, joint venture or other
business enterprise.
7.4 ABSENCE OF DEFAULT. The execution, delivery and consummation of
this Agreement, and all other agreements and documents executed in connection
herewith by CHAD, CLG and Sellers will not constitute a violation of, or be in
conflict with, will not, with or without the giving of notice or the passage of
time, or both, result in a breach of, constitute a default under, create or
cause the acceleration of the maturity of any debt, indenture, obligation or
liability affecting CHAD, CLG, the Sellers, the Business, CHAD Assets or Real
Estate Assets or rights in the CHAD Stock, result in the creation or imposition
of any security interest, lien, charge or other encumbrance upon any of the CHAD
Stock, the CHAD Assets or the Real Estate Assets under: (a) any term or
provision of the Charter or Bylaws of CHAD or the Operating Agreement of CLG;
(b) any contract, lease, purchase order, agreement, document, instrument,
indenture, mortgage, pledge, assignment, permit, license, approval or other
commitment to which CHAD, CLG and/or any Seller is a party or by which either
CHAD, CLG, any Seller, the CHAD Stock, the CHAD Assets and/or the Real Estate
Assets are bound; (c) any judgment, decree, order, regulation or rule of any
court or regulatory authority; or (d) any law, statute, rule, regulation, order,
writ, injunction, judgment or decree of any court or governmental authority or
arbitration tribunal to which CHAD, CLG, any Seller, the CHAD Stock, the CHAD
Assets and/or the Real Estate Assets are subject.
7.5 FINANCIAL STATEMENTS.
(1) Attached hereto as Exhibit 7.5(1) are true and correct
copies of CHAD's compiled balance sheets and income statements for the year
ended September 30, 1997 (the "Fiscal Year Financial Statements"), and the
interim unaudited balance sheets and income statements of CHAD for the one (1)
month period ended October 31, 1997 (the "Interim Financial Statements," which,
with the Fiscal Year Financial Statements, will be referred to as the "Financial
Statements"). The Financial Statements are based on the books and records of
CHAD. Except as set forth in the Interim Financial Statements or on Exhibit
7.5(1), CHAD has, and as of the Closing will have, no material contingent
liabilities or obligations, except for such liabilities
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and obligations (none of which individually or in the aggregate shall be
material) which are incurred in the ordinary course of business.
(2) To the best knowledge of CHAD and the Sellers, the books
and records of CHAD are in such order and completeness so that an unqualified
audit may be performed for any period prior to Closing not already audited. The
Sellers will cooperate in all reasonable respects with the Merger Sub in
attempting to perform an audit of CHAD for any period prior to Closing not
already audited at Merger Sub's expense.
7.6 OPERATIONS SINCE SEPTEMBER 30, 1997. Except as set forth in Exhibit
7.6, since September 30, 1997 there has been no:
(1) change in the condition of CHAD, financial or otherwise,
which has, or could reasonably be expected to have, a material adverse effect on
any of the CHAD Assets, the Real Estate Assets, the Business or on the results
of the operations of CHAD as a whole;
(2) material loss, damage or destruction of or to any of the
CHAD Assets or the Real Estate Assets, whether or not covered by insurance;
(3) sale, lease, transfer or other disposition by CHAD or CLG
of, or mortgages or pledges of, or the imposition of any lien, charge or
encumbrance (other than taxes and fees imposed by the governmental authorities
none of which are delinquent) on, any portion of the CHAD Assets or the Real
Estate Assets, except inventory and equipment held for use in the ordinary
course of business and the disposal of obsolete assets in non-material amounts
in the ordinary course of business;
(4) increase in the compensation payable by CHAD, the Shareholder,
officers of directors or any increase in the compensation payable to CHAD to any
other employees, independent contractors or agents, or increase in, or
institution of, any bonus, insurance, pension, profit-sharing or other employee
benefit plan or arrangements made to, for or with the employees, independent
contractors or agents of CHAD outside the ordinary course of business. A list of
employees and their compensation as of February 10, 1998 is attached hereto as
Exhibit 7.6(4);
(5) adjustment or write-off of Receivables or reduction in
reserves for Receivables outside of the ordinary course of business, or change
in the accounting methods or practices employed by CHAD or change in adopted
depreciation or amortization policies;
(6) issuance or sale by CHAD, or contract or other commitment
entered into by CHAD or any Seller for the issuance or sale, of any shares of
capital stock or securities convertible into or exchangeable for capital stock
of CHAD;
(7) payment by CHAD of any dividend, distribution or
extraordinary or unusual disbursement or expenditure or intercompany payable
other than lease payments to CLG under the CLG Lease (as defined herein) and the
conveyance of a garage to the Shareholder as additional compensation to the
Shareholder;
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(8) merger, consolidation or similar transaction; or solicitation
therefor;
(9) security interest, guarantee or other encumbrance, other
than in the ordinary course of business, obligation or liability, in each case
whether absolute, accrued, contingent or otherwise, or whether due or to become
due, incurred or paid by CHAD to any person or entity; or the making by CHAD of
any loan or advance to, or an investment in, any person or entity other than
prepayments for goods and services actually used in the Business in non-material
amounts made in the ordinary course of business;
(10) federal, state, or local statute, rule, regulation, order
or case adopted, promulgated or decided that, to the knowledge of CHAD or the
Sellers, materially and adversely affects CHAD, the CHAD Stock, the Business,
the CHAD Assets or the Real Estate Assets;
(11) strike, work stoppage or other labor dispute adversely
affecting the Business; or
(12) termination, waiver or cancellation of any material
rights or claims of CHAD, under any contract of CHAD or otherwise.
7.7 LITIGATION. Except as disclosed in Exhibit 7.7, no person or party
including, without limitation, any governmental agency has asserted, or, to the
knowledge of CHAD or CLG or Sellers, has threatened to assert, any claim for any
action or proceeding, against CHAD or CLG (or any officer, director, employee,
agent or Shareholder of CHAD or CLG) arising out of any statute, ordinance or
regulation relating to wages, collective bargaining, discrimination in
employment or employment practices or occupational safety and health standards
(including, without limitation, the Fair Labor Standards Act, Title VII of the
Civil Rights Act of 1964, as amended, the Occupational Safety and Health Act,
the Age Discrimination in Employment Act of 1967, or the Americans With
Disabilities Act or the Family Medical Leave Act of 1993). Neither CHAD nor CLG
nor Sellers have received notice of any violation of any law, rule, regulation,
ordinance or order of any court or federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality
(including, without limitation, legislation and regulations applicable to
environmental protection, civil rights, public health and safety and
occupational health). Except as set forth in Exhibit 7.7, there are no lawsuits,
proceedings, actions, arbitrations, governmental investigations, claims,
inquiries or proceedings pending or threatened involving CHAD, CLG, the Sellers,
the CHAD Stock, any of the CHAD Assets, the Real Estate Assets or the Business
Disclosure of such matters on Exhibit 7.7 shall not limit or vitiate the
indemnity for such pre-Closing claims provided in Article XV.
7.8 LICENSES. CHAD has all Licenses necessary for CHAD to operate and
conduct the Business, and there does not exist any waivers or exemptions
relating thereto, except where the failure to hold such licenses would not have
a material adverse effect. There is no material default on the part of CHAD or
any other party under any of the Licenses. To the best knowledge of CHAD and the
Shareholder, there exists no grounds for revocation, suspension or limitation of
any of the Licenses, except to the extent the Merger may have such effect.
Copies of each of the Licenses are attached hereto and are listed on Exhibit
7.8. No notices have been received by
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CHAD or either of the Sellers with respect to any threatened, pending, or
possible revocation, termination, suspension or limitation of the Licenses.
7.9 MEDICARE AND MEDICAID MATTERS. To the extent applicable to CHAD,
CHAD has complied, and, to CHAD's best knowledge, as it might relate to CHAD or
the Business, each of the providers, if any, with which CHAD contracts (herein a
"CHAD Provider") has complied in all material respects with all laws, rules and
regulations of the Medicare, Medicaid and other governmental health care
programs, and has filed all claims, invoices, returns, cost reports and other
forms substantially in the manner prescribed. All cost reports, claims,
invoices, filings and other forms made or filed by CHAD, if applicable, and, to
CHAD's best knowledge, made or filed by each CHAD Provider with Medicare,
Medicaid or any other governmental health or welfare related entity or any third
party payor since the inception of the Business, are in all respects true,
complete, correct and accurate in all material respects. To the best of CHAD's
knowledge, no deficiency, either individually or in the aggregate, in any such
cost reports, claims, invoices and other filings, including claims for
over-payments or deficiencies or for late filings, has been asserted or
threatened by any federal or state agency or instrumentality or other provider
reimbursement entities relating to Medicare or Medicaid claims or any other
third party payor, and there is no reasonable basis known to CHAD or the Sellers
for any claims or requests for reimbursement. Neither CHAD nor, to the best of
its knowledge, any CHAD Provider has been subject to any audit relating to
fraudulent procedures or practices. To the best of CHAD's knowledge, there is no
basis for any claim or request for recoupment or reimbursement from CHAD or, to
the best of its knowledge, any CHAD Provider, of any federal or state agency or
instrumentality or other provider reimbursement entities.
7.10 TITLE TO AND CONDITION OF CHAD ASSETS.
(1) CHAD is the sole legal and beneficial owner of the personal
property included in the CHAD Assets, free and clear of all mortgages, security
interests, liens, leases, covenants, assessments, easements, options, rights of
refusal, restrictions, reservations, defects in title, encroachments, and other
encumbrances, except for Permitted Encumbrances. The CHAD Assets are all the
assets set forth on the Interim Financial Statements or currently used in the
operation of the Business. The description of the Real Estate Assets and
retained Easement contained in Exhibit 6.1(a) is based on the Survey and
includes all real property leased from CLG pursuant to the CLG lease attached
hereto as Exhibit 7.10(1) (the "CLG Lease"). Subject to the CLG Lease, CLG is in
lawful possession of the Real Estate Assets including without limitation the
buildings, structures and improvements situated thereon and appurtenances
thereto, free of all mortgages, liens, and other encumbrances and restrictions
except for Permitted Encumbrances.
(2) CHAD is in lawful possession of all the Real Estate Assets
including, without limitation, the buildings, structures and improvements
situated thereon and appurtenances thereto, in each case free and clear of all
mortgages, liens and other encumbrances or restrictions, except for Permitted
Encumbrances and the CLG Lease.
(3) The Equipment and Furnishings are all of the "Equipment"
reflected on the Interim Financial Statements, other than those items sold and
replaced in the ordinary course of business. All of the Equipment and
Furnishings in all material respects (a) operate in accordance
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with their intended use, (b) perform the functions they are used for by CHAD,
(c) are free of known structural, installation, engineering, or mechanical
defects or problems, and (d) are otherwise in good working order. Neither CHAD
nor CLG has received any written recommendation from any insurer to repair or
replace any of the material CHAD Assets or Real Estate Assets with which CHAD
has not complied to the best of its understanding of each such recommendation.
(4) All motor vehicles used in the Business, whether owned or
leased, are listed in Exhibit 1.2(2) attached hereto, are properly licensed and
are registered in accordance with applicable law. If such vehicles are leased,
the leases are in full force and effect, and CHAD has complied with all terms of
such leases in all material respects.
(5) All trademarks, service marks, trade names, patents,
inventions, processes, copyrights and applications therefor, whether registered
or at common law (collectively, the "Intellectual Property"), owned or used by
CHAD are listed and described in Exhibit 7.10(5) attached hereto. No proceedings
have been instituted or are pending that have been served on the Sellers or CHAD
or as to which any of them has actual notice or, to the knowledge of CHAD or
either of the Sellers, threatened that challenge the validity of the ownership
by CHAD of any such Intellectual Property. CHAD has licensed no one to use any
such Intellectual Property, and neither CHAD nor the Sellers has any knowledge
of the use or the infringement of any of such Intellectual Property by any other
person. CHAD owns or possesses adequate and enforceable licenses or other rights
to use all Intellectual Property now used in the conduct of the Business, except
as enforcement may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally and by general principles of
equity.
7.11 CONTRACTS.
(1) Exhibit 7.11(1) sets forth a complete and accurate list of
all material provider agreements, service agreements or other similar agreements
comprising the Business, together with all contracts, leases, subleases, options
and commitments, oral or written, and all assignments and amendments thereof,
affecting or relating to the Business, the CHAD Stock or any CHAD Asset or any
interest therein, to which CHAD, CLG and/or either of the Sellers is a party or
by which CHAD, the CHAD Assets, the Real Estate Assets or the Business is bound
or affected (collectively, the "Contracts"). Exhibit 7.11(1), as well as the
term "contracts", may exclude Contracts involving annual amounts of $5,000.00 or
less. Accurate, complete and unredacted copies of all written Contracts will be
made a part of Exhibit 7.11(1) which also includes written summaries of key
terms of all oral Contracts.
(2) Except as reflected in Exhibit 7.11(2), and except for
consents required as a result of the Merger and other transactions contemplated
herein, a list of which consents is included in Exhibit 7.11(2), none of the
Contracts has been modified, amended, assigned or transferred and each is in
full force and effect and is valid, binding and enforceable in accordance with
its respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights generally
and by general principles of equity. No event or condition has happened or
presently exists which constitutes a default or
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breach or, after notice or lapse of time or both, would constitute a default or
breach by any party under any of the Contracts. To the best knowledge of the
Sellers, there are no counterclaims or offsets under any of the Contracts.
(3) Except as therein stated, there does not exist any security
interest, lien, encumbrance or claim of others created or suffered to exist on
any interest created under any of the Contracts. No purchase commitment by CHAD
is in excess of CHAD's ordinary and/or reasonably anticipated business
requirements.
(4) Exhibit 7.11(4) lists every repair and maintenance obligation
of CHAD or CLG pursuant to the Contracts over $10,000.00 required to be
performed on or before the Closing, if any, but which will remain unperformed at
the Closing.
7.12 ENVIRONMENTAL MATTERS.
(1) Hazardous Substances. As used in this Section 7.12(1), the
term "Hazardous Substances" means any hazardous or toxic substances, materials
or wastes, including but not limited to those substances, materials, and wastes
defined in Paragraph 101 of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), listed in the
United States Department of Transportation Table (49 CFR 172.101) or by the
Environmental Protection Agency as hazardous substances pursuant to 40 CFR Part
302, or which are regulated under any other Environmental Law (as such term is
defined herein), and any of the following: hydrocarbons, petroleum and petroleum
products (except as they exist in the ordinary course of business and in
material compliance with Environmental Law, asbestos, polychlorinated biphenyls,
formaldehyde, radioactive substances (other than naturally occurring materials
in place), flammables and explosives.
(2) Compliance with Laws and Regulations. All operations or
activities on, and any use or occupancy of any property owned leased or managed
by CHAD or CLG, any Affiliates of CHAD or CLG (wherein the term "Affiliates"
will mean any person or entity controlling, controlled by or under common
control at any time with CHAD or CLG, and the term "control" will mean the
power, directly or indirectly to direct the management or policies of such
person or entity), and any agent, contractor or employee of any agent or
contractor of CHAD or CLG or their respective Affiliates ("Agents"), or to the
knowledge of either of the Sellers (including any tenant or subtenant of CHAD or
CLG) is and has been in compliance with any and all laws, regulations, orders,
codes, judicial decisions, decrees, licenses, permits and other applicable
requirements of governmental authorities with respect to Hazardous Substances,
pollution or protection of human health and safety (collectively, "Environmental
Laws"), including but not limited to the release, emission, discharge, storage
and removal of Hazardous Substances. CHAD or CLG, Affiliates and Agents have
kept the property owned, leased or managed by CHAD or CLG free of any lien
imposed pursuant to Environmental Laws. To the knowledge of CHAD, CLG and each
of the Sellers, all prior owners, operators, managers and other occupants of
such premises have complied with Environmental Law. Except for uses and storage
or presence of Hazardous Substances reasonably necessary or incidental to the
customary operation of a business
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similar to the Business, as appropriate which, if required, was stored or
present in material compliance with Environmental Law:
(a) CHAD utilizes commercially available cleaning and waxing
materials, gasoline, diesel fuel, and sewage treatment chemicals in the
operation of the Business. Other than these materials, which are transported,
stored, utilized and disposed of in the ordinary course of Business in
compliance with Environmental Law and, except as reflected in the Environmental
Reports (as defined herein), neither CHAD, CLG nor the Sellers nor any employees
or persons hired by any of the foregoing have used, generated, treated, handled,
manufactured, voluntarily transmitted or stored any Hazardous Substances on any
property owned or leased by CHAD, including the Real Estate Assets, or in
connection with the Business, nor, to the knowledge of CHAD, CLG or either of
the Sellers, has any premises owned, leased or managed by CHAD or CLG ever been
used for any of the foregoing; and
(b) Neither CHAD nor CLG nor any Affiliates or Agents have
installed on any premises owned, leased or managed by CHAD or CLG friable
asbestos or any substance containing asbestos in condition or amount deemed
hazardous by Environmental Law; and
(c) Neither CHAD nor CLG has at any time engaged in any
dumping, discharge, disposal, spillage or leakage (whether legal or illegal,
accidental or intentional) of such Hazardous Substances that would subject CHAD,
CLG, either of the Sellers or Merger Sub to clean-up obligations imposed by
governmental authorities; and
(d) To the knowledge of the Sellers, neither CHAD nor CLG nor
the prior owners of any premises owned, leased or managed by CHAD or CLG (i)
have either received or been issued a notice, demand, request for information,
citations, summons or complaint regarding an alleged failure to comply with
Environmental Law, or (ii) is subject to any existing, pending, or, to the
knowledge of CHAD, CLG or either of the Sellers, threatened investigation or
inquiry by any governmental authority for noncompliance with, or any remedial
obligations under Environmental Law, and there are no circumstances known to
CHAD, CLG or either of the Sellers which could serve as a basis therefor.
Neither CHAD nor CLG has assumed any liability of a third party for clean-up
under or noncompliance with Environmental Law; and
(e) CHAD or CLG or their respective Affiliates or Agents have
not transported or arranged for the transportation of any Hazardous Substances
to any location which is listed or, to the knowledge of CHAD, CLG or either of
the Sellers, proposed for listing under Environmental Law or is the subject of
any enforcement action, investigation or other inquiry under Environmental Law.
(3) Other Environmental Matters. CHAD has furnished or caused
to be furnished to counsel to the Merger Sub the environmental report that CLG
obtained prior to the acquisition of the Real Estate Assets, and CHAD has
cooperated with the Parent and its agents in the engineering and environmental
audit conducted by them in connection with the transaction and the acquisition
of the Real Estate Assets by the Merger Sub. The environmental report
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obtained by CHAD and the environmental report obtained by Merger Sub constitute
the "Environmental Reports."
(4) Environmental Reports. Notwithstanding anything contained
in this Section 7.12, CHAD shall not be liable to the Merger Sub or to the
Parent for any matters disclosed in the Environmental Reports.
7.13 CHAD EMPLOYEES.
(1) Exhibit 7.13(1)(a) attached hereto sets forth: (i) a
complete list of all of CHAD's employees, (ii) their respective rates of pay,
(iii) the employment dates and job titles of each such person, (iv)
categorization of each such person as a full-time or part-time employee of CHAD,
(v) the amount of accrued vacation with respect to such person, and (vi) the
amount of accrued sick pay with respect to such person. For purposes of this
paragraph, "part-time employee" means an employee who is employed for an average
of fewer than twenty (20) hours per week or who has been employed for fewer than
six (6) of the twelve (12) months preceding the date on which notice is required
pursuant to the "Worker Adjustment and Retraining Notification Act" ("WARN"), 29
U.S.C. ss.2102, et seq. Except as provided in Exhibit 7.13(1)(a), CHAD has no
employment agreements with its employees and all such employees are employed on
an "at will" basis. Exhibit 7.13(1)(b) (i) contains a list and copies of all
employee fringe benefits and personnel policies, and (ii) lists all ex-employees
of CHAD utilizing or eligible to utilize COBRA. CHAD has or prior to Closing
will have adequately accrued and included in the Financial Statements, all
salaries and wages, related payroll taxes and all sick leave, holiday, vacation
benefits, retirement and other fringe benefits that will have accrued to CHAD's
employees through the Closing Date, including related payroll taxes.
(2) CHAD is not a party to any labor contract, collective
bargaining agreement, contract, letter of understanding, or any other
arrangement, formal or informal, with any labor union or organization that
obligates CHAD to compensate employees at prevailing rates or union scale, nor
are any of its employees represented by any labor union or organization. There
is no pending or, to the knowledge of CHAD or either of the Sellers, threatened
labor dispute, work stoppage, unfair labor practice complaint, strike,
administrative or court proceeding or order between CHAD and any present or
former employee(s) of CHAD. Except as provided in Exhibit 7.13(2), there is no
pending or, to the knowledge of CHAD or either of the Sellers, threatened suit,
action, investigation or claim between CHAD and any present or former
employee(s) of CHAD, other than unemployment claims filed and/or pending from
time to time in the ordinary course of business. To the best knowledge of either
of the Sellers, there has not been any labor union organizing activity with
respect to CHAD's employees.
7.14 EMPLOYEE BENEFIT PLANS.
(1) Benefit Plans. Except for health and life insurance plans
offered in the ordinary course of Business (if and to the extent such plans may
be considered, for any purpose, to be an "employee welfare benefit plan"), CHAD
has not instituted any (a) "employee welfare benefit plan" (as defined in
Paragraph 3(1) of the Employee Retirement Income Security Act of
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1974 as amended ("ERISA")) maintained by CHAD or to which CHAD contributes or is
required to contribute, and (b) "employee pension benefit plan" (as defined in
Paragraph 3(2) of ERISA) maintained by CHAD, to which CHAD contributes or is
required to contribute, or which covers employees of such CHAD during the period
of their employment with any predecessor of CHAD, including any multi-employer
pension plan as defined under The Code, Paragraph 414(f) (such employee welfare
benefit plans and pension benefit plans being hereinafter collectively referred
to as the "Benefit Plans"). Copies of all Benefit Plans and health and life
insurance plans have previously been provided to Merger Sub.
(2) Liabilities. There are no unfunded liabilities under any
Benefit Plan.
7.15 INSURANCE. CHAD has in effect and has for at least five (5) years
or the period of its existence, whichever is less, continuously maintained
insurance coverage for all of its operations, personnel and assets, and for the
CHAD Assets and the Business. A complete and accurate list of all current
insurance policies is included in Exhibit 7.11(1). Exhibit 7.15 attached hereto
sets forth a summary of CHAD's current insurance coverage (listing type, carrier
and limits), includes a list of any pending insurance claims relating to CHAD or
the Business, and includes a recent three (3)-year claims history relating to
CHAD and the Business as prepared by the applicable insurance carrier(s). To the
best of its knowledge, CHAD is not in default or breach with respect to any
provision contained in any such insurance policies, nor has CHAD failed to give
any notice or to present any claim thereunder in due and timely fashion.
7.16 CONFLICTS OF INTEREST. Except as set forth on Exhibit 7.16, none
of the following is either a supplier of goods or services to CHAD, or directly
or indirectly controls or is a director, officer, employee or agent of any
corporation, firm, association, partnership or other business entity that is a
supplier of goods or services to CHAD: (a) either of the Sellers, (b) any
director or officer of CHAD, or (c) any entity under common control with CHAD or
controlled by or related to either of the Sellers.
7.17 COMPLIANCE WITH LAWS. Neither CHAD nor either of the Sellers has
made any kickback or bribe to any person or entity, directly or indirectly, for
referring, recommending or arranging business with, to or for CHAD. CHAD is in
material compliance (without obtaining waivers, variances or extensions) with
all federal, state and local laws, rules and regulations that relate to the
operations of the Business, except where the failure to be in compliance would
not have a material adverse effect on the Business. All tax and other returns,
reports, plans and filings of any nature required to be or otherwise filed by
CHAD or either of the Sellers with any governmental authorities have been
properly completed, except where the failure to be so completed or filed could
not have a material adverse effect on the Business, and timely filed in
compliance with all applicable requirements. Each return, report, plan and
filing contains no materially untrue or misleading statements and does not omit
anything which would cause it to be misleading or inaccurate in any material
respect. The final tax return for CHAD shall be prepared and timely filed by the
Merger Sub with such assistance from the Shareholder's and CHAD's respective
accountants as Merger Sub may require at Merger Sub's reasonable expense as to
the accountants and such taxes shall be paid by Merger Sub with any excess or
shortfall to be adjusted on the Final Closing Statement.
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7.18 WARN. Since ninety (90) days prior to Effective Date, CHAD has not
temporarily or permanently closed or shut down any single site of employment or
any facility or any operating unit, department or service within a single site
of employment, as such terms are used in WARN.
7.19 TAX RETURNS; TAXES. CHAD and each of Sellers have filed all
federal, state and local tax returns and tax reports required by such
authorities to be filed as of the time of Closing. CHAD and each of the Sellers,
as applicable, have paid or accrued for all material taxes, assessments,
governmental charges, penalties, interest and fines due as of the time of
Closing (including, without limitation, taxes on properties, income, franchises,
licenses, sales and payrolls) by any governmental authority. Additionally, the
reserves for taxes, if any, shown in the Final Closing Statement are and will be
adequate to accurately reflect all material tax liabilities accrued or owing as
of the Closing. Except as set forth on Exhibit 7.19, there is no pending tax
examination or audit of, nor any action, suit, investigation or claim asserted
or, to the knowledge of CHAD or either of the Sellers, threatened against CHAD
or either of the Sellers by any governmental authority; and neither CHAD nor
either of the Sellers has been granted any extension of the limitation period
applicable to any tax claims.
7.20 ACCREDITED INVESTOR. Shareholder hereby represents and warrants to
the Parent and Merger Sub that he is an "Accredited Investor" as such term is
defined in Rule 501(a) of Regulation D promulgated under the Securities Act of
1933. Shareholder represents that he has the requisite experience, knowledge and
sophistication necessary to evaluate and make an informed decision about the
investment being made by him in the Merger by virtue of the receipt of the
Parent Common Stock. Shareholder acknowledges he has been provided complete
access to all records of the Parent which it has requested, as well as to its
properties and executive employees as Shareholder may have requested. In
addition to the information and disclosures of the SEC Reports (as defined in
Section 8.3), the Shareholder acknowledges that he has had the opportunity to
ask questions and receive answers from executive employees of the Parent about
the Parent, its business and his investment in the Parent Common Stock.
7.21 PURCHASE FOR INVESTMENT; RESTRICTIONS ON TRANSFER. The Shareholder
acknowledges that he is acquiring the Parent Common Stock for his own account
and not with a view to or present intention of distribution thereof in violation
of the Securities Act of 1933, as amended, or any state securities or blue sky
laws. The Parent Common Stock will not be disposed of in contravention of any
such laws. The Shareholder also acknowledges that, although there exists a
public market for registered shares of the Parent Common Stock, the Parent
Common Stock being received by him as Merger Consideration has not been
registered under any securities laws and, therefore, cannot be sold and must be
held indefinitely, unless subsequently registered under applicable securities
laws or unless an exemption from such registration is available. The Shareholder
acknowledges and agrees that certificate(s) representing the Parent Common Stock
issued as Merger Consideration will contain the following legend:
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The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or any state securities
laws. The securities have been acquired without a view to distribution
and may not be offered, sold, transferred, pledged or hypothecated,
whether or not for consideration, in the absence of registration under
the Securities Act of 1933, as amended, and applicable state securities
laws or written opinion of counsel in customary form addressed to
Children's Comprehensive Services, Inc. that registration is not
required.
Notwithstanding the foregoing requirements concerning registration or
an opinion of counsel, no such registration or opinion of counsel shall be
required in the event that the Shareholder returns shares of Parent Common Stock
to Merger Sub or Parent pursuant to Section 3.2 of this Agreement.
7.22 SOLVENCY. None of CHAD, CLG or the Shareholder are insolvent nor
will any such party be rendered insolvent by the execution delivery or
performance of this Agreement.
ARTICLE VIII.
REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND PARENT
As an inducement to each of the Members, CHAD and CLG to enter into
this Agreement and to consummate the transactions contemplated hereunder, Merger
Sub and Parent each hereby represent and warrant to each of the Members, to CHAD
and to CLG, which representations and warranties will be true and correct on the
date of Closing, as follows:
8.1 ORGANIZATION, QUALIFICATION AND AUTHORITY. Merger Sub and Parent
are corporations duly organized, validly existing and in good standing under the
laws of the State of Tennessee (the "CCSI Companies"). Each of the CCSI
Companies has the full corporate power and authority to own, lease and operate
its properties and assets as presently owned, leased and operated and to carry
on its business as it is now being conducted. The CCSI Companies have the full
right, power and authority to execute, deliver and carry out the terms of this
Agreement and all documents and agreements relating to this Agreement and to
consummate the Merger and other transactions contemplated on the part of Merger
Sub and Parent hereunder. The execution, delivery and consummation of this
Agreement and all other agreements and documents executed in connection herewith
by the CCSI Companies have been duly authorized by all necessary corporate
action and shareholder action on the part of each and all of the respective CCSI
Companies. No other action on the part of any CCSI Companies or any other person
or entity is necessary to authorize the execution, delivery, consummation and/or
performance of this Agreement and all other agreements and documents executed in
connection herewith. This Agreement, and all other agreements and documents
executed in connection herewith by the CCSI Companies, upon due execution and
delivery thereof, will constitute the valid and binding obligations of the
respective CCSI Companies, enforceable in accordance with their respective
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization or similar
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laws affecting creditors' rights generally and by general principles of equity.
Copies of the Certificates of Existence of each of the CCSI Companies are
attached to the opinion of counsel to be supplied by such companies pursuant to
Section 13.5.
8.2 ABSENCE OF DEFAULT. The execution, delivery and consummation of
this Agreement and all other agreements and documents executed in connection
herewith by the CCSI Companies will not constitute a violation of, be in
conflict with, or, with or without the giving of notice or the passage of time,
or both, result in a breach of, constitute a default under (or cause the
acceleration of the maturity of) or create any debt, indenture, obligation or
liability affecting any CCSI Companies or result in the creation or imposition
of any security interest, lien, charge or other encumbrance upon any of the
assets of any thereof (except in the ordinary course of Parent's business
pursuant to the credit agreement, if any, of the Parent) under: (a) any term or
provision of the Charter or Bylaws of any of the CCSI Companies; (b) any
contract, lease, agreement, indenture, mortgage, pledge, assignment, permit,
license, approval or other commitment to which any of the CCSI Companies is a
party or by which any of them (or any of their respective properties) is bound;
(c) any judgment, decree, order, regulation or rule of any court or regulatory
authority, or (d) any law, statute, rule, regulation, order, writ, injunction,
judgment or decree of any court or governmental authority or arbitration
tribunal to which any of the CCSI Companies is subject.
8.3 SEC REPORTS. The Merger Sub has furnished to the Shareholder true
and complete copies of Parent's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997, its Quarterly Reports on form 10-Q for the fiscal quarter
ended September 30, 1997 and its proxy materials for the most recently held
annual meeting of shareholders (the "SEC Reports") as such reports were filed
with the Securities and Exchange Commission (the "SEC"). The SEC Reports, at the
time such SEC Reports were filed, did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, and since then, Parent and its
affiliates have not suffered any material adverse change in their business. The
Parent has timely filed all reports and other matters required to be filed by it
with the SEC and all Stock Exchanges. Insofar as the Parent is concerned, Rule
144 is available to its shareholders who qualify to use such safe harbor and
will be available to the Shareholder after the Merger.
8.4 SHARES TO BE ISSUED. The Shares of Parent Common Stock to be issued
and delivered pursuant to this Agreement will be duly and validly issued, fully
paid and non-assessable.
8.5 WARN. It is the present intention of the Parent to continue
employment of employees of CHAD under current arrangements, subject, however, to
the Merger Sub's rights to hire and discharge employees from time to time in the
ordinary course of business.
8.6 SOLVENCY. Neither the Parent nor the Merger Sub is insolvent nor
will either be rendered insolvent by the execution, delivery, consummation or
performance of this Agreement.
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8.7 NATURE OF MERGER TRANSACTION; CONTROL OF MERGER SUB; CONSIDERATION
FOR MERGER. Prior to the Merger, Parent will own all of the issued and
outstanding capital stock of Merger Sub and will be in control of the Merger Sub
within the meaning of Section 368(c)(1) of the Code. Following the Merger,
Merger Sub will not issue additional shares of its stock that would result in
Parent losing control of the Merger Sub within the meaning of Section 368(c)(1)
of the Code. The Merger is being consummated pursuant to the plan of
reorganization reflected in this Agreement (or a summary form of such agreement
approved by CHAD) and no Merger Sub stock is being issued as part of the Merger
Consideration.
ARTICLE IX.
COVENANTS OF PARTIES
9.1 CERTIFICATE OF INCORPORATION AND BYLAWS OF CHAD; CAPITALIZATION.
From the date of this Agreement until Closing, the Certificate of Incorporation
and Bylaws of CHAD shall not be changed. CHAD shall not change its authorized or
issued capital stock, declare or pay any dividend, or issue, encumber, purchase,
or otherwise acquire, any of its capital stock.
9.2 APPROVAL BY SHAREHOLDER. CHAD will submit this Agreement for
approval by the Shareholder with a favorable recommendation by its board of
directors and will use its best efforts to obtain requisite shareholder
approval.
9.3 APPROVAL BY MEMBERS. The Members of CLG shall take such action as
necessary under the CLG Operating Agreement to approve of this Agreement.
9.4 PRESERVATION OF BUSINESS AND CHAD ASSETS. From the date of this
Agreement until Closing, CHAD and the Shareholder will use their best efforts
and will do or cause to be done all such acts and things as may be reasonably
necessary to preserve, protect and maintain intact the operation of the Business
and CHAD Assets as a going concern consistent with prior practice and not other
than in the ordinary course of business, to preserve, protect and maintain for
Merger Sub the goodwill of the suppliers, employees, clientele and others having
business relations with CHAD or the Business. CHAD will use its reasonable
commercial efforts to retain its employees in their current positions up to
Closing. Until termination of this Agreement, neither CHAD nor the Shareholder
will sell, transfer or pledge, or negotiate the sale, transfer or pledge of,
either any of the CHAD Assets or CHAD Stock or other security of CHAD, nor merge
or consolidate with any other entity; neither CHAD nor the Shareholder will
solicit any inquiries, proposals or offers relating to any such transactions;
and such parties will promptly notify Merger Sub orally, and confirm in writing,
of all relevant details relating to inquiries, proposals or offers that any may
receive relating to any such matters. CHAD will pay no dividend, and will make
no distribution or extraordinary payment to Shareholder or any third party or
pay any intercompany payable and, other than in the ordinary course of business.
CHAD will not sell, discard or dispose of any of the CHAD Assets except in the
ordinary course of business consistent with past practice or as may be required
by law. None of the Contracts will be amended in any material respect, other
than to obtain any needed consents to the exchange of the CHAD Stock
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contemplated in the Merger between the date hereof and Closing without the prior
written consent of Merger Sub or Parent, and CHAD will not enter into any new
material contract, commitment or other transaction with respect to the Business
or the CHAD Assets without the prior written consent of Merger Sub. From the
Effective Date until Closing, CHAD will maintain and keep the CHAD Assets in a
well-maintained condition and in good order and repair in accordance with past
practices.
9.5 BOOKS AND RECORDS.
(1) From the date hereof until the Closing, CHAD will maintain its
books of account in the usual, regular and ordinary manner on a basis consistent
with prior years and will make no change in its accounting methods or practices.
(2) Until Closing, CHAD and the Shareholder will give to Merger Sub
full access to all of CHAD's offices, properties, books, contracts, commitments,
records and affairs relating to the CHAD Stock, CHAD Assets or the Business so
that Merger Sub or Parent may inspect and audit them and will furnish to Merger
Sub a copy of all documents and information concerning the properties and
affairs of CHAD, the Business, the CHAD Stock or the CHAD Assets as Merger Sub
may reasonably request. If any such books, records and materials are in the
custody of third parties, CHAD and the Shareholder will direct such third
parties to promptly provide them to Merger Sub. No costs attributable to
complying with requests or directives hereunder from any of the CCSI Companies
shall cause a reduction in the Merger Consideration.
(3) Following the Closing, Parent will permit the Shareholder, during
normal business hours, to have reasonable access to, and examine and make copies
of, all books and records of the Business that relate to transactions or events
occurring prior to the Closing. All out-of-pocket costs associated with the
copying of the requested documents will be paid by the Shareholder. No costs
attributable to complying with requests or directives hereunder from any of the
CCSI Companies shall cause a reduction in the Merger Consideration.
(4) The Shareholder will use reasonable efforts to cause CHAD's
accounting firm to consent to the inclusion of the Financial Statements in any
registration statements, private placement memoranda, and periodic reports, if
any, necessary or appropriate in order to enable Parent or any Parent Affiliates
to comply with any applicable registration or reporting requirements of federal
or state securities laws.
9.6 PRESERVE ACCURACY OF REPRESENTATIONS AND WARRANTIES. The Members,
CHAD and CLG will each refrain from knowingly taking any action which would
render any representation and warranty contained in this Agreement untrue,
inaccurate or misleading in any material respect as of Closing. Each Member,
CHAD and CLG will promptly notify Merger Sub of any lawsuit, claim, audit,
investigation, administrative action or other proceeding asserted or commenced
against CHAD or its directors, officers, or shareholder, or against CLG or its
Members, that may involve or relate in any way to CHAD, CLG, the CHAD Assets,
the Real Estate Assets, the CHAD Stock, or the operation of the Business
promptly upon receiving actual notice thereof. Each Member, CHAD and CLG will
promptly notify Merger Sub of any facts or
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circumstances that come to his, her or its actual attention and that cause, or
through the passage of time may cause, any of Shareholder's, CHAD's or CLG's
representations, warranties or covenants to be untrue or misleading in any
material respect at any time from the date hereof through Closing.
9.7 BROKER'S OR FINDER'S FEE. No party has retained, utilized, or
received the services, or is liable for the payment of any fee, to any finder,
broker, government official or similar person in connection with the
transactions contemplated under this Agreement.
9.8 INDEBTEDNESS; LIENS. Other than in the ordinary course of business,
from the date of this Agreement through Closing, neither CHAD nor CLG will
create, incur, assume, guarantee or otherwise become liable or obligated with
respect to any indebtedness for borrowed money, nor make any loan or advance to,
or any investment in, any person or entity, nor create any lien, security
interest, mortgage, right or other encumbrance in any of the CHAD Assets,
without Parent's or Merger Sub's prior written approval. At Closing, subject
only to the Peoples Bank debt and liens, which are to be paid pursuant to the
consummation of the purchase of the Real Estate Assets as described in this
Agreement, the CHAD Assets will be free and clear of all mortgages, security
interests, liens, leases, covenants, assessments, easements, options, rights of
first refusal, restrictions, reservations, defects in title, encroachments or
other encumbrances, except for Permitted Encumbrances, and Shareholder will
deliver to Merger Sub such pay-off letters, releases, U.C.C. termination
statements and other documents as Merger Sub may reasonably request to evidence
the same.
9.9 COMPLIANCE WITH LAWS AND REGULATORY CONSENTS. From the date hereof
through Closing, (a) CHAD and CLG will each comply with all applicable statutes,
laws, ordinances and regulations in all material respects, (b) CHAD will keep,
hold and maintain all Licenses necessary for the Business and operation of the
CHAD Assets, (c) upon request, the Shareholder, CHAD and CLG will use their
respective reasonable efforts (at Parent's expense) to obtain all consents,
approvals, exemptions and authorizations of third parties, whether governmental
or private, necessary to consummate the transactions contemplated by this
Agreement, and (d) the Shareholder, CHAD, CLG, and each of the CCSI Companies
will make and cause to be made all filings and give and cause to be given all
notices which may be necessary on their parts, respectively, under all
applicable laws and under their respective contracts, agreements and commitments
in order to consummate the transactions contemplated under this Agreement.
9.10 MAINTAIN INSURANCE COVERAGE. From the date hereof through Closing,
CHAD will maintain in full force and effect the existing insurance on the CHAD
Assets and the operations of the Business and will provide at Closing written
evidence reasonably satisfactory to Merger Sub that such insurance continues to
be in effect, that all premiums due have been paid.
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ARTICLE X.
CHAD'S AND SELLERS' CONDITIONS TO CLOSE
The respective obligations of CHAD, CLG and the Sellers under this
Agreement are subject to the satisfaction on or prior to Closing, of the
following conditions (which may be waived in writing by CHAD, CLG or either of
the Sellers (individually, collectively, or in any capacity whatsoever), in
whole or in part):
10.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING; COMPLIANCE WITH
AGREEMENT. The representations and warranties of the CCSI Companies contained in
this Agreement and in any certificate or document delivered pursuant hereto will
be deemed to have been made again at the Closing and will then be true in all
material respects. Each of the CCSI Companies will have performed and complied
with all covenants, agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at Closing and both the Merger
Consideration and the Cash Consideration shall have been paid.
10.2 NO ACTION/PROCEEDING. No action or proceeding before a court or
any other governmental agency or body will have been instituted or threatened to
restrain or prohibit the transactions hereunder contemplated, and no
governmental agency or body or other entity will have taken any other action or
made any request of CHAD, CLG, any of the Members or any the CCSI Companies as a
result of which CHAD, CLG or any of the Members reasonably and in good faith
deem that to proceed with the transactions hereunder may constitute a violation
of law, rule, or regulation, or any judicial, administrative or regulatory
order.
10.3 ORDER PROHIBITING TRANSACTION. No order will have been entered in
any action or proceeding before any court or governmental agency, and no
preliminary or permanent injunction by any court will have been issued which
would have the effect of (a) making the transactions contemplated under this
Agreement illegal or violative of such order, or (b) otherwise preventing
consummation of the Merger or the sale of the Real Estate Assets. There will
have been no United States federal or state statute, rule or regulations enacted
or promulgated after the date of this Agreement that would or could reasonably
be expected, directly or indirectly, result in any of the consequences referred
to in this Section 10.3.
10.4 EMPLOYMENT AGREEMENT. The Shareholder and the Parent have executed
the employment contract (the "Employment Contract") attached hereto as Exhibit
10.4 and the same has become effective (or specified to become effective as of
the Closing).
10.5 OTHER MATTERS, ETC. None of the CCSI Companies shall be in
material breach of this Agreement and all of the CCSI Companies shall have fully
performed under, and paid all of the consideration specified in, this Agreement.
CHAD, CLG, and each of the Members shall have received the opinion of counsel to
the CCSI Companies specified in Section 13.5.
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ARTICLE XI.
CCSI COMPANIES' CONDITIONS TO CLOSE
The obligations of the CCSI Companies under this Agreement are subject
to the satisfaction, on or prior to Closing, of the following conditions (which
may be waived in writing by the respective the CCSI Companies, as applicable, in
whole or in part):
11.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING; COMPLIANCE WITH
AGREEMENT. The representations and warranties of CHAD, CLG, and the Members
contained in this Agreement (including the Exhibits hereto) and in any
certificate or document delivered pursuant hereto will be deemed to have been
made again at the Closing and will then be true in all material respects. Each
of CHAD, CLG and the Members will have performed and complied with all
covenants, agreements and conditions required by this Agreement to be performed
or complied with by such person or entity prior to or at Closing.
11.2 NO ACTION/PROCEEDING. No action or proceeding before a court or
any other governmental agency or body will have been instituted or threatened to
restrain or prohibit the transactions hereunder contemplated, and no
governmental agency or body or other entity will have taken any other action or
made any request of CHAD, CLG, any of the Members or any of the CCSI Companies
as a result of which the Parent reasonably and in good faith deems that to
proceed with the transactions hereunder may constitute a violation of law, rule,
or regulation, or any judicial, administrative or regulatory order.
11.3 ORDER PROHIBITING TRANSACTION. No order will have been entered in
any action or proceeding before any court or governmental agency, and no
preliminary or permanent injunction by any court will have been issued which
would have the effect of (a) making the transactions contemplated under this
Agreement illegal or violative of such order, or (b) otherwise preventing
consummation of the Merger or the sale of the Real Estate Assets. There will
have been no United States federal or state statute, rule or regulations enacted
or promulgated after the date of this Agreement that would or could reasonably
be expected, directly or indirectly, result in any of the consequences referred
to in this Section 11.3.
11.4 OTHER MATTERS, ETC. None of CHAD, CLG, or the Members shall be in
material breach of this Agreement and all of them shall have fully performed
those parts of this Agreement specified in this Agreement for their performance
at or prior to Closing.
11.5 DUE DILIGENCE; INSPECTION OF CHAD ASSETS; U.C.C. SEARCHES, ETC.
Merger Sub and its representatives will have had and continue to have reasonable
rights of inspection of the Business in connection with Merger Sub's due
diligence review as provided herein. Merger Sub shall have received the
cooperation of CHAD, CLG, and the Members in obtaining all information that it
reasonably desired to obtain in order to effectively evaluate CHAD, the
Business, the CHAD Assets and the Real Estate Assets.
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11.6 NONCOMPETITION AGREEMENTS. The Shareholder will have executed the
Employment Contract specified in Section 10.4, which contract provides that the
Shareholder shall not compete with the Merger Sub for a period of five (5) years
from the date of Closing in the Geographic Area. As used herein, the term
"Geographic Area" means the states in which the CCSI Companies are doing
business as of the date of this Agreement which states are Montana, Michigan,
Utah, California, Texas, Florida, Louisiana, Arkansas, Alabama and Tennessee.
11.7 LICENSES AND PERMITS. The Merger Sub shall have obtained, after
reasonable efforts, all necessary health care or other licenses, permits and
approvals, if any, necessary for the continued operation of the Business of CHAD
as operated prior to Closing or shall have otherwise procured assurances
acceptable to the Merger Sub that such licenses and permits will be issued in
due course following Closing.
11.8 CONSENTS. Prior to Closing, Shareholder shall have obtained the
consents required to consummate the Merger, the sale of the Real Estate Assets
to the Merger Sub and other transactions contemplated herein and involving the
agreements listed on Exhibit 7.11(2).
11.9 OPINION OF CHAD'S COUNSEL; OPINION OF CLG'S COUNSEL. Parent and
Merger Sub shall have received a favorable opinion, dated as of the Closing, of
counsel for CHAD, the Members and for CLG, in the form of the attached Exhibit
11.9 to the effect that:
(1) This Agreement has been duly authorized, executed and delivered by
each of CHAD, CLG and each of the Members and (assuming that it is enforceable
against the CCSI Companies) constitutes the legal, valid and binding obligation
of each such party enforceable against each of them in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and by
general principles of equity;
(2) The Board of Directors of CHAD has duly and lawfully approved the
Merger;
(3) The shares of Common Stock of CHAD outstanding immediately prior to
the Closing of the Merger are validly authorized and issued and duly paid and
non-assessable; and
(4) Neither the execution and delivery of this Agreement, nor
performance hereunder, will conflict with, or result in a breach of the terms,
conditions, or provisions of, or constitute a default under, CHAD's Certificate
of Incorporation or Bylaws or any agreement, instrument, judgment, decree,
regulation or other restriction known to such counsel to which CHAD is a party
or by which it is bound.
(5) Neither the execution and delivery of this Agreement nor
performance hereunder will conflict with or result in a breach of the terms,
conditions, provisions of or constitute a default under, CLG's Articles of
Organization or Operating Agreement or any agreement, instrument, judgment,
decree, regulation or other restriction known to such counsel to which CLG is a
party or by which it is bound.
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ARTICLE XII.
OBLIGATIONS OF CHAD, CLG AND SHAREHOLDER AT CLOSING
At Closing, CHAD and the Shareholder will deliver or cause to be
delivered to Merger Sub the following in form and substance reasonably
satisfactory to Merger Sub:
12.1 DOCUMENTS EFFECTING CLOSING. CHAD, CLG and the Members will
execute, acknowledge, deliver and cause to be executed, acknowledged and
delivered to Merger Sub all documents reasonably requested by the Parent as
being necessary to effect the Merger including resignations of each member of
the Board of Directors and each officer of CHAD effective as of the Closing,
together with the other documents and instruments specified in this Agreement.
12.2 OPINION OF COUNSEL. The Shareholder will cause to be delivered to
Merger Sub an opinion of counsel, dated as of Closing, in the form specified in
Section 11.8 hereof.
12.3 CORPORATE GOOD STANDING AND CORPORATE RESOLUTION. CHAD and CLG
will, respectively, deliver all certificates of public officials (exclusive of
any approval of licensing authorities), resolutions and consents reasonably
required of them to evidence the lawful approval by them, respectively, of the
Merger and the sale of the Real Estate Assets.
12.4 CLOSING CERTIFICATE. CHAD, CLG and the Shareholder will each
deliver to Merger Sub a certificate or certificates of an officer of CHAD, of
the members of CLG the Shareholder, dated as of Closing, certifying that (a)
each covenant and obligation of CHAD, CLG and the Members have been complied
with in all material respects and (b) each representation and warranty contained
therein of CHAD, CLG and the Members, respectively, is true and correct in all
material respects at the Closing as if made on and as of the Closing.
12.5 THIRD PARTY CONSENTS. The Shareholder and CLG, as applicable, will
deliver to Merger Sub by Closing all consents, including those listed on Exhibit
7.11(2), as provided in Section 11.8, estoppels, approvals, releases, pay-off
letters (including a payoff letter from Peoples Bank in form attached hereto as
Exhibit 12.5 such that, upon payment of the amounts specified therein, Peoples
Bank shall have been fully paid and shall be required to release all of its
liens on the CHAD Assets and the Real Estate Assets and other filings and
authorizations of third parties that are required for the legal and proper
execution delivery of this Agreement and the transactions contemplated thereby.
12.6 EVIDENCE OF REPAYMENT OF THE PEOPLES BANK DEBT. CHAD and CLG shall
deliver to the Parent a payoff letter from Peoples Bank in customary form such
that, upon payment of the amounts specified therein, Peoples Bank shall have
been fully paid and shall be required to release all of its liens on the CHAD
Assets and the Real Estate Assets. A payoff letter from Peoples Bank is attached
hereto as Exhibit 12.5.
12.7 CHAD CLOSING STATEMENT. The Shareholder and CHAD will execute the
Preliminary Closing Statement in respect of the Merger specified in this
Agreement.
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12.8 CLG CLOSING STATEMENT. CLG will execute a Closing Statement in
respect of the sale by CLG, and the purchase by the Merger Sub, of the Real
Estate Assets in the form of the attached Exhibit 12.7.
12.9 ADDITIONALLY REQUESTED DOCUMENTS; POST-CLOSING ASSISTANCE. Each
party to this Agreement shall cooperate with the other party in executing such
documents and instruments, and in taking such actions at the other party's
expense, as shall be reasonably necessary to accomplish the purposes of this
Agreement as applicable to such party, all at the expense of the requesting
party.
ARTICLE XIII.
OBLIGATIONS OF MERGER SUB AT CLOSING
At Closing, the Merger Sub will deliver or cause to be delivered to the
Shareholder or CLG, as applicable, the following in a form and substance
reasonably satisfactory to the CLG and the Shareholder:
13.1 MERGER CONSIDERATION. The Merger Sub will deliver to the
Shareholder the Merger Consideration upon the terms specified in this Agreement.
13.2 REAL ESTATE ASSETS CONSIDERATION. The Merger Sub shall deliver to
CLG the Cash Consideration in payment for the Real Estate Assets.
13.3 CORPORATE GOOD STANDING AND CERTIFIED BOARD RESOLUTIONS. The CCSI
Companies will each deliver to the Sellers certificates of existence from the
Secretary of State of Tennessee, dated the most recent practical date prior to
Closing, together with a certified copy of the resolutions of each of the Board
of Directors of each of the Merger Sub and the Parent authorizing the execution,
delivery and consummation of this Agreement and the consummation of the
transactions contemplated hereunder.
13.4 CLOSING CERTIFICATE. The Merger Sub and Parent will deliver to the
Members, individually and in their capacities as Shareholder and/or Members, a
certificate of officers of each dated as of Closing, certifying that (a) each
covenant and obligation of Merger Sub and Parent has been complied with in all
material respects, and (b) each representation and warranty of Merger Sub and
Parent is true and correct in all material respects at the Closing as if made on
and as of the Closing.
13.5 OPINION OF MERGER SUB'S COUNSEL. The CCSI Companies will deliver
to Sellers a favorable opinion of Harwell Howard Hyne Gabbert & Manner, P.C., in
the form of Exhibit 13.5, dated the date of the Closing and addressed to CLG and
to the Sellers to the effect that:
(1) All proceedings, other than the filing and recording of the
Certificate(s) of Merger in the State of Tennessee necessary to effectuate the
Merger of CHAD into the Merger Sub have
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been duly taken by Parent and Merger Sub in accordance with applicable law and
upon such filing and recording of said Agreement, CHAD will be duly merged with
and into Merger Sub;
(2) The Board of Directors and of each of the respective CCSI Companies
have duly and lawfully approved the Merger and all other transactions described
in this Agreement and no approval by Parent's shareholders is required;
(3) This Agreement has been duly authorized, executed and delivered by
each of the CCSI Companies and (assuming that it is enforceable against CHAD,
CLG, and the Sellers) constitutes the legal, valid and binding obligation of
each such party enforceable against each of them in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally and by general principles
of equity;
(4) The shares of Parent Common Stock that are to be issued and
delivered to the stockholders of CHAD upon consummation of the Merger are
validly authorized and, when so issued, will be validly issued, fully paid and
non-assessable; and
(5) Neither the execution and delivery of this Agreement nor
performance hereunder will conflict with or result in a breach of the terms,
conditions or provisions of or constitute a default under Articles of
Incorporation or Bylaws, the Parent or the Merger Sub or any judgment, decree,
regulation or similar restriction of which such counsel has knowledge and to
which Parent, the Merger Sub or Merger Sub is a party or by which either is
bound.
13.6 CHAD CLOSING STATEMENT. The Parent and the Merger Sub will execute
the Preliminary Closing Statement in respect of the Merger specified in this
Agreement.
13.7 CLG CLOSING STATEMENT. The Parent and the Merger Sub will execute
a Closing Statement in respect of the sale by CLG, and the purchase by the
Merger Sub, of the Real Estate Assets in the form of the attached Exhibit 12.7.
ARTICLE XIV.
TERMINATION
14.1 CIRCUMSTANCES OF TERMINATION. This Agreement may be terminated as
follows:
(1) By the mutual consent in writing of the boards of directors of CHAD
and Parent.
(2) By the board of directors of CHAD if any condition provided in
Article X hereof has not been satisfied of waived on or before the Effective
Date.
(3) By the board of directors of Parent if any condition provided in
Article XI hereof has not been satisfied or waived on or before the Effective
Date.
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(4) By the board of directors of either CHAD or Parent if the Effective
Date has not occurred on or before February 15, 1998.
14.2 EFFECT OF TERMINATION. In the event of a termination of this
Agreement pursuant to Section 14.1 hereof, except as specified in Section 16.2
of this Agreement, each party shall pay the costs and expenses incurred by it in
connection with this Agreement and no party (or any of its officers, directors
and shareholders) shall be liable to any other party for any costs, expenses,
damage, or loss of anticipated profits hereunder.
ARTICLE XV.
SURVIVAL OF PROVISIONS, INDEMNIFICATION, AND DISPUTE RESOLUTION
15.1 SURVIVAL. The representations and warranties of Merger Sub,
Parent, CHAD, CLG, and the Shareholder contained in this Agreement, or in any
certificate or document delivered pursuant to this Agreement, will survive the
date of Closing for a period of thirty-six (36) months. The obligations of CLG
and the Sellers, on the one hand, or Merger Sub and Parent, on the other hand,
under this Article XV will not begin until the indemnified party incurs one or
more claims that equal, in the aggregate, Fifty Thousand and No/100 Dollars
($50,000.00) (the "Basket") in which case the indemnified party shall be
indemnified for all such claims. All claims sought by any party hereunder shall
be net of any insurance proceeds received by such party with respect to such
claim and each party agrees to diligently pursue any potential claims under such
policies to minimize the size of claims for which indemnification is applicable.
