UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---------- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 0-16946
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SEAFIELD CAPITAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Missouri 43-1039532
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(State or other jurisdiction (IRS Employer Incorporation
of organization) or Identification Number)
P. O. Box 410949
2600 Grand Blvd., Suite 500
Kansas City, Missouri 64141
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (816) 842-7000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None Not Applicable
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1 per share and
common stock rights coupled therewith.
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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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.
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Approximate aggregate market value of voting stock held by non-affiliates
of Registrant: $264,430,947 (based on closing price as of February 28,
1997)
Number of shares outstanding of only class of Registrant's common stock as
of February 28, 1997: $1 par value common - 6,489,103
Documents incorporated by reference:
Portions of Registrant's Proxy Statement for use in connection with the
1997 Annual Meeting of Shareholders is incorporated by reference into Part
III of this report, to the extent set forth therein, if such Proxy
Statement is filed with the Securities and Exchange Commission on or before
April 30, 1997. If such Proxy Statement is not filed by such date, the
information required to be presented in Part III will be filed as an
amendment to this report. The exhibits for this Form 10-K are listed in
Item 14.
PART I.
ITEM 1. BUSINESS.
Seafield Capital Corporation (Seafield or Registrant), was organized in
Missouri as BMA Properties, Inc. in 1974 as a 100% owned subsidiary of
Business Men's Assurance Company of America (which was incorporated in
1909). In 1988, BMA Properties, Inc. was renamed BMA Corporation, and on
June 1, 1988, became the parent company. Registrant changed its name in
1991 from BMA Corporation to Seafield Capital Corporation. Registrant is a
holding company whose subsidiaries operate primarily in the healthcare and
insurance services areas. Registrant implemented this new strategic
business focus after the insurance operations were sold during 1990.
Various operating subsidiaries of Registrant provide risk-appraisal
laboratory testing services to the insurance industry, clinical testing
services to the healthcare industry, and comprehensive cancer treatment
management. In addition, Seafield had investments in early-stage
healthcare technology companies and either directly or through
subsidiaries, also held interests in energy investments, marketable
securities and real estate.
On March 3, 1997, Seafield distributed to its shareholders all of the
outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation (SLH). In connection with this distribution and pursuant to a
Distribution Agreement between Seafield and SLH, Seafield transferred its
real estate and energy businesses and miscellaneous assets and liabilities
to SLH. As a result of the distribution, Seafield's principal assets
consist of its stock holdings in LabOne, Inc. (LabOne) and Response
Oncology, Inc. (Response). See Item 7 and Notes 5 and 6 to the
Consolidated Financial Statements for additional information.
Seafield had 17 employees as of December 31, 1996. None of the employees
is represented by a labor union and Seafield believes its relations with
employees are good.
* * *
The following list shows the Registrant and each subsidiary corporation of
which Registrant owned a majority interest at December 31, 1996, together
with the ownership percentage and state or country of incorporation. See
Item 7 and Notes to Consolidated Financial Statements for additional
information.
SEAFIELD CAPITAL CORPORATION (Missouri)
LabOne, Inc. (Delaware) 82%
Lab One Canada Inc. (Canada) 100%
Response Oncology, Inc. (Tennessee) 56%
SLH Corporation (Kansas) 100%
BMA Resources, Inc. (Missouri) 100%
Scout Development Corporation (Missouri) 100%
Scout Development Corporation of New Mexico (Missouri) 100%
Carousel Apartment Homes, Inc. (Georgia) (inactive) 100%
Pyramid Diagnostic Services, Inc. (Delaware) (inactive) 74%
The following list shows the Registrant and each subsidiary corporation of
which Registrant owns a majority interest after the March 3, 1997
distribution of the real estate and energy businesses and miscellaneous
assets and liabilities to Seafield shareholders through the dividend of SLH
Corporation and the conversion of a loan into additional Response stock.
SEAFIELD CAPITAL CORPORATION (Missouri)
LabOne, Inc. (Delaware) 82%
Lab One Canada Inc. (Canada) 100%
Response Oncology, Inc. (Tennessee) 67%
Pyramid Diagnostic Services, Inc. (Delaware) (inactive) 74%
* * *
HEALTHCARE SERVICES
The following businesses are considered to be in the healthcare services
segment: Response Oncology, Inc., LabOne, Inc. (the healthcare segment) and
Pyramid Diagnostic Services, Inc.
RESPONSE ONCOLOGY, INC.
As of December 31, 1996, the Registrant owned approximately 56% of Response
Oncology, Inc. (Response); effective February 1997, the Registrant now owns
approximately 67% of Response. The increase in ownership was achieved by
converting a loan to Response to equity. On November 2, 1995, Response
changed its name from Response Technologies, Inc. Response's common stock
trades on the NASDAQ National Market System under the symbol ROIX.
Response is a comprehensive cancer management company. Response provides
advanced cancer treatment services through outpatient facilities known as
IMPACT (registered trademark) Centers under the direction of approximately
350 independent oncologists, manages the practices of oncologists with whom
Response has affiliated and conducts clinical cancer research on behalf of
pharmaceutical manufacturers.
RESPONSE - IMPACT SERVICES
Response presently operates 47 IMPACT Centers in 23 states which provide
high-dose chemotherapy with stem cell support to cancer patients on an
outpatient basis. Through its IMPACT Centers, Response has developed
extensive medical information systems and databases containing clinical and
patient information, analysis of treatment results and side effects and
clinical care pathways. These systems and databases support Response's
clinical trials program, which involves carefully planned, uniform
treatment regimens administered to a significant group of patients together
with the monitoring of outcomes and side effects of these treatments. The
clinical trials program allows Response to develop a rational means of
improving future treatment regimens by predicting which patients are most
likely to benefit from different treatments.
Each IMPACT Center is staffed by, and makes extensive use of, experienced
oncology nurses, pharmacists, laboratory technologists, and other support
personnel to deliver outpatient services under the direction of independent
medical oncologists. IMPACT Center services include preparation and
collection of stem cells, administration of high-dose chemotherapy,
reinfusion of stem cells and delivery of broad-based supportive care.
IMPACT Center personnel extend the support mechanism into the patient's
home, further reducing the dependence on hospitalization. The advantages
of this system to the physician and patient include (i) convenience of the
local treatment facility; (ii) specialized on-site laboratory and pharmacy
services, including home pharmacy support; (iii) access to Response's
clinical trials program to provide ongoing evaluation of current cancer
treatment; (iv) specially trained medical and technical staff; (v) patient
education and support materials through computer, video and staff
consultation; and (vi) reimbursement assistance.
High-dose chemotherapy is most appropriate for patients with lymphoma,
acute leukemia, multiple myeloma and breast and ovarian cancer. Patients
referred to Response by the treating oncologist are placed on a treatment
protocol developed from the cumulative analysis of Response's approximately
3,000 high-dose cases. Protocols conducted at the IMPACT Center begin with
a drug regimen which allows for the collection and cryopreservation of stem
cells. A stem cell is a cell which originates in the bone marrow and is a
precursor to white blood cells. At the appropriate time, stem cells
capable of restoring immune system and bone marrow function are harvested
over a two to three day period. The harvested stem cells are then frozen
and stored at the IMPACT Center, and following confirmation of response to
treatment and a satisfactory stem cell harvest, patients receive high-dose
chemotherapy followed by reinfusion of stem cells. Most patients are then
admitted to an affiliated hospital for 10-14 days. After discharge, the
patient is monitored in the oncologist's office. Response believes that
the proprietary databases and the information gathering techniques
developed from the foregoing programs enable practicing oncologists to
manage cancer cases cost effectively. Clinical research conducted by
Response focuses on (i) improving cancer survival rates; (ii) enhancing the
cancer patient's quality of life; (iii) reducing the costs of cancer care;
and (iv) developing new approaches to cancer diagnosis, treatment and post-
treatment monitoring.
Since 1989, Response has conducted a clinical trials program pursuant to
which carefully planned, uniform treatments administered to a substantial
number of patients have been monitored and studied, with the results being
collected in a database and utilized to predict outcomes and determine
utilization of high-dose chemotherapy as a treatment. In addition,
Response has recorded outcomes from over 3,000 cases in which high-dose
chemotherapy was utilized as a treatment and has developed and continues to
refine treatment pathways, which forecast the best outcome with the lowest
possible cost. Pursuant to agreements between Response and the oncologists
who supervise their patients' treatment in IMPACT Centers, such oncologists
are obligated to record and monitor outcomes, collect information and
report such information to Response, for which the oncologists are paid a
fixed fee.
Response - Oncology Practice Management Services
During 1996 Response executed a strategy of physician practice management
diversification consummating the acquisitions of 10 medical oncology
practices including 38 medical oncologists in Florida and Tennessee.
Through these acquisitions, Response believes that it has successfully
achieved deep geographic penetration in those markets believing that
significant market share is crucial to achieving efficiencies, revenue
enhancements, and marketing of complete cancer services to diverse payors
including managed care. Pursuant to management service agreements (Service
Agreements), Response provides management services that extend to all
nonmedical aspects of the operations of the affiliated practices.
Pursuant to the Service Agreements, Response is the sole and exclusive
manager and administrator of all day-to-day business functions connected
with the medical practice of an affiliated physician group. Response is
responsible for providing facilities, equipment, supplies, support
personnel, and management and financial advisory services. Under the terms
of the Service Agreements in general, Response (i) prepares annual capital
and operating budgets; (ii) prepares financial statements; (iii) orders and
purchases medical and office inventory and supplies; (iv) bills patients
and third party payors; (v) maintains accounting, billing, medical, and
collection records; (vi) negotiates and administers managed care contracts;
(vii) arranges for legal and accounting services related to practice
operations; (viii) recruits, hires and appoints an executive director to
manage and administer all of the day-to-day business functions of each
practice; and (ix) manages all non-physician professional support and
administrative personnel, clerical, secretarial, bookkeeping and collection
personnel. Response seeks to combine the purchasing power of numerous
physicians to obtain favorable pricing and terms for equipment,
pharmaceuticals and supplies and to obtain favorable contracts with
suppliers.
In addition, Response provides its outcomes database, treatment protocols
and pathways to affiliated oncologists, permitting these physicians to more
effectively manage cancer cases. Response utilizes its management
expertise to conduct utilization review and quality assurance programs and
establish well-defined medical policies for its affiliated physicians.
In return for its management services and expertise, Response receives a
service fee based on net revenue or net operating income of the practice.
Pursuant to each Service Agreement, the physicians and the practice agree
not to compete with Response and the practice. Each Service Agreement has
an initial term of 40 years and, after the initial term, will be
automatically extended for additional five year terms unless either party
delivers written notice to the other party, 180 days prior to the
expiration of the preceding term. The Service Agreement may only be
terminated for cause. If Response terminates the Service Agreement for
cause, the practice is typically obligated to purchase assets (which
typically include intangible assets) and pay liquidated damages, which are
guaranteed by individual physicians for a period of time. Each Service
Agreement provides for the creation of an oversight committee, a majority
of whom are designated by the practice. The oversight committee is
responsible for developing management and administrative policies for the
overall operation of each clinic.
Response - Cancer Research Services
Response also utilizes its database to provide various types of data to
pharmaceutical companies regarding the use of their products. The IMPACT
Center network and Response's medical information systems make Response
ideally suited to this process. Response is currently participating in
several projects with leading pharmaceutical manufacturers to furnish data
in connection with FDA applications and post-FDA approval marketing
studies. Revenue from these contracts helps to underwrite Response's
clinical trials expenses. Such relationships with pharmaceutical companies
allow patients and physicians earlier access to drugs and therapies and
ensure access to clinical trials under managed care, which guarantee
Response's role as a leader in oncological developments.
Response - Competition
As a result of growing interest among oncologists and the more widely
recognized efficacy of high-dose chemotherapy treatments, the competitive
environment in the field is starting to heighten. Most community hospitals
with a commitment to cancer treatment are evaluating their need to provide
high-dose treatments, and other entities are competing with Response in
providing high-dose services similar to those offered by Response.
Such competition has long been contemplated by Response, and is indicative
of the evolution of this field. While Response believes that the demand
for high-dose chemotherapy services is sufficiently large to support
several significant providers of these services, it is subject to
increasing competitive risks from these entities.
In addition, Response is aware of at least two competitors specializing in
the management of oncology practices and two other physician management
companies that manage at least one oncology practice. Several healthcare
companies with established operating histories and significantly greater
resources than Response are also providing at least some management
services to oncologists. There are certain other companies, including
hospitals, large group practices, and outpatient care centers, that are
expanding their presence in the oncology market and may have access to
greater resources than Response. Furthermore, organizations specializing
in home and ambulatory infusion care, radiation therapy, and group practice
management compete in the oncology market.
Response's revenue depends on the continued success of its affiliated
physician groups. These physician groups face competition from several
sources, including sole practitioners, single and multi-specialty groups,
hospitals and managed care organizations.
Response - Government Regulation
The delivery of healthcare items and services has become one of the most
highly regulated of professional and business endeavors in the United
States. Both the federal government and the individual state governments
are responsible for overseeing the activities of individuals and businesses
engaged in the delivery of healthcare services. Federal law and
regulations are based primarily upon the Medicare program and the Medicaid
program, each of which is financed, at least in part, with federal money.
State jurisdiction is based upon the state's authority to license certain
categories of healthcare professionals and providers, and the state's
interest in regulating the quality of healthcare in the state, regardless
of the source of payment.
Response believes it is in material compliance with applicable laws.
However, the laws applicable to Response are subject to evolving
interpretations and therefore, there can be no assurance that a review of
Response's or the affiliated physicians' practices by a court or law
enforcement or regulatory authority will not result in a determination that
could adversely affect the operations of Response or the affiliated
physicians. Furthermore, there can be no assurance that the laws
applicable to Response will not be amended in a manner that could adversely
affect Response.
Response - Federal Law
The federal healthcare laws apply in any case in which Response is
providing an item or service that is reimbursable under Medicare or
Medicaid or is claiming reimbursement from Medicare or Medicaid on behalf
of physicians with whom Response has a Service Agreement. The principal
federal laws include those that prohibit the filing of false or improper
claims with the Medicare or Medicaid program, those that prohibit unlawful
inducements for the referral of business reimbursable under Medicare or
Medicaid and those that prohibit the provision of certain services by a
provider to a patient if the patient was referred by a physician with which
the provider has certain types of financial relationships.
Response - False and Other Improper Claims
The federal government is authorized to impose criminal, civil and
administrative penalties on any healthcare provider that files a false
claim for reimbursement from Medicare or Medicaid. Criminal penalties are
also available in the case of claims filed with private insurers if the
government can show that the claims constitute mail fraud or wire fraud.
While the criminal statutes are generally reserved for instances evidencing
an obviously fraudulent intent, the civil and administrative penalty
statutes are being applied by the government in an increasingly broader
range of circumstances. For example, the government takes the position
that a pattern of claiming reimbursement for unnecessary services violates
these statutes if the claimant should have known that the services were
unnecessary. The government also takes the position that claiming
reimbursement for services that are substandard is a violation of these
statutes if the claimant should have known that the care was substandard.
Response - Anti-Kickback Law
Federal law commonly known as the "Anti-kickback Amendments" prohibits the
offer, solicitation, payment or receipt of anything of value (direct or
indirect, overt or covert, in cash or in kind) which is intended to induce
the referral of Medicare or Medicaid patients, or the ordering of items or
services reimbursable under those programs. The law also prohibits
remuneration that is intended to induce the recommendation of, or the
arranging for, the provision of items or services reimbursable under
Medicare and Medicaid. The law has been broadly interpreted by a number of
courts to prohibit remuneration which is offered or paid for otherwise
legitimate purposes if the circumstances show that one purpose of the
arrangement is to induce referrals. Even bona fide investment interests in
a healthcare provider may be questioned under the Anti-kickback Amendment
if the government concludes that the opportunity to invest was offered as
an inducement for referrals. The penalties for violations of this law
include criminal sanctions and exclusion from the federal healthcare
program.