In no event shall the aggregate liability of Shareholder exceed the value of the
shares issued as Merger Consideration as of the Closing.
15.2 INDEMNIFICATION BY SHAREHOLDER. Subject to the provisions of
Section 11.4, the Shareholder and CLG will, jointly and severally, promptly
indemnify, defend, and hold harmless Merger Sub and the Parent and its
directors, officers, stockholders, employees and agents against any and all
losses, costs, and expenses (including reasonable cost of investigation, court
costs and legal fees actually incurred) and other damages resulting from (a) any
breach by CHAD or the Shareholder of any of the covenants, obligations,
representations or warranties or any certificate or document of CHAD and/or
Shareholder delivered pursuant to this Agreement, and (b) any claim not
disclosed herein that is brought or asserted by any third party(ies) against
Merger Sub or CHAD arising out of the ownership, licensing, operation or conduct
of the Business or CHAD Assets, the Real Estate Assets or related to the CHAD
Stock or the conduct of any of CHAD's employees, agents or independent
contractors, relating to all periods of time prior to the Closing.
15.3 INDEMNIFICATION BY MERGER SUB AND PARENT. Merger Sub and Parent
will promptly indemnify, defend, and hold CLG and the Sellers harmless against
any and all losses, costs, and expenses (including reasonable cost of
investigation, court costs and legal fees) and other damages resulting from (a)
any breach by Merger Sub and Parent of any of its covenants, obligations,
representations or warranties contained in this Agreement or any certificate or
document of Parent or Merger Sub delivered pursuant to this Agreement and (b)
any claim that
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is brought or asserted by any third party(ies) against CLG and/or any one or
more of the Sellers arising out of and/or in connection with (a) the ownership,
licensing, operation or conduct of the Business or the conduct of CHAD's
employees, agents or independent contractors, relating to periods of time
subsequent to the Closing and/or (b) as to the Sellers, CHAD, and/or CLG, the
execution, consummation or performance of this Agreement relating to periods of
time prior to the Closing to the extent that it is asserted that the
transactions described in this Agreement were unauthorized or unlawful as to any
of the CCSI Companies.
15.4 RULES REGARDING INDEMNIFICATION. The obligations and liabilities
of each party that may be subject to indemnification liability hereunder (the
"indemnifying party") to the other party (the "indemnified party") will be
subject to the following terms and conditions:
(1) Claims by Non-Parties. The indemnified party will give written
notice to the indemnifying party, within such time as not to prejudice unduly
the indemnifying party's ability to defend against the underlying claim, of any
written claim by a third party which is likely to give rise to a claim by the
indemnified party against the indemnifying party based on the indemnity
agreements contained in this Article XV, stating the nature of said claim and
the amount thereof, to the extent known. The indemnified party will give notice
to the indemnifying party that pursuant to the indemnity, the indemnified party
is asserting against the indemnifying party a claim with respect to a potential
loss from the third party claim, and such notice will constitute the assertion
of a claim for indemnity by the indemnified party. If, within thirty (30) days
after receiving such notice, the indemnifying party advises the indemnified
party that it will provide indemnification and assume the defense at its
expense, then so long as such defense is being conducted, the indemnified party
will not settle or admit liability with respect to the claim and will afford to
the indemnifying party and defending counsel reasonable assistance in defending
against the claim. If the indemnifying party assumes the defense, counsel will
be selected by such party and if the indemnified party then retains its own
counsel, it will do so at its own expense. If the indemnified party does not
receive a written objection to the notice from the indemnifying party within ten
(10) days after the indemnifying party's receipt of such notice, the claim for
indemnity will be conclusively presumed to have been assented to and approved,
and in such case the indemnified party may control the defense of the matter or
case and, at its sole discretion, settle or admit liability. If within the
aforesaid ten (10) day period the indemnified party will have received written
objection to a claim (which written objection will briefly describe the basis of
the objection to the claim or the amount thereof, all in good faith), then for a
period of sixty (60) days after receipt of such objection the parties will
attempt to settle the dispute as between the indemnified and indemnifying
parties. If they are unable to settle the dispute, the unresolved issue or
issues will be settled by arbitration in Nashville, Tennessee, in accordance
with the rules and procedures of the American Arbitration Association; and
(2) Claims by a Party. The determination of a claim asserted by a party
hereunder (other than as set forth in subsection 15.4(1) above) pursuant to this
Article XV will be made as follows. The indemnified party will give written
notice to the indemnifying party, within such time as not to prejudice unduly
the indemnifying party's ability to defend against the underlying claim, of any
claim by the indemnified party which has not been made pursuant to subsection
15.4(1) above, stating the nature and basis of such claim and the amount
thereof, to the extent
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known. The claim will be deemed to have resulted in a determination in favor of
the indemnified party and to have resulted in a liability of the indemnifying
party in an amount equal to the amount of such claim estimated pursuant to this
paragraph if within thirty (30) days after the indemnifying party's receipt of
the claim the indemnified party will not have received written objection to the
claim. In such event, the claim will be conclusively presumed to have been
assented to and approved. If within the aforesaid thirty (30) day period the
indemnified party will have received written objection to a claim (which written
objection will briefly describe the basis of the objection to the claim or the
amount thereof, all in good faith), then for a period of sixty (60) days after
receipt of such objection the parties will attempt to settle the disputed claim
as between the indemnified and indemnifying parties. If they are unable to
settle the disputed claim, the unresolved issue or issues will be settled by
arbitration in accordance with the provisions of Section 15.6 below.
15.5 EXCLUSIVITY. Each of the parties to this Agreement acknowledges
and agrees that its sole and exclusive remedy subsequent to Closing with respect
to any and all claims for all losses, costs, and expenses covered by the
indemnification provisions in Sections 15.2 and 15.3, as the case may be, shall
be pursuant to the indemnification provisions set forth in this Article XV.
Subject to Section 15.1, in furtherance of the foregoing, each of the
Shareholder, CHAD, the Merger Sub and Parent hereby waive, to the fullest extent
permitted under applicable law, any and all rights, claims and causes of actions
it or any of its respective subsidiaries or its affiliates may have against the
other party or such other party's subsidiaries or its affiliates, as the case
may be, arising under or based upon any federal, state or local statute, law,
ordinance, rule, regulation or common law or at equity but only to the extent
they relate to the matters described in the immediately proceeding sentence.
15.6 MANDATORY BINDING ARBITRATION. All claims, disputes, and demands
for indemnification shall be arbitrated and not litigated as set forth in this
part of Article XV.
(1) Exclusive Procedure. Except for actions for extraordinary relief,
which shall be permitted only to preserve the rights of the parties pending the
issuance of the arbitrator's award, and to enforce an arbitrator's decision
hereunder, all disputes, controversies, and claims arising out of the terms,
operation, or interpretation of this Agreement shall be initiated by a written
demand for resolution, documented in writing, and escalated through the
appropriate levels of management of each party, up to and including a corporate
officer responsible for this Agreement, until resolution of the issue is
achieved within the time permitted by this Section.
(2) If the dispute cannot be resolved by the parties by negotiation
within thirty (30) days from the date of the written demand for resolution, the
dispute shall be resolved by binding arbitration under the Federal Arbitration
Act, 9 U.S.C. Section 1, et seq. and, to the extent not inconsistent therewith,
under the Commercial Arbitration Rules (the "CAR") of the American Arbitration
Association ("AAA") then in effect. The proceedings shall be held in Nashville,
Tennessee under the auspices of the AAA. As a minimum set of rules in the
proceeding, the parties agree that the terms of this Section shall be deemed to
supplement and/or amend, as necessary, the CAR.
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(3) The arbitration proceeding shall be conducted by (a) a single
arbitrator if the amount(s) in dispute do not exceed Fifty Thousand and No/100
Dollars ($50,000.00) and (b) a panel of three (3) arbitrators for any dispute
above that amount. The parties shall mutually agree on the identity of all
arbitrators but, if the parties cannot agree on the arbitrator or panel of
arbitrators within fifteen (15) days after the date written demand for the
appointment of an arbitrator or panel is made, each party shall identify one
independent individual, and these individuals shall then meet to appoint the
arbitrator or panel of arbitrators. If an arbitrator or panel still cannot be
agreed upon within an additional thirty (30) days, the arbitrator or panel shall
be appointed by the AAA. If a single arbitrator serves, such arbitrator shall be
a licensed Tennessee attorney reasonably experienced in both arbitration and
mergers and acquisitions. If there is a panel of attorneys, at least one
arbitrator shall be familiar with the operations of facilities comparable to the
Facility and at least one arbitrator shall be a licensed Tennessee attorney
reasonably experienced in both arbitration and mergers and acquisitions.
(4) Hereinafter, reference to "arbitrator" shall be deemed in each case
to include references to a panel of arbitrators. The decision by a majority of
any arbitration panel shall be deemed the decision of the panel.
(5) The parties shall equally bear the costs and fees of the
arbitration proceeding.
(6) Any arbitration proceeding hereunder shall be conducted on a
confidential basis.
(7) Any question of whether a dispute should be settled by arbitration
under this Section shall also be arbitrated as provided in this Section.
(8) The arbitrator shall specify the basis of his/her decision and the
basis for any damages awarded. The decision of the arbitrator shall be
considered as a final and binding resolution of the dispute, and may be entered
as judgment in any court of competent jurisdiction in the United States. Each
party agrees to submit to the jurisdiction of any such court for purposes of the
enforcement of any such decision, award, order, or judgment.
(9) The parties shall agree upon what, if any, discovery will be made
available. If the parties cannot agree on the form of discovery within fifteen
(15) days of the written demand for the appointment of the arbitrator, there
shall be only non-abusive, clearly relevant discovery in the form of
depositions, document production, and inspections of items and things. The
arbitrator shall have the power to issue subpoenas. In no event, however, shall
any such discovery take more than one hundred twenty (120) days. The arbitrator
shall be authorized to terminate or refuse any discovery sought outside the
bounds of the foregoing sentence.
(10) The arbitrator's award shall be issued not later than one hundred
twenty (120) days from the date that the AAA notifies the other party of a
demand for arbitration.
(11) Neither party shall sue the other where the basis of the suit is a
disagreement arising directly under the express terms of this Agreement except
for (a) extraordinary relief described in
36
<PAGE> 42
this Section or (b) enforcement of any written decision or order of the
arbitrator, including any award, in the event the other party is not performing
in accordance with the arbitrator's decision.
ARTICLE XVI.
MISCELLANEOUS
16.1 ASSIGNMENT. No party may assign its rights or delegate its
responsibilities without the express written consents of the other parties,
which consents may be granted or withheld in the sole discretion of each of such
other parties. Any assignment or delegation without such consent will be null
and void. Subject to the foregoing, this Agreement will be binding upon and
inure to the exclusive benefit of the parties hereto and their respective heirs,
legal representatives, successors and assigns. This Agreement is not intended to
nor will it, create any rights in any other party.
16.2 OTHER EXPENSES. Each party will pay all of its, his, her or their
respective expenses in connection with the negotiation, execution, and
implementation of the transactions contemplated under this Agreement. Merger Sub
will pay all expenses in connection with the implementation of the Merger
contemplated under this Agreement. CHAD and Merger Sub will split equally all
expenses for the sale of the Real Estate Assets to Merger Sub, including not
limited to recording fees and expenses, conveyance taxes, survey costs, title
insurance premiums and the like. It is agreed, however, that Parent will pay the
professional fees and expenses incurred by CHAD, the Members and CLG up to
Twenty-Five Thousand and No/100 Dollars ($25,000.00) in the event that the CCSI
Companies fail or refuse to close the transactions described in this Agreement
for any reason other than a material adverse change in the balance sheet or
operations of CHAD since September 30, 1997, or the inability of CLG to convey
good title to the Real Estate Assets, or inability of CHAD to consummate the
Merger. All parties will pay their own taxes to be paid subsequent to the
Closing.
16.3 NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement will be in
writing and will be deemed to have been duly given:
(1) if delivered personally to the addressee, on the date actually
received by the addressee;
(2) if sent by facsimile, on the date actually received by the
addressee; or
(3) if sent by an overnight courier of national standing (such as
FedEx), and sent for next business day delivery to the address specified below
(and any subsequent change of address), with charges prepaid by the sender, on
the day specified by such courier as the date of delivery.
(4) if sent by certified mail, return receipt requested, on the date of
receipt as shown on the return receipt notice.
37
<PAGE> 43
To Members, CLG and, prior to Closing, CHAD:
c/o CHAD Youth Enhancement Center, Inc.
1751 Oak Plains Road
Ashland City, Tennessee 37015
Phone: (931) 362-4723
Fax: (931) 362-2816
To Sellers and CLG after the Closing:
1753 Oak Plains Road
Ashland City, Tennessee 37015
Phone: (931) 362-2461
Fax: (NONE)
with a copy of any notice to CHAD, CLG or either of the Sellers to:
Daniel W. Small, Esq.
Small & Ragan
323 Union Street, Suite 300
Post Office Box 190608
Nashville, Tennessee 37219-0608
Phone: (615) 252-6000
Fax: (615) 262-6001
To Merger Sub and Parent and, after Closing, to CHAD:
H. Neil Campbell
Children's Comprehensive Services, Inc.
3401 West End Avenue
Suite 500
Nashville, TN 37203
Phone: (615) 383-0376
Fax: (615) 269-7525
with a copy to:
Glen Allen Civitts, Esq.
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238-1800
Phone: (615) 256-0500
Fax: (615) 251-1059
38
<PAGE> 44
Any party may change her, his or its address, telephone or facsimile numbers by
sending notice of such change in accordance with this Section of such new
address or telephone or facsimile number.
16.4 CONFIDENTIALITY: PROHIBITION ON TRADING. Except for press releases
issued by Merger Sub or Parent in the ordinary course following the execution of
this Agreement, all parties agree to maintain the confidentiality of the
existence of this Agreement and the transactions contemplated hereunder, unless
(a) disclosure is required by law, (b) except to the extent that disclosure has
been made, or is made, in connection with the CCSI Companies' due diligence
efforts and the obtaining of consents or giving of notices made in connection
with this Agreement, or (c) except disclosures made as a result of transactions
contemplated in this Agreement. The Shareholder, CHAD and their respective
affiliates agree not to trade in the securities of Parent or its affiliates
based upon any material nonpublic information prior to the public announcement
of the Merger. Parent agrees that it will promptly announce the Merger and the
acquisition of the Real Estate Assets within thirty (30) days after the Merger.
16.5 CONFIDENTIAL INFORMATION. The parties acknowledge and agree that
during the course of the negotiations of this Agreement and the transactions
contemplated by this Agreement, each may make available to the other certain
confidential or secret information that is of value to the party disclosing the
information ("Confidential Information"). The parties agree (a) to maintain the
confidentiality of the Confidential Information of the other party and not to
disclose or disseminate such Confidential Information and (b) not to use the
Confidential Information or any ideas, concepts and/or techniques contained in
such Confidential Information for any purpose whatsoever other than in
evaluation of the business opportunity contemplated by the letter of intent
executed by the parties and the negotiation, execution, and consummation of this
Agreement. The party receiving Confidential Information agrees to use the same
standard of care in maintaining the confidentiality of the Confidential
Information as it uses to avoid disclosure of its most sensitive confidential
information. For purposes of this paragraph, Confidential Information shall not
include any information which was not received from the other party.
The parties also agree to return the other party's
Confidential Information or that part of any other information incorporating
such Confidential Information at the request of the party disclosing
Confidential Information to the extent that the disclosure thereof is required
by law in the event that the Merger and the purchase of the Real Estate Assets
by the Merger Sub are not consummated.
16.6 PARTIAL INVALIDITY; WAIVER. The invalidity or unenforceability of
any particular provision of this Agreement will not affect the other provisions
hereof, and (subject to the application of the following sentence) this
Agreement will be construed in all respects as if such invalid or unenforceable
provisions were omitted. Further, there will be automatically substituted for
such invalid or unenforceable provision a provision as similar as possible that
is valid and enforceable. Neither the failure nor any delay on the part of any
party hereto in exercising any rights, power or remedy hereunder will operate as
a waiver thereof, or of any other right, power or remedy; nor will any single or
partial exercise of any right, power or remedy preclude any further or other
exercise thereof, or the exercise of any other right, power or remedy. No waiver
of any of the provisions of this Agreement will be valid unless it is in writing
and signed by the party against which it is sought
39
<PAGE> 45
to be enforced. However, the last two sentences of this Section shall be subject
to the limitation provision set forth in this Agreement.
16.7 INTERPRETATION; KNOWLEDGE. All pronouns and any variation thereof
will be deemed to refer to the masculine, feminine, neuter, singular or plural
as the identity of the person or entity, or the context, may require. Further,
it is acknowledged by the parties that this Agreement has undergone several
drafts with the negotiated suggestions of both; and, therefore, no presumptions
will arise favoring either party by virtue of the authorship of any of its
provisions or the changes made through revisions. Any table of contents and
paragraph headings in this Agreement are for convenience of reference only and
will not be considered or referred to in resolving questions of interpretation.
When used in this Agreement to qualify a representation or warranty made by a
party hereto, the terms "knowledge", "best knowledge", and the like shall be
deemed to refer to an awareness on the part of such party after reasonable
inquiry about such matter.
16.8 LIMITATION OF ACTIONS. No claims shall be brought by any party for
a breach of or indemnity under this Agreement (a) more than one year after
discovery of the existence of the claim or (b) regardless of the date of
discovery, more than three years after the Effective Date.
16.9 LEGAL FEES AND COSTS. In the event any party hereto incurs legal
expenses to enforce, defend or interpret any provision of this Agreement, the
prevailing party will be entitled to recover such legal expenses, including,
without limitation, attorney's fees, costs and disbursements, in addition to any
other relief to which such party will be entitled.
16.10 CONTROLLING LAW. This Agreement will be construed, interpreted
and enforced in accordance with the substantive laws of the State of Tennessee,
without giving effect to its conflicts of laws provisions.
16.11 REPRESENTATIVES. The parties agree that the CCSI Companies may
rely on the signature and representations of Robert DuWayne Glasner (the
Shareholder) and that the Sellers, CLG and CHAD may rely on the signature and
representations of H. Neil Campbell, President of Parent.
16.12 PARENT GUARANTEE. Parent agrees that it is executing this
Agreement to guarantee the obligation of Merger Sub to pay the Merger
Consideration on the terms and conditions provided herein and to guarantee the
indemnification obligations of the Merger Sub as set forth in Section 15.3 of
this Agreement.
16.13 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement, including the
Exhibits and any other attachments hereto, constitutes the entire agreement
between the parties hereto with regard to the matters contained herein and it is
understood and agreed that all previous undertakings, negotiations, letter of
intent and agreements between the parties are merged herein. This Agreement may
not be modified orally, but only by an agreement in writing signed by Merger
Sub, CHAD and the Shareholder. This Agreement may be executed simultaneously in
two or more counterparts each of which will be deemed an original and all of
which together will constitute but one and the same instrument.
40
<PAGE> 46
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
"CHAD":
CHAD YOUTH ENHANCEMENT CENTER, INC.
By: Robert DuWayne Glasner
-----------------------------
Title: President
---------------------------
"CLG":
CLG MANAGEMENT COMPANY, LLC
By: Robert DuWayne Glasner
------------------------------
Title: Chief Manager
---------------------------
"MEMBERS" / "SELLERS":
Robert DuWayne Glasner
- --------------------------------------------
Robert DuWayne Glasner, Psy.D., Individually
Beckye Lynn Glasner
- --------------------------------------------
Beckye Lynn Glasner, Individually
41
<PAGE> 47
"MERGER SUB":
CHILDREN'S COMPREHENSIVE SERVICES
MANAGEMENT COMPANY
By: /s/ H. Neil Campbell
------------------------------
Title: President
--------------------------
"PARENT":
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By: /s/ H. Neil Campbell
--------------------------------
Title: Executive Vice President
----------------------------
42
<PAGE> 48
COMPROMISE AND SETTLEMENT AGREEMENT
This COMPROMISE AND SETTLEMENT AGREEMENT ("Agreement") is made and
entered into the 14th day of August, 1998 by and between CHILDREN'S
COMPREHENSIVE SERVICES MANAGEMENT COMPANY ("CCS") and ROBERT DUWAYNE GLASNER,
Psy.D. ("Dr. Glasner") on the following terms and conditions.
R E C I T A L S:
WHEREAS, on or about February 11, 1998 CCS and The Chad Youth
Enhancement Center, Inc. ("CHAD") entered into an Agreement and Plan of Merger;
and
WHEREAS, Dr. Glasner was the controlling interest in CHAD; and
WHEREAS, in connection with the transaction the parties understood
there would be an adjustment to the purchase price reflected on the Preliminary
Closing Statement as "PURCHASE PRICE ADJUSTMENT INCREASE (DECREASE)" (the
"Purchase Price Adjustment"); and
WHEREAS, the parties have disputed the calculation of the adjustment
amount and wish to finally settle their dispute as to the amount of the Purchase
Price Adjustment.
NOW, THEREFORE, in consideration of the promises contained herein and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties covenant and agree as follows:
1. The parties agree to compromise and settle this dispute and agree
that the amount of the PURCHASE PRICE ADJUSTMENT INCREASE will be the amount of
Forty Two Thousand Six Hundred Three and 50/100 Dollars ($42,603.50). CCS will
remit this amount to Dr. Glasner upon the execution of this Agreement.
2. Dr. Glasner for himself and any other former shareholders of CHAD
hereby releases CCS and its shareholders, directors, successors and assigns from
any and all further claims to additional funds related in any way to the
PURCHASE PRICE ADJUSTMENT INCREASE amount and accepts the settlement amount in
full satisfaction of the Purchase Price Adjustment.
3. This Agreement only compromises and settles the claim with respect
to the PURCHASE PRICE ADJUSTMENT INCREASE and does not operate to release or
compromise any other undertakings or obligations of the parties as contained in
the transaction documents.
<PAGE> 49
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
CCS:
CHILDREN'S COMPREHENSIVE SERVICES
MANAGEMENT COMPANY
By: H. Neil Campbell
---------------------------------------
Title: President
-----------------------------------
DR. GLASNER:
Robert Duwayne Glasner
-------------------------------------------
ROBERT DUWAYNE GLASNER, Psy.D.
2
<PAGE> 1
ASSET EXCHANGE AGREEMENT
BY AND BETWEEN
MEADOW PINES HOSPITAL, INC.
AND
CCS/GULF PINES, INC.
Dated: February 23, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1
DEFINITIONS..............................................................................................1
Section 1.1 Certain Defined Terms..................................................................1
Section 1.2 Index of Other Defined Terms...........................................................4
ARTICLE 2
TRANSFER OF GULF PINES HOSPITAL TO MPH...................................................................6
Section 2.1 Assets Transferred to MPH..............................................................6
Section 2.2 Assets Excluded by CCS.................................................................8
Section 2.3 Liabilities Assumed by MPH.............................................................9
Section 2.4 Liabilities Excluded from MPH.........................................................10
ARTICLE 3
TRANSFER OF MEADOW PINES HOSPITAL TO CCS................................................................11
Section 3.1 Assets Transferred to CCS.............................................................11
Section 3.2 Assets Excluded by MPH................................................................13
Section 3.3 Liabilities Assumed by CCS............................................................14
Section 3.4 Liabilities Excluded from CCS.........................................................14
ARTICLE 4
TERMS OF THE EXCHANGE...................................................................................16
Section 4.1 Transfer of MPH Assets and Assumption of Certain CCS Liabilities in
Exchange for Transfer of CCS Assets and Assumption of Certain MPH Liabilities.......16
Section 4.2 Working Capital Adjustment............................................................16
Section 4.3 Allocation of Exchange Price..........................................................18
Section 4.4 Remittances and Receivables...........................................................18
Section 4.5 Employee Matters......................................................................20
Section 4.6 Manuals...............................................................................21
Section 4.7 No Assignment If Breach; Discharge of Assumed Liabilities.............................22
Section 4.8 Closing...............................................................................22
Section 4.9 Management Agreement..................................................................23
Section 4.10 Office Space..........................................................................24
ARTICLE 5
REPRESENTATIONS AND WARRANTEES OF MPH AND CCS...........................................................24
Section 5.1 Organization and Corporate Power......................................................24
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 5.2 Authority Relative to this Agreement..................................................24
Section 5.3 Absence of Breach.....................................................................25
Section 5.4 Brokers...............................................................................25
Section 5.5 Title to Personal Property............................................................25
Section 5.6 Contracts Assumed by MPH and CCS......................................................25
Section 5.7 Compliance with Laws..................................................................26
Section 5.8 U.S. Person...........................................................................27
Section 5.9 Employee Relations....................................................................27
Section 5.10 Employee Plans........................................................................28
Section 5.11 Litigation............................................................................30
Section 5.12 Hazardous Substances..................................................................30
Section 5.13 Financial Information.................................................................31
Section 5.14 Changes Since Balance Sheet...........................................................31
Section 5.15 Taxes.................................................................................33
Section 5.16 Representations Not Affected By Due Diligence.........................................33
Section 5.17 Lists of Other Data...................................................................33
Section 5.18 Absence of Undisclosed Liability......................................................34
Section 5.19 Real Property. Schedules 2.1(a) and 3.1(a)............................................34
Section 5.21 Insurance.............................................................................36
Section 5.22 Pending Transactions..................................................................36
Section 5.23 Operations............................................................................37
ARTICLE 6
COVENANTS OF MPH AND CCS................................................................................37
Section 6.1 Efforts to Consummate Transaction.....................................................37
Section 6.2 Cooperation...........................................................................37
Section 6.3 Further Assistance....................................................................37
Section 6.4 Cooperation Respecting Proceedings....................................................37
Section 6.5 Expenses..............................................................................38
Section 6.6 Announcements; Confidentiality; Non-Solicitation......................................38
Section 6.7 Preservation of and Access to Certain Hospital Records................................39
ARTICLE 7
ADDITIONAL COVENANTS OF MPH AND CCS.....................................................................39
Section 7.1 Conduct Pending Closing...............................................................40
Section 7.2 Access and Information, Environmental Survey; Remediation or
Adjustment..........................................................................41
Section 7.3 Updating..............................................................................43
Section 7.4 Exclusivity...........................................................................43
Section 7.5 Cost Reports..........................................................................43
Section 7.6 Tax Matters...........................................................................44
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
Section 7.7 Risk of Loss..........................................................................44
Section 7.8 Post-Closing Insurance................................................................45
Section 7.9 Consents..............................................................................45
Section 7.10 Relationship with Employees, Suppliers and Patients...................................45
Section 7.11 Amendment to Certificate of Incorporation or Bylaws...................................46
Section 7.12 Other Actions.........................................................................46
Section 7.13 Non-Facility Records..................................................................46
Section 7.14 Reliance on Environmental Survey......................................................46
ARTICLE 8
CONDITIONS TO CLOSING...................................................................................46
Section 8.1 Performance of Agreement..............................................................46
Section 8.2 Accuracy of Representations and Warranties............................................46
Section 8.3 Officer's Certificate.................................................................47
Section 8.4 Consents..............................................................................47
Section 8.5 Absence of Injunctions................................................................47
Section 8.6 Title to Real Property................................................................47
Section 8.7 Environmental Survey and Engineer Survey..............................................48
Section 8.8 Receipt of Other Documents............................................................48
Section 8.9 CCS Payor Contracts...................................................................49
ARTICLE 9
TERMINATION.............................................................................................49
Section 9.1 Termination...........................................................................49
Section 9.2 Effect of Termination.................................................................50
ARTICLE 10
SURVIVAL AND REMEDIES; INDEMNIFICATION..................................................................50
Section 10.1 Survival..............................................................................50
Section 10.2 Exclusive Remedy......................................................................50
Section 10.3 Mutual Indemnity......................................................................50
Section 10.4 Further Qualifications Respecting Indemnification.....................................52
Section 10.5 Procedures Respecting Third Party Claims..............................................53
ARTICLE 11
NONCOMPETITION..........................................................................................54
Section 11.1 Noncompetition........................................................................54
Section 11.2 Remedies for Breach...................................................................54
Section 11.3 Severability and Substitution of Valid Provisions.....................................55
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C>
Section 11.4 Extension of Periods..................................................................55
ARTICLE 12
GENERAL PROVISIONS......................................................................................55
Section 12.1 Notices...............................................................................55
Section 12.2 Attorneys' Fees.......................................................................56
Section 12.3 Successors and Assigns................................................................56
Section 12.4 Counterparts..........................................................................56
Section 12.5 Captions and Paragraph Headings.......................................................56
Section 12.6 Entirety of Agreement, Amendments.....................................................56
Section 12.7 Waiver................................................................................57
Section 12.8 Governing Law.........................................................................57
Section 12.9 Severabilily..........................................................................57
</TABLE>
iv
<PAGE> 6
EXHIBITS
1 Form Bill of Sale
B. Form of Warranty Deed
C. Form of Assignment and Assumption of Liabilities Agreement
D. Management Agreement
LIST OF SCHEDULES
2.1(a) CCS Owned Real Property
2.1(e) Contracts Assumed by MPH
2.1(f) Business Names Transferred to MPH
2.1(m) CCS Intellectual Property
2.2(a) Non-Current Assets Excluded by CCS
2.2(c) CCS Non-Public Day School
2.2(d) Other Entities
2.3(a) Contracts Assumed by MPH
2.4(j) Other Liabilities Excluded from MPH
3.1(a) MPH Owned Real Property
3.1(e) Contracts Assumed by CCS
3.1(f) Business Names Transferred to CCS
3.1(m) MPH Intellectual Property
3.2(a) Non-Current Assets Excluded by MPH
3.2(c) Other Entities
3.3(a) Contracts Assumed by CCS
3.4(j) Other Liabilities Excluded from CCS
4.2 Gulf Pines and Meadow Pines Working Capital
4.3 Allocation Schedule
4.5(a) ERISA Plans
4.5(b) Employee List
5.7(a) Compliance Exceptions
5.7(c) False Claims
5.7(d) Termination of rights under Medicare or Medicaid
5.9 Employee Exceptions
5.10(a) Benefit Plans
5.10(c) Benefit Plan Compliance
5.10(g) Benefit Plan Requirements
5.10(h) Effect of this Transaction on Benefit Plans
5.11 Litigation
5.13(a) Financial Statements
5.14 Changes Since Balance Sheet
5.15 Contested Tax Liability
5.17(a) Leases
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<PAGE> 7
5.17(b) Accrued Paid Time Off
5.17(c) Material Licenses
5.18 Undisclosed Liabilities
5.19(a) Real Property Maintenance
5.19(c) Zoning Compliance
5.19(d) Leases
5.21 Insurance Policies
7.1 Conduct Pending Closing
8.4 Consents to be Obtained
vi
<PAGE> 8
ASSET EXCHANGE AGREEMENT
This ASSET EXCHANGE AGREEMENT (the "Agreement") is made and entered
into on the 23rd day of February, 1998 by and between MEADOW PINES HOSPITAL,
INC. a Delaware corporation ("MPH"), and CCS/GULF PINES, INC., a Texas
corporation ("CCS"), and, for purposes of Sections 6.6 and 7.5(c) and Articles
10 and 11 only, joined by The BROWN SCHOOLS, INC., a Delaware corporation
("Brown Schools"), and CHILDREN'S COMPREHENSIVE SERVICES, INC., a Tennessee
corporation ("CCS Parent"), with reference to the following facts:
A. MPH and CCS are engaged in the business of delivering behavioral
treatment services to youth.
B. MPH desires to acquire from CCS Gulf Pines Hospital located in
Houston, Texas and CCS desires to acquire from MPH Meadow Pines Hospital located
in Longview, Texas, in each case together with related assets (the exchanges and
other transactions which are the subject of this Agreement are herein referred
to as the "Transaction").
C. Brown Schools is the parent corporation of MPH, and CCS Parent is
the parent corporation of CCS.
NOW, THEREFORE, in consideration of the foregoing recitals and the
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, do hereby agree as follows:
ARTICLE 2
DEFINITIONS
Section 2.1 Certain Defined Terms. For purposes of this Agreement, the
following terms shall have the following meanings:
"Affiliate" of a specified person shall mean any corporation,
partnership, sole proprietorship or other person or entity which directly or
indirectly through one or more intermediaries controls, is controlled by or is
under common control with the person specified. The term "control" means the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person or entity.
"Benefit Plans" means all Employee Benefit Plans, all Employee Pension
Benefit Plans, all Employee Welfare Benefit Plans, all plans established
pursuant to Section 125, 127, 129 or 132 of the Code and all stock bonus, stock
ownership, stock option, stock purchase, stock appreciation rights, phantom
stock and other stock plans (whether qualified or nonqualified) and all other
pension, welfare, severance, retirement, bonus, deferred compensation, incentive
compensation, insurance (whether life, accident and health or other and whether
key man, group or other), profit sharing, disability, thrift, dependent care,
legal services, adoption, assistance, leave of absence, layoff,
<PAGE> 9
vacation and supplemental or excess benefit plans and all other benefit
contracts, arrangements or procedures having the effect of a plan, in each case
existing on or before the Closing Date under which a person or any of its
subsidiaries is or may hereafter become obligated in any manner (including,
without limitation, obligations to make contributions or other payments) and
which cover or have covered some or all of the present or former officers,
directors, employees, agents, consultants or other similar representatives
providing services to or for CCS or MPH; provided, however, that such term shall
not include (a) workers' compensation insurance, (b) MPH's Texas employee injury
plan, and (c) directors and officers' liability insurance.
"Cost Report" means the cost report required to be filed, as of the end
of a provider cost year or for any other required period, with cost-based Payors
with respect to cost reimbursement.
"Employee Benefit Plan" means each employee benefit plan (whether or
not insured), as defined in Section 3(3) of the Employee Retirement of Income
Security Act of 1974, as amended ("ERISA"), which is or was in existence on or
before the Closing Date, under which CCS or MPH is or may hereafter become
obligated in any manner (including, without limitation, obligations to make
contributions or other payments) and which cover or have covered some or all of
the present or former officers, directors, employees, agents, consultants or
other similar representatives providing services to or for CCS or MPH.
"Employee Pension Benefit Plan" means each employee pension benefit
plan (whether or not insured), as defined in Section 3(2) of ERISA, which is or
was in existence on or before the Closing Date, under which CCS or MPH is or may
hereafter become obligated in any manner (including, without limitation,
obligations to make contributions or other payments) and which cover or have
covered some or all of the present or former officers, directors, employees,
agents, consultants or other similar representatives providing services to or
for CCS or MPH.
"Employee Welfare Benefit Plan" means each employee welfare benefit
plan (whether or not insured), as defined in Section 3(l) of ERISA, which is or
was in existence on or before the Closing Date, under which CCS or MPH is or may
hereafter become obligated in any manner (including, without limitation,
obligations to make contributions or other payments) and which cover or have
covered some or all of the present or former officers, directors, employees,
agents, consultants or other similar representatives providing services to or
for CCS or MPH.
"Environmental Laws" means the Laws of any governmental or regulatory
authority (including, without limitation, any state wherein CCS or MPH conducts
business) relating to the use, refinement, recycling, handling, treatment,
removal, storage, production, manufacture, transportation, disposal, emissions,
discharges, releases or threatened releases of Hazardous Materials, or otherwise
relating to protection of the environment (including, without limitation,
ambient air, surface water, ground water, land surface or subsurface strata), as
the same may be amended or modified until the Closing Date, including, without
limitation, the following statutes: Federal Resources Conservation and Recovery
Act of 1976, 42 U.S.C. ss. 6901, et seq.; Federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, 42 U.S.C. ss. 9601, et seq.;
Federal Clean Air
2
<PAGE> 10
Act, 42 U.S.C. ss. 7401, et seq.; Federal Water Pollution Control Act, Federal
Clean Water Act of 1977, 33 U.S.C. ss. 1251, et seq.; Federal Insecticide,
Fungicide, and Rodentcide Act, Federal Pesticide Act of 1978, 7 U.S.C. ss. 136,
et seq.; Federal Hazardous Materials Transportation Act, 48 U.S.C. ss. 1801, et
seq.; Federal Toxic Substances Control Act, 15 U.S.C. ss. 2601, et seq.; and
Federal Safe Drinking Water Act, 42 U.S.C. ss. 300f, et seq.
"ERISA Plan" means any Employee Pension Benefit Plan or Employee
Welfare Benefit Plan.
"Facility" shall mean either Gulf Pines Hospital or Meadow Pines
Hospital as applicable in the context in which the reference appears.
"GAAP" shall mean at any particular time generally accepted accounting
principles as in effect at such time. Any accounting term used in this Agreement
shall have, unless otherwise specifically provided herein, the meaning
customarily given in accordance with GAAP, and all financial computations
hereunder shall be computed, unless otherwise specifically provided herein, in
accordance with GAAP as consistently applied and using the same method of
valuation as used in the preparation of MPH's and CCS's financial statements.
"Knowledge" "has no knowledge" or "do not know of" or similar phrases,
shall mean (1) in the case of an entity, the particular fact was known or not
known as the context requires to the corporate officer or hospital administrator
of such entity after reasonable inquiry by the principal executive officer of
such entity, and (2) in the case of an individual, the particular fact was known
or not known as the context requires after reasonable inquiry by such person.
"Laws" shall mean all statutes, rules, regulations, ordinances, orders,
codes, permits, licenses and agreements with or of federal, state, local and
foreign governmental and regulatory authorities and any order, writ, injunction
or decree issued by any court, arbitrator or governmental agency or in
connection with a judicial, administrative or other non-judicial proceeding
(including, without limitation, arbitration or reference).
"Licenses" shall mean certificates of need, accreditations,
registrations, licenses, permits and other consents or approvals of governmental
agencies or accreditation organizations.
"Medical Waste" means any substance, pollutant, materials or
containment listed or regulated under either the Medical Waste Tracking Act of
1988, 42 U.S.C. ss. 6992, et seq. ("MWTA"), 42 Part 72 and 49 CFR ss. 173, 386
or the Medical Waste Laws.
"Medical Waste Laws" means the following, including, without
limitation, regulations promulgated and orders issued thereunder, to the extent
such Medical Waste Laws regulate Medical Waste, all as may be amended or
modified until the Closing Date,: the MWTA, the Resource Conservation and
Recovery Act, 42 USCA ss. 6901 et seq.; the Air Pollution Prevention and Control
Act, 42 USCA ss. 7401 et seq.; the Federal Water Pollution Control Act, 33 USCA
ss.ss. 1251 et seq.; the Marine Protection, Research and Sanctuaries Act of
1972, 33 USCA ss.ss. 1401 et seq.; Nuclear
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Regulatory Commission regulations contained in 10 CFR Part 20; and 10 CFR Part
61, Occupational Health Act, 29 USCA 651 et seq.; Public Health Service
regulations contained in 42 CFR Part 72; Food and Drug Administration
regulations contained in 21 CFR Parts 58 and 211; U.S. Department of
Transportation regulations contained in 49 CFR Parts 171-179; the Act to Prevent
Pollution from Ships, 33 U.S.C.A. ss. 1901 et seq.; United States Department of
Agriculture regulations contained in 9 CFR Parts 50 through 56; United States
Postal Service regulations contained in 39 CFR Part 111; and local environmental
and safety laws, rules, regulations, and other legally binding requirements, and
any other federal, state, regional, county, municipal, or other local laws,
regulations, and ordinances insofar as they purport to regulate Medical Waste,
or impose requirements relating to Medical Waste.
"Payor" shall mean Medicare, Medicaid, CHAMPUS and Medically Indigent
Assistance programs, Blue Cross and Blue Shield of Texas, Inc. or any other
third party payor (including an insurance company), or any health care provider
(such as a health maintenance organization, preferred provider organization,
peer review organization, or any other managed care program).
"Purchasing Party" shall mean such party which is receiving a Facility
pursuant to the Agreement.
"Red River Receivables" means accounts receivable of CCS or its
Affiliates that arose solely from billing or invoicing by CCS or its Affiliates
for services rendered at Red River Hospital, Wichita Falls, Texas.
"Taxes" shall mean (i) all federal, state, county and local sales, use,
property, payroll, recordation and transfer taxes, (ii) all state, county and
local taxes, levies, fees, assessments or surcharges (however designated,
including privilege taxes, room or bed taxes and user fees) which are based on
the gross receipts, net operating revenues or patient days of a Facility for a
period ending on, before or including the Closing Date (as defined in Section
4.8) or a formula taking any one of the foregoing into account, and (iii) any
interest, penalties and additions to tax attributable to any of the foregoing,
but shall not include income and other taxes described in Sections 2.4(a) and
(b) and Sections 3.4(a) and (b).
"Transferring Party" shall mean such party which is transferring a
Facility pursuant to the Agreement.
Section 2.2 Index of Other Defined Terms. In addition to those terms
defined above, the following terms shall have the respective meanings given
thereto in the sections indicated below:
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
Agreement.........................................................................................Preamble
Allocation Schedule....................................................................................4.3
Assets Excluded by CCS.................................................................................2.2
</TABLE>
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<PAGE> 12
<TABLE>
<S> <C>
Assets Excluded by MPH.................................................................................3.2
Assets Transferred to MPH .............................................................................2.1
Assets Transferred to CCS .............................................................................3.1
Business Names Transferred to MPH ..................................................................2.1(f)
Business Names Transferred to CCS ..................................................................3.1(f)
CCS Cost Report Settlement .........................................................................2.2(f)
CCS Owned Real Property ............................................................................2.1(a)
CCS Equipment ......................................................................................2.1(b)
CCS Inventory ......................................................................................2.1(c)
CCS Receivables ....................................................................................2.1(d)
CCS Non-Public Day School ..........................................................................2.2(c)
Charter Documents .....................................................................................5.3
Claim Notice .........................................................................................10.5
Closing ...............................................................................................4.8
Closing Date ..........................................................................................4.8
COBRA ..............................................................................................4.5(c)
Code ..................................................................................................5.8
Consultant .........................................................................................7.2(b)
Contracts Assumed by MPH ...........................................................................2.1(e)
Contracts Assumed by CCS ...........................................................................3.1(e)
Cost Report Settlements ....................................................................2.2(g); 3.2(g)
Current Assets Transferred to MPH .....................................................................4.2
Current Assets Transferred to CCS .....................................................................4.2
Current Liabilities Assumed by MPH ....................................................................4.2
Current Liabilities Assumed by CCS ....................................................................4.2
Deductible Amount ...........................................................................10.3(b)(i)(B)
Deferred CCS Transaction Items .....................................................................4.9(b)
Document Retention Period ..........................................................................6.7(b)
Environmental Survey ...............................................................................7.2(b)
ERISA .................................................................................................1.1
Exchange Price ........................................................................................4.1
Foreign Person ........................................................................................5.8
Gulf Pines Working Capital ............................................................................4.2
MPH Cost Report Settlements ........................................................................3.2(e)
MPH Owned Real Property ............................................................................3.1(a)
MPH Equipment ......................................................................................3.1(b)
MPH Inventory ......................................................................................3.1(c)
MPH Receivables ....................................................................................3.1(d)
Hazardous Materials ..................................................................................5.12
Hospital Records ...................................................................................6.7(a)
Indemnified Party .................................................................................10.3(a)
Indemnifying Party ...................................................................................10.3
Insurance Program .....................................................................................7.8
</TABLE>
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<PAGE> 13
<TABLE>
<S> <C>
Intercompany Transactions ..................................................................2.2(b); 3.2(b)
Liabilities Assumed by MPH ............................................................................2.3
Liabilities Assumed by CCS ............................................................................3.3
Liabilities Excluded from MPH .........................................................................2.4
Liabilities Excluded from CCS .........................................................................3.4
Losses ............................................................................................10.3(a)
Management Agreement ...............................................................................4.9(a)
Manuals ............................................................................................4.6(a)
Meadow Pines Working Capital ..........................................................................4.2
Non-Transferrable Receivables ......................................................................4.4(c)
Permitted Encumbrances ................................................................................5.5
Permitted Liens and Encumbrances .....................................................................5.19
Representing Party ......................................................................................5
Related Agreements ....................................................................................5.3
Straddle Cost Reports ..............................................................................7.5(b)
Straddle Patients ..................................................................................4.4(b)
Straddle Patient Payments ......................................................................4.4(b)(ii)
Straddle Patient Records ...........................................................................6.7(a)
TEFRA ..........................................................................................4.4(b)(ii)
Third Party Claims ................................................................................10.4(a)
Title Insurer .........................................................................................8.6
Title Policies ........................................................................................8.6
Transaction ......................................................................................Recitals
Trigger Amount ..............................................................................10.3(b)(i)(B)
</TABLE>
ARTICLE 3
TRANSFER OF GULF PINES HOSPITAL TO MPH
Section 3.1 Assets Transferred to MPH. On the terms and subject to the
conditions contained in this Agreement, at the Closing (as defined in Section
4.8), MPH shall receive and accept from CCS and CCS shall convey, assign,
transfer and deliver to MPH, the following assets, and only the following
assets, as of the Closing (the "Assets Transferred to MPH"):
(a) All of CCS's right, title and interest in and to the real
property owned in fee (the "CCS Owned Real Property") that is
identified in Schedule 2. I (a) on which Gulf Pines Hospital is
located, together with the Gulf Pines Hospital construction,
work-in-progress, and all other buildings and improvements thereon,
and, all rights, privileges, permits and easements appurtenant thereto;
(b) All of CCS's right, title and interest in and to fixed
equipment, furniture, and fixtures, moveable equipment and furniture,
trucks, tractors, trailers and other vehicles, and
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<PAGE> 14
all other items of tangible personal property (collectively "CCS
Equipment") "(i) that are not consumed, disposed of or held for sale or
as inventory in the ordinary course of business, (ii) that are owned by
CCS as of the Closing, and (iii) that are used or utilized with respect
to, or necessary for, the operation of Gulf Pines Hospital;
(c) All of CCS's right, title and interest in and to
inventories of supplies, drugs, food, janitorial and office supplies,
maintenance and shop supplies, and other similar items of tangible
personal property intended to be consumed, disposed of or sold in the
ordinary course of business (collectively, the "CCS Inventory") that
are owned by or consigned to CCS as of the Closing and that are used or
utilized by CCS with respect to, or necessary for, the operation of the
Gulf Pines Hospital;
(d) All of CCS's right, title and interest as of the Closing
Date in and to accounts receivable recorded by CCS as an account
receivable from Payors, patients and other third parties (collectively,
the "CCS Receivables"), but not including the Cost Report Settlements
described in Section 2.2(f) below and the Red River Receivables;
(e) All of CCS's right, title and interest in and to all
contracts described on Schedule 2.1(e) and all contracts entered into
in the ordinary course of business and consistent with past practice
involving, for each contract, to the extent the same are transferable
to MPH, which (i) have an aggregate amount payable of less than $15,000
or (ii) may be canceled by MPH within 30 days after the Closing Date
without a penalty (the "Contracts Assumed by MPH");
(f) All of CCS's right, title and interest in and to the
business names set forth in Schedule 2.1(f) it being understood and
agreed that no right, title or interest in or to the name "Children's
Comprehensive Services, Inc." or any derivation thereof shall be
transferred to MPH (the "Business Names Transferred to MPH");
(g) To the extent transferable, all of CCS's right, title and
interest in and to Licenses in favor of CCS as of the Closing that are
related to, necessary for, or used in connection with the operation of
the Gulf Pines Hospital as presently operated by CCS;
(h) All of CCS's right, title and interest in and to unexpired
warranties as of the Closing that are transferable to MPH which CCS has
received from third parties with respect to the Assets Transferred to
MPH, including, but not limited to, such warranties as are set forth in
any construction agreement, lease agreement, equipment purchase
agreement, consulting agreement or agreement for architectural and
engineering services;
(i) To the extent lawfully and contractually enforceable, all
of CCS's right, title and interest in and to advance payments,
prepayments, prepaid expenses, deposits and the like made by CCS on its
behalf in the ordinary course of business prior to the Closing, which
7
<PAGE> 15
exist as of the Closing and with respect to which MPH will receive the
benefit after the Closing, and other items recorded as prepaid expenses
by CCS;
(j) All of CCS's right, title, and interest in and to all
claims, choses in action, rights of recovery, rights of set-off, rights
to refunds, advance payments, prepayments, prepaid expenses, deposits
and the like, and similar rights in favor of CCS as of the Closing that
are directly related to the operation of Gulf Pines Hospital as
presently operated by CCS or related to a Contract Assumed by MPH;
(k) Subject to the provisions of Section 6.7, any and all
business and patient records of or related to the operation of Gulf
Pines Hospital, which are legally transferable, whether or not
maintained at or by Gulf Pines Hospital;
(l) All of CCS's right, title and interest in and to the
goodwill of the business evidenced by the Assets Transferred to MPH,
and, except for CCS Assets Excluded by CCS, any and all other assets of
CCS used or utilized solely in the operations of Gulf Pines Hospital as
conducted prior to the Closing Date, whether or not such assets have
any value for accounting purposes; and
(m) All of CCS's intellectual property (such as marks,
trademarks, service marks, patents, patent rights, slogans, and
copyrights), including but not limited to that described in Schedule
2.1(m).
Section 3.2 Assets Excluded by CCS. CCS shall not sell, convey, assign,
transfer or deliver to MPH, and MPH shall not purchase the following assets of
CCS (the "Assets Excluded by CCS"):
(a) Cash, cash equivalents, securities, and only those
noncurrent assets that are listed in Schedule 2.2 (a);
(b) Any contract respecting an intercompany transaction
between a subsidiary, on the one hand, and CCS or an Affiliate of CCS,
on the other hand, whether or not such transaction relates to the
provision of goods and services, tax sharing arrangements, payment
arrangements, intercompany charges or balances, or the like ("CCS
Intercompany Transactions") and all amounts due to CCS arising from CCS
Intercompany Transactions;
(c) All assets pertaining to the non-public day school
operated by CCS at Gulf Pines Hospital including but not limited to
furniture, fixtures, inventory and equipment (the "CCS Non-Public Day
School") as more particularly described in Schedule 2.2(c);
(d) All of CCS's right, title and interest in the subsidiaries
and other entities listed on Schedule 2.2(d);
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<PAGE> 16
(e) The amounts payable to CCS under any insurance policy, if
any, included in the Assets Transferred to MPH which relate to any
Asset Excluded by CCS or Liability Excluded from MPH (as defined in
Section 2.4) (it being understood, however, that MPH shall have no
obligation to take any action under any such policy to seek any
recovery except at the reasonable request, and at the sole expense, of
CCS or to continue any such policies in force);
(f) All of the right, title and interest of CCS in assets
resulting from the finalization under the Medicare and Medicaid
programs of amounts due by such programs with respect to Cost Reports
("CCS Cost Report Settlements") and other rights of CCS respecting Cost
Reports described in Section 7.5;
(g) All prepaid taxes and claims for refunds of Taxes relating
to periods ended on or prior to the Closing Date and refunds of
overpayments (including refunds based on cost report adjustments or
settlements) to government authorities relating to periods ended on or
prior to the Closing Date;
(h) All rights and funds in connection with CCS's Benefit
Plans;
(i) All rights of CCS arising under this Agreement; and
(j) All of CCS's right, title and interest in and to the Red
River Receivables.
MPH acknowledges and agrees that CCS shall have the right to remove
from Gulf Pines Hospital, and, except as otherwise provided herein,
shall remove, at any time on or prior to June 30, 1998, any and all of
the Assets Excluded by CCS from Gulf Pines Hospital, provided that CCS
shall do so in a manner that does not unduly or unnecessarily disrupt
MPH's normal business activities at Gulf Pines Hospital.
Section 3.3 Liabilities Assumed by MPH. Subject to the terms and
conditions set forth in this Agreement, MPH shall assume at the Closing and pay,
discharge and perform as and when due only those obligations and liabilities
expressly described in this Section 2.3 (the "Liabilities Assumed by MPH"):
(a) All liabilities and obligations of CCS which pertain to or
are to be performed during the period following the Closing Date (as
defined in Section 4.8), and which arise under any Contracts Assumed by
MPH, including without limitation any capitalized lease liabilities and
obligations as set forth in Schedule 2.3(a); provided that if MPH
assumes any capital leases that are Contracts Assumed by MPH, the
Exchange Price shall be reduced by an amount equal to the principal
amount of such capital leases assumed as of the Closing Date, as
determined by GAAP; and
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<PAGE> 17
(b) Current Liabilities Assumed by MPH (defined below) as set
forth in Schedule 4.2.
Section 3.4 Liabilities Excluded from MPH. MPH shall not assume and
shall have no liability or obligation of any kind for or with respect to any
obligation or liability unless expressly assumed by it in accordance with this
Agreement, including without limitation having no liability or obligation for or
with respect to any of the following (collectively, "Liabilities Excluded from
MPH"):
(a) Any of CCS's liabilities or obligations with respect to
franchise taxes and with respect to federal, state, local or other
taxes imposed upon or measured, in whole or in part, by the net income
or stockholders' equity for any period ending on or prior to the
Closing Date of CCS or with respect to interest, penalties or additions
to any of such taxes;
(b) Any of CCS's liabilities or obligations with respect to
the recapture of federal, state, local or other tax deductions or
credits taken by CCS for any period ending on or prior to the Closing
Date imposed upon, or any taxable gain recognized by, CCS on account of
the Transaction contemplated hereby;
(c) Any liabilities or obligations of CCS for Taxes incurred
as a result of the sale of Assets Transferred to MPH;
(d) Liabilities or obligations of CCS arising from the breach
by CCS on or prior to the Closing Date of any term, covenant, or
provision of any of the Contracts Assumed by MPH;
(e) Liabilities or obligations of CCS or its Affiliates now
existing or which may hereafter exist by reason of any alleged
violation of Laws by CCS or any of its Affiliates on or prior to the
Closing Date;
(f) Subject to the provisions of Section 7.5, liabilities or
obligations of CCS now existing, except as included in the Current
Liabilities Assumed by MPH (defined below), or which may hereafter
exist by reason of any liability to refund any payment or reimbursement
received by CCS from any Payor which is attributable to any period of
time ending on or prior to the Closing Date;
(g) Liabilities or obligations of CCS under any Contract
Assumed by MPH which would be included in the Assets Transferred to MPH
but for the provisions of Section 4.7, unless MPH is provided with the
benefits thereunder as contemplated in such Section;
(h) Liabilities of CCS arising from or in connection with
litigation described in Section 5.1 I., or from or in connection with
any other litigation, whether or not pending or threatened, to which
CCS or any subsidiary or any Affiliate of CCS is or may become a party
10
<PAGE> 18
with respect to CCS's ownership and operation of its Facility,
including, without limitation, all such liabilities that relate to the
provision of psychiatric services (or the failure to provide such
services) on or prior to the Closing Date;
(i) Liabilities of CCS incurred in connection with its
obtaining or failing to obtain any consent, authorization or approval
necessary for it to sell, convey, assign, transfer or deliver any Asset
Transferred to MPH hereunder;
(j) Such other liabilities and obligations, if any,
specifically described in Schedule 2.4(j) and liabilities which would
be Liabilities Assumed by MPH but for the provisions of Sections 4.7
8.5 or 8.6.
(k) Amounts owed by CCS in connection with CCS Intercompany
Transactions, or under any contract that evidences indebtedness for
money borrowed;
(l) Liabilities and obligations respecting CCS Cost Report
Settlements, and other obligations of CCS respecting Cost Reports
described in Section 7.4;
(m) Liabilities and obligations of CCS arising from or in
connection with all Benefit Plans, except as set forth in Section
2.3(b); and
(n) Liabilities of CCS arising from or in connection with
Hazardous Substances as described in Section 5.12.