In part to address concerns regarding the implementation of the Anti-
kickback Amendments, the federal government in 1991 published regulations
that provide exceptions, or "safe harbors," for certain transactions that
will not be deemed to violate the Anti-kickback Amendments. Among the safe
harbors included in the regulations were provisions relating to the sale of
physician practices, management and personal services agreements and
employee relationships. Subsequently, regulations were published offering
safe harbor protection to additional activities, including referrals within
group practices consisting of active investors. Proposed amendments to the
Anti-kickback Regulations were published in 1994 which, if ultimately
adopted, would result in substantive changes to existing regulations. The
failure to qualify under a safe harbor provision, while potentially
subjecting the activity to greater regulatory scrutiny, does not render the
activity illegal per se.
There are several aspects of Response's relationships with physicians to
which the Anti-kickback Law may be relevant. In some instances, Response
itself may become a provider of services for which it will claim
reimbursement from Medicare or Medicaid, and physicians who are investors
in Response may refer patients to Response for those services.
Furthermore, the government may construe some of the marketing and managed
care contracting activities of Response as arranging for the referral of
patients to the physicians with whom Response has a management contract.
Finally, at the request of a physician or medical practice with which
Response has a contract, Response will manage in the physician's office the
provision of ancillary services which the physician desires to make
available to his patients. At the present time, the services provided by
Response in its IMPACT Centers are generally not reimbursable by Medicare
or Medicaid.
Although neither the investments in Response by physicians nor the
management contracts between Response and physicians qualify for protection
under the safe harbor regulations, Response does not believe that these
activities fall within the type of activities the Anti-kickback Amendments
were intended to prohibit. A determination that Response had violated the
Anti-kickback Amendments would have a material adverse effect on Response's
business.
Response - The Stark Self-Referral Law
The Stark Self-Referral Law (Stark Law) prohibits a physician from
referring a patient to a healthcare provider for certain designated health
services reimbursable by Medicare or Medicaid if the physician has a
financial relationship with that provider, including an investment
interest, a loan or debt relationship or a compensation relationship. The
designated services covered by the law include radiology services, infusion
therapy, radiation therapy, outpatient prescription drugs and hospital
services, among others. In addition to the conduct directly prohibited by
the law, the statute also prohibits "circumvention schemes," that are
designed to obtain referrals indirectly that cannot be made directly. The
penalties for violating the law include (i) a refund of any Medicare or
Medicaid payments for services that resulted from an unlawful referral;
(ii) civil fines; and (iii) exclusion from the Medicare and Medicaid
programs. The Stark Law contains a number of exceptions potentially
applicable to Response's operations. These include exceptions for a
physician's ownership of publicly traded securities in a corporation with
stockholders' equity exceeding $75 million as of the end of its most recent
fiscal year, for certain in-office ancillary services and for certain
personal services arrangements.
Response is not currently a provider of any designated health service under
the Stark Law for which Response claims reimbursement from Medicare or
Medicaid. Response intends to assure that any designated health services
provided by physicians with whom Response has a management contract will
qualify under the applicable exception in the Stark Law for in-office
services. However, because Response will provide management services
related to those designated health services, there can be no certainty that
Response will not be considered as the provider for those services. In
that event, the referrals from the physicians will be permissible only if
(i) Response qualifies for the exception for publicly-traded corporations
and (ii) the management contract meets the exception in the Stark Law for
payments by physicians to a health care entity. To qualify for such
exception, such payments must be set at a fair market value. Response
intends to structure its arrangements so as to qualify for applicable
exceptions under the Stark Law, however, there can be no assurance that a
review by courts or regulatory authorities would not result in a contrary
determination.
Response - State Anti-Kickback Laws
Many states have laws that prohibit the payment of kickbacks in return for
the referral of patients. Some of these laws apply only to services
reimbursable under the state Medicaid program. However, a number of these
laws apply to all healthcare services in the state, regardless of the
source of payment for the service. Response believes, based on the advice
of counsel, that these laws prohibit payments to referral sources only
where a principal purpose for the payment is for the referral. Response
pays oncologists, who supervise their patients' treatment at the IMPACT
Centers, fees for collecting and monitoring treatment and outcomes data and
reporting such data to Response. Response believes such fees reflect the
fair market value of the services rendered by such physicians to Response.
However, the laws in most states regarding kickbacks have been subjected to
limited judicial and regulatory interpretation and therefore, no assurances
can be given that Response's activities will be found to be in compliance.
Noncompliance with such laws could have an adverse effect upon Response and
subject it and such physicians to penalties and sanctions.
Response - State Self-Referral Laws
A number of states have enacted self-referral laws that are similar in
purpose to the Stark Self-Referral Law. However, each state law is unique.
For example, some states only prohibit referrals where the physician's
financial relationship with a healthcare provider is based upon an
investment interest. Other state laws apply only to a limited number of
designated health services. Finally, some states do not prohibit
referrals, but merely require that a patient be informed of the financial
relationship before the referral is made. Response believes that it is in
compliance with the self-referral law of any state in which Response has a
financial relationship with a physician.
Response - Fee-Splitting Laws
Many states prohibit a physician from splitting with a referral source the
fees generated from physician services. Other states have a broader
prohibition against any splitting of a physician's fees, regardless of
whether the other party is a referral source. In most cases, it is not
considered to be fee-splitting when the payment made by the physician is
reasonable reimbursement for services rendered on the physician's behalf.
Response will be reimbursed by physicians on whose behalf Response provides
management services. Response intends to structure the reimbursement
provisions of its management contracts with physicians in order to comply
with applicable state laws relating to fee-splitting. However, there can
be no certainty that, if challenged, Response and its affiliated physicians
will be found to be in compliance with each state's fee-splitting laws.
Response - Corporate Practice of Medicine
Most states prohibit corporations from engaging in the practice of
medicine. Many of these state doctrines prohibit a business corporation
from employing a physician. However, states differ with respect to the
extent to which a licensed physician can affiliate with corporate entities
for the delivery of medical services. Some states interpret the "practice
of medicine" broadly to include decisions that have an impact on the
practice of medicine, even where the physician is not an employee of the
corporation and the corporation exercises no discretion with respect to the
diagnosis or treatment of a particular patient.
Response's standard practice under its management contracts is to avoid the
exercise of any responsibility on behalf of its physicians that could be
construed as affecting the practice of medicine. Accordingly, Response
believes that it is not in violation of applicable state laws relating to
the corporate practice of medicine. However, because such laws and legal
doctrines have been subjected to only limited judicial and regulatory
interpretation, there can be no assurance that, if challenged, Response
will be adjudicated to be in compliance with all such laws and doctrines.
Response - Insurance Laws
Laws in all states regulate the business of insurance and the operation of
HMOs. Many states also regulate the establishment and operation of
networks of health care providers. While these laws do not generally apply
to companies that provide management services to networks of physicians,
there can be no assurance that regulatory authorities of the states in
which Response operates would not apply these laws to require licensure of
Response's operations as an insurer, as an HMO or as a provider network.
Response believes that it is in compliance with these laws in the states in
which it does business, but there can be no assurance that future
interpretations of insurance and health care network laws by regulatory
authorities in these states or in the states into which Response may expand
will not require licensure or a restructuring of some or all of Response's
operations.
Response - State Licensing
Response's laboratories operated in conjunction with certain IMPACT Centers
are registered with the U.S. Food & Drug Administration and are certified
pursuant to the Clinical Laboratory Improvement Amendments of 1988. In
addition, Response maintains pharmacy licenses for all IMPACT Centers
having self-contained pharmacies, and state health care facility licenses,
where required.
Response - Reimbursement and Cost Containment
Approximately 50% of the net revenue of Response's practice management
division and less than five percent of the revenue of Response's IMPACT
division is derived from payments made by government sponsored health care
programs (principally, Medicare and Medicaid). As a result, any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of Response. In recent years, the
federal government has sought to constrain the growth of spending in the
Medicare and Medicaid programs. Through the Medicare program, the federal
government has implemented a resource-based relative value scale (RBRVS)
payment methodology for physician services. RBRVS is a fee schedule that,
except for certain geographical and other adjustments, pays similarly
situated physicians the same amount for the same services. The RBRVS is
adjusted each year and is subject to increases or decreases at the
discretion of Congress. The implementation of RBRVS may result in
reductions in payment rates for procedures provided by physicians under
current contract with Response. RBRVS-type payment systems have also been
adopted by certain private third party payors and may become a predominant
payment methodology. A broader implementation of such programs would
reduce payments by private third party payors and could indirectly reduce
Response's operating margins to the extent that the cost of providing
management services related to such procedures could not be proportionately
reduced. To the extent Response's costs increase, Response may not be able
to recover such cost increases from government reimbursement programs. In
addition, because of cost containment measures and market changes in non-
governmental insurance plans, Response may not be able to shift cost
increases to non-governmental payors. Response expects a reduction from
historical levels in per patient Medicare revenue received by certain of
the physician groups with which Response contracts; however, Response does
not believe such reductions would, if implemented, result in a material
adverse effect on Response.
In addition to current governmental regulation, the Clinton Administration
and several members of Congress have proposed legislation for comprehensive
reforms affecting the payment for and availability of health care services.
Aspects of certain of such health care proposals, such as reductions in
Medicare and Medicaid payments, if adopted, could adversely affect
Response. Other aspects of such proposals, such as universal health
insurance coverage and coverage of certain previously uncovered services,
could have a positive impact on Response's business. It is not possible at
this time to predict what, if any, reforms will be adopted by Congress or
state legislatures, or when such reforms would be adopted and implemented.
As health care reform progresses and the regulatory environment
accommodates reform, it is likely that changes in state and federal
regulations will necessitate modifications to Response's agreements and
operations. While Response believes it will be able to restructure in
accordance with applicable laws and regulations, Response cannot assure
that such restructuring in all cases will be possible or profitable.
Rates paid by private third party payors, including those that provide
Medicare supplemental insurance, are based on established physician, clinic
and hospital charges and are generally higher than Medicare payment rates.
Changes in the mix of Response's patients among the non-governmental payors
and government sponsored health care programs, and among different types of
non-government payor sources, could have a material adverse effect on
Response.
Response - Employees
As of March 1, 1997, Response employed approximately 500 persons,
approximately 400 of whom were full-time employees. Under the terms of the
Service Agreements with the affiliated physician groups, Response is
responsible for the practice compensation and benefits of the groups' non-
physician medical personnel. No employee of Response or of any affiliated
physician group is a member of a labor union or subject to a collective
bargaining agreement. Response believes that its labor relations are good.
LABONE, INC.
LabOne provides clinical testing services to the healthcare industry to aid
in the diagnosis and treatment of patients. LabOne operates only one
highly automated and centralized laboratory, which LabOne believes has
significant economic advantages over other conventional laboratory
competitors. LabOne markets its clinical testing services to the payers of
healthcare-insurance companies and self-insured groups. LabOne does this
through Lab Card(trademark), a Laboratory Benefits Management (LBM)
program.
The Lab Card Program provides laboratory testing at reduced rates as
compared to traditional laboratories. It uses a unique benefit design that
shares the cost savings with the patient, creating an incentive for the
patient to help direct laboratory work to LabOne. Under the Program, the
patient incurs no out-of-pocket expense when the Lab Card is used, and the
insurance company or self-insured group receives substantial savings on its
laboratory charges.
LabOne is certified by the Substance Abuse and Mental Health Services
Administration (SAMHSA) to perform substance abuse testing services for
federally regulated employers and is currently marketing these services
throughout the country to both regulated and nonregulated employers.
LabOne's rapid turnaround times and multiple testing options help clients
reduce downtime for affected employees and meet mandated drug screening
guidelines.
LabOne's Clinical Patient Testing
LabOne began offering laboratory testing services to the healthcare
industry in 1994. Clinical laboratory tests are generally requested by
physicians and other healthcare providers to diagnose and monitor diseases
and other medical conditions through the detection of substances in blood
and other specimens. Laboratory testing is generally categorized as either
clinical testing, which is performed on bodily fluids including blood and
urine, or anatomical pathology testing, which is performed on tissue.
Clinical and anatomical pathology tests are frequently performed as part of
regular physical examinations and hospital admissions in connection with
the diagnosis and treatment of illnesses. The most frequently requested
tests include blood chemistry analyses, blood cholesterol level tests,
urinalysis, blood cell counts, PAP smears and AIDS-related tests.
Clinical specimens are collected at the physician's office or other
specified sites. LabOne's couriers pick up the specimens and deliver them
to local airports for express transport to the Kansas laboratory.
Specimens are coded for identification and processed. LabOne's testing
menu includes the majority of tests requested by its clients. Tests not
performed in-house are sent to reference laboratories for testing, and
results are entered into LabOne's computer system along with all other
completed results.
LabOne has established the Lab Card (trademark) Program, as well as
alliances with major healthcare providers, as vehicles for delivering out-
patient laboratory services. The Lab Card Program is marketed to
healthcare payers (self-insured groups and insurance companies), allowing
them to avoid price mark-ups and cost shifting. With the Program,
companies save substantially on their outpatient laboratory testing, and
patients pay no out-of-pocket fees when they use their Lab Card.
LabOne's Substance Abuse Testing Services
LabOne markets substance abuse testing to Fortune 1000 companies, third
party administrators and occupational health providers. Certification by
SAMHSA enables LabOne to offer substance abuse testing services to
federally regulated industries. There are presently 70 laboratories that
are SAMHSA certified.
Specimens for substance abuse testing are typically collected by
independent agencies who use LabOne's forms and collection supplies.
Specimens are sealed with bar-coded, tamper-evident seals and shipped
overnight to LabOne. Automated systems monitor the specimens throughout
the screening and confirmation process. Negative results are available
immediately after testing is completed. Initial positive specimens are
verified by the gas chromatography/mass spectrometry method, and results
are generally available within 24 hours. Results can be transmitted
electronically to the client's secured computer, printer or fax machine, or
the client can use LabOne's LabLink Dial-In software to retrieve, store,
search and print its drug testing results.
PYRAMID DIAGNOSTIC SERVICES, INC.
The Registrant acquired a 52% ownership position in Pyramid Diagnostic
Services, Inc. (Pyramid) in 1992. The original $4 million purchase price
included newly-issued shares, thereby providing expansion financing to
Pyramid. Pyramid ultimately expanded to nine pharmacies which distributed
radiopharmaceuticals and related services to nuclear medicine departments,
clinics and hospitals. During 1993, Registrant acquired an additional 18%
ownership position for $332,000. In 1994, Registrant's ownership increased
by 5% (ownership totaled 74%) with a $l million investment.
Pyramid entered bankruptcy proceedings in early October 1995 as a result of
an adverse $6 million judgment entered in a lawsuit against Pyramid.
Pyramid's bankruptcy proceedings are expected to be finalized in 1997. The
impact on Registrant's results of operations was the September 1995 write-
off of Registrant's investment in Pyramid by recording a pre-tax expense of
approximately $3.3 million and a corresponding tax benefit of $2.1 million
resulting in an after-tax $1.2 million charge to earnings. See Item 7 and
Note 1 of Notes to Consolidated Financial Statements for additional
information.
INSURANCE SERVICES
The following businesses are considered to be in the insurance services
segment: LabOne, Inc. (the insurance segment), Agency Premium Resource,
Inc. (APR), and International Underwriting Services, Inc. (IUS). APR and
IUS were sold during 1995.
LABONE, INC.
The Registrant's laboratory testing activities are conducted through
LabOne, Inc. (LabOne), a subsidiary which was 82% owned by the Registrant
and 18% publicly held at December 31, 1996. LabOne is a publicly-traded
stock (NASDAQ-LABS). LabOne, together with its wholly-owned subsidiary,
Lab One Canada Inc., hereinafter collectively referred to as LabOne, is the
largest provider of laboratory services to the insurance industry in the
United States and Canada. In 1994, LabOne expanded its testing offerings
to include the healthcare market. LabOne provides high-quality laboratory
services to self-insured groups, insurance companies and physicians
nationwide.
LabOne provides risk-appraisal laboratory services to the insurance
industry. The tests performed by LabOne are specifically designed to
assist an insurance company in objectively evaluating the mortality and
morbidity risks posed by policy applicants. The majority of the testing is
performed on specimens of individual life insurance policy applicants.
LabOne also provides testing services on specimens of individuals applying
for individual and group medical and disability policies.
LabOne also provides clinical testing services to the healthcare industry
to aid in the diagnosis and treatment of patients. Additionally, LabOne is
certified by the Substance Abuse and Mental Health Services Administration
(SAMHSA) to perform substance abuse testing services for federally
regulated employers and is currently marketing these services throughout
the country to both regulated and nonregulated employers. See the
Healthcare Segment for additional information regarding LabOne's clinical
and substance abuse testing services.
LabOne's Insurance Applicant Testing
In order to establish the appropriate level of premium payments or to
determine whether to issue a policy, an insurance company requires
objective means of evaluating the insurance risk posed by policy
applicants. Because decisions of this type are based on statistical
probabilities of mortality and morbidity, an insurance company generally
requires quantitative data reflecting the applicant's general health.
Standardized laboratory testing, tailored to the needs of the insurance
industry and reported in a uniform format, provides an insurance company
with an efficient means of evaluating the mortality and morbidity risks
posed by policy applicants. The use of standardized blood, urine and oral
fluid testing has proven a cost-effective alternative to individualized
physician examinations, which utilize varying testing procedures and
reports.
LabOne's insurance testing services consist of certain specimen profiles
that provide insurance companies with specific information that may
indicate liver or kidney disorders, diabetes, the risk of cardiovascular
disease, bacterial or viral infections and other health risks. LabOne also
offers tests to detect the presence of antibodies to human immunodeficiency
virus (HIV). Standardized laboratory testing can also be used to verify
responses on a policy application to such questions as whether the
applicant is a user of tobacco products, certain controlled substances or
certain prescription drugs. Insurance companies generally offer a premium
discount for nonsmokers and often rely on testing to determine whether an
applicant is a user of tobacco products. Cocaine use has been associated
with increased risk of accidental death and cardiovascular disorders, and
as a result of the increasing abuse in the United States and Canada,
insurance companies are testing a greater number of policy applicants to
detect its presence. Therapeutic drug testing also detects the presence of
certain prescription drugs that are being used by an applicant to treat a
life-threatening medical condition that may not be revealed by a physical
examination.
Insurance specimens are normally collected from individual insurance
applicants by independent paramedical personnel using LabOne's custom-
designed collection kits and containers. These kits and containers are
delivered to LabOne's laboratory via overnight delivery services or mail,
coded for identification and processed according to each client's
specifications. Results are generally transmitted to the insurance
company's underwriting department that same evening.
Starting in 1996, LabOne introduced a one-day service guarantee on oral
fluid and urine HIV specimen results. LabOne also offers LabOne Net, a
combination network/software product that provides a connection for
insurance underwriters for ordering, delivery and management of risk
assessment information such as laboratory results, motor vehicle reports
and other applicant information.
The following table summarizes LabOne's revenues from services provided to
the insurance and healthcare (clinical and substance abuse testing)
markets:
Year ended December 31,
1996 1995 1994
------------ ------------ ------------
(Dollars in thousands)
Insurance $ 50,801 85% $ 52,544 92% $ 60,260 99%
Healthcare 8,631 15% 4,485 8% 466 1%
------ ------ ------
Total $ 59,432 $ 57,029 $ 60,726
====== ====== ======
LabOne - Operations
LabOne's operations are designed to facilitate the testing of a large
number of specimens and to report the results to its clients, generally
within 24 hours of receipt of specimens. LabOne has internally developed,
custom-designed laboratory and business processing systems. These systems
enable each client company to customize its own testing and reflex
requirements by several parameters to satisfy its particular needs. It is
a centralized network system that provides an automated link between
LabOne's testing equipment, data processing equipment and the client's
computer systems. This system offers LabOne's clients the ability to
customize their testing activities to best meet their needs.
As a result of the number of tests it has performed over the past several
years, LabOne has compiled and maintains a large statistical database of
test results. These summary statistics are useful to the actuarial and
underwriting departments of an insurance client in comparing that client's
test results to the results obtained by LabOne's entire client base.
Company-specific and industry-wide reports are frequently distributed to
clients on subjects such as coronary risk analysis, cholesterol and drugs
of abuse.
LabOne considers the confidentiality of its test results to be of primary
importance and has established procedures to ensure that results of tests
remain confidential as they are communicated to the client that requested
the tests.
Substantially all of the reagents and materials used by LabOne in
conducting its testing are commercially purchased and are readily available
from multiple sources.
LabOne - Regulatory Affairs/Quality Improvement
The objective of the Regulatory Affairs/Quality Improvement department is
to ensure that accurate and reliable test results are released to clients.
This is accomplished by incorporating both internal and external quality
assurance programs in each area of the laboratory. In addition, quality
assurance specialists share the responsibility with all LabOne employees of
an ongoing commitment to quality and safety in all laboratory operations.
Internal quality and education programs are designed to identify
opportunities for improvement in laboratory services and to meet all
required safety training and education issues. These programs help ensure
the reliability and confidentiality of test results.
Procedure manuals in all areas of the laboratory help maintain uniformity
and accuracy and meet regulatory guidelines. Tests on control samples with
known results are performed frequently to maintain and verify accuracy in
the testing process. Complete documentation provides record keeping for
employee reference and meets regulatory requirements. All employees are
thoroughly trained to meet standards mandated by OSHA in order to maintain
a safe work environment. Superblind(trademark) controls are used to
challenge every aspect of service at LabOne from specimen arrival through
final billing. Approximately 2,000 samples are prepared and submitted
anonymously each month. These samples are especially designed to challenge
testing, handling and reporting procedures. Specimens requiring special
handling are evaluated and verified by control analysis personnel. A
computer edit program is used to review and verify clinically abnormal
results, and all positive HIV antibody and drugs-of-abuse records. As an
external quality assurance program, LabOne participates in a number of
proficiency programs established by the College of American Pathologists
(CAP), the American Association of Bioanalysts and the Centers for Disease
Control. Only three to five percent of accredited laboratories receive no
deficiencies for any one on-site inspection performed by CAP. LabOne
received no deficiencies on the last two CAP inspections.
LabOne is licensed under the Clinical Laboratory Improvement Amendments
(CLIA) of 1988. LabOne has additional licenses for HIV and substance abuse
testing from the State of Kansas and all other states where such licenses
are required. LabOne is certified by SAMHSA to perform testing to detect
drugs of abuse in federal employees and in workers governed by federal
regulations.
LabOne - Technology Development
The technology development department evaluates new commercially available
tests and technologies or develops new assays and compares them to
competing products in order to select the most accurate laboratory
procedures. Additionally, LabOne's scientists present findings to LabOne's
clients to aid them in choosing the best tests available to meet their
requirements. Total technology development expenditures are not considered
significant to LabOne as a whole.
LabOne - Sales and Marketing
LabOne's client base currently consists primarily of insurance companies in
the United States and Canada. LabOne believes that its ability to provide
prompt and accurate results on a cost-effective basis and its
responsiveness to customer needs have been important factors in servicing
existing business.
All of LabOne's sales representatives for the insurance market have
significant business experience in the insurance industry or clinical
laboratory-related fields. These representatives call on major clients
several times each year, usually meeting with a medical director or vice
president of underwriting. An important part of LabOne's marketing effort
is directed toward providing its existing clients and prospects with
information pertaining to the actuarial benefits of, and trends in,
laboratory testing. LabOne's sales representatives and its senior
management also attend underwriters' and medical directors' meetings
sponsored by the insurance industry.
The sales representatives for the clinical industry are experienced in the
healthcare benefit market or clinical laboratory-related fields and
currently work in the geographic areas which they represent. Marketing
efforts are directed at insurance carriers, self-insured employers and
trusts, and other organizations nationwide.
Substance abuse marketing efforts are primarily directed at Fortune 1000
companies, occupational health clinics and third party administrators.
LabOne's strategy is to offer quality service at competitive prices. The
sales force focuses on the ability of LabOne to offer multiple reporting
methods, next flight out options, dedicated client service representatives
and reporting of negative results before 8:00 A.M.
LabOne - Competition
LabOne believes that the insurance laboratory testing market is
approximately a $100 million industry. LabOne currently controls over half
the market. LabOne has maintained its market leadership through the client
relationships that it has developed over its 25-year history, its
reputation for providing quality products and services at competitive
prices, and its battery of tests which are tailored specifically to an
insurance company's needs. LabOne has three other main competitors, Osborn
Laboratories, Inc., Clinical Reference Laboratory and GIB Laboratories,
Inc. Effective January 30, 1997, LabOne acquired certain assets, including
customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential
Insurance Company of America. Concurrently, Prudential's Individual
Insurance Group agreed to use LabOne as its exclusive provider of risk
assessment testing services. At the time of the purchase, GIB served
approximately 5% of the insurance laboratory testing market.
The insurance testing industry continues to be highly competitive. The
primary focus of the competition has been on pricing. This continued
competition has resulted in a decrease in LabOne's average price per test.
It is anticipated that prices may continue to decline in 1997.
The clinical laboratory testing market is a $40 billion industry which is
highly fragmented and very competitive. LabOne faces competition from
numerous independent clinical laboratories and hospital- or physician-owned
laboratories. Many of LabOne's competitors are significantly larger and
have substantially greater financial resources than LabOne. Through the
use of Lab Card, LabOne is working to establish a solid client base in this
environment.
LabOne's business plan is to be the premier low-cost provider of high-
quality laboratory services to self-insured employers and insurance
companies in the healthcare market. LabOne feels that its superior quality
and centralized, low-cost operating structure enable it to compete
effectively in this market.
LabOne competes in the substance abuse testing market nationwide. LabOne's
major competitors are the three major clinical chains, Laboratory
Corporation of America, Quest Diagnostics and Smith Kline Beecham
Laboratories, who collectively constitute approximately two-thirds of the
substance abuse testing market.
LabOne - Foreign Markets
Lab One Canada Inc. markets insurance testing services to Canadian clients,
with laboratory testing performed in the United States. The following
table summarizes the revenue, profit and assets applicable to LabOne's
domestic operations and its subsidiary, Lab One Canada, Inc.
Year ended December 31,
1996 1995 1994 *
---- ---- ----
(In millions)
Sales:
United States $53.0 $50.8 $53.0
Canada 6.4 6.2 7.7
Operating Profit:
United States 2.5 2.1 5.8
Canada 0.7 0.3 1.1
Identifiable Assets:
United States 62.0 64.3 71.3
Canada 2.7 5.7 5.5
* 1994 data includes restructuring charges of $1.6 million.
LabOne - Employees
As of March 1, 1997, LabOne had 566 full-time employees, representing an
increase of 57 employees from the same time in 1996. None of LabOne's
employees are represented by a labor union. LabOne believes its relations
with employees are good.
AGENCY PREMIUM RESOURCE, INC.
Agency Premium Resource, Inc. (APR) was an insurance premium finance
company serving independent insurance agents. APR provided premium
financing for the commercial customers of these independent insurance
agents. On May 31, 1995, Seafield sold APR. See Item 7 and Note 1 to
Consolidated Financial Statements for additional information.
INTERNATIONAL UNDERWRITING SERVICES, INC.
International Underwriting Services, Inc. (IUS) offered turnkey
policyholder and underwriting services. This subsidiary operated only
within the life and health insurance industry and provided some or all of
the following services to its customers: product design, underwriting of
applicants, policy issuance, policy service, premium collection and payment
of commissions. On July 17, 1995, Seafield sold IUS. See Item 7 and Note 1
to Consolidated Financial Statements for additional information.
OTHER BUSINESSES
BMA RESOURCES, INC.
BMA Resources, Inc. (Resources) held the Registrant's energy investments at
December 31, 1996. No new energy investments are being made, and it has
been the Registrant's intent to maximize cash flow from Resources to be
deployed in healthcare and insurance services. The investments include oil
and gas working interests (all of which had been sold by June 1996), oil
and gas partnerships and a stock investment in an unconsolidated affiliate.
The oil and gas primarily consisted of partnership interests in Texas gulf
coast oil and gas wells and leasehold interests. Resources has an
approximate 32.5% equity interest in Syntroleum Corporation (Syntroleum).
Syntroleum is the developer and owner of a patented process and several
related proprietary technologies (Syntroleum(registered trademark) Process)
for the conversion of natural gas into synthetic liquid hydrocarbons which
can be further processed into fuels such as diesel, kerosene (used by jet
aircraft) and naphtha and related non-fuel chemical feedstocks and
lubricants. Syntroleum is currently engaged in negotiations for the
licensing of the Syntroleum(registered trademark) Process with major oil
companies. Because Syntroleum continues to be in the developmental phase
of its operations, no assurances can be given that it will be able to
successfully conclude any license or agreement on a favorable basis or that
a commercially viable Syntroleum(registered trademark) Process plant will
be constructed and successfully operated.
TENENBAUM & ASSOCIATES, INC.
Tenenbaum & Associates, Inc. (TAI) was a full service real estate, personal
property and sales and use tax consulting firm providing tax consulting
services on a contingency basis. TAI's core business was commercial real
estate.
On May 31, 1995, TAI sold certain assets to Ernst & Young U.S. LP. TAI
retained its accounts receivable as of May 31, 1995. The agreement
provides for Ernst & Young to continue the work-in-process on current
accounts (where formal or informal tax valuation protests have been filed
but not yet resolved). Ernst & Young will earn a fee for collecting the
current accounts and will participate in net cash collected on certain
accounts after third party costs and Ernst & Young's fees. During June
1995, TAI distributed its remaining assets to shareholders and filed for
dissolution.
REAL ESTATE
At December 31, 1996, the Registrant held real estate through a wholly-
owned subsidiary, Scout Development Corporation. Real estate holdings as
of December 31, 1996 consisted of approximately 1,160 acres of partially
developed and undeveloped land in six locations, three residential
development projects, a multi-story parking garage and a community shopping
center. Real estate assets are located in the following states: Florida,
Kansas, Nevada, New Mexico, Texas, and Wyoming, all of which are listed for
sale.
In 1992, the Registrant's board of directors approved a plan to discontinue
real estate operations. As a result of this decision, a $6 million after-
tax loss provision for estimated write-downs and costs through final
disposition was included in the discontinued real estate's 1992 loss.
Additional after-tax losses of $2.9 million, $6.6 million, and $1.5 million
were recorded in 1994, 1995, and 1996, respectively. These losses resulted
from changes in estimated net realizable value based upon management's
analysis of recent sales transactions and other current market conditions.