ARTICLE 3
TRANSFER OF MEADOW PINES HOSPITAL TO CCS
Section 3.5 Assets Transferred to CCS. On the terms and subject to the
conditions contained in this Agreement, at the Closing (as defined in Section
4.8), CCS shall receive and accept from MPH and MPH shall convey, assign,
transfer and deliver to CCS, the following assets, and only the following
assets, as of the Closing (the "Assets Transferred to CCS"):
(a) All of MPH's right, title and interest in and to the real
property owned in fee (the "MPH Owned Real Property")that is identified
in Schedule 3.1(a) on which Meadow Pines Hospital is located, together
with construction, work-in-progress, and all other buildings and
improvements thereon, and all rights, privileges, permits and easements
appurtenant thereto;
(b) All of MPH's right, title and interest in and to fixed
equipment, furniture, and fixtures, moveable equipment and furniture,
trucks, tractors, trailers and other vehicles, and all other items of
tangible personal property (collectively "MPH Equipment") that (i) are
not
11
<PAGE> 19
consumed, disposed of or held for sale or as inventory in the ordinary
course of business, (ii) are owned by MPH as of the Closing, and (iii)
are used or utilized with respect to, or necessary for, the operation
of Meadow Pines Hospital;
(c) All of MPH's right, title and interest in and to
inventories of supplies, drugs, food, janitorial and office supplies,
maintenance and shop supplies, and other similar items of tangible
personal property intended to be consumed, disposed of or sold in the
ordinary course of business (collectively, the "MPH Inventory") that
are owned by or consigned to MPH as of the Closing and that are used or
utilized by MPH with respect to, or necessary for, the operation of the
Meadow Pines Hospital;
(d) All of MPH's right, title and interest as of the Closing
Date in and to accounts receivable recorded by MPH as an account
receivable from Payors, patients and other third parties but not
including the Cost Report Settlements described in Section 3.2(e) below
(collectively, the "MPH Receivables");
(e) All of MPH's right, title and interest in and to all
contracts described on Schedule 3.1(e) and all contracts entered into
in the ordinary course of business and consistent with past practice
involving, for each contract, to the extent the same are transferable
to CCS, which (i) have an aggregate amount payable of less than $15,000
or (ii) may be canceled by CCS within 30 days after the Closing Date
without a penalty (the "Contracts Assumed by CCS");
(f) All of MPH's right, title and interest in and to the
business names set forth in Schedule 3.1(f) it being understood that no
right, title or interest in or to the name "The Brown Schools" or any
derivation thereof shall be transferred to CCS (the "Business Names
Transferred to CCS");
(g) To the extent transferable, all of MPH's right, title and
interest in and to Licenses in favor of MPH as of the Closing that are
related to, necessary for, or used in connection with the operation of
the Meadow Pines Hospital as presently operated by MPH;
(h) All of MPH's right, title and interest in and to unexpired
warranties as of the Closing that are transferable to CCS which MPH has
received from third parties with respect to the Assets Transferred to
CCS, including, but not limited to, such warranties as are set forth in
any construction agreement, lease agreement, equipment purchase
agreement, consulting agreement or agreement for architectural and
engineering services;
(i) To the extent lawfully and contractually enforceable, all
of MPH's right, title and interest in and to advance payments,
prepayments, prepaid expenses, deposits and the like made by MPH on its
behalf in the ordinary course of business prior to the Closing, which
exist as of the Closing and with respect to which CCS will receive the
benefit after the Closing, and other items recorded as prepaid expenses
by MPH;
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(j) All of MPH's right, title, and interest in and to all
claims, choses in action, rights of recover, rights of set-off, rights
to refunds, advance payment, prepayment, prepaid expenses, deposits and
the like, and similar rights in favor of MPH as of the Closing that are
directly related to the operation of Meadow Pines Hospital as presently
operated by MPH or related to a Contract Assumed by CCS;
(k) Subject to the provisions of Section 6.7, any and all
business and patient records of or related to the operation of Meadow
Pines Hospital, which are legally transferable, whether or not
maintained at or by Meadow Pines Hospital;
(l) All of MPH's right, title and interest in and to the
goodwill of the business evidenced by the Assets Transferred to CCS,
and, except for MPH Assets Excluded by MPH, any and all other assets of
MPH used or utilized solely in the operations of Meadow Pines Hospital
as conducted prior to the Closing Date, whether or not such assets have
any value for accounting purposes; and
(m) All of MPH's intellectual property (such as marks,
trademarks, service marks, patents, patent rights, slogans, and
copyrights), including but not limited to that described in Schedule
3.1(m).
Section 3.6 Assets Excluded by MPH. MPH shall not sell, convey, assign,
transfer or deliver to CCS, and CCS shall not purchase the following assets of
MPH (the "Assets Excluded by MHP"):
(a) Cash, cash equivalents, securities, and only those
non-current assets that are listed in Schedule 3.2 (a);
(b) Any contract respecting an intercompany transaction
between a subsidiary, on the one hand, and MPH or an Affiliate of MPH,
on the other hand, whether or not such transaction relates to the
provision of goods and services, tax sharing arrangements, payment
arrangements, intercompany charges or balances, or the like ("MPH
Intercompany Transactions") and all amounts due to MPH arising from MPH
Intercompany Transactions;
(c) All of MPH's right, title and interest in the subsidiaries
and other entities listed on Schedule 3.2(c);
(d) The amounts payable to MPH under any insurance policy, if
any, included in the Assets Transferred to CCS which relate to any
Asset Excluded by MPH or Liability Excluded from CCS (as defined in
Section 3.4) (it being understood, however, that CCS shall have no
obligation to take any action under any such policy to seek any
recovery except at the reasonable request, and at the sole expense, of
MPH or to continue any such policies in force);
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(e) All of the right, title and interest of MPH in assets
resulting from the finalization in Medicare and Medicaid programs of
amounts due by such programs with respect to Cost Reports ("MPH Cost
Report Settlements"), and other rights of MPH respecting Cost Reports
described in Section 7.5;
(f) All prepaid taxes and claims for refunds of Taxes relating
to periods ended on or prior to the Closing Date and refunds of
overpayments (including refunds based on cost report adjustments or
settlements) to government authorities relating to periods ended on or
prior to the Closing Date;
(g) All rights and funds in connection with MPH's Benefit
Plans; and
(h) All rights of MPH arising under this Agreement.
CCS acknowledges and agrees that MPH shall have the right to remove, and shall
remove, at any time within thirty (30) days following the Closing Date or, from
time to time any and all of the Assets Excluded by MPH from Meadow Pines
Hospital, provided that MPH shall do so in a manner that does not unduly or
unnecessarily disrupt MPH's normal business activities at Meadow Pines Hospital.
Section 3.7 Liabilities Assumed by CCS. Subject to the terms and
conditions set forth in this Agreement, CCS shall assume at the Closing and pay,
discharge and perform as and when due only those obligations and liabilities
expressly described in this Section 3.3, (the "Liabilities Assumed by CCS"):
(a) All liabilities and obligations of MPH which pertain to or
are to be performed during the period following the Closing Date (as
defined in Section 4.8), and which arise. under any Contracts Assumed
by CCS, including without limitation any capitalized lease liabilities
and obligations as set forth in Schedule 3.3(a); provided that if CCS
assumes any capital leases that are Contracts Assumed by CCS, the
Exchange Price shall be reduced by an amount equal to the principal
amount of such capital leases assumed as of the Closing Date, as
determined by GAAP; and
(b) Current Liabilities Assumed by CCS (defined below) as set
forth in Schedule 4.2.
Section 3.8 Liabilities Excluded from CCS. CCS shall not assume and
shall have no liability or obligation of any kind for or with respect to any
obligation or liability unless expressly assumed by it in accordance with this
Agreement, including without limitation having no liability or obligation for or
with respect to any of the following (collectively, "Liabilities Excluded from
CCS"):
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(a) Any of MPH's liabilities or obligations with respect to
franchise taxes and with respect to federal, state, local or other
taxes imposed upon or measured, in whole or in part, by the net income
or stockholders' equity of MPH for any period ending on or prior to the
Closing Date or with respect to interest, penalties or additions to any
of such taxes;
(b) Any of MPH's liabilities or obligations with respect to
the recapture of federal, state, local or other tax deductions or
credits taken by MPH for any period ending on or prior to the Closing
Date imposed upon, or any taxable gain recognized by, MPH on account of
the Transaction;
(c) Any liabilities or obligations of MPH for Taxes incurred
as a result of the sale of Assets Transferred to CCS;
(d) Liabilities or obligations of MPH arising, from the breach
by MPH on or prior to the Closing Date of any term, covenant, or
provision of any of the Contracts Assumed by CCS;
(e) Liabilities or obligations of MPH or its Affiliates now
existing or which may hereafter exist by reason of any alleged
violation of Laws by MPH or any of its Affiliates on or prior to the
Closing Date;
(f) Subject to the provisions of Section 7.5, liabilities or
obligations of MPH now existing, except as reflected in the Current
Liabilities Assumed by CCS (defined below), or which may hereafter
exist by reason of any liability to refund any payment or reimbursement
received by MPH from any Payor which is attributable to any period of
time ending on or prior to the Closing Date;
(g) Liabilities or obligations of MPH under any Contract
Assumed by CCS which would be included in the Assets Transferred to CCS
but for the provisions of Section 4.7, unless CCS is provided with the
benefits thereunder as contemplated in such Section;
(h) Liabilities of MPH arising from or in connection with
litigation described in Section 5.11, or from or in connection with any
other litigation, whether or not pending or threatened, to which MPH or
any subsidiary or any Affiliate of MPH is or may become a party with
respect to MPH's ownership and operation of its Facility, including,
without limitation, all such liabilities that relate to the provision
of psychiatric services (or the failure to provide such services) on or
prior to the Closing Date;
(i) Liabilities of MPH incurred in connection with its
obtaining or failing to obtain any consent, authorization or approval
necessary for it to sell, convey, assign, transfer or deliver any Asset
Transferred to CCS hereunder;
(j) Such other liabilities and obligations, if any,
specifically described in
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Schedule 3.4(j) and liabilities which would be Liabilities Assumed by
CCS but for the provisions of Sections 4.7, 8.5 or 8.6.
(k) Amounts owed by MPH in connection with MPH Intercompany
Transactions or under any contract that evidences indebtedness for
money borrowed;
(i) Liabilities and obligations respecting MPH Cost Report
Settlements, and other obligations of MPH respecting Cost Reports
described in Section 7.4;
(l) Liabilities and obligations of MPH arising from or in
connection with all Benefit Plans, except as set forth in Section
3.3(b); and
(m) Liabilities of MPH arising from or in connection with
Hazardous Substances as described in Section 5.12.
ARTICLE 4
TERMS OF THE EXCHANGE
Section 4.1 Transfer of MPH Assets and Assumption of Certain CCS
Liabilities in Exchange for Transfer of CCS Assets and Assumption of Certain MPH
Liabilities.
(a) At Closing, MPH shall:
(i) Pay Three Million Dollars ($3,000,000; the
"Cash") subject to adjustments, if any,
pursuant to Sections 2.3(a) and 3.3(a);
(ii) Transfer assets pursuant to Section 3.1, not
to include Assets Excluded by MPH pursuant
to Section 3.2; and
(iii) Assume Liabilities Assumed by MPH.
(b) At Closing, CCS shall:
(i) Transfer assets pursuant to Section 2.1, not
to include Assets Excluded by CCS pursuant
to Section 2.2; and
(ii) Assume Liabilities Assumed by CCS.
All of the foregoing are together herein referred to as (the "Exchange Price").
Section 4.2 Working Capital Adjustment.
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(a) MPH and CCS acknowledge and agree that the Assets
Transferred to MPH and the Assets Transferred to CCS will include
certain current assets (the "Current Assets Transferred to MPH" and the
"Current Assets Transferred to CCS," respectively) and the Liabilities
Assumed by MPH and the Liabilities Assumed by CCS will include certain
current liabilities (the "Current Liabilities Assumed by MPH" and the
"Current Liabilities Assumed by CCS." respectively) as set forth in
Schedule 4.2. For the purposes hereof, (i) Current Assets Transferred
to MPH less Current Liabilities Assumed by MPH, or at any date other
than the Closing Date, items that would be the foregoing, shall equal
"Gulf Pines Working Capital" and (ii) Current Assets Transferred to CCS
less Current Liabilities Assumed by CCS, or at any date other than the
Closing Date, items that would be the foregoing, shall equal "Meadow
Pines Working Capital." Working Capital as described herein shall be
determined in accordance with GAAP consistently applied and in
accordance with the historical practice of the Transferring Party for
the prior one (1) year. MPH and CCS acknowledge and agree that the Gulf
Pines Working Capital and the Meadow Pines Working Capital equaled the
amounts specified on Schedule 4.2 as of the time(s) specified in
Schedule 4.2.
(b) No later than forty-five (45) days after the Closing Date,
the actual amounts of the Gulf Pines Working Capital and Meadow Pines
Working Capital, in each case as of the Closing Date, shall be
determined. Any dispute concerning the actual values as of the Closing
Date that is unresolved for thirty (30) days shall be submitted for
resolution by the parties to their respective independent certified
public accountants. If such accountants cannot resolve the disagreement
within thirty (30) days of such submission, then they shall submit the
matter to a third accounting firm of national standing selected by
them, whose value determination shall be final and binding, and shall
be rendered within thirty (30) days of the date on which the matter is
submitted to such firm. The cost of the third accounting firm shall be
borne by the party whose values are determined by the third accounting
firm to be the most different than the values determined by such third
accounting firm. No particular procedures are intended to be imposed
upon such third accounting firm, it being the desire of the parties
that any such dispute shall be resolved as expeditiously and
inexpensively as reasonably practicable.
(c) Within five (5) business days following the determination
of both the Gulf Pines Working Capital and the Meadow Pines Working
Capital as of the Closing Date, then MPH or CCS, as the case may be,
shall make a payment to the other in the amount derived in accordance
with the following formula:
A - (B - C) = P, where
A = Change in Gulf Pines Working Capital as defined below
B = Meadow Pines Working Capital as of 9/30/97
C = Meadow Pines Working Capital as of the Closing Date
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If Gulf Pines Working Capital as of the Closing Date is less
than $622,000, then:
A = $622,000 less Gulf Pines Working Capital at
Closing Date
If Gulf Pines Working Capital as of the Closing Date is more
than $622,000 but less than $725,000, then:
A = 0
If Gulf Pines Working Capital as of the Closing Date is more
than $725,000, then:
A = $725,000 less Gulf Pines Working Capital at
Closing Date
If P is a negative number, then the absolute amount of the negative
number shall be paid by MPH to CCS. In the event that P is a positive
number, then that amount shall be paid by CCS to MPH.
Section 4.3 Allocation of Exchange Price. The Exchange Price shall be
allocated to the Assets Transferred by MPH and the Assets Transferred by CCS in
accordance with Schedule 4.3 (as the same may be updated as of the Closing to
reflect changes in assets as of the Closing Date, the "Allocation Schedule").
CCS and MPH shall allocate the Exchange Price in accordance with the Allocation
Schedule, to be bound by such allocations for all purposes, to account for and
report the purchases and sales contemplated hereby for all purposes (including,
without limitation, financial, accounting, Medicare reimbursement and federal
and state tax purposes) in accordance with such allocations, and not to take any
position (whether in financial statements, Cost Reports, tax returns, Cost
Report or tax audits, or otherwise), including without limitation any claim to a
step up in the basis of such assets by MPH and CCS, respectively or its
successors and assigns for Medicare purposes which is inconsistent with such
allocations in the Allocation Schedule without the prior written consent of the
other party, except to the extent, if any, required by applicable Law or GAAP.
Section 4.4 Remittances and Receivables.
(a) In General. All remittances, mail and other communications
relating to the Assets Excluded by MPH or CCS, respectively, or
Liabilities Excluded from MPH or CCS, respectively, received by the
Purchasing Party at any time after the Closing shall be immediately
turned over by the Purchasing Party to the addressee thereof, and
pending such delivery, the Purchasing Party shall have no interest in
the same and shall hold such remittances, mail and other communications
in trust for the benefit of the Transferring Party. All remittances,
mail and other communications relating to the Assets Transferred to MPH
or CCS, respectively, or the Liabilities Assumed by MPH or CCS,
respectively, received by the Transferring Party any time after the
Closing shall be immediately turned over by the Transferring Party to
the addressee thereof, or if the addressee is no longer affiliated with
the Purchasing Party, to the Purchasing Party, and pending such
delivery, the Transferring Party
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<PAGE> 26
shall have no interest in the same and shall hold such remittances,
mail and other communications in trust for the benefit of the
Purchasing Party.
(b) Straddle Patient Receivables. To compensate MPH and CCS,
respectively, for services rendered and medicine, drugs and supplies
provided through the Closing Date with respect to patients ("Straddle
Patients") who were admitted to a Facility on or before the date of the
Closing and discharged by the Facility after the Closing, the following
shall apply:
(i) Cut-Off Billings. The Transferring Party
shall, prepare cut-off billings for all
Straddle Patients as of the close of
business on the Closing Date. All payments
which are received by the Purchasing Party
(or its successors in interest or assigns)
after the Closing Date with respect to
Straddle Patients and which relate to such
cut-off billings shall constitute MPH or CCS
Receivables, whichever of MPH or CCS is the
Transferring Party, for purposes of
calculating Gulf Pines or Meadow Pines
Working Capital, respectively.
(ii) Cut-Off Billings Not Accepted. If the Payor
of any Straddle Patient cannot for any
reason accept cut-off billings, then the
Purchasing Party shall notify the
Transferring Party of same, and the
Transferring Party shall deliver to the
Purchasing Party a statement calculating the
total charges made by the Transferring Party
for services rendered and medicine, drugs
and supplies provided through the Closing
Date with respect to such Straddle Patient.
Within ten (10) days following the discharge
of each such Straddle Patient if such
patient is discharged after Closing and
prior to the date on which the difference or
change in Gulf Pines and Meadow Pines
Working Capital is determined for the
purposes of Section 4.2(c), the Purchasing
Party shall deliver to the Transferring
Party a statement reflecting the total
charges for the services rendered and
medicine, drugs and supplies billed to such
Straddle Patient after the Closing Date and
the patient receivable (the "Straddle
Patient Payments") of the Purchasing Party
with respect to such Straddle Patient
(including any cost per discharge limit
imposed by the Tax Equity and Fiscal
Responsibility Act of 1982, as amended
("TEFRA") and all deductibles and
coinsurance payments). For purposes of
calculating the final values pursuant to
Section 4.2, the pro rata share of the
Straddle Patient Payments which shall be
treated as a MPH or CCS Receivable,
respectively, shall be equal to the amount
obtained by multiplying the Straddle Patient
Payments by a fraction, the numerator of
which is the total charges of the
Transferring Party with respect to such
Straddle Patient through the Closing Date
and the denominator of which is the sum of
the total
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<PAGE> 27
charges of the Purchasing Party and the
total charges of the Transferring Party with
respect to such Straddle Patient.
(c) Cooperation in Collecting MPH and CCS Receivables and
Assets Excluded by MPH and CCS, respectively. MPH and CCS shall
cooperate with each other and to provide access to records (both
medical and financial) to assist in the collection, rebelling and
auditing (by either party or its representatives, including its
independent public accountants) of MPH and CCS Receivables and the
Assets Excluded by MPH and CCS. To the extent any MPH or CCS
Receivables are not legally transferrable (the "Non-Transferrable
Receivables"), the Transferring Party shall pay to the Purchasing Party
amounts received with respect to such Non-Transferrable Receivables
immediately upon receipt of payment from the Payor. The Transferring
Party hereby grants to the Purchasing Party a security interest in the
Non-Transferrable Receivables, and the proceeds and products thereof,
to secure the payment of all monetary obligations of the Transferring
Party to the Purchasing Party arising hereunder. In the event any of
the obligations are not paid pursuant to this Section 4.4(c), the
Purchasing Party may exercise all rights and remedies afforded a
secured party under the Uniform Commercial Code. The Transferring Party
shall execute all separate security agreements, financing statements or
other documents which may be necessary to protect the Purchasing
Party's security interest hereunder. This Agreement may serve as a
financing statement and the Purchasing Party may file this Agreement
with appropriate authorities in order to perfect its security interest
granted by the Transferring Party hereby.
Section 4.5 Employee Matters.
(a) ERISA Plans. Schedule 4.5(a) lists all ERISA Plans. The
Transferring Party shall (i) terminate as of the Closing Date the
active participation of all such employees in the ERISA Plans who
terminate employment with the Transferring Party as of the Closing
Date, (ii) cause the ERISA Plans to make timely appropriate
distributions, to the extent required, to such employees in accordance
with, and to the extent permitted by, the terms and conditions of such
ERISA Plans, and (iii) in connection with the termination of the active
participation of all such employees in such ERISA Plans, comply, and
cause each Pension Plan to comply, with all applicable Laws. The
Purchasing Party shall assume no liability for the Transferring Party
ERISA Plans.
(b) Hiring of Employees. Schedule 4.5(b) sets forth a complete
list of names, positions, and current annual salaries or wage rates and
bonus or other compensation arrangements (including severance payments)
as of the date hereof of all full-time or part-time employees of the
Transferring Party employed in the Facility and indicating whether such
employee is a full-time or part-time employee. At Closing, CCS shall
hire all of the employees who perform services at Meadow Pines Hospital
upon substantially the same terms and conditions under which such
employees were employed prior to Closing including, without limitation,
the right to severance payments in the event that the employment of any
such employees is terminated after the Closing. At Closing, MPH shall
hire at least 48
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employees who perform services at Gulf Pines Hospital and who would
otherwise have been entitled to notice under the Worker Adjustment and
Retraining Notification Act, upon substantially the same terms and
conditions under which such employees were employed prior to Closing
including, without limitation, the right to severance payments in the
event that the employment of any such employee is terminated after the
Closing. Each of CCS and MPH further agree to provide such employees
with the same amount of credit for the past service that each such
employee had prior to Closing.
(c) Acknowledgment of Responsibility. The Purchasing Party
acknowledges and agrees that such party is a successor employer for
purposes of the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended ("COBRA"), that the employees it hires as of the Closing in
accordance with Section 4.5(b) will not, as a result, be deemed to have
had a termination of employment for purposes of COBRA and that any
COBRA notices or coverages required to be given or made available to
any such employee shall be given or made by the Purchasing Party. The
Purchasing Party does not assume, and shall not be deemed to have
assumed, any COBRA obligations which the Transferring Party may have to
former employees of the Transferring Party whose employment was
terminated prior to the Closing Date, and the Transferring Party shall
be responsible for any COBRA coverages required to be made available to
all employees hired as of the Closing by the Purchasing Party who are
entitled to COBRA coverage under existing plans of the Transferring
Party as a result of the Transaction. The Transferring Party is
responsible for all liabilities and obligations pertaining to its
employees prior to the Closing which arise out of events occurring
prior to the Closing Date, except as provided for in Sections 2.3(b)
and 3.3(b), as applicable. Furthermore, CCS shall indemnify and hold
MPH and its Affiliates harmless, in accordance with Sections 10.3 10.4
and 10.5, from and against all Losses (i) resulting from any obligation
arising from the termination of employees who performed services at
Gulf Pines Hospital prior to the Closing and were not hired by MPH
pursuant to Section 4.5(b) including, but not limited to, the Worker
Adjustment and Retraining Notification Act, or (ii) resulting from any
claims of such employees (including, without limitation, claims for
health care coverage or benefits).
Notwithstanding the foregoing, nothing in this Section 4.5 shall, or shall be
deemed to, create any rights in favor of any person not a party hereto or to
constitute an employment agreement or condition of employment for any employee
of MPH or CCS or any Affiliate of MPH or CCS.
Section 4.6 Manuals.
(a) The respective Purchasing Party shall accept the clinical
policy and procedures manuals of the Transferring Party (the "Manuals")
presently used at the Transferring Party's Facility in their present
condition, "AS IS" and "WITH ALL FAULTS" and without any representation
or warranty of any kind whatsoever, either express or implied, by the
Transferring Party, including, but not limited to, any representation
or warranty that
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the Manuals are adequate for the Purchasing Party's operation of the
Facility after the Closing or are in compliance with any Laws.
(b) The Purchasing Party acknowledges and agrees that the
Manuals are confidential and proprietary information of the
Transferring Party and its Affiliates and the Purchasing Party agrees
that it will not, directly or indirectly, reproduce, distribute or
disclose the contents of the Manuals except as may be required in the
operation of the Facilities (including, but not limited to, as may be
required by any Laws) and will exercise due care to otherwise preserve
and protect the proprietary nature thereof.
Section 4.7 No Assignment If Breach; Discharge of Assumed Liabilities.
Notwithstanding anything contained in this Agreement to the contrary, this
Agreement shall not constitute an agreement to assign any Asset Transferred to
MPH and CCS, respectively, or assume any Liability Assumed by MPH and CCS,
respectively, if the attempted assignment or assumption of the same, as a result
of the absence of the consent or authorization of a third party, would
constitute a breach or default under any lease, agreement, encumbrance or
commitment or would in any way adversely affect the rights, or increase the
obligations, of any party or any subsidiary with respect thereto or would
otherwise affect the ability of the Purchasing Party to receive by benefit of
the Asset Transferred to MPH or CCS, whichever is the Purchasing Party, or the
ability of the Transferring Party to receive the benefit of the Liability
Assumed by MPH or CCS, whichever is the Purchasing Party. If any such consent or
authorization is not obtained, or if an attempted assignment or assumption would
be ineffective or would adversely affect the rights or benefits or increase the
obligations of the Transferring Party or the Purchasing Party, as contemplated
in the preceding sentence, with respect to any such lease, agreement,
encumbrance, commitment, Asset Transferred by MPH or CCS as appropriate, or
Liability Assumed by MPH or CCS, as appropriate, then, the parties shall enter
into such reasonable cooperative arrangements (including without limitation,
sublease, agency, partial closing, management, indemnity or payment arrangements
and enforcement at the cost and for the benefit of the Purchasing Party of any
and all rights of the Transferring Party against an involved third party) to
provide for the Purchasing Party the benefits of such Asset Transferred to MPH
or CCS, respectively, or to relieve the Transferring Party from the obligations
(or the economic impact of such obligations) of such Liability Assumed by MPH or
CCS, and any transfer or assignment to the Purchasing Party by the Transferring
Party or a subsidiary of any such Asset Transferred to MPH or CCS, or any
assumption by the Purchasing Party of any such Liability Assumed by MPH or CCS,
which shall require such consent or authorization of a third party that is not
obtained shall be made subject to such consent or authorization being obtained.
Section 4.8 Closing. Subject to the terms and conditions hereof, the
consummation of the Transaction (the "Closing") shall occur and be effective for
all purposes on the date on which the Closing occurs, at 11:59 p.m., Central
Standard Time (the "Closing Date"). At the Closing and subject to the terms and
conditions hereof, the following will occur:
(a) Deliveries by each Transferring Party. Each Transferring
Party shall deliver to the Purchasing Party:
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(i) Bills of Sale in substantially the form of
Exhibit A executed by each Transferring Party with respect to
the Assets Transferred to MPH and CCS, respectively;
(ii) Warranty deeds in substantially the form of
Exhibit B properly executed and acknowledged by each
Transferring Party with respect to MPH and CCS Owned Real
Properties included in the Assets Transferred to MPH and CCS,
respectively;
(iii) Assignment and Assumption of Liabilities
Agreement, in substantially the form of Exhibit C executed by
each Transferring Party with respect to Contracts Assumed by
MPH and CCS respectively, and Liabilities Assumed by MPH and
CCS, respectively;
(iv) Instruments of transfer, sufficient to transfer
personal property interests of each Transferring Party that
are included in the Assets Transferred to MPH and CCS but not
otherwise transferred by the Bills of Sale referred to in
clause (i) above, executed by each Transferring Party;
(v) Such other instruments of transfer, executed by
each Transferring Party necessary to transfer to and vest in
the Purchasing Party all of the Transferring Party's rights,
title and interest in and to the Assets Transferred to MPH and
CCS, respectively; and
(vi) Possession of the Assets Transferred to MPH and
CCS.