See Item 7 and Note 13 of Notes to Consolidated Financial Statements for
additional information concerning discontinued real estate operations.
The location and use of each majority owned property is as follows:
Houston, TX - 370 acres and 37 lots; Ft. Worth, TX - 761 acres; Olathe, KS
- - 16 acres; Juno Beach, FL - 6 units; and Santa Fe, NM - 25 units. In
addition, the Registrant has a 49.9% investment in a joint venture that
owns a shopping center and 14 acres of undeveloped land in Gillette,
Wyoming.
Only two properties, one of which is 100% owned and the 49.9% joint venture
referenced above, are categorized as commercial properties. Registrant's
net asset value of these two projects at December 31, 1996 was $2.8
million.
The 100% owned commercial property consists of an 850-space parking garage
located in downtown Reno, Nevada. The building contains a total of 144,500
square feet of leasable parking space. Parking revenue totaled
approximately $595,000 or $700 per space or $4.12 per square foot in 1996.
In addition, 8,258 square feet located on the ground floor of the garage is
leased to a retail tenant under a 15-year lease. Revenue from the retail
lease during 1996 was $133,800 or $16.20 per square foot. In addition to
basic rent, the retail tenant is responsible for its prorata share of real
estate taxes and insurance. During 1996, $5,400 was collected from the
retail tenant for taxes and insurance.
The joint venture commercial property consists of a retail shopping center
containing approximately 163,000 square feet of net leaseable area. At the
end of 1996, the center was 88% occupied. Rental revenue totaled $733,000
for 1996. The average annual gross rental per occupied square foot was
$5.62. In addition to rental revenue, tenants are responsible for their
share of common area maintenance (CAM). During 1996, CAM collections from
tenants totaled $83,000.
Information regarding real estate debt is summarized in Note 13 of the
Notes to Consolidated Financial Statements. The detailed information is as
follows:
Balance at
Property Description Rate Maturity 12-31-96
- --------------------------------------------------------------------------
(In thousands)
Gillette, WY shopping center IRB 2.9%-4.55% 2016 $ 6,170
Olathe, KS vacant land Mortgage 8.625% 1997 1,194
------
Total $ 7,364
======
In management's opinion, the real estate properties are adequately covered
by insurance with coverages for real and personal property, commercial
general liability, commercial crime, garagekeepers legal liability,
earthquake, flood, windstorm and hail.
On March 3, 1997, Seafield distributed to its shareholders all of the
outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation (SLH). In connection with this distribution and pursuant to a
Distribution Agreement between Seafield and SLH, Seafield transferred its
real estate and energy businesses and miscellaneous assets and liabilities,
including two wholly-owned subsidiaries, Scout Development Corporation
(Scout) and BMA Resources, Inc. (Resources), to SLH. Additionally, SLH
assumed liabilities relating to the transfer assets as well as certain
contingent Seafield liabilities, including Seafield's liability for
disputed income taxes which the Internal Revenue Service claims to be owed
by Seafield for its 1986-1990 tax years and which the State of California
claims to be owed for the 1987-1989 years. See Item 3 and Note 3 to
Consolidated Financial Statements for additional information.
As a result of the distribution, Seafield`s principal assets consist of its
stock holdings in LabOne and Response. See Note 5 to Consolidated
Financial Statements for additional information.
ITEM 2. PROPERTIES.
Properties of Registrant
Registrant had a long-term lease for approximately 13,674 square feet of
office space at 2600 Grand Boulevard in the Crown Center complex in Kansas
City, Missouri. This lease, which began April 1, 1992, is for a ten year
term with a right to cancel after seven years. Registrant's previously
owned real estate subsidiary held diversified types of properties for sale
or investment purposes in various geographical locations. In certain
cases, projects were developed on a joint venture basis with one or more
joint venture partners. Title to property in such cases may be held
jointly with such partners or in the name of the venture. Rights and
obligations with respect to such properties are governed by the terms of
the joint venture agreement. Registrant's real estate is described in
greater detail in Items 1 and 7 and Schedule III. The Registrant and
subsidiaries lease office space, equipment, land and buildings under
various noncancelable leases that expire over the next several years. See
Note 8 of the Notes to Consolidated Financial Statements for additional
lease information.
On March 3, 1997, Registrant distributed to its shareholders the stock of
SLH Corporation (SLH). In connection with this distribution, Registrant
transferred the office lease and the real estate subsidiary and other
assets and liabilities to SLH, subject to SLH agreeing to make necessary
office space available to the Registrant in the 2600 Grand Blvd. location
to the extent necessary to permit the Registrant to conduct its operations.
See Items 1 and 7 and Note 5 to Consolidated Financial Statements for
additional information regarding the SLH distribution.
ITEM 3. LEGAL PROCEEDINGS.
In 1986, a lawsuit was initiated in the Circuit Court of Jackson County,
Missouri by Seafield's former insurance subsidiary (i.e., Business Men's
Assurance Company of America) against Skidmore, Owings & Merrill ("SOM")
which is an architectural and engineering firm, and a construction firm to
recover costs incurred to remove and replace the facade on the former home
office building. Because the removal and replacement costs had been
incurred prior to the sale of the insurance subsidiary, Seafield negotiated
with the buyer for an assignment of the cause of action from the insurance
subsidiary. In September 1993, the Missouri Court of Appeals reversed a
$5.7 million judgment granted in 1992 in favor of Seafield; the Court of
Appeals remanded the case to the trial court for a jury trial limited to
the question of whether or not the applicable statute of limitations barred
the claim. The Appeals Court also set aside $1.7 million of the judgment
originally granted in 1992. In July 1996, this case was retried to a
judge. On January 21, 1997, the judge entered a judgment in favor of
Seafield. The amount of that judgment, together with interest is
approximately $5.8 million. Although the judgment has been appealed,
counsel for the Company expects that it will be difficult for the
defendants to cause the judgment to be reversed. The final outcome is not
expected for at least another year. Settlement arrangements with other
defendants have resulted in payments to plaintiff which have offset legal
fees and costs to date of approximately $478,000. Future legal fees and
costs can not reliably be estimated. Pursuant to the Distribution
Agreement, this matter was assigned to SLH Corporation.
In 1988, a lawsuit was initiated in the United States District Court for
the District of New Mexico against Seafield's former insurance subsidiary
by Lyon Development Company and Jeanne Lyon, d/b/a Lyon and Associates
Realty, its former partners in the Quail Run real estate project in Santa
Fe, New Mexico. The plaintiffs alleged that the project partnership
agreement was improperly terminated, thus denying them an ongoing interest
in the project, and the loss of their exclusive real estate brokerage
arrangement. The plaintiffs were seeking approximately $11 million in
actual damages and unspecified punitive damages based upon alleged breaches
of contract and fiduciary duty and economic compulsion. After a trial in
July 1994, the jury returned a verdict absolving Seafield of any liability.
Subsequent to the trial, the judge awarded Seafield approximately $250,000
in connection with marketing expenses which the plaintiffs were to have
repaid, and approximately $64,000 in legal costs, with interest until paid.
Total legal fees and costs incurred by Seafield and its former insurance
subsidiary have aggregated approximately $3.6 million. In February 1996,
the United States Court of Appeals for the Tenth Circuit affirmed the
jury's verdict in Seafield's favor, reversed the trial judge's award for
marketing expenses, and affirmed the trial judge's award of legal costs.
The plaintiffs did not seek a rehearing or review of the Appeals Court
affirmation of the verdict. In April 1996, plaintiffs paid the legal costs
awarded by the trial judge and affirmed by the Court of Appeals
(approximately $68,000, including interest). Because the Quail Run project
was retained by Seafield in connection with the sale of its former
insurance subsidiary, Seafield defended the lawsuit under an
indemnification arrangement with the purchaser of the former insurance
subsidiary; all costs incurred and any judgments rendered in favor of the
plaintiff have been for the account of Seafield.
In the opinion of management, after consultation with legal counsel and
based upon current available information, none of these lawsuits is
expected to have a material adverse impact on the consolidated financial
position or results of operations of Seafield.
Seafield has received notices of proposed adjustments (Revenue Agent's
Reports) from the Internal Revenue Service (IRS) with respect to 1986-1990
federal income taxes. These notices claim total federal income taxes due
for the entire five year period in the approximate net amount of
$13,867,000, exclusive of interest thereon.
The substantive issues raised in these notices for the years 1986-1990 are
primarily composed of the former television subsidiaries' amortization of
film rights, the sale of the stock of a former television station, certain
insurance company tax issues and a $27 million loss on the sale of a real
estate partnership interest.
The IRS' denial of film right amortization equates to approximately $10.5
million of the $13.9 million in additional taxes; provided that if the IRS
were to prevail on the amortization issues, the tax basis in the television
stations would be increased. This would have the effect of reducing income
taxes in connection with the stations' sales; all have been sold.
With respect to the loss on the sale of the real estate partnership
interest, the IRS has claimed that the sale did not occur during 1990, but
rather occurred after 1991. If the sale did not occur in 1990, then 1990
losses could not be carried back to 1987, to reduce Seafield's significant
taxable income in 1987.
Seafield has filed protests regarding the 1986-1990 notices of proposed
adjustments. Seafield is currently pursuing a compromise with the Appeals
Division of the IRS for the 1986-1989 years. The 1990 issues have not yet
been formally addressed at the Appeals Division but Seafield is advised by
IRS representatives that tax issues in all years under audit will be
addressed together. Resolution of these tax disputes may reasonably be
expected, but is not certain, during 1997.
In December 1996, the California state auditor sent Seafield an audit
report covering the 1987-1989 taxable years. The State of California has
determined to include, as a "unitary taxpayer," all majority owned non-life
insurance subsidiaries and joint ventures of Seafield. The auditor's
report has been forwarded to the California Franchise Tax Board for action.
The total amount of California state income taxes due for the 1987-1989
years is expected to be approximately $750,000. An accrual for the tax and
approximately $1 million of interest is included in Seafield's financial
statements at December 31, 1996. Pursuant to the Distribution Agreement,
SLH Corporation assumed all potential tax liabilities and interest thereon
regarding the California audit for the 1987-1989 tax years.
Pursuant to the Distribution Agreement, SLH Corporation assumed from
Seafield all of the contingent tax liabilities described above and acquired
all rights to refunds, plus any interest related to these tax years. SLH
Corporation also assumed all contingent liabilities and refunds related to
any issues raised by the IRS for the years 1986-1990 whose resolution may
extend to tax years beyond the 1990 tax year. Seafield believes that
adequate accruals for these income tax liabilities have been made in the
accompanying consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF REGISTRANT.
Following is a list of all executive officers of Registrant as of March 1,
1997, together with certain related information. There are no arrangements
or understandings among any such persons and any other persons pursuant to
which any was selected as an officer. All such persons serve at the
discretion of the board of directors.
Served as Executive
Officer with
Name Age Position with Registrant Registrant Since
- ---------------------------------------------------------------------------
S.K. Fitzwater 50 Vice President, Chief Accounting 1990
Officer and Secretary (see note 1 below)
W.T. Grant II 46 Chairman and Chief Executive Officer 1980
(see note 2 below)
P.A. Jacobs 55 President and Chief Operating Officer 1980
(see note 3 below)
J.R. Seward 44 Executive Vice President and 1989
Chief Financial Officer (see note 4 below)
J.T. Clark 41 President and Chief Executive Officer 1996
of Response Oncology, Inc.
(see note 5 below)
Except as noted below, each executive officer of Registrant has held the
executive position noted with Registrant or similar positions with its
former insurance subsidiary as his principal occupation for the last five
years.
1. Steven K. Fitzwater has been Vice President and Chief Accounting
Officer since August 1990. On April 1, 1993, he assumed
the additional duties of Secretary of the Registrant.
2. William T. Grant II became Chairman of the Board and Chief
Executive Officer in May 1993. He had been President and Chief
Executive Officer since 1986. In October 1995, he also became the
Chairman, President and Chief Executive Officer of LabOne, Inc.
He is the son of W.D. Grant and the brother-in-law of John C.
Gamble, both of whom are Directors of Registrant.
3. P. Anthony Jacobs became President and Chief Operating Officer in
May 1993. He had been Executive Vice President and Chief
Operating Officer since 1990.
4. James R. Seward became Executive Vice President and Chief
Financial Officer in May 1993. He had been Senior Vice President
and Chief Financial Officer since August 1990.
5. Response Oncology, Inc. (Response) is 67% owned by the
Registrant. Effective February 1996, Registrant's board of
directors designated Joseph T. Clark as an Executive Officer of
Registrant because Response was determined to constitute a
principal business unit of Registrant and Mr. Clark became Chief
Executive Officer of Response in January 1996. Mr. Clark is not a
corporate officer of Registrant. Mr. Clark is President and Chief
Executive Officer of Response. Prior to 1996, Mr. Clark served as
Response's President since February 1993. Mr. Clark was formerly
the Executive Vice President and Chief Operating Officer of
Response from May 1989 to February 1993 and Secretary of Response
from September 1988 to February 1993.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Registrant's common stock is traded in the national over-the-counter market
and is listed in the NASDAQ National Market System maintained by the
National Association of Securities Dealers. As of March 7, 1997, the
outstanding shares were held by 1,929 stockholders of record. High and low
sales prices for each quarter of 1996 and 1995 are included in the table of
quarterly financial data in Note 14 of the Notes to Consolidated Financial
Statements. Also set forth in the table are quarterly dividends paid per
share. Registrant's payment of future dividends will be at the discretion
of its board of directors and can be expected to be dependent upon a number
of factors, including future earnings, financial condition, cash needs and
general business conditions. The dividend-paying capabilities of
subsidiaries may be restricted as to their transfer to the parent company.
ITEM 6. SELECTED FINANCIAL DATA
December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------
(In thousands except share and per share amounts)
REVENUES $ 129,232 119,544 124,278 129,867 111,332
===============================================
OPERATING EARNINGS
Earnings (loss) from
continuing operations $ (3,544) (748) (1,872) 5,618 4,168
Loss from discontinued
real estate operations (1,452) (6,600) (2,904) -- (7,214)
Gain on disposal of
discontinued insurance
operations -- -- -- -- 4,265
Cumulative effect to
January 1, 1992 of
change in method of
accounting for
income taxes -- -- -- -- 3,352
-----------------------------------------------
Net earnings (loss) $ (4,996) (7,348) (4,776) 5,618 4,571
===============================================
PER SHARE OF COMMON STOCK
Earnings (loss) from
continuing operations $ (.55) (.12) (.29) .82 .55
Loss from discontinued
real estate operations (.22) (1.02) (.46) -- (.95)
Gain on disposal of
discontinued insurance
operations -- -- -- -- .56
Cumulative effect of
accounting change -- -- -- -- .44
-----------------------------------------------
Net earnings (loss) $ (.77) (1.14) (.75) .82 .60
===============================================
Cash dividends $ 1.20 1.20 1.20 1.20 1.20
Book value $ 26.84 28.96 31.50 33.52 34.00
Average shares
outstanding 6,481,943 6,374,952 7,589,043
during the year 6,454,068 6,847,559
Shares outstanding 6,483,934 6,378,261 6,706,165
end of year 6,461,061 6,733,245
Total assets $ 288,676 211,516 245,387 273,570 280,514
Long-term debt $ 39,611 -- 8 18 1,013
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Introductory remarks about results of operations
Seafield Capital Corporation's (Seafield or Registrant) principal assets
consist of majority ownership of LabOne, Inc. (LabOne) and Response
Oncology, Inc. (Response). Additionally Seafield had investments in real
estate, energy businesses and miscellaneous assets. On March 3, 1997,
Seafield distributed to its shareholders all of the outstanding shares of
common stock of its wholly-owned subsidiary, SLH Corporation (SLH). In
connection with this distribution and pursuant to a Distribution Agreement
between Seafield and SLH, Seafield transferred its real estate and energy
businesses and miscellaneous assets and liabilities to SLH. The spinoff
was accounted for as a 1997 dividend with no gain or loss recognition. As
a result of the distribution, Seafield's principal assets consist of its
stock holdings in LabOne and Response. See Item 1 and Note 5 to
Consolidated Financial Statements for additional information.
1996 Compared to 1995
Healthcare Services Segment:
The following businesses are included in 1996's healthcare services
segment: an comprehensive cancer management company and the clinical and
substance abuse laboratory testing services. During 1995's first nine
months, the radiopharmaceuticals and related nuclear medicine services were
also included in the healthcare services segment.
Response Oncology, Inc. (Response), a 56%-owned subsidiary of Seafield at
December 31, 1996, is a publicly-traded company (NASDAQ-ROIX). On February
26, 1997, Seafield converted its Response note receivable and accrued
interest into Response common stock. The conversion increased Seafield's
ownership to approximately 67% of Response shares outstanding.
Response is a comprehensive cancer management company. Response provides
advanced cancer treatment services through outpatient facilities known as
IMPACT Centers under the direction of practicing oncologists; owns the
assets of and manages the business aspects of oncology practices; and
conducts clinical cancer research on behalf of pharmaceutical
manufacturers. Approximately 350 medical oncologists are associated with
Response through these programs.
In 1990, Response began development of a network of specialized IMPACT
Centers to provide complex outpatient chemotherapy services under the
direction of practicing oncologists. The majority of the therapies
provided at the IMPACT Centers entail the administration of high-dose
chemotherapy coupled with peripheral blood stem cell support of the
patient's immune system. At December 31, 1996, Response's network
consisted of 47 IMPACT Centers, including 24 wholly-owned, 12 managed
programs, and 11 owned and operated in joint venture with a host hospital.
Prior to January 1996, Response derived substantially all of its revenues
from outpatient cancer treatment services through reimbursements from third
party payors on a fee-for-service or discounted fee-for-service basis.
During 1996, Response executed a strategy of practice management
diversification which included the affiliation of 38 physicians in 10
medical oncology practices in Florida and Tennessee. Response has
successfully achieved deep geographic penetration in those markets
believing that significant market share is crucial to achieving
efficiencies, revenue enhancements, and marketing of complete cancer
services to diverse payors including managed care. Pursuant to Service
Agreements, Response provides management services that extend to all
nonmedical aspects of the operations of the affiliated practices. Response
is responsible for providing facilities, equipment, supplies, support
personnel, and management and financial advisory services.
In its practice management relationships, Response has predominantly used
two models of Service Agreements: (i) an "adjusted net revenue" model; and
(ii) a "net operating income" model. Service Agreements utilizing the
adjusted net revenue concept provide for the payment by the physician group
out of practice net revenue, in the following order of payment (A)
physician retainage (i.e. physician compensation, benefits, and
prerequisites, including malpractice insurance) of between 24% and 50% of
net revenue (Physician Expense); (B) a clinic expense portion of the
management fee (the Clinic Expense Portion) equal to the aggregate actual
practice operating expenses exclusive of Physician Expense; and (C) a base
service fee portion (the Base Fee) of between 8.7% and 29.5% of net
revenue. In the event that net revenue is insufficient to pay all of the
foregoing in full, then the Base Fee is first reduced, followed by the
Clinic Expense Portion of the management fee, and finally, physician
retainage, therefore effectively shifting all operating risk to Response.
In each Service Agreement utilizing the adjusted net revenue model,
Response is entitled to a Performance Fee generally equal to 50% of Annual
Surplus, defined as the excess of practice revenue over the sum of
Physician Retainage, the Clinic Expense Portion, and the Base Fee.
Service Agreements utilizing the net operating income model provide for a
management fee equal to the sum of Clinic Expense Portion (see preceding
paragraph) plus a percentage (the Percentage Portion), ranging from 20% to
40%, of the net operating income of the practice (defined as net revenue
minus practice operating expenses). In those practice management
relationships utilizing the net operating income model Service Agreement,
Response and the physician group share the risk of expense increases and
revenue declines, but likewise share the benefits of expense savings,
economies of scale and practice enhancements.
Each Service Agreement contains a liquidated damages provision binding the
physician practice and the principals thereof in the event the Service
Agreement is terminated "for cause" by Response. The liquidated damages
are a declining amount, equal in the first year to the purchase price paid
by Response for practice assets and declining over a period of between 5
and 17.5 years. Principals are relieved of their individual obligations
for liquidated damages only in the event of death, disability, or
retirement at a predetermined age.
Response recorded net earnings of $900,000 for the year ended December 31,
1996, compared to net earnings of $2.3 million for the year ended December
31, 1995. Response's net revenue increased 52% to $67.3 million compared
to $44.3 million for the year ended December 31, 1995. Net revenue from
patient services decreased $400,000 from $33.8 million in 1995 to $33.4
million in 1996. Several jointly-owned IMPACT Centers became operational
during 1996 that minimized the effect of the closure of three wholly-owned
IMPACT Centers. These sites were closed due to affiliations by referring
physicians with another physician practice management company prior to
Response establishing its own practice management alternative for
oncologists. Practice management service fees from affiliations
consummated beginning in January 1996 were $19.3 million or 84% of the
overall increase in net revenue. Additionally, pharmaceutical sales to
physicians increased $3.7 million from $9.8 million in 1995 to $13.5
million in 1996. Practice management service fees and pharmaceutical sales
to physicians both carry a lower operating margin than Response's
traditional patient service revenue.
Response's EBITDA (earnings before interest, taxes, depreciation and
amortization) increased $3.3 million or 80% to $7.4 million for the year
ended December 31, 1996, in comparison to $4.1 million for the year ended
December 31, 1995. The increase is primarily due to the increase in
revenues related to the management service agreements with affiliated
physicians. EBITDA is a measure of cash flow used by management in the
day-to-day operations of the business. It is not intended to serve as a
substitute for operating income. Response's net earnings, however, reflect
significant non-cash expenses related to the amortization of the costs of
the Service Agreements.
Response's operating expenses increased $18.9 million, or 57%, from $32.9
million in 1995 to $51.8 million in 1996. Operating expenses consist
primarily of payroll costs, pharmaceutical and laboratory expenses, medical
director fees, rent expense, and other operational costs. Operating
expenses as a percentage of net revenue were 77% and 74% for the years
ended 1996 and 1995, respectively. The increase is primarily due to clinic
expenses incurred at the affiliated physician practices under Service
Agreements. The increase as a percentage of net revenue is due to the
lower margins realized on increased practice management service fees and
pharmaceutical sales to physicians. Response's lab and pharmacy expense,
which represents the largest component of operating expenses, increased
$11.6 million, or 62%, from 1995 to 1996. Payroll costs increased $2.8
million, or 42%, from 1995 to 1996. The increases are primarily related to
lab and pharmacy expenses and payroll costs at the affiliated physician
practices that were not included in Response's operating results in 1995.
Response's general and administrative costs increased $700,000, or 13%,
from $5.5 million in 1995 to $6.2 million in 1996. Salaries and benefits,
which represent the largest component of general and administrative
expenses, were $4.2 million in 1996 and $3.3 million in 1995. The increase
is primarily due to the addition of operational management personnel for
the practice management division and general increases in salaries and
benefits. General and administrative costs as a percentage of net revenue
were 9% and 12% in 1996 and 1995, respectively. The decrease as a
percentage of net revenue is due to the significant increase in the revenue
base from practice management service fees without a significant increase
in general and administrative costs.
Response's depreciation and amortization increased $1.8 million from $1.7
million in 1995 to $3.5 million in 1996. The increase is primarily
attributable to the amortization of the Service Agreements purchased in
practice management affiliations consummated during 1996.
Response's provision for doubtful accounts decreased $500,000 from $2.1
million in 1995 to $1.6 million in 1996. The provision as a percentage of
net revenue from patient services was 5% and 6% for 1996 and 1995,
respectively. The decrease is attributable to a higher proportion of
contracted patient accounts. Response's collection experience in 1996 and
1995 may not be indicative of future periods.
Response's other costs of $608,000 were primarily non-recurring costs
associated with Response's financing efforts in 1996.
LabOne, Inc. (LabOne), an 82% owned subsidiary of Seafield, is a publicly-
traded company (NASDAQ-LABS). LabOne changed its name from Home Office
Reference Laboratory, Inc. in February 1994. LabOne expanded into the
clinical laboratory testing market in May 1994. LabOne's clinical testing
services are provided to the healthcare industry to aid in the diagnosis
and treatment of patients. LabOne markets substance abuse testing to
Fortune 1000 companies, third party administrators and occupational health
providers.
LabOne's total revenue for the year ended December 31, 1996, was $59.4
million as compared to $57 million in 1995. The increase of $2.4 million
or 4% can be attributed to an increase in healthcare (clinical and
substance abuse testing) segment revenue of $4.1 million. Healthcare
revenue increased from $4.5 million in 1995 to $8.6 million in 1996 due to
continued expansion efforts.
LabOne's cost of sales increased $2.8 million (9%) for the year as compared
to the prior year. This increase is due primarily to increases in inbound
freight expense, kit expense and outside laboratory services. These were
partially offset by a decrease in rent expense due to the closing of
certain LabOne Service Center (LSC) locations in 1995. Healthcare cost of
sales expenditures for the year were $10.2 million as compared to $8.6
million in 1995.
As a result of the above factors, LabOne's gross profit for the year
decreased 1% from $27.1 million in 1995 to $26.7 million in 1996.
Healthcare results improved from a loss of $4.1 million in 1995 to a loss
of $1.6 million in 1996.
LabOne selling, general and administrative expenses decreased $1.2 million
(5%) in 1996 as compared to the prior year due primarily to decreases in
depreciation, travel, insurance and legal expenses. Healthcare overhead
expenditures increased from $5.8 million in 1995 to $7.6 million in 1996,
primarily due to an increase in allocated overhead and growth in healthcare
segment payroll.
LabOne operating income increased from $2.4 million in 1995 to $3.2 million
in 1996. The increase is partially attributable to a $700,000 decrease in
the healthcare segment operating loss.
LabOne non-operating income decreased $700,000 primarily due to a decrease
in investment income.
Another healthcare subsidiary, Pyramid Diagnostic Services, Inc. (Pyramid),
incurred a loss of $768,000 for the first nine months of 1995. Pyramid
entered bankruptcy proceedings in early October 1995 as a result of an
adverse $6 million judgment entered in a lawsuit against Pyramid.
Pyramid's bankruptcy proceedings are expected to be finalized in 1997. The
impact on Seafield's results of operations was the September 1995 write-off
of Seafield's investment in Pyramid by recording a pre-tax expense of
approximately $3.3 million and a corresponding tax benefit of $2.1 million
resulting in an after-tax $1.2 million charge to earnings. Included with
the Pyramid write-off was $2.3 million of goodwill. Seafield consolidated
Pyramid's nine months 1995 revenues of $7.6 million while expenses
consolidated in 1995 were $7.7 million. See Note 1 of Notes to
Consolidated Financial Statements for additional information.
Insurance Services Segment:
The following business is considered to be in the insurance services
segment in 1996: LabOne's risk-appraisal laboratory testing for the life
and health insurance industries. Additionally, during 1995's first six
months, the underwriting and policy administration services and insurance
premium finance services businesses were also included in the insurance
services segment.
LabOne provides risk-appraisal laboratory services to the insurance
industry. The tests performed by LabOne are specifically designed to
assist an insurance company in objectively evaluating the mortality and
morbidity risks posed by policy applicants. The majority of the testing is
performed on specimens of individual life insurance policy applicants.
Testing services are also provided on specimens of individuals applying for
individual and group medical and disability policies.
LabOne insurance segment revenue decreased in 1996 to $50.8 million from
$52.5 million in 1995, primarily due to a 6% reduction in revenue per
applicant, partially offset by an increase in insurance kit revenue. The
total number of applicants tested for the year was relatively the same as
in 1995.
LabOne operating income increased from $2.4 million in 1995 to $3.2 million
in 1996. The increase is partially attributable to a $200,000 increase in
the insurance segment operating income.
Other Segment:
Seafield's oil and gas subsidiary contributed revenues of $2.4 million in
1996 as compared to $2 million in 1995. Variances in the oil and gas
prices nationally impact operating results.
The other segment's revenues and expenses in 1995 included the operating
results of a real estate, personal property, sales and use taxes consulting
subsidiary--Tenenbaum and Associates, Inc. (TAI). On May 31, 1995, TAI
sold certain assets to Ernst & Young U.S. LP. TAI retained its accounts
receivable as of May 31, 1995. The agreement provides for Ernst & Young to
continue the work-in-process on current accounts (where formal or informal
protests have been filed but not yet resolved). Ernst & Young will earn a
fee for collecting the current accounts and will participate in net cash
collected on certain accounts after third party costs and Ernst & Young's
fees. During June 1995, TAI distributed its remaining assets to
shareholders and filed for dissolution.
Consolidated revenues in 1995 for TAI were $5.3 million while TAI expenses
consolidated in 1995 were $4.1 million. See Note 1 of Notes to
Consolidated Financial Statements for additional information.
Investment Income - Net:
Other investments contributing earnings include venture capital and
liquidity investments. The return on short-term investments is included in
the investment income line in the consolidated statements of operations.
Investment income totaled $5 million in 1996 and $4.4 million in 1995.
Investment income was higher in 1996 reflecting both realized and
unrealized holding gains/losses recorded on trading securities and improved
venture capital operating results. See Notes 1 and 9 of Notes to
Consolidated Financial Statements for additional investment information.
Interest Expense:
Interest expense increased in 1996 to $2.9 million from $124,000 in 1995.
Response's $1.8 million of interest expense was related to borrowings under
its Credit Facility and debt assumed and/or issued by Response in
connection with practice management affiliations. During 1996, Seafield
incurred $1 million of interest expense associated with a preliminary state
tax audit.
Other Income/(Loss):
The major components of other income/(loss) in 1995 included $1.1 million
of losses on subsidiary dispositions and a $3.4 million provision for
Pyramid's bankruptcy. This compares with $411,000 of other losses in 1996.
Taxes:
The consolidated effective tax rate in 1996 was impacted primarily by the
accrual of state income taxes, net of federal income tax benefit, resulting
from an ongoing California franchise tax audit for the 1987-1989 years.
Other items affecting the tax rate were non-deductible goodwill, a net
increase in deferred income tax valuation allowances, and the utilization
of tax net operating losses at Response. See Note 10 of Notes to
Consolidated Financial Statements for additional tax information.
Consolidated Results:
The combined effect of the above factors resulted in a 1996 net loss from
continuing operations of $3.5 million compared with a $748,000 net loss
from continuing operations in 1995.
1995 Compared to 1994
Healthcare Services Segment:
Response recorded net earnings of $2.3 million for the year ended December
31, 1995 compared to a loss of $2.3 million in 1994. The significant
improvement in operations in 1995 compared to 1994 is attributable to
increased revenues from the increased referrals of high-dose chemotherapy
patients, including the establishment of additional IMPACT Centers,
principally in joint venture with hospitals, and the further development of
physician investigator studies for the pharmaceutical industry. Net
revenue increased $6 million, or 16%, from 1994 to 1995. In addition to an
approximate $2 million increase in net revenues from services to patients
to $33.8 million in 1995, sales of pharmaceuticals to physicians increased
by $3.3 million to $9.8 million, and revenues from physician investigator
studies in 1995, the first year of significant revenues generated from this
source, amounted to $665,000.