(b) Deliveries by each Purchasing Party. Each Purchasing Party
shall deliver to the Transferring Party the Assignment and Assumption
of Liabilities Agreements in substantially the form of Exhibit C.
Section 4.9 Management Agreement. In the event that the conditions to
consummation of the Closing have otherwise been met or waived, but CCS has not
been able to obtain each of the Licenses referred to in Schedule 8.4 for its
operation of Meadow Pines Hospital at or before the Closing, and the parties
have not entered into an alternative arrangement pursuant to Section 4.7. then
and in either of such events the parties shall nevertheless consummate the
Transaction in accordance with the provisions of this Agreement, as modified by
the following provisions:
(a) At the Closing, the parties shall execute a management
agreement (the "Management Agreement"), substantially in the form of
Exhibit D, pursuant to which CCS shall undertake to manage Meadow Pines
Hospital pending the receipt of such License(s).
(b) The instruments of transfer and assumption set forth in
Sections 3.1 and 3.3, which instruments are described in Section 4.8 as
they relate to those Assets Transferred to
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CCS, Contracts Assumed by CCS, Current Assets Transferred to CCS and
Current Liabilities Assumed by CCS that may not be lawfully transferred
or assumed until the requisite License(s) are obtained (collectively,
the "Deferred CCS Transaction Items"), shall be executed and delivered
by the parties at the Closing (which shall be deemed to have occurred
for the purposes of this Agreement) but shall be given force and effect
as to those Deferred CCS Transaction Items only upon, and immediately
upon, without any further action by the parties, CCS's receipt of such
License(s).
Section 4.10 Office Space. MPH hereby will provide from the Closing
Date and until June 30, 1998, a reasonable amount of office space and office
equipment at Gulf Pines Hospital included to allow up to three employees of CCS
to continue to collect CCS's Red River Receivables. MPH further agrees to
provide the space currently used for operations of the CCS Non-Public Day School
at Gulf Pines Hospital from the Closing Date until June 30, 1998 and to provide
dietary service to the staff and students of the CCS Non-Public Day School in
exchange for a rental payment of Ten Thousand Dollars ($10,000) per month and a
payment of Two Dollars ($2.00) per meal.
ARTICLE 5
REPRESENTATIONS AND WARRANTEES OF MPH AND CCS
MPH and CCS hereby represent and warrant to each other, each as a
"Representing Party", as of the date hereof, as follows:
Section 5.1 Organization and Corporate Power. The Representing Party is
a corporation duly incorporated and validly existing under the laws of, and is
authorized to exercise its corporate powers, rights and privileges and is in
good standing in, the State of Incorporation and has full corporate power to
carry on its business as presently conducted and to own or lease and operate its
properties and assets now owned or leased and operated by it. Copies of (i) the
articles of incorporation and all amendments thereto and (ii) the bylaws, as
amended, of the Representing Party have been made available to the other party
for review and are true, complete and in effect as of the date hereof, and
accurately reflect all material proceedings of the board of directors and
shareholders thereof.
Section 5.2 Authority Relative to this Agreement. The execution,
delivery and performance of this Agreement and all other agreements contemplated
hereby and the consummation of the transactions contemplated hereby and thereby
have been duly and effectively authorized by the board of directors of the
Representing Party; no other corporate act or proceeding on the part of the
Representing Party, its board of directors or its shareholders is necessary to
authorize this Agreement, any such other agreement or the transactions
contemplated hereby and thereby. This Agreement has been, and each of the other
agreements contemplated hereby will, as of the Closing, have been, duly executed
and delivered by the Representing Party, and this Agreement constitutes, and
each such other agreement when executed and delivered will constitute, a valid
and binding
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obligation of the Representing Party, enforceable against the Representing Party
in accordance with its terms, except as it may be limited by bankruptcy,
insolvency reorganization, moratorium or other similar Laws now or hereafter in
effect relating to creditors rights generally and that 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 may be brought.
Section 5.3 Absence of Breach. The execution, delivery and performance
by the Transferring Party of this Agreement and all other agreements
contemplated hereby or executed in connection herewith (the "Related
Agreements") does not, (a) conflict with or result in a breach of any of the
provisions of the Representing Party Articles of Incorporation or Bylaws or
similar charter documents (the "Charter Documents"), (b) contravene any Law or
cause the suspension or its revocation of any License presently in effect, which
affects or binds, or any of its material properties, or (c) conflict with or
result in a breach of or default under any indenture or loan or credit agreement
or any other agreement or instrument to which the Representing Party is a party
or by which it or any of its properties may be affected or bound.
Section 5.4 Brokers. No broker, finder, or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with this Agreement or the Transaction based upon any agreements or arrangements
or commitments, written or oral, made by or on behalf of the parties.
Section 5.5 Title to Personal Property. The Representing Party has good
and indefeasible title, or valid and effective leasehold rights in the case of
leased property, to all tangible personal property included in the Assets
Transferred to the Purchasing Party to be sold, conveyed, assigned, transferred
and delivered to the Purchasing Party by the Representing Party, free and clear
of all liens, charges, claims, pledges, security interests, .equities and
encumbrances of any nature whatsoever, except for the following (individually
and collectively, the "Permitted Encumbrances"): (a) the lien of current taxes
not delinquent, (b) the Liabilities Assumed by the Purchasing Party, and (c)
liens, charges, claims, pledges, security interests, equities and encumbrances
which will be discharged or released either prior to, or substantially
simultaneously with, the Closing.
Section 5.6 Contracts Assumed by MPH and CCS. Except for such matters
that, when viewed in the aggregate, do not have a material adverse effect on the
Assets Transferred to the Purchasing Party, (a) there is no liability to any
person by reason of the default by the Representing Party under any Contract
Assumed by the Purchasing Party, (b) the Representing Party has not received
written notice that any person intends to cancel or terminate any Contract
Assumed by the Purchasing Party, (c) all of the Contracts Assumed by the
Purchasing Party are in full force and effect, (d) the consummation of the
Transaction will not constitute and, to the best of the Representing Party's
Knowledge, no event has occurred which, with or without the passage of time or
the giving of notice, would constitute a breach or default by the Representing
Party of such Contract Assumed by the Purchasing Party or would cause the
acceleration of any obligation of the Representing Party or the creation of any
lien (except for Permitted Encumbrances) upon any Asset Transferred to the
Purchasing Party, and (e) the Representing Party has not waived any right under
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any Contract Assumed by the Purchasing Party. No Contract Assumed by the
Purchasing Party, management fee, or billings and collections fee is based on
previous or expected volume of referrals, items or services furnished or the
amount of business otherwise generated or expected to be generated by any person
that is a party to a Contract Assumed by the Purchasing Party.
Section 5.7 Compliance with Laws.
(a) Except as set forth on Schedule 5.7(a), since December 1,
1996, the Representing Party has complied with all Laws applicable to
it or the Facility, the violation of which would have a material
adverse effect on the Facility or the Assets Transferred to Purchasing
Party, and has obtained all Licenses of any governmental or regulatory
authority material to the ownership, maintenance and operation of the
Facility including, without limitation, the right to receive Medicare
and Medicaid reimbursements; and, to the Representing Party's
Knowledge, there is no pending threat of cancellation, modification or
nonrenewal of any such License nor any basis for such cancellation,
modification or nonrenewal which would have a material adverse effect
on the Facility. All such Licenses have been made available to the
Purchasing Party for its review. The Representing Party is not
presently in violation or default of any such License, and the present
uses of the Facility and the assets being transferred to the Purchasing
Party do not violate any Laws where such violation or default would
have a material adverse effect on the consolidated financial position
or operations of the Representing Party. Except as set forth on
Schedule 5.7(a), since December 1, 1996, no written notice or warning
from any governmental or regulatory authority with respect to any
failure or alleged failure of the Representing Party to comply with any
Laws, which failure to comply would have a material adverse effect on
the Representing Party, has been issued or given, nor, to the
Representing Party's Knowledge, is any such notice or warning proposed
or threatened. Except as set forth on Schedule 5.7(a), no consent or
approval of, prior filing with or notice to, or other action by, any
governmental or regulatory authority is required in connection with the
execution and delivery of this Agreement or any assignment, agreement
or other instrument to be executed and delivered pursuant to this
Agreement by Representing Party or the consummation of the transactions
provided for herein or therein, except for such consents and approvals
that have been obtained or will have been obtained on or before the
Closing Date, and filings, notices and other actions that have been
taken or made or will have been taken or made on or before the Closing
Date.
(b) Neither the Representing Party nor any officer, director,
employee, agent or other representative thereof acting or purporting to
act on behalf of any such entity or any business enterprise with which
Representing Party has been associated or affiliated has, directly or
indirectly, made or authorized any payment, contribution or gift of
money, property or services, in violation of applicable Law (i) as a
kickback or bribe to any person, or (ii) to any political organization
or the holder of, or any aspirant to, any elective or appointive office
of any nation, state, political subdivision thereof, or other
governmental body or instrumentality in violation of Law.
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(c) Except as set forth on Schedule 5.7(c), neither the
Representing Party nor any officer, director, employee, agent or other
representative thereof acting or purporting to act on behalf of any
such entity or any business enterprise with which Representing Party
has been associated or affiliated has, directly or indirectly,
submitted or caused to be submitted a false or fraudulent claim for
payment to any state or the federal government which is related to the
Facility.
(d) Except as set forth on Schedule 5.7(d), the rights of
Representing Party and, to Representing Party's Knowledge, the rights
of licensed physicians, director of nursing and other licensed health
care professionals, to receive Medicare or Medicaid reimbursements have
not been terminated or otherwise adversely affected as a result of any
investigation or action by any federal or state governmental regulatory
authority. Except as set forth on Schedule 5.7(d), neither Representing
Party nor, to Representing Party's Knowledge, licensed physicians,
director of nursing or other licensed health care professionals, has,
subsequent to December 1, 1996, been the subject of any inspection,
known investigation, survey, audit or known monitoring by any
governmental regulatory entity, trade association, professional review
organization, accrediting organization or certifying agency, which has
resulted in an outstanding deficiency which would have a material
adverse effect on such entity, nor has any such entity received any
notice of deficiency in connection with the operation thereof which
would have a material adverse effect on such entity. Except as set
forth on Schedule 5.7(d), copies of all material reports,
correspondence, notices and other documents relating to any such
inspection, investigation, survey, audit, monitoring or other form of
review by a governmental or regulatory authority to which any of the
foregoing has been subject to and to which the Representing Party has
access have been made available to the Purchasing Party.
Section 5.8 U.S. Person. Neither MPH nor CCS is a "foreign person" for
purposes of Section 1445 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any other Laws requiring withholding of amounts paid to foreign
persons.
Section 5.9 Employee Relations. Except as set forth on Schedule 5.9,
with respect to the employees of the Facility:
(a) neither the Representing Party nor its respective Facility
is a party to any agreement with any union, trade association or other
similar employee organization, no written demand has been made for
recognition by a labor organizations and, to the best of the
Representing Party's Knowledge no union organizing activities by or
with respect to any such employees are taking place and no employee is
represented by any labor union or organization;
(b) there are no controversies (including, without limitation,
any unfair labor practice complaints, labor strikes, arbitrations,
disputes, work slowdowns or work stoppages)
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affecting a material number of Facility employees pending or, to the
best of the Representing Party's Knowledge, threatened;
(c) the Representing Party is in compliance in all material
respects with all Laws respecting employment and employment practices,
terms and conditions of employment and wages and hours the violation of
which would have a material adverse effect on the Representing Party's
Facility, and is not engaged in any unfair labor practices to any
extent that any such practice would have a material adverse effect on
the Representing Party's Facility;
(d) there are no pending or, to the Representing Party's
Knowledge, threatened EEOC claims, wage and hour claims the like
against Representing Party or the Facility; and
(e) there are no pending or, to the Representing Party's
Knowledge, threatened workers' compensation claims in excess of $15,000
against the Representing Party or the Facility.
Section 5.10 Employee Plans.
(a) Schedule 5.10(a) lists all Benefit Plans. Neither the
Representing Party nor any entity aggregated therewith under Code
Section 414(b) or 414(c) has had an "obligation to contribute" (as
defined in ERISA Section 4212) to a "multiemployer plan" (as defined in
ERISA Sections 4001(a)(3) and 3(37)(A)) ("Multiemployer Plan").
Representing Party has not incurred and is reasonably expected not to
incur prior to the Closing Date, any liability under Title I or Title
IV of ERISA or under Code Section 412 other than routine funding
obligations and routine claims for benefits. Except as set forth on
Schedule 5.10(a), all liabilities arising out of or related to Benefit
Plans and ERISA Plans of Representing Party and of its affiliates in
the same controlled group of corporations or who are under common
control with the Representing Party (within the meaning of Section 414
of the Code) (an "ERISA Affiliate") are reflected in its financial
statements in accordance with GAAP.
(b) True, correct and complete copies of all written Benefit
Plans, as currently in effect (or as otherwise requested by Purchasing
Party), listed on Schedule 5.10(a) and all trust agreements or other
funding arrangements, including insurance contracts, all amendments
thereto and, where applicable, with respect to any such plans or plan
amendments, the most recent determination letters issued by the IRS,
any private letter rulings issued by the IRS with respect to any such
plan, the annual reports or returns, audited or unaudited financial
statements, actuarial valuations, and summary annual reports for the
most recent three plan years, the most recent summary plan descriptions
and any summary of material modifications, summary of material
reduction or notice under ERISA Section 204(h) thereto have been
provided or made available to the Purchasing Party.
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(c) Except as listed on Schedule 5.10(c), all the Benefit
Plans and the related trusts subject to ERISA comply with and have been
administered in material compliance with, the provisions of ERISA, all
provisions of the Code relating to qualification and tax exemption
under Code Section 401(a) and 501(a) or otherwise applicable to secure
intended tax consequences, and all collective bargaining agreements.
Except as listed on Schedule 5.10(c), all material governmental
approvals for the Benefit Plans have been obtained, timely
determination letters have been obtained or sought on a timely basis on
the qualification of any ERISA Plans intended to qualify under Section
401(a) of the Code and on the tax exemption of related trusts, the
failure of which to obtain or seek would have a material adverse effect
on the Representing Party's Facility, or on the Purchasing Party, and
no such governmental approvals have been revoked. Neither the
Representing Party nor, to the Representing Party's Knowledge, any
administrator or fiduciary of any such Benefit Plan (or agent of any of
the foregoing) has engaged in any transaction or acted or failed to act
in any manner which could subject any such entity to any material
liability (by indemnity or otherwise) for a breach of any fiduciary,
co-fiduciary or other duty under ERISA. Except as set forth on Schedule
5.10(c), to the Representing Party's knowledge, no written
representation or communication with respect to any material aspect of
the Benefit Plans has been made to employees of Representing Party or
any of its predecessors prior to or on the Closing Date that is not in
accordance with the written terms and provisions of such Benefit Plans
in effect immediately prior to the Closing Date. There are no
unresolved claims or disputes (other than routine claims for benefits)
under the terms of, or in connection with, the Benefit Plans, and no
action, legal or otherwise, has been commenced, to the Representing
Party's Knowledge, with respect to any claim.
(d) All annual reports or returns, audited or unaudited
financial statements, actuarial valuations, summary annual reports and
summary plan descriptions issued with respect to the Benefit Plans are
correct, complete and accurate in all material respects.
(e) Since January 1, 1996, no "party in interest" (as defined
in Section 3(14) of ERISA) or "disqualified person" (as defined in
Section 4975(e)(2) of the Code) of any ERISA Plan has engaged in any
"prohibited transaction" (within the meaning of Section 4975(c) of the
Code or Section 406 of ERISA) that could have a material adverse effect
on Representing Party.
(f) No liability exists, and no event, to the Representing
Party's Knowledge, that could result in a liability has occurred, with
respect to any Benefit Plan that individually or in the aggregate could
have a material adverse effect on the Facility or the Assets
Transferred to Purchasing Party.
(g) Except as set forth on Schedule 5.10(g), Representing
Party has not maintained, and does not currently maintain, a Benefit
Plan providing welfare benefits (as defined in ERISA Section 3(l)) to
employees after retirement or other separation of service except to the
extent required under Part 6 of Title I of ERISA and Code Section
498OB(f).
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(h) Except as set forth on Schedule 5.10(h), the consummation
of the Transaction will not entitle any current or former employee of
the Representing Party to severance pay or any similar payment, and
will not accelerate the time of payment or vesting, or increase the
amount, of compensation due any such employee or former employee.
(i) All Benefit Plans subject to Section 4980B of the Code or
Part 6 of Title I of ERISA, or both, have been maintained in material
compliance with the requirements of such laws and any regulations
(proposed or otherwise) issued thereunder.
Section 5.11 Litigation. Except for matters set forth on Schedule 5.11,
there are no actions, suits, claims or proceedings pending or, to the Knowledge
of the Representing Party, threatened against or affecting the Assets
Transferred to the Purchasing Party or relating to the operations of the
Facilities, at law or in equity, or before or by any federal, state, municipal
or other governmental department, commission, agency or instrumentality.
Section 5.12 Hazardous Substances. Except as may be disclosed by the
Environmental Survey (as defined in Section 7.2(b):
(a) To the Representing Party's Knowledge, there are no
Hazardous Materials (as defined below) upon, about, beneath or
migrating or threatening to migrate to or from MPH or CCS Owned Real
Properties of the Representing Party or any leased real property of the
Representing Party or the existence of any violation in any material
respect of any Environmental or Medical Waste Laws;
(b) There is no proceeding or action pending or, to the
Representing Party's Knowledge, threatened by any person or
governmental agency regarding the environmental condition or
occupational safety of the Facilities;
(c) The Representing Party has not received any written, or,
to the Representing Party's Knowledge, other, notice from any federal,
state or local governmental agency relating to its Facility or any
other Asset Transferred to the Purchasing Party notifying such
transferring person of any improper management or disposal of Hazardous
Materials;
(d) Representing Party is currently in material compliance
with all Environmental Laws which compliance includes, but is not
limited to, the possession by Representing Party of all permits and
other governmental authorization required under the Environmental Laws,
and compliance in all material respects with the terms and conditions
thereof; and
(e) There have been no actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the
generation, handling, transportation, treatment, storage, release,
emission, discharge, presence or disposal of any Hazardous Material,
that could reasonably form the basis of any environmental claims
against Representing Party which would have a material adverse effect
on the Facility. Representing Party hereby
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represents and warrants that there are no underground storage tanks on
or beneath MPH or CCS (whichever is the Representing Party) Owned Real
Properties and CCS further represents and warrants to MPH that certain
underground storage tank referenced in the Phase I Environmental Site
Assessment, dated May 1997 and prepared by Geraghty & Miller, Inc. for
Children's Comprehensive Services, Inc. (c/o Bass, Berry & Sims) (the
"CCS Environmental Survey") has been and, before the Closing, that
certain metal drum referenced in the CCS Environmental Survey will have
been, properly removed and properly disposed of in accordance with
Environmental Laws.
"Hazardous Materials" shall mean any toxic or hazardous waste,
pollutants or substances, including, without limitation, asbestos,
PCBS, petroleum products and byproducts, substances defined or listed
as "hazardous substances," "hazardous waste," "toxic substances,"
"toxic pollutant," "medical waste" or similarly identified substances
or mixtures, in or pursuant to the Environmental Laws or the Medical
Waste Laws. This representation and warranty shall survive for the
period ending on the third (3rd) anniversary of the Closing Date.
Section 5.13 Financial Information.
(a) Attached hereto as Schedule 5.13(a) are a regularly
prepared unaudited balance sheet as of December 31, 1997 for each
Facility and an income statement of (i) Meadow Pines Hospital for the
12-month period ending December 31, 1997, and (ii) Gulf Pines Hospital
for the period January 1, 1997 through June 2, 1997, as prepared by
Vendell Healthcare, Inc., and for the period June 2, 1997 through
December 31, 1997, as prepared by CCS.
(b) All financial statements referred to in this Section 5.13
have been prepared in accordance with GAAP consistently applied. Such
financial statements fairly represent the financial position of the
Representing Party's Facility and the results of its operations at the
dates and for the periods indicated.
Section 5.14 Changes Since Balance Sheet. Except as disclosed on
Schedule 5.14, since December 31, 1997, there has not been any material
transaction or material occurrence (or, in the case of subparagraphs (i) and (n)
below, any transaction or occurrence) in which the Representing Party has:
(a) Suffered any material adverse change in the financial
condition, assets, liabilities, working capital reserves, income or
business of Representing Party or the Facility;
(b) Incurred or knowingly become subject to any material
liability other than in the ordinary course of business and consistent
with past practice;
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(c) Discharged or satisfied any material lien or paid any
material liability other than (i) current liabilities shown on the
balance sheet as of December 31, 1997 included in the financial
statements, or (ii) current liabilities incurred since that date in the
ordinary course of business;
(d) Mortgaged, pledged, or subjected any of the Assets
Transferred to the Purchasing Party, tangible or intangible, to any
lien other than lien(s) created in the ordinary course of business
consistent with past practice, which lien(s) will be released as of the
Closing except as to liens constituting Liabilities Assumed by MPH or
CCS, as the case may be, or as otherwise provided in this Agreement;
(e) Sold, assigned, or transferred any tangible assets, or
canceled any debts or claims, except, in each case, in the ordinary
course of business and consistent with past practice;
(f) Suffered any material damage, destruction, or loss,
whether or not covered by insurance, which materially adversely
affected the properties or business thereof, or suffered any
extraordinary losses or waived any rights of substantial value, whether
or not in the ordinary course of business;
(g) Terminated or amended any material contract, license, or
other instrument to which it is a party or suffered any loss or
termination or threatened loss or termination of any existing business
arrangement or material supplier, the termination or loss of which
would have a material adverse effect on any such entity;
(h) Through negotiation or otherwise, made any commitment or
incurred any liability, whether or not enforceable, to any labor
organization;
(i) Except for normal annual bonuses to persons other than
officers of Representing Party, made any accrual or arrangement for or
payment of any bonus or special compensation of any kind to any
officer, director, employee or agent;
(j) Changed any accounting, pricing, actuarial, financial
reporting or tax practice or policy, or any assumption underlying such
a practice or policy, or any method of calculating any bad debt,
contingency or other reserve for financial reporting, tax or other
accounting purposes, except as required by Law or GAAP;
(k) Offered or extended more favorable prices, discounts or
other allowances except in the ordinary course of business and
consistent with past practice;
(l) Made or committed to making any capital expenditure
exceeding the amount of $15,000 in any instance;
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(m) Made any provisions for write-downs or decrease in the
value of inventories or fixed assets, other than in the ordinary course
of business and consistent with past practice;
(n) Become aware or been notified of any circumstances that
would indicate that Representing Party has incurred any obligations or
liabilities to any governmental or third party reimbursement program,
including, without limitation, Medicare or Medicaid, materially in
excess of the amounts indicated as contractual allowances or otherwise
in the financial statements; or
(o) Entered into any agreement or contract to do any of the
foregoing.
Section 5.15 Taxes. The Representing Party has duly paid (or there has
been paid on their behalf) all federal, state, county and local income, gross
receipts, excise, property, franchise, sales, use, employment and any and all
other taxes or unemployment insurance contributions required to have been paid
by them prior to the date hereof, except for those taxes the payment of which is
contested in good faith, as described in Schedule 5.15.
Section 5.16 Representations Not Affected By Due Diligence. The
Purchasing Party's opportunity to make an investigation of the Assets
Transferred to the Purchasing Party shall not limit the express representations
and warranties of the Representing Party made herein. Nothing in this Agreement
shall be deemed to create any duty or responsibility on the part of the
Purchasing Party to investigate or discover any inaccuracy with respect to the
express representations and warranties made herein.
Section 5.17 Lists of Other Data. Except for contracts and agreements
already listed in Schedules 2.1(e) and 3.1(e), Schedules 5.17(a) through (c)
contain lists, complete and correct as of the dates shown thereon, of the
following:
(a) Each lease constituting a Contract Assumed by MPH and CCS,
respectively as of such date (whether an operating or a capital lease)
under which tangible personal property was leased, where the annualized
lease payments exceed $5,000;
(b) The aggregate accrued paid time off (including vacation
time) and earned or available sick pay for all employees at each
Facility of the Representing Party, as of the date shown; and
(c) Material Licenses of the Representing Party in force, as
of the date shown, with respect to the health care Facilities to be
included in the Assets Transferred to the Purchasing Party.
(d) Except as disclosed on Schedule 5.19(d), there are no
leases affecting all or any part of the Representing Party Owned Real
Property and there are no material promises,
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<PAGE> 41
understandings, agreements or commitments, either written or oral
between Representing Party and any tenant or other occupant of the
Representing Party Owned Real Property;
(e) As of the date of this Agreement, no proceeding are
presently pending, nor, to the Representing Party's knowledge,
threatened for the taking by exercise of the power of eminent domain,
or in any other manner, for public or quasi-public purpose, of all or
any part of the Representing Party Owned Real Property;
(f) To the Representing Party's Knowledge, there is no plan,
study, or effort by any governmental authority or any non-governmental
person or agency which would a materially adversely affect the current
or planned use of any of the Representing Party Owned Real Property.
(g) To the Representing Party's Knowledge, there is no
existing, proposed or contemplated plan to modify or realign any street
or highway or any existing, proposed or contemplated eminent domain
proceeding that would result in the taking of all or any part of the
Representing Party Owned Real Property or that would materially,
adversely affect the current or any planned use of the Representing
Party Owned Real Property; and
(h) Neither Representing Party nor the Representing Party
Owned Real Property is subject to any commitment, obligation or
agreement including, but not limited to, any right of first refusal or
option to purchase granted to a third party, which would prevent
Representing Party from completing or impairing Representing Party's
ability to complete the transfer or conveyance of the Representing
Party Owned Real Property to the Purchasing Party or the consummation
of the Transaction or which would bind the Purchasing Party subsequent
to the completion of the Transaction.
Section 5.18 Absence of Undisclosed Liability. Except as disclosed on
Schedule 5.18, as of the date hereof neither Representing Party has, and at the
Closing Date neither will have, any undisclosed liabilities known to
Representing Party in excess of $25,000 in the aggregate, except current
liabilities incurred in the ordinary course of business.
Section 5.19 Real Property. Schedules 2.1(a) and 3.1(a) set forth the
Representing Party's Owned Real Property. The Representing Party now owns, and
the Closing will own, good, record and indefeasible fee simple title to the
Representing party owned Real Property set forth on Schedules 2.1(a) and 3.1(a),
free and clear of all title defects, deeds of trust, mortgages, liens, claims,
charges, encumbrances, leases (except those disclosed on Schedule 5.19(d),
tenancies, licenses, security interest, covenants, agreements, conditions,
restrictions, reservations, judgments, rights of way, easements, encroachments,
rights of first refusal and other matters affecting title, excepting, however,
statutory liens that are not refusal and other matters affecting title that do
not materially impair the value of the property, and liens for current ad
valorem taxes and assessments not yet due and payable and existing utility,
access or other easements and rights of way and record and other liens that do
not materially interfere with or impair the present use, operation, value or
title of the
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property and the matters reflected on Schedule B of the title commitments for
each Representing Party Owned Real Property that have been previously received
by the Purchased Party (the "Permitted Liens and Encumbrances"). In addition:
(a) Except as disclosed on Schedule 519(a), to the
Representing Party's Knowledge, all buildings, structures, and improvements
which are located on or a part of the Representing Party Owned Real Property are
in good operating condition and repair and are structurally sound;
(b) The Representing Party has not received written notice of
a violation of any applicable ordinance or Law, order, regulation or requirement
or any covenant, condition, restriction or easement affecting the Representing
Party Owned Real Property or the use or occupancy thereof, which has not been
complied with or remedied, and has not received written notice of any
condemnation, lien, assessment or the like, relating to any party of the
Representing Party Owned Real Property or the operation thereof, in each case
which would have a material adverse effect on the Representing Party Owned Real
Property, except for Permitted Liens and Encumbrances;
(c) Except as disclosed on Schedule 5.19(c), to the
Representing Party's Knowledge, the Representing Party Owned Real Property and
all of Representing Party's operations thereon and therein are in compliance
with all applicable zoning ordinances, local building codes and ordinances; the
Representing Party has received no written notice that Representing Party's
Owned Real Property is in violation of local building codes, ordinance or zoning
laws, which violation or noncompliance would have any material adverse effect on
the Representing Party Owned Real Property; and the consummation of the
Transaction will not result, to the Representing Party's Knowledge, in a
violation of any applicable zoning ordinance or the termination of any
applicable zoning variance now existing;
(d) Except as disclosed on Schedule 5.19(d), there are no
leases affecting all or any part of the Representing Party Owned Real Property
and there are no material promises, understandings,, agreements or commitments,
either written or oral, between Representing party and any tenant or other
occupant of the Representing Party Owned Real Property.