Response's operating expenses increased $1.1 million, or 4%, from 1994 to
1995. Operating expenses consist primarily of payroll costs,
pharmaceutical and laboratory expenses, medical director fees, rent expense
and other operational costs. These expenses are expected to display a high
degree of variability in proportion to Center revenues. Operating expenses
as a percentage of net revenue were 74% and 83% for the years ended 1995
and 1994, respectively. This decrease is primarily attributable to
operating efficiencies at higher levels of Center activity and certain
fixed operating expenses being spread over a larger revenue base.
Response's lab and pharmacy expense, which represents the largest component
of operating expenses, increased $1.7 million, or 10%, from 1994 to 1995.
The increase is primarily due to an increase in patient referrals and
pharmaceutical supply expense related to sales to physicians. A reduction
in medical director fees and other operating expenses of $528,000 was
realized during 1995.
Response's general and administrative costs increased $1.2, million or 29%,
from 1994 to 1995. Salaries and benefits, which represent the largest
component of general and administrative expenses, were $3.3 million in 1995
and $2.2 million in 1994. The increase is primarily due to management
incentive compensation relative to significant improvement in operations
and general increases in salaries and benefits. General and administrative
costs as a percentage of net revenue were 12% and 11% in 1995 and 1994,
respectively.
Response's depreciation expense decreased $140,000 from 1994 to 1995. The
decrease is primarily attributable to many prior capital expenditures
becoming fully depreciated. Amortization expense decreased $249,000 from
1994 to 1995 due to the startup costs of many Centers being fully amortized
after a two-year operational period. The provision for doubtful accounts
decreased $422,000 from 1994 to 1995. The provision as a percentage of net
revenue was 5% and 7% for 1995 and 1994, respectively. The decrease is
attributable to a higher proportion of contracted patient accounts,
improved collections performance and an increase in revenues from physician
sales, hospital management fees, and contract research for which collection
is more certain. Collection experience in 1995 and 1994 may not be
indicative of future periods.
LabOne's clinical and substance abuse laboratory testing revenues were $4.5
million during 1995, as compared to $500,000 in 1994. LabOne's total cost
of sales for all services increased $900,000 (3%) in 1995 as compared to
1994. This increase is due to increases in payroll, outside lab services
related to clinical and substance abuse testing and LSC expenses. LSC
expenses increased due to the LSC expansion as well as a write-off for
closing non-performing locations. Healthcare cost of sales expenses were
$8.6 million during 1995, as compared to $4.0 million in 1994. Healthcare
overhead expenses were $5.8 million during 1995, as compared to $3.1
million in 1994. LabOne's 1995 healthcare segment operating loss increased
by $3.3 million to $9.9 million.
Another healthcare subsidiary, Pyramid incurred a loss of $768,000 for the
first nine months of 1995 compared to a loss of $572,000 for the twelve
months of 1994. Pyramid entered bankruptcy proceedings in early October
1995. The impact on Seafield's results of operations was the September
1995 write-off of Seafield's investment in Pyramid by recording a pre-tax
expense of approximately $3.3 million and a corresponding tax benefit of
$2.1 million resulting in an after-tax $1.2 million charge to earnings.
Included with the Pyramid write-off was $2.3 million of goodwill. Seafield
consolidated Pyramid's nine months 1995 revenues of $7.6 million compared
to $6.4 million of revenues in 1994. Expenses consolidated in 1995 were
$7.7 million compared to $6.2 million in 1994. See Note 1 of Notes to
Consolidated Financial Statements for additional information.
Insurance Services Segment:
LabOne's total revenues decreased approximately 6% in 1995 to $57.0 million
from $60.7 million in 1994 due to decreases in insurance laboratory and kit
revenue, partially offset by increases in healthcare laboratory revenues.
Insurance laboratory revenues declined due to decreases in the volume and
price of tests performed. The total number of insurance applicants tested
by LabOne during 1995 decreased 10% as compared to 1994. This decline was
due to market competition, a reduction in the total number of life
insurance applications written in the industry, and regulations restricting
the use of laboratory testing for underwriting of medical insurance.
Average revenue per applicant declined 5%, primarily due to a decrease in
prices as a result of continued competitive pressures. During the fourth
quarter 1994, LabOne initiated a price stabilization plan. The purpose of
the plan was to increase prices by promoting service. The initial result
of this action was a slight increase in the average revenue per applicant.
However, prices subsequently declined during 1995.
LabOne's total cost of sales increased $900,000 (3%) in 1995 as compared to
the prior year. This increase is due to increases in payroll and outside
lab services related to clinical and substance abuse testing and LSC
expenses. LSC expenses increased due to the LSC expansion as well as a
write-off for closing non-performing locations. These were partially offset
by decreases in Lab One Canada expenses due to closing the laboratory in
1994. Lab One Canada continues to market testing services with laboratory
testing performed in the United States.
In September 1995, LabOne reduced staff by 7% resulting in additional
expenses of $500,000. The work force reduction was considered necessary to
improve the cost structure of its insurance testing operations.
LabOne's selling, general and administrative expenses decreased $100,000 in
1995 as compared to the prior year, primarily due to expenses related to
the one-time restructuring charge of $1.6 million incurred in 1994.
Depreciation and maintenance expenses also declined in 1995. These
declines were partially offset by increases in commission, bad debt and
third party billing expenses. The above factors reduced LabOne's 1995
insurance segment operating income by $1.3 million to $12.4 million.
Agency Premium Resource, Inc. (APR) is an insurance premium finance company
serving independent insurance agents in 21 states. APR provides premium
financing for the commercial customers of these independent insurance
agents. On May 31, 1995 Seafield sold APR receiving approximately $800,000
in cash and $9.2 million in US Treasury Bills that matured in June 1995.
In 1995, APR's revenues consolidated by Seafield decreased to $1.6 million
from $3.7 million in 1994, reflecting the May 1995 sale of this subsidiary.
Correspondingly, consolidated costs and expenses decreased to approximately
$500,000 from $1.3 million in 1994. Prior to the sale, APR had increased
its securitized receivables by $1.5 million in 1995 compared with $4
million in 1994. See Notes 1 and 5 of Consolidated Financial Statements
for additional information.
International Underwriting Services, Inc. (IUS), offers turnkey
policyholder and underwriting services. This subsidiary operated only
within the life and health insurance industry and provided some or all of
the following services to its customers: product design, underwriting of
applicants, policy issuance, policy service, premium collection and payment
of commissions. On July 17, 1995, Seafield sold IUS receiving approximately
$2.1 million in cash. In 1995, IUS's revenues consolidated by Seafield
decreased to $1.8 million from $3.3 million in 1994, reflecting the July
1995 sale of this subsidiary. Correspondingly, consolidated costs and
expenses decreased to approximately $1.6 million from $3.2 million in 1994.
See Note 1 to Consolidated Financial Statements for additional information.
Other Segment:
Seafield's oil and gas subsidiary contributed revenues of $2 million in
1995 as compared to $3.1 million in 1994. Variances in the oil and gas
prices nationally impact operating results. Additionally, various oil and
gas partnerships production decreased in 1995.
The other segment's revenues and expenses in 1995 and 1994 included the
operating results of a real estate, personal property, sales and use taxes
consulting subsidiary--Tenenbaum and Associates, Inc. (TAI). On May 31,
1995, TAI sold certain assets to Ernst & Young U.S. LP. Consolidated
revenues in 1995 for TAI were $5.3 million compared to $8.9 million in 1994
while TAI expenses consolidated in 1995 were $4.1 million compared to $9.2
million in 1994. The decreases primarily reflect five months of operation
in 1995 compared with twelve months in 1994. See Note 1 of Notes to
Consolidated Financial Statements for additional information.
Investment Income - Net:
Other investments contributing earnings include venture capital and
liquidity investments. The return on short-term investments is included in
the investment income line in the consolidated statements of operations.
Investment income totaled $4.4 million in 1995 and $2.9 million in 1994.
Investment income was lower in 1994 primarily resulting from approximately
$2.2 million of unrealized holding losses recorded on trading securities
that were impacted by interest rate changes. See Notes 1 and 9 of Notes to
Consolidated Financial Statements for additional investment information.
Taxes:
The consolidated effective tax rates were primarily impacted by tax
benefits on subsidiary dispositions and non-deductibility of goodwill
amortization. See Note 10 of Notes to Consolidated Financial Statements for
additional tax information.
Other Income/(Loss):
The major components of other income/(loss) in 1995 included $1.1 million
of losses on subsidiary dispositions and a $3.4 million provision for
Pyramid's bankruptcy compared to $67,000 of other income in 1994.
Consolidated Results:
The combined effect of the above factors resulted in a 1995 net loss from
continuing operations of $748,000 compared with a $1.9 million net loss
from continuing operations in 1994.
Real Estate - discontinued operations
In 1992, Seafield's board of directors approved a plan to discontinue real
estate operations. As a result of this decision, a $6 million after-tax
loss provision for estimated write-downs and costs through final
disposition was included in the discontinued real estate's 1992 loss.
Additional after-tax losses of $2.9 million, $6.6 million, and $1.5 million
were recorded in 1994, 1995, and 1996, respectively. These losses resulted
from changes in estimated net realizable value based upon management's
analysis of recent sales transactions and other current market conditions.
See Item 1 and Note 13 of Notes to Consolidated Financial Statements for
additional information concerning discontinued real estate operations.
Real estate revenues were $16.3 million in 1996 compared with $11.5 million
in 1995 and $12 million in 1994. The real estate sales revenues in 1996
include the sale of 40 residential units in Florida and New Mexico ($14.8
million); 20 acres of land in Oklahoma ($275,000) and 1.5 acres of land in
Kansas ($580,000). The real estate sales revenues in 1995 include the sale
of 29 residential units or lots in Florida, Missouri, New Mexico and Texas
($7.9 million) and 302 acres of land in Kansas and Texas ($2.6 million).
The 1994 real estate sales revenue included the sale of 47 residential
units or lots in Florida, New Mexico and Texas ($10.4 million) and land in
California ($500,000).
At December 31, 1996, real estate holdings include residential land,
undeveloped land, single-family housing and commercial structures located
in the following states: Florida, Kansas, Nevada, New Mexico, Texas and
Wyoming, all of which are listed for sale. The total acreage consisted of
approximately 1,160 acres and approximately 68 lots or units for sale.
Real estate operations are influenced from period to period by several
factors including seasonal sales cycles for projects in Florida and New
Mexico.
Cost of the real estate sales in 1996 totaled $15.3 million, compared with
a cost of approximately $10.9 million in both 1995 and 1994, reflecting the
mix of real estate sold during each period as discussed above in the
revenue analysis. Real estate operating expenses totaled $2.7 million in
1996, compared with $3.2 million in 1995 and $4 million in 1994. The
decrease is attributable to a reduction in expenses associated with the
substantial completion of the residential projects.
Listed below is the status of the discontinued real estate operations as of
December 31, 1996:
Land:
North Ft. Worth, TX 297 acres sold, 547 acres listed for sale
Ft. Worth, TX 214 acres listed for sale
Houston, TX 1 acre sold, 30 lots sold, 370 acres and 37
lots listed for sale
Olathe, KS 5.5 acres sold, 16 acres listed for sale
Tulsa, OK 12 acres sold
Land Lease:
Honolulu, HI sold
San Diego, CA sold
Nashville, TN sold
Commercial:
Reno, NV listed for sale
Denver, CO sold
Gillette, WY listed for sale
Residential:
Juno Beach, FL last 2 units listed for sale
Juno Beach, FL last unit and 3 marina slips listed for sale
Santa Fe, NM last 25 units listed for sale with 6 of the
25 units under contract
Mazatlan, Mexico final sales remittance received in 1995
The net real estate asset amounts are influenced from period to period by
several factors including seasonal sales cycles for projects in Florida and
New Mexico, a decision at the end of 1993 to accelerate the build-out of
the New Mexico project and construction on the final three houses in
Florida.
Publicly-Traded Subsidiaries
Seafield has investments in two majority-owned entities that are publicly-
traded, LabOne and Response. At December 31, 1996, based on the market
prices of publicly-traded shares of these two subsidiaries, pretax
unrealized gains of approximately $163 million on these investments were
not reflected in either Seafield's book value or stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1996 at the holding company level, Seafield had available
for operations approximately $26.3 million in cash and short-term
investments. Primarily as a result of investments in and loans to
Response, Seafield's working capital decreased $22 million during 1995 to
$24 million at December 31, 1996.
On a consolidated basis, Seafield and its subsidiaries (primarily LabOne
with $31.4 million) had $60.6 million in cash and short-term investments at
December 31, 1996. Current assets totaled approximately $109.1 million
while current liabilities totaled $27.9 million. Increases in other
current assets are related to receivables Response acquired through
practice management affiliations and amounts due from affiliated physicians
for practice management service fees. Current liabilities increased for
Response's amounts payable for operating expenses of practices under
management and liabilities assumed as consideration in the practice
management affiliations.
Net cash provided by continuing operations totaled $25.9 million in 1996
compared with $911,000 used in 1995. The increase reflects a $12.9 million
net decrease during 1996 (funds provided) in trading portfolios while
1995's increase in these trading portfolios used $11.8 million in funds.
Net cash used by investing activities totaled $40.4 million in 1996
primarily representing Response's use of funds to acquire the nonmedical
assets of the physician practices. Net cash provided by investing
activities totaled $9.5 million in 1995 related primarily to proceeds from
sale of subsidiaries by Seafield.
Net cash provided by financing activities totaled $12.3 million in 1996
compared with $9.6 million used in 1995. The change reflects proceeds from
long-term debt by Response net of payments on long-term debt.
In August 1990, Seafield's board of directors rescinded a previous
authorization and passed a new authorization of up to $70 million for the
acquisition of Seafield and LabOne common stock. Up to $20 million of this
authorization could be utilized to purchase LabOne stock.
In January 1994, Seafield's board of directors approved an additional $8.4
million authorization necessary to complete an acquisition of 382,350
Seafield shares for $13 million. During 1996, treasury stock issued for
exercised options totaled 22,873 shares.
In 1994, Seafield expended $722,000 to acquire 44,200 shares of LabOne
stock resulting in a total of 1,462,200 shares of LabOne's stock acquired
under the board authorizations at a cost of $17.3 million. No acquisitions
of LabOne stock were made during 1995 or 1996. At December 31, 1996, the
remaining aggregate authorization totals $7.7 million.
Seafield is primarily a holding company. Sources of cash are investment
income and sales, borrowings and dividends from subsidiaries. The dividend
paying capabilities of subsidiaries may be restricted as to their transfer
to the parent company. The primary uses of cash for Seafield are
investments, subsidiary stock purchases and dividends to shareholders.
Seafield has received notices of proposed adjustments (Revenue Agent's
Reports) from the Internal Revenue Service (IRS) with respect to 1986-1990
federal income taxes. These notices claim total federal income taxes due
for the entire five year period in the approximate net amount of
$13,867,000, exclusive of interest thereon.
The substantive issues raised in these notices for the years 1986-1990 are
primarily composed of the former television subsidiaries' amortization of
film rights, the sale of the stock of a former television station, certain
insurance company tax issues and a $27 million loss on the sale of a real
estate partnership interest. The IRS' denial of film right amortization
equates to approximately $10.5 million of the $13.9 million in additional
taxes; provided that if the IRS were to prevail on the amortization issues,
the tax basis in the television stations would be increased. This would
have the effect of reducing income taxes in connection with the stations'
sales; all have been sold.