(e) As of the date of this Agreement, no proceedings are
presently pending, nor, to the Representing Party's Knowledge, threatened for
the taking by exercise of the power of eminent domain, or in any other manner,
for public or quasi-public purpose, of all or any party of the Representing
Party Owned Real Property;
(f) To the Representing party's Knowledge, there is no plan,
study, or effort by any governmental authority or any non-governmental person or
agency which would materially adversely affect the current or planned use of any
of the Representing Party Owned Real Property;
(g) To the Representing Party's Knowledge, there is no
existing, proposed or contemplated plan to modify or realign any street or
highway or any existing, proposed or
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<PAGE> 43
contemplated eminent domain proceeding that would result in the taking of all or
any part of the Representing Party Owned Real Property or that would materially,
adversely affect the current or any planned use of the Representing Party Owned
Real Property; and
(h) Neither Representing Party nor the Representing Party
Owned Real Property is subject to any commitment, obligation or agreement
including, but not limited to, any right of first refusal or option to purchased
granted to a third party, which would prevent Representing Party from completing
or impairing Representing Party's ability to complete the transfer or conveyance
of the Representing Party Owned Real Property to the Purchasing Party or the
consummation of the Transaction or which would bind the Purchasing Party
subsequent to the completion of the Transaction.
Section 5.20 Intellectual Property.
(a) Schedules 2.1(m) and 3.1(m) contain a true and complete
list of all intellectual property owned by, registered in the name of,
or used by Representing Party in connection with the operation of the
Facility on the date hereof, or for which application has been made.
Representing Party owns or is a valid licensee of all intellectual
property rights listed on Schedules 2.1(m) and 3.1(m). Representing
Party has not received written notice that (i) any other entity claims
the right to use the intellectual property listed on Schedules 2.1(m)
and 3.1(m); (ii) any other entity asserts ownership rights in the
intellectual property listed on Schedules 2.1(m) and 3.1(m); (iii)
Representing Party's use of the intellectual property listed on
Schedules 2.1(m) and 3.1(m) may infringe any rights of any third party;
or (iv) any third party is infringing any of Representing Party's
rights in the intellectual property listed on Schedules 2.1(m) and
3.1(m).
(b) To the Knowledge of Representing Party, no officer,
director or employee of Representing Party has entered into any
contract which requires such officer, director or employee to assign
any interest in any intellectual property or keep confidential any
trade secrets, proprietary data, patient lists or other business
information of Representing Party or which restricts or prohibits such
officer, director or employee from engaging in activities competitive
with Representing Party.
Section 5.21 Insurance. A complete and accurate lists of all insurance
policies held by Representing Party and now in force (including, without
limitation, property damage, public liability, medical malpractice liability,
worker's compensation in the case of CCS only, fidelity bonds, errors and
omissions, theft, forgery and other coverage), is attached as Schedule 5.21. All
such policies are in full force and effect, and the premiums due thereon have
been timely paid. Representing Party is not in default regarding the provisions
of any such policy and has not failed to give any notice or present any material
claim thereunder in due and timely fashion.
Section 5.22 Pending Transactions. With respect to the Facilities,
there are no (i) pending acquisitions or sales by Representing Party which are
subject to a written letter of intent or other
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agreement in principle, (ii) pending behavioral hospital development projects;
or (iii) pending private placements of any security of Representing Party.
Section 5.23 Operations. CCS represents and warrants that neither
Houston Health Alliance nor any other CCS subsidiary or Affiliate owns any
assets, operates any portion of, or performs any services for, Gulf Pines
Hospital, or is in any way Affiliated with Gulf Pines Hospital except by
ownership by CCS or common ownership by an Affiliate of CCS.
ARTICLE 6
COVENANTS OF MPH AND CCS
Section 6.1 Efforts to Consummate Transaction. Subject to the terms and
conditions herein provided, each of the parties hereto shall use its reasonable
commercial efforts to take, or to cause to be taken, all reasonable actions and
to do, or to cause to be done, all reasonable things necessary, proper or
advisable under applicable Laws to consummate and make effective, as soon as
reasonably practicable, the Transaction, including the satisfaction of all
conditions thereto set forth herein.
Section 6.2 Cooperation. Prior to and after the Closing, upon prior
reasonable written request, each party will cooperate with the other in every
reasonable commercial way to consummate the Transaction.
Section 6.3 Further Assistance. From time to time, at the request of
either party, whether on or after the Closing, without further consideration,
either party, at its expense and within a reasonable amount of time after
request hereunder is made, shall execute and deliver such further instruments of
assignment, transfer and assumption and take such other action as may be
reasonably required to effectively assign and transfer particular Assets
Transferred by the Transferring Party to, and vest the Liabilities Assumed by
the Purchasing Party in, the Purchasing Party, deliver or make the payment of
the Exchange Price to the Transferring Party or any amounts due from one party
to the other pursuant to the terms of this Agreement or confirm the Transferring
Party's ownership of the Assets Excluded and obligations with respect to the
Liabilities Excluded.
Section 6.4 Cooperation Respecting Proceedings. After the Closing upon
prior reasonable written request, each party shall cooperate with the other, at
the requesting party's expense (but including only out-of-pocket expenses to
third parties and not the costs incurred by any party for the wages or other
benefits paid to its officers, directors or employees), in furnishing
information, testimony and other assistance in connection with any inquiries,
actions, tax or cost report audits, proceedings, arrangements or disputes
involving either of the parties hereto (other than in connection with disputes
between the parties hereto) and based upon contracts, arrangements or acts of
the Transferring Party which were in effect or occurred on or prior to the
Closing and which relate to the Assets Transferred by that Transferring Party,
including, without limitation, arranging
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discussions with (and the calling as witness of) officers, directors, employees,
agents, and representatives of the Purchasing Party.
Section 6.5 Expenses. Whether or not the Transaction contemplated
hereby is consummated, except as otherwise provided in this Agreement, all costs
and expenses incurred in connection with this Agreement and the Transaction
contemplated hereby shall be paid by the party incurring such expenses.
Section 6.6 Announcements; Confidentiality; Non-Solicitation. Prior to
the Closing Date, no press or other public announcement, or public statement or
comment in response to any inquiry, relating to the Transaction contemplated by
this Agreement shall be issued or made by MPH or CCS without the prior written
consent of the other party. Subject to the foregoing, the parties hereto
recognize and agree that all information, instruments, documents and details
concerning the businesses of MPH and CCS are strictly confidential, and MPH and
CCS expressly covenant and agree with each other that, prior to and after the
Closing, they will not, nor will they allow any of their respective officers,
directors, employees, representatives or agents (including professional
advisors) to disclose or publicly comment upon any matters relating to the
business of the other or relating to this Agreement, including, without
limitation, the terms, timing or progress of the Transaction contemplated
hereby, or its negotiation, terms, provisions or conditions, including Exchange
Price, except for disclosure to their respective professional advisors (who
shall agree not to disclose the same) which is reasonably necessary to
effectuate the Transaction contemplated hereby in a manner consistent with the
provisions of this Agreement and disclosures required by any Laws.
Notwithstanding anything contained in this Agreement to the contrary, except in
connection with filings to obtain Licenses necessary for consummation of the
Transaction (but subject to Section 6.2) and except as may be required by any
Laws (based on advice of independent counsel), MPH and CCS shall not (nor shall
either party allow any of its officers, directors, employees, representatives or
agents to), without the prior written consent of the other party (in its sole
and absolute discretion), disclose to or otherwise discuss with any person,
regulatory board, fiscal intermediary or other entity the parties' proposed
exchange of the Assets Transferred to MPH and CCS, the contents of this
Agreement or the negotiation of this Agreement. Each party shall keep all
information obtained from the other either before or after the date of this
Agreement confidential, and neither party shall reveal such information to, nor
produce copies of any written information for, any person outside its management
group or its professional advisors without the prior written consent of the
other party, unless such party is compelled to disclose such information by
judicial or administrative process or by any other requirements of Law. If the
Transaction contemplated by this Agreement should fail to close for any reason,
each party shall (i) return to the other within seven (7) days of receiving a
written request therefor all originals and copies of written information
provided to such party by or on behalf of the other party and none of such
information shall be used by either party, or their employees, agents or
representatives in the business operations of any person and (ii) whether or not
this Agreement is consummated, refrain from offering or soliciting employment of
the other party's current employees at each respective Facility for one (1) year
from the date of this Agreement, without the prior written consent of the other
party; further, CCS shall refrain from offering or soliciting employment of the
employees at the MPH Affiliate's facility known as Cypress
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Creek Hospital. Notwithstanding the foregoing, each party's obligations under
this Section shall not apply to any information or document which is or becomes
available to the public other than as a result of a disclosure by the other
party in violation of this Agreement or other obligation of confidentiality
under which such information may be held or becomes available to the party on a
non-confidential basis from a source other than the other party or its officers,
directors, employees, representatives or agents. Brown Schools and CCS Parent
shall, and shall cause each of their respective Affiliates to, comply with the
obligations set forth in this Section 6.6. The obligations under this Section
shall survive the termination of this Agreement.
Section 6.7 Preservation of and Access to Certain Hospital Records.
(a) As set forth in Section 2.1(k) and Section 3.1(k), all or
any portion of the medical, clinical and other records directly or
indirectly associated with the admission, care and treatment of
Straddle Patients on or prior to the Closing Date (the "Straddle
Patient Records"), and all financial, patient and other records of each
Facility for the period ending on or prior to the Closing Date, whether
or not maintained at or by the Facilities (the Straddle Patient Records
and such other records are collectively referred to as the "Hospital
Records") shall be Assets Transferred to MPH or CCS, respectively.
(b) Each party will afford the other party, its counsel,
accountants and other representatives, during normal business hours,
reasonable access to the Hospital Records in such party's possession
relating directly or indirectly to the properties, liabilities or
operations of the Facilities, with respect to periods prior to the
Closing, and the right to make copies and extracts therefrom, to the
extent that such access may be reasonably required by the requesting
party for any lawful purpose. Each party agrees for a period extending
seven (7) years after the Closing (and, if at the expiration thereof
any tax or Payor audit or judicial proceeding is in progress or the
applicable statute of limitations has been extended, for such longer
period as such audit or proceeding is in progress or such statutory
period is extended) (the "Document Retention Period") not to destroy or
otherwise dispose of any such records. After the expiration of the
aforementioned Document Retention Period, the Purchasing Party shall
not, without ninety-one (91) days prior written notification to the
Transferring Party, destroy any Hospital Records in its possession. The
Transferring Party shall have the right, at its own expense, for ninety
(90) days after its receipt of such notice of intent to destroy, to
remove any such records from the locations at which they may be
maintained. Notwithstanding the foregoing, the Transferring Party's
access to, or right to make copies of, any Hospital Records shall be
subject to any applicable Law, accreditation standard or rule or
agreement (express or implied) of confidentiality.
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ARTICLE 7
ADDITIONAL COVENANTS OF MPH AND CCS
MPH and CCS hereby additionally covenant, promise and agree as follows:
Section 7.1 Conduct Pending Closing. Prior to consummation of the
Transaction or the termination or expiration of this Agreement pursuant to its
terms, unless the other party shall otherwise consent in writing, which consent
shall not be unreasonably withheld or delayed, and except for actions taken
pursuant to Contracts Assumed by MPH or CCS, or which arise from or are related
to the anticipated transfer of the Assets Transferred to MPH or CCS, or as
otherwise contemplated by this Agreement or disclosed in Schedule 7.1 or another
Schedule to this Agreement, MPH and CCS shall:
(a) Conduct the business represented by, and otherwise deal
with, the Assets Transferred to MPH and CCS, respectively, only in the
usual and ordinary course, materially consistent with practices
followed prior to the execution of this Agreement, except as required
by Law;
(b) Use reasonable efforts to keep intact the Assets
Transferred to MPH and CCS, respectively, and the business they
represent and to preserve relationships beneficial to such business
that doctors, patients, Payors, suppliers and others have with the
Facilities;
(c) Except as required by their terms, not amend, terminate,
renew, fail to renew or renegotiate any material contract, except in
the ordinary course of business and consistent with practices of the
recent past, or default or take or omit to take any action that, with
or without the giving of notice or passage of time, would constitute a
default in any of its obligations under any such contracts, that would
be a Contract Assumed by MPH or CCS as of the date hereof;
(d) Not sell, lease, mortgage, encumber, or otherwise dispose
of or grant any interest in, or permit or suffer to exist any lien or
encumbrance upon or the disposition of, any Facility, Inventory, or
items of Equipment having an undepreciated book value in excess of
$10,000, including without limitation any of its leasehold interests
therein, whether by the taking of action or the failure to take action,
except for (i) sales of MPH or CCS Inventory in the ordinary course,
(ii) liens constituting permitted Encumbrances, or (iii) sales or
dispositions of MPH or CCS Equipment in the ordinary course of business
that are consistent with practices of the recent past;
(e) Maintain in force and effect the insurance policies
identified in Section 5.21;
(f) Not enter into any contract that will constitute a
Contract Assumed by MPH or CCS as of the Closing except in the ordinary
course of business and consistent with practices of the recent past;
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(g) Not grant any general or uniform increase in the rates of
pay or benefits to current employees (or a class thereof) or any
increase in salary or benefits of any chief executive or financial
officer of any Facility, except for compensation previously agreed to
prior to the date hereof;
(h) Not increase the compensation payable to or to become
payable to any employee listed on Schedule 4.5(b) whose gross
compensation is in excess of $30,000, except general hourly rate
increases and normal merit increases for employees made in the ordinary
course of business and consistent with past practice;
(i) Not sell or make any commitment to sell any of the assets
to be transferred to the Purchasing Party other than in the ordinary
course of business and consistent with past practice;
(j) Not take any action, or omit to take any action, which
would cause the representations and warranties contained in Article 5
to be untrue or incorrect in any material respect;
(k) Not make any changes in its accounting methods or
practices, except for changes in its accounting methods or practices
that may be necessitated by changes in applicable Laws or changes in
its financial reporting practices necessitated by GAAP; or
(l) Not make any loan to any person nor make any agreement or
commitment that will result in or cause to occur a violation of any of
the items contained in paragraphs (a) through (k) above;
provided that nothing in this Section shall (i) obligate the
Transfer-ring Party to make expenditures other than in the ordinary
course of business and consistent with practices of the recent past or
to otherwise suffer any economic detriment (ii) preclude the
Transferring Party from paying, prepaying or otherwise satisfying any
liability which, if outstanding as of the Closing Date, would be a
Liability Assumed by MPH or CCS or a Liability Excluded from MPH or
CCS, or (iii) preclude the Transferring Party from incurring any
liabilities or obligations to any third party in connection with
obtaining such party's consent to any transaction contemplated by this
Agreement or the Related Agreements provided such liabilities and
obligations under this clause (iii) shall be Liabilities Excluded from
MPH or CCS pursuant to Sections 2.4(h) and 3.4(h), respectively.
Section 7.2 Access and Information, Environmental Survey; Remediation
or Adjustment.
(a) Subject to the restrictions set forth in Section 6.6
respecting confidentiality and provided that the Purchasing Party has
complied with each and every provision thereof, the Transferring Party
shall afford the Purchasing Party, and the counsel, accountants and
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other representatives of the Purchasing Party, reasonable access,
throughout the period from the date hereof to the Closing, to the
Assets Transferred to MPH and CCS and the employees, personnel and
medical staff associated therewith and all the properties, books,
contracts, commitments, cost reports and records respecting the Assets
Transferred to MPH and CCS (regardless of where such information may be
located). Such access shall be afforded on a reasonable basis, during
normal business hours whenever reasonably possible and only in such
manner so as not to disturb patient care or to interfere with the
normal operations of the Facilities. The Transferring Party's covenants
under this Section are made with the understanding that the Purchasing
Party shall use all such information in compliance with all Laws. The
foregoing notwithstanding, the Purchasing Party acknowledges and agrees
that the Purchasing Party's access to the books and records of the
Assets Transferred to MPH and CCS shall not include access to any
privileged information concerning any alleged dispute or any pending
litigation, investigation or proceeding involving the Transferring
Party or its Affiliates, and the Transferring Party shall not have any
obligation to deliver any such information to the Purchasing Party;
moreover, the Purchasing Party shall not have access to patient or
employee records or any other records the disclosure of which would be
prohibited by any Law, accreditation standards, or rule or agreement
(express or implied) of confidentiality, except that the Purchasing
Party may be granted access to such records to the extent they are
appropriately redacted and in conformity with such other reasonable
procedures as may be required to conform to any such requirements of
Law, accreditation standards or rule or agreement of confidentiality.
(b) Prior to the Closing, MPH and CCS shall provide to each
other copies of the most recent Level I Environmental Assessment
Reports prepared for each Facility. Neither party makes any
representations or warranties with respect to the information contained
therein with respect to each of the Facilities. MPH and/or CCS (at its
sole expense) may have performed an additional Level I Environmental
Assessment Report on the real property they will acquire pursuant to
this Agreement (the "Environmental Survey"). The Environmental Survey
shall be conducted by an environmental consulting firm or firms (the
"Consultant") and in accordance with such reasonable procedures as are
determined by the Transferring Party, in its reasonable discretion, and
the Transferring Party shall make reasonable efforts to accommodate
reasonable requests of the Purchasing Party with respect to such
procedures that do not delay the completion of the Environmental
Survey. The results of any such Environmental Survey shall be delivered
to and owned by the Purchasing Party, and all proceedings in connection
with the Environmental Survey and the results thereof shall be subject
to the confidentiality provisions of Section 6.6 and such other
restrictions as the Transferring Party may impose in its reasonable
discretion.
(c) With respect to any matters disclosed by such
Environmental Survey that would constitute a breach of MPH or CCS's
warranties Section 5.12, but for the qualifications to such warranties
based on the Transferring Party's Knowledge or disclosures in the
Environmental Survey, the Transferring Party will at its election,
either (i) clean up or otherwise remediate such matters in a reasonable
manner prior to the Closing Date, at its
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expense, or (ii) reimburse the Purchasing Party for the costs of such
reasonable clean-up or remediation incurred by the Purchasing Party
after the Closing Date, provided the Transferring Party shall have
approved such costs in advance and in writing (such approval not
unreasonably to be withheld); provided, however, that in no case will
the Transferring Party be required to remove or otherwise remediate (or
bear the costs of same) any Hazardous Materials used as construction
materials in structures or improvements constituting the Facilities.
Section 7.3 Updating. MPH and CCS shall notify each other of any
changes or additions to any of their respective Schedules to this Agreement by
the delivery of updates thereof, if any, as soon as they become aware of any
such change, provided, however, that the Financial Information shall be updated
within thirty (30) days of the end of each month subsequent to December 31,
1997. No such updates made pursuant to this Section shall be deemed to cure-any
breach of any representation or warranty made in this Agreement, unless the
non-breaching party specifically agrees thereto in writing, nor shall any such
notification be considered to constitute or give rise to a waiver by either
party of any condition set forth in this Agreement.
Section 7.4 Exclusivity. Each of MPH and CCS contemplates the
expenditure of substantial sums of time and money in connection with legal,
accounting, and due diligence work to be performed in conjunction with the
Transaction prior to the Closing Date. Consequently, upon execution of this
Agreement, and until termination of this Agreement in accordance with Section
9.1, CCS and MPH agree: (a) to negotiate exclusively with the other with respect
to any proposed transfer or acquisition of, or merger, consolidation or business
combination with respect to the operations of Gulf Pines Hospital and Meadow
Pines Hospital; (b) not to solicit, initiate, consider or encourage the
submission of other proposals or offers from any person concerning a transaction
or provide information with respect to the transferred assets to any person in
connection with a possible transaction, in either case whether such person is an
officer or employee of CCS or MPH or otherwise,; and (c) not to divulge or
otherwise disclose any information to any person regarding any aspect of this
Transaction, including, but not limited to, purchase price, terms, conditions,
financing or status of negotiations and discussions between CCS and MPH or their
authorized representatives.
Section 7.5 Cost Reports.
(a) MPH and CCS shall cause to be prepared and timely filed
all Cost Reports which are required to be filed with Medicare and
Medicaid with respect to the operations of the Facilities for any and
all periods ending on or prior to the Closing Date. For the Facility
each party is transferring pursuant to this Agreement, the Transferring
Party shall retain all rights and all obligations for amounts due to or
from Medicare and Medicaid to the extent such Cost Reports cover any
period through Closing. The parties hereby acknowledge and agree that
neither party is being assigned or otherwise receiving and is not
hereby assuming any of the same. The Transferring Party's rights with
respect to Cost Reports filed
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with Medicare and Medicaid through Closing shall include, without
limitation, the right to dispute or to appeal any determinations
relating to such reports.
(b) With respect to Cost Reports containing costs attributable
to Straddle Patients ("Straddle Cost Reports") the Purchasing Party
shall provide such information at such times and in such formats as is
reasonably requested by the Transferring Party to allow it to file such
Cost Reports for the period of time prior to the Closing Date in a
timely manner. All amounts due to or from Payors with respect to such
Straddle Cost Reports shall, as regards Payors, be the responsibility
of the Purchasing Party. The parties shall further cooperate with one
another with respect to disputes with or audits by Payors in respect of
Straddle Cost Reports, so that the party who, under the foregoing
provisions, has the economic interest in the matter that is the subject
of dispute or audit shall have effective control over the resolution
thereof with such Payors, including effective control over any appeals
or legal proceedings with respect thereto.
(c) After the Closing and for the period of time necessary to
conclude any pending or potential audit or contest of any Cost Reports
with respect to the Facilities that include periods ending on or before
the Closing Date (which period of time shall generally be five (5)
years after the month of the filing date of the Cost Report), the
Purchasing Party shall (a) properly keep and preserve all financial
books and records delivered to the Purchasing Party by the Transferring
Party and utilized in preparing such Reports, including, without
limitation, accounts payable invoices, Medicare logs and billing
information in accordance with Section 6.7, and (b) within five (5)
days of MPH and CCS's receipt of the same, forward to the Transferring
Party all information received from Payors relating to periods prior to
and as of the Closing Date including, without limitation, Cost Report
Settlements, notices of program reimbursements, demand letters for
payment and proposed audit adjustments. Upon reasonable written notice
by the Transferring Party, the Transferring Party (or its agents) shall
be entitled, at the Transferring Party's expense, during regular
business hours, to have access to, inspect and make copies of all such
books and records. Upon the reasonable request of the Transferring
Party, the Purchasing Party shall assist in obtaining information
deemed by the Transferring Party to be necessary or desirable in
connection with any audit or contest of such reports. To the extent
required to meet its obligations under this Section, each party shall
provide to the other the reasonable support of its employees at no cost
to the Transferring Party.
Section 7.6 Tax Matters. After the Closing, MPH and CCS, respectively,
shall be responsible for causing its employees, at no cost to the Transferring
Party, to assist the Transferring Party, in the same manner and to the extent
that personnel of the Facilities currently provide such assistance, in the
preparation and filing of all returns relating to taxes imposed upon the
businesses operated through the Assets Transferred to MPH and CCS, respectively,
that relate to periods ending on or prior to the Closing Date, including without
limitation, income tax and information returns.
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Section 7.7 Risk of Loss. In the event there is any damage to or loss
of Gulf Pines Hospital (whether by fire, theft, vandalism or other cause or
casualty), in whole or in part, between the date hereof and the Closing, the
Purchase Price shall be reduced by the amount necessary to repair the damage,
which reduction shall be offset by any amounts paid by CCS's insurer. CCS hereby
assigns to MPH such insurance proceeds. In the event there is any damage to or
loss of Meadow Pines Hospital (whether by fire, theft, vandalism or other cause
or casualty), in whole or in part, between the date hereof and the Closing, MPH
may terminate this Agreement; however, if MPH does not terminate the Agreement,
the Purchase Price shall be reduced by the amount necessary to repair the
damage, which reduction shall be offset by any amounts paid by MPH's insurer.
MPH hereby assigns to CCS such insurance proceeds, if MPH does not terminate
this Agreement.
Section 7.8 Post-Closing Insurance. The Transferring Party for five (5)
years after the Closing, shall maintain comprehensive general liability and
hospital professional liability insurance coverages with at least one million
dollars of coverage per occurrence and three million dollars of coverage in the
aggregate with respect to the Facility for all periods prior to the Closing in
substantially their present form as described on Schedule 5.21 (the "Insurance
Program"), provided that (a) the Transferring Party shall have the right to
reduce (but not increase beyond $100,000 per occurrence) the existing deductible
under the Insurance Program and (b) shall have the right to cancel or terminate,
or have canceled or terminated, the coverages under the Insurance Program so
long as the Transferring Party acquires (from (i) its present insurance company
or (ii) another reasonably acceptable insurance company under a reasonably
acceptable policy) an extended discovery period of not less than five (5) years
after any such cancellation or termination for periods prior to the Closing.
Such Insurance Program, if maintained, shall be maintained at the Transferring
Party's expense, and if such Insurance Program is maintained, the Transferring
Party shall cause the Purchasing Party to be named as an additional insured with
respect to the applicable Facility and the Transferring Party shall provide the
Purchasing Party with copies thereof and copies of renewals prior to the
expiration of the prior policy or policies. The Transferring Party shall use
commercially reasonable efforts to avoid invalidating the insurance policies
referred to in this Section 7.8.
Section 7.9 Consents. The Transferring Party covenants and agrees that
it will use its best efforts prior to Closing to obtain all consents, approvals,
authorizations and waivers of third parties, whether governmental or private,
necessary for the consummation of the Transaction. All such consents shall be in
writing and executed counterparts thereof shall be delivered to the Purchasing
Party promptly after the Transferring Party's receipt thereof.
Section 7.10 Relationship with Employees, Suppliers and Patients. At
all times prior to the consummation of the Transaction, the Transferring Party
shall use its reasonable efforts consistent with past practice (without making
any commitments other than in the ordinary course of business and consistent
with past practice), to (i) preserve the Facility intact, (ii) keep available
the present key officers and employees located at the Facility, (iii) preserve
the present relationships of the Facility with its suppliers, physicians,
advisers, patients, and payors and others having business
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relationships therewith, and (iv) take all steps reasonably necessary to
maintain its intangible assets and intellectual property.
Section 7.11 Amendment to Certificate of Incorporation or Bylaws. The
Transferring Party shall not amend its Certificate of Incorporation or Bylaws
between the date of this Agreement and the Closing Date without the prior
written consent of the Purchasing Party.
Section 7.12 Other Actions. Between the date hereof and the Closing
Date, Transferring Party shall not take any action that would, or reasonably
might be expected to, result in any of its representations and warranties set
forth herein being or becoming untrue in any material respect, or in any of the
conditions set forth in this Agreement not being satisfied, or (unless such
action is required by applicable Law) which would have a material adverse effect
on the ability of either party to obtain any consents or approvals required for
the consummation of the Transaction contemplated hereby.
Section 7.13 Non-Facility Records. No later than sixty (60) days after
the Closing, CCS shall remove, at its expense, from Gulf Pines Hospital all
records located at Gulf Pines Hospital which are not related to the operation of
Gulf Pines Hospital. The removal of such records shall be during reasonable
business hours with 24 hours advance notice to MPH. Notwithstanding the above,
the records which are necessary for the collection of the Red River Receivables
by CCS may be maintained at Gulf Pines Hospital through June 30, 1998 and shall
be completely removed, at CCS' expense, no later than June 30, 1998.