With respect to the loss on the sale of the real estate partnership
interest, the IRS has claimed that the sale did not occur during 1990, but
rather occurred after 1991. If the sale did not occur in 1990, then 1990
losses could not be carried back to 1987, to reduce Seafield's significant
taxable income in 1987.
Seafield has filed protests regarding the 1986-1990 notices of proposed
adjustments. Seafield is currently pursuing a compromise with the Appeals
Division of the IRS for the 1986-1989 years. The 1990 issues have not yet
been formally addressed at the Appeals Division but Seafield is advised by
IRS representatives that tax issues in all years under audit will be
addressed together. Resolution of these tax disputes may reasonably be
expected, but is not certain, during 1997. Seafield believes that it has
meritorious defenses to many of the substantive issues raised by the IRS,
and adequate accruals for income tax liabilities.
In December 1996, the California state auditor sent Seafield an audit
report covering the 1987-1989 taxable years. The State of California has
determined to include, as a "unitary taxpayer," all majority owned non-life
insurance subsidiaries and joint ventures of Seafield. The auditor's
report has been forwarded to the California Franchise Tax Board for action.
The total amount of California state income taxes due for the 1987-1989
years is expected to be approximately $750,000. An accrual for the tax and
approximately $1 million of interest in included in Seafield's financial
statements at December 31, 1996. Pursuant to the Distribution Agreement,
SLH assumed all potential tax liabilities and interest thereon regarding
the California audit for the 1987-1989 tax years.
Pursuant to the Distribution Agreement, SLH assumed from Seafield all of
the contingent tax liabilities described above and acquired all rights to
refunds, plus any interest related to these tax years. SLH Corporation
also assumed all contingent liabilities and refunds related to any issues
raised by the IRS for the years 1986-1990 whose resolution may extend to
tax years beyond the 1990 tax year.
LabOne paid quarterly dividends during 1996, 1995 and 1994. As an 82%
owner, Seafield received $7.7 million of cash as dividends from LabOne in
1996. LabOne's working capital position declined from $44.2 million at
December 31, 1995, to $38.8 million at December 31, 1996. This decrease is
the result of dividends paid and capital additions exceeding net cash
provided by operations. LabOne's cash and investments totaled $31.9
million at December 31, 1996, and LabOne expects to fund operations,
capital asset additions, treasury stock purchases, if any, and future
dividend payments from a combination of cash flow and cash reserves.
LabOne had no short-term borrowings during 1996.
Response's working capital at December 31, 1996, was $14.6 million with
current assets of $31.7 million and current liabilities of $17.1 million.
Cash and cash equivalents and short-term investments represented $400,000
of Response's current assets.
In April 1996, Response obtained an unsecured $10 million loan from
Seafield bearing interest at the rate of prime plus 1%, which after August
1, 1996, became convertible at the election of Seafield into shares of
Response's common stock. Proceeds of the loan were used to finance a
practice management affiliation. The loan was exchanged for 909,090 shares
of common stock during August 1996.
In May 1996, Response entered into a $27.5 million Bank Credit Facility to
fund Response's acquisition and working capital needs and to repay an
existing facility. The Credit Facility, comprised of a $22 million
Acquisition Facility and a $5.5 million Working Capital Facility, is
collateralized by the common stock of Response's subsidiaries. The
Acquisition Facility matures May 31, 1998, and bears interest at a variable
rate equal to LIBOR plus a spread between 1.5% and 2.625%, depending upon
borrowing levels. The Working Capital Facility matures May 30, 1997,
subject to a one-year extension, and bears interest at a variable rate
equal to LIBOR plus a spread between 1.875% and 2.375%. At December 31,
1996, $20.9 million aggregate principal was outstanding under the Credit
Facility with a current interest rate of approximately 7.7%. Response's
available credit under the Credit Facility at December 31, 1996 was
$200,000. The Credit Facility contains affirmative and negative covenants
which, among other things, require Response to maintain certain financial
ratios, including minimum fixed charges coverage, funded debt to EBITDA,
net worth and current ratio. As of December 31, 1996, Response was in
compliance with the covenants included in the Credit Facility.
Response has received a commitment to increase the Credit Facility to $45
million. Response anticipates that working capital generated from
operations and anticipated availability under the Credit Facility will be
adequate to expand the IMPACT Center network, manage the practices with
which Response has affiliated, and to make certain strategic acquisitions
for the next 12 months. Response's acquisition strategy is dependent upon
capital resources in excess of working capital generated from operations
and currently available credit facilities.
Response issued long-term unsecured amortizing promissory notes bearing
interest at rates from 4% to 9% as partial consideration for the practice
management affiliations. Principal and interest under the long-term notes
may, at the election of the holders, be paid in shares of common stock of
Response based upon conversion rates ranging from $13.75 to $17.50. The
unpaid principal amount of the long-term notes was $26.5 million at
December 31, 1996.
In October 1996, Response procured a $23.5 million credit facility from
Seafield (the Seafield Facility) to finance acquisitions and for working
capital. At December 31, 1996, $22.5 million was outstanding under the
Seafield Facility at an interest rate of 8%. On February 26, 1997, the
$23.5 million loan and accrued interest of $664,000 was converted into
3,020,536 shares of Response's common stock at a rate of $8 per share.
On July 17, 1996, Response filed a registration statement with the
Securities and Exchange Commission with respect to the public offering of
5.3 million shares of its common stock, $.01 par value per share. Because
of market conditions subsequent to filing, Response chose not to pursue the
public offering and sought acquisition financing from the aforementioned
sources.
Response's capital expenditures of $1.4 million for the year ended December
31, 1996, were primarily associated with the expansion of Response's
network of IMPACT Centers. No material commitments for capital
expenditures currently exist.
Response is committed to future minimum lease payments under operating
leases of $18.7 million for administrative and operational facilities.
TRENDS
The following is LabOne's analysis of certain existing trends that have
been identified as potentially affecting the future financial results of
LabOne. Due to the potential for a rapid rate of change in any number of
factors associated with the insurance and healthcare laboratory testing
industries, it is difficult to quantify with any degree of certainty
LabOne's future volumes, sales or net earnings.
In the last several years there has been a decline in the number of life
insurance applications written in the industry. In addition, the insurance
laboratory testing industry continues to be highly competitive. The primary
focus of the competition has been on pricing. LabOne continues to maintain
its market leadership by providing quality products and services at
competitive prices. Management expects that prices will continue to
decline during 1997 due to competitive pressures. This trend may have a
continuing material impact on earnings from operations.
During June 1996, the FDA approved an oral fluid Western blot test as a
confirmation for the oral fluid HIV-1 antibody test. This allows for the
initial screen and the Western blot confirmation test to be performed on
the same specimen. Due to the lower collection expense associated with
oral fluid collection devices, the potential exists for an expansion of the
testing market. Currently, there are approximately 13.5 million individual
life insurance policies sold in the United States annually. However,
laboratory services are provided on only approximately 4.5 million of these
policy applicants. The non-invasive nature of oral specimen collection
allows for low cost collection, making testing much more affordable on
smaller face value insurance policies. Conversely, the device also has the
potential to cannibalize part of the existing blood and urine testing
market. The net impact of oral fluid testing cannot be determined at this
time.
During 1996, the FDA approved two home-based collection kits for HIV-1
testing. These products allow individuals to confidentially determine
their HIV status prior to applying for insurance. To avoid insuring these
high-risk applicants, the insurance companies may elect to lower the
threshold at which laboratory tests are requested to prevent writing
policies on HIV-positive applicants. Most insurance laboratory testing is
performed on policies of $100,000 or greater, representing about one-third
of all policy applicants. The $25,000 to $99,999 range represents
approximately one-quarter of current insurance policy applicants. The
potential exists for a significant expansion of laboratory testing for
lower policy amounts. Several clients have indicated that they plan to
test a higher percentage of their applicants in 1997 because of these new
HIV testing products. The net impact of these potential changes cannot be
determined at this time.
Effective January 30, 1997, LabOne acquired certain assets, including
customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential
Insurance Company of America. Concurrently, Prudential's Individual
Insurance Group agreed to use LabOne as its exclusive provider of risk
assessment testing services. At the time of the purchase, GIB served
approximately 5% of the insurance laboratory testing market.
LabOne entered the clinical and SAMHSA-certified substance abuse testing
markets during 1994. LabOne continues to add new customers in both fields.
LabOne's Lab Card Program covered approximately 1.1 million lives as of
January 1, 1997, including The Guardian Life Insurance Company of America
(The Guardian) and Principal Healthcare of Kansas City (Principal).
Additionally, LabOne had a signed backlog of more than 300,000 additional
lives to be covered by the Program.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128 "Earnings per Share" is
required to be implemented for both interim and annual periods ending after
December 15, 1997. The adoption of this standard is not expected to have
any significant impact on Seafield's financial position or results of
operations.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" is required to be implemented for
periods ending after December 15, 1997. The adoption of this standard is
not expected to have any significant impact on Seafield's financial
position or results of operations.
No other recently issued accounting standards presently exist which will
require adoption in future periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Part III
ITEM 10. DIRECTORS OF THE REGISTRANT.
See Cross Reference Sheet, "Documents Incorporated by Reference."
ITEM 11. EXECUTIVE COMPENSATION.
See Cross Reference Sheet, "Documents Incorporated by Reference."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See Cross Reference Sheet, "Documents Incorporated by Reference."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Cross Reference Sheet, "Documents Incorporated by Reference."
Cross Reference Sheet To Documents Incorporated By Reference PART III
Item 10. Directors and Executive Proxy Statement relating to Annual
Officers of the Company Meeting of Shareholders to be held
May 14, 1997, under the caption
"Election of Directors - Nominees
and Directors whose terms expire in
1998 and 1999."
Item 11. Executive Compensation Proxy Statement relating to Annual
Meeting of Shareholders to be held
May 14, 1997, under the captions
"Election of Directors -
Compensation of Executive
Officers."
Item 12. Security Ownership of Proxy Statement relating to Annual
Certain Beneficial Meeting of Shareholders to be held
Owners and Management May 14, 1997, under the captions
"Election of Directors - Security
Ownership of Management and
Security Ownership of Certain
Beneficial Owners."
Item 13. Certain Relationships Proxy Statement relating to Annual
and Related Meeting of Shareholders to be held
Transactions May 14, 1997, under the caption
"Election of Directors - Certain
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Operations -
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
II. Valuation and Qualifying Accounts and Reserves -
Years ended December 31, 1996, 1995 and 1994
III. Real Estate and Accumulated Depreciation - December 31, 1996
All other schedules are omitted because they are not applicable or the
information is given in the financial statements or notes thereto.
Portions of Registrant's Proxy Statement for use in connection with the
1997 Annual Meeting of Shareholders are incorporated by reference into
Part III of this report, if such Proxy Statement is filed with the
Securities and Exchange Commission on or before April 30, 1997. If such
Proxy Statement is not filed by such date, the information required to
be presented in Part III will be filed as an amendment to this report.
(3) Exhibits required by Item 601 of Regulation S-K (see Index to
Exhibits in paragraph (c) infra.)
(b) Reports on Form 8-K.
A Form 8-K current report dated December 5, 1996 was filed with the
Commission reporting under Other Events the agreement by the
Registrant's 82% owned subsidiary, LabOne, Inc., to acquire selected
assets, including customer lists, of Gib Laboratories, Inc., a
subsidiary of Prudential Insurance Company of America. Concurrently,
Prudential's Individual Insurance Group agreed to use LabOne as its
exclusive provider of risk assessment testing services.
The following reports all related to practice acquisitions by the
Registrant's subsidiary, Response Oncology, Inc., and were filed on the
dates indicated:
(a) Form 8-K/A (Amendment No. 2) filed October 17, 1996 (Rymer,
Zaravinos & Faig, M.D., P.A.)
(b) Form 8-K filed October 21, 1996 and Form 8-K/A (Amendment No. 1)
filed November 7, 1996 (The Center for Hematology-Oncology,
P.A.)
(c) Form 8-K filed November 5, 1996 and Form 8-K/A (Amendment No. 1)
filed November 7, 1996 (Hematology Oncology Associates of the
Treasure Coast, P.A.)
(d) Form 8-K/A (Amendment No. 1) filed November 13, 1996 (Rosenberg
& Kalman, M.D., P.A.)
(c) Index to Exhibits (Exhibits follow the Schedules);
2.1 Distribution Agreement, dated December 20, 1996, between the
Registrant and SLH Corporation (filed as Exhibit 2(a) to SLH
Corporation's Form 10/A (Amendment No. 1) filed February 4,
1997 (File No. 0-21911) and incorporated herein by reference).
2.2 Blanket Assignment, Bill of Sale, Deed and Assumption
Agreement, dated as of February 28, 1997, between the
Registrant and SLH Corporation (filed as Exhibit 2(b) to SLH
Corporation's Form 10/A (Amendment No. 1) filed February 4,
1997 (File No. 0-21911) and incorporated herein by reference).
3.1 Registrant's Articles of Incorporation, as amended (filed as
Exhibit 3.1 to Amendment No. 1 to Registrant's Registration
Statement on Form S-4, filed April 8, 1988 (File No. 33-20298)
and incorporated herein by reference).
3.2 Amendment to Registrant's Articles of Incorporation, effective
May 15, 1991, (filed as Exhibit 3(b) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991 (File
No. 0-16946) and incorporated herein by reference).
3.3 Registrant's Bylaws, as amended (filed as Exhibit 3(c) to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992 (File No. 0-16946) and incorporated herein by
reference).
4.1 Form of Rights Agreement dated April 5, 1988, between
Registrant and Morgan Shareholder Services Trust Company, as
Rights Agent (filed as Exhibit 4.1 to Amendment No. 1 to
Registrant's Registration Statement on Form S-4, filed April 8,
1988 (File No. 33-20298) and incorporated herein by reference).
4.2 Form of Certificate of Serial Designation of Series A Preferred
Stock (filed as Exhibit 4.2 to Amendment No. 1 to Registrant's
Registration Statement on Form S-4, filed April 8, 1988, (File
No. 33-20298) and incorporated herein by reference).
4.3 Amendment No. 1 to the Rights Agreement, dated November 14,
1988, between Registrant and Morgan Shareholder Services Trust
Company, as Rights Agent (filed as Exhibit 1 to the
Registrant's current report on Form 8-K filed November 18, 1988
(File No. 0-16946) and incorporated herein by reference).
4.4 Amendment No. 2 to the Rights Agreement, dated May 15, 1991,
between Registrant and First Chicago Trust Company of New York,
as Rights Agent (filed as Exhibit 4(d) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991 (File
No. 0-16946) and incorporated herein by reference).
4.5 Notice and Agreement Respecting Removal of Rights Agent and
Appointment of Successor Rights Agent (filed as Exhibit 4(e) to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 0-16946) and incorporated herein by
reference).