Section 7.14 Reliance on Environmental Survey. MPH shall use all
commercially reasonable efforts to obtain from KTR Environmental Services, Inc.
a letter addressed to CCS to the effect that CCS is entitled to rely on the
Update to Environmental Site Assessment Phase 1, dated June 2, 1997.
ARTICLE 8
CONDITIONS TO CLOSING
The obligations of MPH and CCS to consummate the Transaction at the
Closing shall be subject to the fulfillment at or prior to the Closing of the
following conditions as applied to the other party, unless such fulfillment is
waived by the party entitled to the benefits of the condition:
Section 8.1 Performance of Agreement. The other party shall have
performed in all material respects its agreements and obligations contained in
this Agreement required to be performed on or prior to the Closing.
Section 8.2 Accuracy of Representations and Warranties. The
representations and warranties of the other party set forth in Article 5 of this
Agreement shall be true in all respects as
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of the date of this Agreement (unless the inaccuracy or inaccuracies which would
otherwise result in a failure of this condition have been cured by the Closing)
and shall be true in all material respects as of the Closing (without reference
to revised Schedules contemplated by Section 7.3) as if made as of such time.
Section 8.3 Officer's Certificate. The other party shall have delivered
an officer's certificate, executed on its behalf by its chief executive officer,
president or chief financial officer (in his or her capacity as such) dated the
Closing Date, stating that to the Knowledge of such individual the conditions in
Sections 8.1 and 8.2 above have been met.
Section 8.4 Consents. Subject to the provisions of Sections 4.7 and
4.9, all approvals, consents, authorizations and waivers from governmental and
accreditation agencies and from third parties, as set forth on Schedule 8.4,
shall have been obtained, unless the failure to obtain such consent is solely
the result of the breach by the party required to obtain or deliver such consent
of the provisions of Sections 6.1, 6.2 or 6.3 of this Agreement in which case
such failure shall not constitute a condition to that party's obligation to
consummate the Transaction.
Section 8.5 Absence of Injunctions. There shall not be in effect a
temporary restraining order or a preliminary or permanent injunction or other
order, decree or ruling by a court of competent jurisdiction or by a
governmental agency which restrains or prohibits either party's exchange or
operation of the Assets Transferred to MPH or CCS provided that the parties will
use their reasonable efforts to litigate against the entry of, or to obtain the
lifting of, any such order or injunction, and the existence of any such
temporary restraining order or preliminary injunction shall operate, at the
option of the other party, only to delay the Closing (and extend the Termination
Date) until the thirtieth day following the lifting of any such order or
injunction, except that such delay may not extend the original Termination Date
for more than one (1) month.
Section 8.6 Title to Real Property. Each party shall have received
written evidence of the willingness of Lawyers Title Insurance Corporation (or
an Affiliate thereof; the "Title Insurer") to issue standard Form T-1 Texas
Owner Policies of Title Insurance (the "Title Policies") in amounts equal to the
respective portions of the Exchange Price allocated to the Owned Real Property
of the other party. The Title Policies shall insure that Purchasing Party has
good and indefeasible fee simple title to the CCS Owned Real Property and the
MPH Owned Real Property, as applicable, subject only to the Permitted Liens and
Encumbrances and the standard printed exceptions with those standard permitted
exceptions amended or deleted as follows: (i) the survey exception must be
amended to read "shortages in area" only (the survey exception will only be so
amended if the Purchasing Party obtains a current survey of the applicable
property satisfactory to the Title Insurer for such purpose); (ii) the exception
for taxes must be completed with only the current year filled in and must be
annotated "not yet due and payable"; (iii) no exception will be permitted for
"visible and apparent easements" or words to that effect (although reference may
be made to any specific easement or use shown on the a current survey of the
applicable property); and (iv) no liens will be shown on Schedule B other than,
if applicable, any liens that may be referred to in this Agreement as being part
of the title being conveyed to a Purchasing Party.
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The willingness of the Title Insurer to issue the Title Policies shall
be evidenced either by the issuance thereof or the written commitments or
binders of the Title Insurer to issue such Title Policies within a reasonable
time after the Closing Date, subject to actual transfer of the real property in
question. If the Title Insurer is unwilling to issue such Title Policy, the
Purchasing Party shall be required to provide, within one (1) business day after
being notified of the Title Company's unwillingness, but in no event later than
the Closing Date, to Transferring Party, in writing, notice setting forth the
reason(s) for such unwillingness. The Transferring Party shall have the right to
seek to cure any defect which is the reason for such unwillingness, and, if such
notice by the Purchasing Party is given less than five (5) business days prior
to the then scheduled Closing Date, then the Closing Date (and, to the extent
necessary, the Termination Date) shall be extended for a period of up to ten
(10) business days after the date of such notice, to provide to the Transferring
Party such opportunity to cure.
Section 8.7 Environmental Survey and Engineer Survey. The Purchasing
Party shall have received the Environmental Survey conducted pursuant to Section
7.2(b) and the results of such Environmental Survey shall not have disclosed any
past or present condition, process or practice with respect to the Facility or
any property owned, occupied or operated by the Transferring Party or any
Affiliates thereof, at any time in connection with the operation of the Facility
which is not in material compliance with all applicable Environmental Laws. The
Purchasing Party shall have received the results of a survey of the Transferring
Party's Facility prepared by an engineering firm chosen by the Purchasing Party
and the results of such shall not have disclosed any material defect in such
Facility or the operating systems thereof. MPH shall be reasonably satisfied
with the condition and compliance with Environmental Laws with respect to the
removal and disposition of the underground storage tank and the metal drum that
had been located at Gulf Pines Hospital, and with respect to the stained soil
under and near an emergency generator at Gulf Pines Hospital as reported in the
CCS Environmental Survey. MPH shall be reasonably satisfied with the results of
Geraghty & Miller's additional investigation being conducted pursuant to that
certain work order dated February 19, 1998.
Section 8.8 Receipt of Other Documents. The Purchasing Party shall have
received the following from the Transferring Party:
(a) Certified copies of the resolutions of the Transferring
Party's board of directors respecting this Agreement, the Agreements
and the Transaction, together with certified copies of any shareholder
resolutions which are necessary to approve the execution and delivery
of this Agreement and any Agreements and/or the performance of the
obligations of the Transferring Party hereunder and thereunder;
(b) Certified copies of the Transferring Party's Charter
Documents, together with a certificate of the corporate secretary of
each that none of such documents have been amended;
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<PAGE> 56
(c) One or more certificates as to the incumbency of each
officer of the Transferring Party who has signed the Agreement, any
Agreement or any certificate, document or instrument delivered pursuant
to the Agreement or any Agreement;
(d) Good standing certificates for the Transferring Party from
the Secretary of State of its states of incorporation, dated as of a
date not earlier than thirty (30) business days prior to the Closing
Date;
(e) Copies of all third party and governmental consents,
permits and authorizations that the Transferring Party has received in
connection with the Agreement, the Agreements and the Transaction; and
(f) Certificates of non-foreign status in the form required by
Section 1445 of the Code duly executed by the Transferring Party.
Section 8.9 CCS Payor Contracts. MPH can elect not to assume any
contract with a third party payor based on its review of contracts if such
contract contains an obligation to provide additional care to patients after
discharge or includes payments to CCS on a capitated, prepaid or risk basis. MPH
can terminate the Agreement if the contracts with third party payors listed in
MPH Exhibit 8.4, taken as a whole, would not be Profitable to Cypress Creek
Hospital, Inc. on a pro forma basis. Profitable is defined as net revenue
resulting from the contract in the 12 months ended 12/31/97 less the direct,
indirect and overhead costs (but excluding Medicare capital costs and home
office allocation) of Cypress Creek Hospital, Inc., allocated using the
methodology used for Medicare cost reports.
ARTICLE 9
TERMINATION
Section 9.1 Termination. This Agreement and the Transaction may be
terminated as follows:
(a) By either MPH or CCS at any time prior to Closing by
written notice to the other, if there has been a material violation or
breach by the other party of any of the agreements, representations or
warranties contained in this Agreement which has not been waived in
writing by the non-breaching party;
(b) On or after March 2, 1998 (but subject to Section 4.9), by
a party that shall, on or before March 2, 1998, have materially
performed its obligations hereunder and satisfied the conditions to
Closing it is required to satisfy for the benefit of the other party,
by written notice to the other party, with such termination to be
effective at noon on the day after delivery of such terminating notice
unless the other party shall have performed its
49
<PAGE> 57
obligations hereunder and satisfied the conditions to Closing it is
required to satisfy for the benefit of the notifying party at or before
such time; or
(c) By MPH, as provided in Section 7.7.
Each party's right of termination hereunder is in addition to any other rights
it may have hereunder or otherwise.
Section 9.2 Effect of Termination. In the event this Agreement is
terminated pursuant to Section 9.1, all further obligations of the parties
hereunder shall terminate upon the effectiveness of termination, except that the
obligations set forth in Sections 6.5 and 6.6 and in Articles 10, 11 and 12
shall survive. In the event of termination of this Agreement as provided above,
there shall be no liability on the part of a party to another under and by
reason of this Agreement or the Transaction contemplated hereby except as set
forth in this Agreement, and except for fraudulent acts by a party the remedies
for which shall not be limited by the provisions of this Agreement. The
foregoing provisions shall not, however, limit or restrict the availability of
specific performance or other injunctive or equitable relief to the extent that
specific performance or such other relief would otherwise be available to a
party hereunder.
ARTICLE 10
SURVIVAL AND REMEDIES; INDEMNIFICATION
Section 10.1 Survival. Except as may be otherwise expressly set forth
in this Agreement, the representations, warranties, covenants and agreements of
MPH and CCS set forth in this Agreement, or in any writing required to be
delivered in connection with this Agreement, shall survive for the period ending
at the close of business on September 30, 1999.
Section 10.2 Exclusive Remedy. Absent fraud, the sole exclusive remedy
for damages of a party hereto for any breach of the representations, warranties,
covenants and agreements of the other party contained in this Agreement and the
Agreements shall be the remedies contained in this Article 10.
Section 10.3 Mutual Indemnity.
(a) MPH and Brown Schools on the one hand, or CCS and CCS
Parent on the other hand, as appropriate (in each case, collectively,
the "Indemnifying Party"), shall indemnify the other party (the
"Indemnified Party") and hold the Indemnified Party harmless from and
against any and all loss, liability, damage and expense, including
reasonable attorneys' fees and costs of investigation, litigation,
settlement and judgment (collectively "Losses"), which Indemnified
Party may sustain or suffer or to which Indemnified Party may become
subject as a result of:
50
<PAGE> 58
(i) The inaccuracy of any representation or the
breach of any warranty made by the Indemnifying Party herein
or in an Agreement;
(ii) The nonperformance or breach of any covenant or
agreement made or undertaken by the Indemnifying Party in this
Agreement or in an agreement delivered by the Indemnifying
Party in connection herewith;
(iii) If the Closing occurs, the existence of, or the
failure of the Indemnifying Party to pay, discharge or perform
as and when due, any of the Liabilities Excluded by the
Indemnifying Party, as the case may be;
(iv) If the Closing occurs, the operations, prior to
and on the Closing Date, of the Indemnifying Party with
respect to Assets Transferred to the Indemnified Party and the
Liabilities Assumed by the Indemnified Party;
(v) If the Closing occurs, the ongoing operations,
after the Closing Date, of the Indemnifying Party with respect
to the Assets Transferred to the Indemnifying Party and the
Liabilities Assumed by the Indemnifying Party; and
(vi) If the Closing occurs, any acts or omissions by
the Indemnifying Party arising from or in connection with any
Pension Plans or Multi-employer Plans covering employees who
work at their respective Facilities.
(b) The indemnification obligations of the Indemnifying Party
provided above shall, in addition to the qualifications and conditions
set forth in Sections 10.4 and 10.5, be subject to the following
qualifications:
(i) The Indemnified Party shall not be entitled to
indemnity under Subsection (a)(i) above unless:
(A) Written notice to Indemnifying Party of such
claim specifying the basis thereof is made, or an
action at law or in equity with respect to such claim
is served, before September 30, 1999;
(B) If the Closing occurs, the Losses sustained or
suffered by the Indemnified Party or to which it may
be subject as a result of circumstances described in
such Subsection (a)(i) exceeds, in the aggregate, the
sum of $50,000 if the Indemnifying Party is CCS and
the Indemnified Party is MPH, and the sum of Two
Hundred Fifty Thousand Dollars ($250,000) if the
Indemnifying Party is MPH and the Indemnified Party
is CCS (in either case, the "Trigger Amount"), in
which case the Indemnified Party shall be entitled
only to recover the amount by which Losses exceed
Fifty Thousand Dollars ($50,000) if the Indemnifying
Party is CCS and the Indemnified Party is
51
<PAGE> 59
MPH, and the sum of Two Hundred Fifty Thousand
Dollars ($250,000) if the Indemnifying Party is MPH
and the Indemnified Party is CCS (in the respective
case, the "Deductible Amount"), provided, however,
that (1) individual claims of Five Thousand Dollars
($5,000) or less shall not be aggregated for purposes
of calculating either the Trigger Amount, the
Deductible Amount or the excess of Losses over the
Deductible Amount and (2) no Trigger Amount and no
Deductible Amount shall apply and this clause (B)
shall not apply to any claim by MPH under Section
10.3(c) or Section 10.3(d) below; and
(C) If the Closing occurs, in no event shall the
Indemnifying Party be liable to the Indemnified Party
under Subsection (a)(i) for amounts which, in the
aggregate, exceed One Million Dollars ($1,000,000).
(ii) If the Closing occurs, the Indemnified Party
shall not be entitled to indemnity under Subsections
(a)(ii)-(vi) above except for out-of-pocket Losses actually
suffered or sustained by the Indemnified Party or to which the
Indemnified Party may become subject as a result of
circumstances described in such Subsections (a)(ii)-(vi), and
such indemnity shall not include Losses in the nature of
consequential damages, lost profits, diminution in value,
damage to reputation or the like.
(c) If the Closing occurs, CCS shall indemnify MPH, and hold
MPH harmless, with respect to any Losses, up to $100,000, relating to
the Lease and Services Agreement between CCS and TRS Behavioral Care,
Inc., dated November 4, 1996, other than Losses suffered by MPH
resulting solely from (i) MPH's termination of such Lease and Services
Agreement in accordance with Section 4.2 thereof or (ii) the failure of
MPH to comply with the express terms and conditions of such Lease and
Service Agreement in the form presented to MPH by CCS.
(d) If the Closing occurs, CCS shall be solely responsible for
and shall indemnify MPH, and hold MPH harmless, with respect to any
Losses from the compliance requirements of Texas Natural Resource
Conservation Commission relating to the removal of the underground
storage tank referenced in the CCS Environmental Survey (including
reporting, closure and post-closure requirements).
Section 10.4 Further Qualifications Respecting Indemnification. The
right of the Indemnified Party to indemnity hereunder shall be subject to the
following additional qualifications:
(a) The Indemnified Party shall promptly upon its discovery of
facts or circumstances giving rise to a claim for indemnification,
including receipt by it of notice of any demand, assertion, claim,
action or proceeding, judicial, governmental or otherwise, by any third
party (such third party actions being collectively referred to herein
as "Third Party Claims"), give notice thereof to the Indemnifying Party
such notice in any event to be given
52
<PAGE> 60
within sixty (60) days from the date the Indemnified Party obtains
Knowledge of the basis or alleged basis for the right of indemnity or
such shorter period as may be necessary to avoid material prejudice to
the Indemnifying Party; and
(b) In computing Losses, such amounts shall be computed net of
any related recoveries to which the Indemnified Party is entitled under
insurance policies or other related payments received or receivable
from third parties and net of any tax benefits actually received by the
Indemnified Party or for which it is eligible, taking into account the
income tax treatment of the receipt of indemnification.
Section 10.5 Procedures Respecting Third Party Claims. In providing
notice to the Indemnifying Party of any Third Party Claim (the "Claim Notice"),
the Indemnified Party shall provide the Indemnifying Party with a copy of such
Third Party Claim or other documents received and shall otherwise make available
to the Indemnifying Party all relevant information material to the defense of
such claim and within the Indemnified Party's possession. The Indemnifying Party
shall have the right, by notice given to the Indemnified Party within fifteen
(15) days after the date of the Claim Notice, to assume and control the defense
of the Third Party Claim that is the subject of such Claim Notice, including the
employment of counsel selected by the Indemnifying Party after consultation with
the Indemnified Party, and the Indemnifying Party shall pay all expenses of, and
the Indemnified Party shall cooperate fully with the Indemnifying Party in
connection with, the conduct of such defense. The Indemnified Party shall have
the right to employ separate counsel in any such proceeding and to participate
in (but not control) the defense of such Third Party Claim, but the fees and
expenses of such counsel shall be borne by the Indemnified Party unless the
Indemnifying Party shall agree otherwise. If the Indemnifying Party shall have
failed to assume the defense of any Third Party Claim in accordance with the
provisions of this Section, then the Indemnified Party shall have the absolute
right to control the defense of such Third Party Claim, and, if and when it is
finally determined that the Indemnified Party is entitled to indemnification
from the Indemnifying Party hereunder, the fees and expenses of Indemnified
Party's counsel shall be borne by the Indemnifying Party, provided that the
Indemnifying Party shall be entitled, at its expense, to participate in (but not
control) such defense. The Indemnifying Party shall have the right to settle or
compromise any such Third Party Claim for which it is providing indemnity so
long as such settlement does not impose any obligations on the Indemnified Party
(except with respect to providing releases of the third party). The Indemnifying
Party shall not be liable for any settlement effected by the Indemnified Party
without the Indemnifying Party's consent. The Indemnifying Party may assume and
control, or bear the costs, of any such defense subject to its reservation of a
right to contest the Indemnified Party's right to indemnification hereunder,
provided that it gives the Indemnified Party notice of such reservation within
fifteen (15) days of the date of the Claim Notice.
53
<PAGE> 61
ARTICLE 11
NONCOMPETITION
As a material inducement for the parties that enter into this
Agreement, MPH and CCS agree as follows:
Section 11.1 Noncompetition. For a time period of three (3) years,
commencing on the Closing Date, MPH and CCS, its affiliates, successors and
assigns, unless otherwise permitted by the written consent of the other party,
or in connection with or on behalf of the other party, shall not, on their own
account or as employees, landlord, lender, trustee, associate, consultant,
partner, agent, principal, contractor, owner, officer, director, member or
shareholder of any other person, or in any other capacity, directly or
indirectly, in whole or in part, engage in the business of delivering mental
health, behavioral counseling, or alcohol or substance abuse services through
the operation of a hospital or otherwise, including, without limitation, through
the delivery of inpatient, partial hospitalization, residential or outpatient
services at a location within 50 miles of the respective Facilities transferred
pursuant to this Agreement. Without limiting the generality of the foregoing,
this non-competition provision shall not include (i) CCS' continuation of the
CCS Non-Public Day School currently offered at Gulf Pines Hospital or (ii) MPH's
or CCS' engaging in day school programs comparable to the CCS Non-Public Day
School and any juvenile justice contracts. Brown Schools and CCS Parent shall,
and each shall cause its respective Affiliates, to comply with this Article 11.
Section 11.2 Remedies for Breach. In the event of a breach of any of
the foregoing provisions, the non-breaching party shall be entitled to exercise
any and all of the following rights, remedies, and provisions:
(i) Injunction. MPH and CCS agree that if either of them or
any of their affiliates, successors or assigns violate or breach, or
substantially threatens to violate or breach, any of the provisions or
covenants contained in this agreement, the non-breaching party shall be
entitled to injunctive relief, and reimbursement of its attorneys' fees
if it prevails. In addition, MPH and CCS agree that the non-breaching
party may have such injunctive relief, without bond but upon due
notice, in addition to such other and further relief as may be
available in equity or by law. MPH and CCS further agree that the sole
remedy in the event of an entry of an injunction, is dissolution of
such injunction, if warranted, at a hearing and all claims for damages
by reason of the wrongful issuance of any such injunction are expressly
waived.
(ii) Exclusivity. In addition to all other remedies available
to MPH and CCS in the event of any breach of any provision of this
Article 11, MPH and CCS agree that the remedies exercisable by the
non-breaching party are not exclusive but are in addition to all of the
remedies provided by this Agreement, by law or in equity and that the
exercise or utilization of any one of the remedies provided by this
Agreement shall not be deemed a waiver of, or prevent the non-breaching
54
<PAGE> 62
party from exercising, any other remedies available to it under this
Agreement, applicable law or in equity.
Section 11.3 Severability and Substitution of Valid Provisions. To the
extent that any provision of this Article 11 is deemed unenforceable by virtue
of the scope of the area involved, the scope of the business activity
prohibited, the length of time the activity is prohibited, or the scope or
magnitude of the remedies provided, but potentially remedied by a reduction of
any or all thereof, MPH and CCS agree that this Agreement shall be enforced to
the fullest extent permissible under the laws and public policies of the
jurisdiction in which the enforcement is sought.
Section 11.4 Extension of Periods. The time period described in Section
11.1 above shall be automatically extended by any length of time during which
the breaching party is in breach of any provision of this Agreement. The
provisions of this Agreement shall continue in full force and effect throughout
the duration of the extended periods.
ARTICLE 12
GENERAL PROVISIONS
Section 12.1 Notices. All notices and other communications hereunder
shall be in writing, shall be delivered either in person, by facsimile or by
mail to the person named below. Notice shall be deemed received on the date on
which it is hand-delivered or transmitted by facsimile, or on the third business
day following the date on which it is so mailed. For purposes of notice, the
addresses of the parties shall be:
If to MPH, addressed to:
Mr. Gregory J. Herring
Healthcare America, Inc.
1407 W. Stassney Lane
Austin, Texas 78745
Facsimile: 512/464-0217
with a copy to:
Mr. Jeffrey P. King
Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202-3789
Facsimile: 214/651-5940
55
<PAGE> 63
If to CCS, addressed to:
Mr. H. Neil Campbell
Children's Comprehensive Services
3401 West End Avenue, Suite 500
Nashville, Tennessee 37203
Facsimile: 615/269-7525
with a copy to:
Ms. Leigh Walton
Bass, Berry & Sims, PLC
2700 First American Center
Nashville, Tennessee 37238
Facsimile: 615/742-6293
Section 12.2 Attorneys' Fees. In an litigation or other proceeding
relating to this Agreement, the prevailing party shall be entitled to recover
its costs and reasonable attorneys' fees. The term "prevailing party" shall mean
the party in whose favor final judgment after appeal (if any) is rendered with
respect to the claims asserted in such litigation or other proceeding.
Section 12.3 Successors and Assigns. The rights under this Agreement
shall not be assignable or transferable nor the duties delegable by either party
without the prior written consent of the other; and nothing contained in this
Agreement, express or implied, is intended to confer upon any person or entity,
other than the parties hereto and their permitted successors-in-interest and
permitted assignees, any rights or remedies under or by reason of this Agreement
unless so stated to the contrary. Notwithstanding the above, MPH and CCS may
each designate an Affiliate to receive the Assets Transferred to MPH and CCS,
respectively, and to assume the Liabilities Assumed by MPH and CCS,
respectively.
Section 12.4 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 12.5 Captions and Paragraph Headings. Captions and paragraph
headings used herein are for convenience only and are not a part of this
Agreement and shall not be used in construing it.
Section 12.6 Entirety of Agreement, Amendments. This Agreement
(including the Schedules and Exhibits hereto) and the other documents and
instruments specifically provided for in this Agreement constitute the entire
agreement between the parties concerning the subject matter of this Agreement
and no amendment, alteration or modification of this Agreement shall be valid
56
<PAGE> 64
unless in each instance such amendment, alteration, or modification is expressed
in a written instrument duly executed by each of the parties hereto.
Section 12.7 Waiver. The failure of a party to insist, in any one or
more instances, on performance of any of the terms, covenants and conditions of
this Agreement shall not be construed as a waiver or relinquishment of any
rights granted hereunder or of the future performance of any such term, covenant
or condition, but the obligations of the parties with respect thereto shall
continue in full force and effect. No waiver of any provision or condition of
this Agreement by a party shall be valid unless in writing signed by the party
sought to be changed.
Section 12.8 Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Texas.
Section 12.9 Severabilily. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be valid, binding and
enforceable under applicable law, but if any provision of this Agreement is held
to be invalid, void (or voidable) or unenforceable under applicable law, such
provision shall be ineffective only to the extent held to be invalid, void (or
voidable) or unenforceable, without affecting the remainder of such provision or
the remaining provisions of this Agreement.
[Next page is signature page]
57
<PAGE> 65
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first above written.
MPH:
MEADOW PINES HOSPITAL, INC.
By: /s/Gregory J. Herring
Name: Gregory J. Herring
Title: Vice President
CCS:
CCS/GULF PINES, INC.
By: /s/ H. Neil Campbell
Name: H. Neil Campbell
Title: President
The undersigned hereby acknowledge and agree that the obligations set
forth in Sections 6.6 and 7.5(c), and Articles 10 and 11, of this Agreement
apply to and fully bind them, and each shall perform the obligations set forth
therein.
THE BROWN SCHOOLS, INC.
By: /s/ Gregory J. Herring
Name: Gregory J. Herring
Title: Senior Vice President
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By: /s/ H. Neil Campbell
Name: H. Neil Campbell
Title: Executive Vice President
58
<PAGE> 1
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percent State of
Owned Incorporation
------- -------------
<S> <C> <C>
Children's Comprehensive Services of California, Inc.
d/b/a Advocate Schools 100% California
CCS/Altacare of Arkansas, Inc. 100% Arkansas
CCS/Bay County, Inc. 100% Florida
d/b/a Bay County Behavioral Health Center
CCS/Gulf Pines, Inc. 100% Texas
d/b/a Gulf Pines Behavioral Health Services
CCS/Lansing, Inc. 100% Michigan
d/b/a Rivendell Center for Behavioral Health
CCS of Montana, Inc. 100% Montana
CCS/Rivendell of Arkansas, Inc. 100% Arkansas
CCS/Rivendell of Kentucky, Inc. 100% Kentucky
CCS/Salt Lake City, Inc. 100% Utah
d/b/a Copper Hills Youth Center
Ventures Healthcare of Gainesville, Inc. 100% Tennessee
Chad Youth Enhancement Center, Inc. 100% Tennessee
CCS/Meadow Pines, Inc. 100% Texas
</TABLE>
<PAGE> 1
EXHIBIT 23--CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-33499, 33-60773 and 333-47983) pertaining to the Employee
Stock Purchase Plan, 1987 Employee Stock Option Plan, 1989 Stock Option Plan for
Non-Employee Directors, 1986 Incentive Stock Plan and 1997 Stock Incentive Plan
of Children's Comprehensive Services, Inc., and in the related Prospectuses of
our report dated August 19, 1998, except for Note R, as to which the date is
September 17, 1998 with respect to the consolidated financial statements and
schedule of Children's Comprehensive Services, Inc. and subsidiaries included in
the Annual Report (Form 10-K) for the year ended June 30, 1998.
Ernst & Young LLP
Nashville, Tennessee
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHILDREN'S COMPREHENSIVE SERVICES, INC. FOR THE YEAR
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 20,067
<SECURITIES> 0
<RECEIVABLES> 19,647
<ALLOWANCES> 1,865
<INVENTORY> 0
<CURRENT-ASSETS> 40,612
<PP&E> 44,993
<DEPRECIATION> 7,831
<TOTAL-ASSETS> 80,201
<CURRENT-LIABILITIES> 10,745
<BONDS> 11,624
0
0
<COMMON> 80
<OTHER-SE> 57,752
<TOTAL-LIABILITY-AND-EQUITY> 80,201
<SALES> 0
<TOTAL-REVENUES> 93,999
<CGS> 0
<TOTAL-COSTS> 84,234
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 972
<INCOME-PRETAX> 11,310
<INCOME-TAX> 4,357
<INCOME-CONTINUING> 6,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,953
<EPS-PRIMARY> .87
<EPS-DILUTED> .84
</TABLE>