10.1 Registrant's 1984 Stock Option Incentive Plan, as amended
(filed as Exhibit 10(b) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1990 (File No. 0-16946)
and incorporated herein by reference).**
10.2 Amendment to Registrant's 1984 Stock Option Incentive Plan,
effective August 17, 1992 (filed as Exhibit 10(b) to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992 (File No. 0-16946) and incorporated herein by
reference).**
10.3 Amendment to Registrant's 1984 Stock Option Incentive Plan,
effective August 2, 1995 (filed as Exhibit 10.3 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
(File No. 0-16946) and incorporated herein by reference).**
10.4 Registrant's 1989 Stock Option and Incentive Plan (filed as
Exhibit 28 to Registrant's Registration Statement on Form S-8
filed April 17, 1989 (File No. 33-28150) and incorporated
herein by reference).**
10.5 Amendment to Registrant's 1989 Stock Option and Incentive Plan,
effective February 20, 1991 (filed as Exhibit 10(d) to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990 (File No. 0-16946) and incorporated herein by
reference).**
10.6 Amendment to Registrant's 1989 Stock Option and Incentive Plan,
effective January 20, 1995 (filed as Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 0-16946) and incorporated herein by
reference).**
10.7 Amendment to Registrant's 1989 Stock Option and Incentive Plan,
effective August 2, 1995 (filed as Exhibit 10.7 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
(File No. 0-16946) and incorporated herein by reference).**
10.8 Registrant's 1991 Non-Employee Directors' Stock Option Plan and
form of Stock Option Agreement, effective May 15, 1991 (filed
as Exhibit 10(e) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 0-16946) and
incorporated herein by reference).***
10.9 Amendment No. 1 to Registrant's 1991 Non-Employee Directors'
Stock Option Plan, dated November 10, 1993 (filed as Exhibit
10.6 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993 (File No. 0-16946) and incorporated
herein by reference).***
10.10 Amendment to Registrant's 1991 Non-Employee Directors'
Stock Option Plan, effective August 2, 1995 (filed as Exhibit
10.10 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-16946) and incorporated
herein by reference).***
10.11 Registrant's Stock Purchase Plan, as amended (filed as Exhibit
10(e) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1990 (File No. 0-16946) and incorporated
herein by reference).***
10.12 Amendment to Registrant's Stock Purchase Plan, effective May
15, 1991 (filed as Exhibit 10(g) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1991 (File No.
0-16946) and incorporated herein by reference).***
10.13 Amendment to Registrant's Stock Purchase Plan effective August
17, 1992 (filed as Exhibit 10(h) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1992 (File No.
0-16946) and incorporated herein by reference).***
10.14 Amendment to Registrant's Stock Purchase Plan effective August
2, 1995 (filed as Exhibit 10.14 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 (File No.
0-16946) and incorporated herein by reference).***
10.15 Supplemental Retirement Agreement between the Registrant and P.
Anthony Jacobs, President of Registrant (filed as Exhibit 10(i)
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992 (File No. 0-16946) and incorporated herein by
reference).**
10.16 * Amendment to Supplemental Retirement Agreement between the
Registrant and P. Anthony Jacobs, President of Registrant,
dated January 2, 1997.**
10.17 Consulting Agreement, dated as of August 1, 1990, First
Amendment to Consulting Agreement, dated as of January 1, 1992,
and Second Amendment to Consulting Agreement, dated as of
January 1, 1993, each between the Registrant and W.D. Grant,
director of the Registrant (filed as Exhibit 10(j) to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992 (File No. 0-16946) and incorporated herein by
reference).***
10.18 Form of Supplemental Retirement Agreement between the
Registrant and certain corporate/executive officers (filed as
Exhibit 10(k) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 0-16946) and
incorporated herein by reference).**
10.19 * Prepayment, Release and Discharge Agreement between Registrant
and W. D. Grant, a director of Registrant, dated January 2,
1997.***
10.20 Form of Termination Compensation Agreement between the
Registrant and corporate/executive officers (filed as Exhibit
10(g) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1990 (File No. 0-16946) and incorporated
herein by reference).**
10.21 Form of Amendment No. 1 to Termination Compensation Agreement,
dated January 20, 1995, between the Registrant and corporate/
executive officers (filed as Exhibit 10.16 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
(File No. 0-16946) and incorporated herein by reference).**
10.22 Form of Amendment No. 2 to Termination Compensation Agreement,
dated February 14, 1996, between the Registrant and corporate/
executive officers (filed as Exhibit 10.21 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
(File No. 0-16946) and incorporated herein by reference).**
10.23 Form of Indemnification Agreement between Registrant and its
directors and corporate/executive officers (filed as Exhibit
10(i) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989 (File No. 0-16946) and incorporated
herein by reference).
10.24 Form of Severance Agreement, dated February 14, 1996, between
the Registrant and corporate/executive officers (filed as
Exhibit 10.23 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 0-16946) and
incorporated herein by reference).**
10.25 Services Agreement, dated January 1, 1993, among Registrant and
LabOne, Inc., relating to services and other matters among the
parties (filed as Exhibit 10.17 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993 (File No.
0-16946) and incorporated herein by reference).
10.26 1985 Stock Option Plan of Response Oncology, Inc., as
amended (filed as Exhibit 10(q) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1992 (File No.
0-16946) and incorporated herein by reference).**
10.27 1990 Non-Qualified Stock Option Plan of Response Oncology,
Inc., as amended through December 31, 1992 (filed as Exhibit
10(r) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992 (File No. 0-16946) and incorporated
herein by reference).**
10.28 Amendment No. 2 to 1990 Non-Qualified Stock Option Plan of
Response Oncology, Inc., effective April 1995 (filed as Exhibit
10.27 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-16946) and incorporated
herein by reference).**
10.29 * Amendment No. 3 to 1990 Non-qualified Stock Option Plan of
Response Oncology, Inc. adopted December 16, 1995 (filed as
part of the Response Oncology, Inc. Registration Statement on
Form S-8 (File No. 333-14371) effective October 11, 1996 and
incorporated herein by reference).**
10.30 Employment Agreement effective July 1, 1995 between Response
Oncology, Inc. and Joseph T. Clark, an executive officer of
Registrant (filed as Exhibit 10.29 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995 (File
No. 0-16946) and incorporated herein by reference).**
10.31 Long-Term Incentive Plan of LabOne, Inc., approved May 16, 1991
with amendments adopted May 21, 1993 and November 9, 1993
(filed as Exhibit 10.21 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 (File No. 0-16946)
and incorporated herein by reference).**
10.32 Amendment to LabOne's Long Term Incentive Plan, effective
February 10, 1995 (filed as Exhibit 10.31 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
(File No. 0-16946) and incorporated herein by reference).**
10.33 LabOne's Stock Plan for non-employee directors (filed as
Exhibit 10.23 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1994 (File No. 0-16946)
and incorporated herein by reference).**/***
10.34 LabOne's Annual Incentive Plan (filed as Exhibit 10.6 to
LabOne, Inc. Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-15975) and incorporated herein by
reference).**
10.35 Facilities Sharing and Interim Services Agreement, dated as of
February 28, 1997, between the Registrant and SLH Corporation
(filed as Exhibit 10(a) to SLH Corporation's Registration
Statement on Form 10/A (Amendment No. 1) filed February 4,1997
(File No. 0-21911) and incorporated herein by reference).
10.36 Tax Sharing Agreement, dated as of February 28, 1997, between
the Registrant and SLH Corporation (filed as Exhibit 10(b) to
SLH Corporation's Registration Statement on Form 10/A
(Amendment No. 1) filed February 4, 1997 (File No. 0-21911) and
incorporated herein by reference).
10.37 Form of the Stock Purchase Agreement by and among Response
Oncology, Inc., Stockholders of Oncology Hematology Group of
South Florida, P.A. and South Florida Oncology Hematology
Associates, P.A. dated December 28, 1995 (filed as Exhibit 1 to
Registrant's Current Report on Form 8-K dated January 17, 1996
(File No. 0-16946) and incorporated herein by reference).
10.38 Form of the Service Agreement between Response Oncology, Inc.
and Oncology Hematology Group of South Florida, P.A. dated
January 2, 1996 (filed as Exhibit 2 to Registrant's Current
Report on Form 8-K dated January 17, 1996 (File No. 0-16946)
and incorporated herein by reference).
10.39 Form of the Purchase and Sale Agreement by and among Response
Oncology, Inc., Knoxville Hematology Oncology Associates and
Partners of Knoxville Hematology Oncology Associates dated
April 12, 1996 (filed as Exhibit 99.1 to Registrant's Current
Report on Form 8-K dated May 1, 1996 (File No. 0-16946) and
incorporated herein by reference).
10.40 Form of the Service Agreement between Response Oncology, Inc.,
Knoxville Hematology Oncology Associates, P.L.L.C. and Members
of Knoxville Hematology Oncology Associates, P.L.L.C. dated
April 12, 1996 (filed as Exhibit 99.2 to Registrant's Current
Report on Form 8-K dated May 1, 1996 (File No. 0-16946) and
incorporated herein by reference).
10.41 Form of the Stock Purchase Agreement by and among Response
Oncology, Inc., Jeffrey L. Paonessa, M.D. and J. Paonessa,
M.D., P.A. dated as of June 19, 1996 (filed as Exhibit 99.1 to
Registrant's Current Report on Form 8-K dated June 20, 1996
(File No. 0-16946) and incorporated herein by reference).
10.42 Form of the Service Agreement by and among Response Oncology,
Inc., Jeffrey L. Paonessa, M.D. and J. Paonessa, M.D., P.A.
dated as of June 19, 1996 (filed as Exhibit 99.1 to
Registrant's Current Report on Form 8-K/A (Amendment No. 1)
dated June 20, 1996 (File No. 0-16946) and incorporated herein
by reference).
10.43 Form of the Stock Purchase Agreement by and among Response
Oncology, Inc. and Stockholders of Rymer, Zaravinos & Faig,
M.D., P.A. dated July 1, 1996 (filed as Exhibit 99.1 to
Registrant's Current Report on Form 8-K dated July 8, 1996
(File No. 0-16946) and incorporated herein by reference).
10.44 Form of the Service Agreement between Response Oncology of
Fort. Lauderdale, Inc., Southeast Florida Hematology Oncology
Group, P.A. and Stockholders of Southeast Florida Hematology
Oncology Group, P.A. dated July 1, 1996 (filed as Exhibit 99.2
to Registrant's Current Report on Form 8-K dated July 8, 1996
(File No. 0-16946) and incorporated herein by reference).
10.45 Form of the Stock Purchase Agreement among Response Oncology,
Inc., Alfred M. Kalman, M.D. and Abraham Rosenberg, M.D. dated
as of September 1, 1996 (filed as Exhibit 10(a) to Registrant's
Current Report on Form 8-K dated September 3, 1996 (File No.
0-16946) and incorporated herein by reference).
10.46 Form of the Service Agreement among Response Oncology, Inc.,
Rosenberg & Kalman, M.D., P.A. and Stockholders of R & K, M.D.,
P.A. dated as of September 1, 1996 (filed as Exhibit 10(b) to
Registrant's Current Report on Form 8-K dated September 3, 1996
(File No. 0-16946) and incorporated herein by reference).
10.47 Form of the Asset Purchase Agreement by and among Response
Oncology, Inc., Stockholders of The Center for Hematology-
Oncology, P.A. and The Center for Hematology-Oncology, P.A.
dated as of October 1, 1996 (filed as Exhibit 10(a) to
Registrant's Current Report on Form 8-K dated October 4, 1996
(File No. 0-16946) and incorporated herein by reference).
10.48 Form of the Stock Purchase Agreement by and among Response
Oncology, Inc., Stockholders of Hematology Oncology Associates
of the Treasure Coast, P.A. and Hematology Oncology Associates
of the Treasure Coast, P.A. dated as of October 1, 1996 (filed
as Exhibit 10(a) to Registrant's Current Report on Form 8-K
dated October 22, 1996 (File No. 0-16946) and incorporated
herein by reference).
10.49 * Loan Agreement dated May 31, 1996 between Response Oncology,
Inc., NationsBank of Tennessee, N.A. and Union Planters
National Bank.
10.50 * Subordination Agreement dated June 18, 1996 by and among
Registrant, Response Oncology, Inc., NationsBank of Tennessee,
N.A. and Union Planters National Bank (filed as Exhibit 99.3 to
Registrant's Schedule 13D/A (Amendment No. 7) dated June 2,
1996 and incorporated herein by reference).
10.51 * Adjustable Rate Convertible Note made by Response Oncology,
Inc. payable to Registrant dated April 12, 1996 (filed as
Exhibit 99.1 to Registrant's Schedule 13D/A (Amendment No. 7)
dated June 2, 1996 and incorporated herein by reference).
10.52 * Loan Agreement dated as of October 4, 1996 between Registrant
and Response Oncology, Inc. (filed as Exhibit 99.1 to
Registrant's Schedule 13D/A (Amendment No. 9) dated October 4,
1996 and incorporated herein by reference).
10.53 * Adjustable Rate Convertible Note of Response Oncology, Inc.
dated October 4, 1996 (filed as Exhibit 99.2 to Registrant's
Schedule 13D/A (Amendment No. 9) dated October 4, 1996 and
incorporated herein by reference).
10.54 * Subordination Agreement dated October 4, 1996 by and among
Registrant, Response Oncology, Inc., and NationsBank of
Tennessee, N.A. (filed as Exhibit 99.3 to Registrant's
Schedule 13D/A (Amendment No. 9) dated October 4, 1996 and
incorporated herein by reference).
10.55 * Agreement of Payment and Satisfaction dated as of February 26,
1997 between Registrant and Response Oncology, Inc (filed as
Exhibit 99.1 to Registrant's Schedule 13D/A (Amendment No. 10)
dated February 26, 1997 and incorporated herein by reference).
10.56 Securities Purchase Agreement between Registrant and Response
Oncology, Inc. (filed as Exhibit (a) to Registrant's Schedule
13D/A (Amendment No. 6) dated February 8, 1995 and incorporated
herein by reference).
10.57 Second Amendment to Securities Purchase Agreement dated August
29, 1996 between Registrant and Response Oncology, Inc. (filed
as Exhibit 99.1 to Registrant's Schedule 13D/A (Amendment No.
8) dated August 29, 1996 and incorporated herein by reference).
11 Statement regarding computation of per share earnings - see
Note l of Notes to Consolidated Financial Statements, "Earnings
Per Share."
13 Annual Report to Shareholders for the year ended December 31,
1996 - To be furnished.
21 Subsidiaries of Registrant (reference is made to Item 1
hereof).
23 * Consents of KPMG Peat Marwick LLP with respect to Forms S-8.
27 Financial Data Schedule - as filed electronically by the
Registrant in conjunction with this 1996 Form 10-K.
99.1 Proxy Statement for 1997 Annual Shareholders meeting - To be
furnished.
99.2 SLH Corporation Registration Statement on Form 10 (filed as SLH
Corporation's Registration Statement on Form 10/A (Amendment
No. 2) on February 12, 1997 (file No. 0-21911) and incorporated
herein by reference).
* These documents may be obtained by stockholders of Registrant upon
written request to: Seafield Capital Corporation, P.0. Box 410949,
Kansas City, Missouri 64141.
** Management Compensatory Plan
*** Non-Management Director Compensatory Plan
(d) Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SEAFIELD CAPITAL CORPORATION
By: /s/ W. Thomas Grant II
-----------------------------
W. Thomas Grant II
Title: Chairman, Chief Executive
Officer and Director
Date: March 17, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons who serve Registrant
in the capacities and on the dates indicated.
By: /s/ P. Anthony Jacobs By: /s/ James R. Seward
----------------------------- -----------------------------
P. Anthony Jacobs James R. Seward
Title: President, Chief Title: Executive Vice President,
Operating Officer Chief Financial Officer
and Director and Director
Date: March 17, 1997 Date: March 17, 1997
By: /s/ Steven K. Fitzwater By: /s/ W. D. Grant
----------------------------- -----------------------------
Steven K. Fitzwater W. D. Grant
Title: Vice President, Chief Title: Director
Accounting Officer and
Secretary
Date: March 17, 1997 Date: March 17, 1997
By: /s/ Lan C. Bentsen By: /s/ John C. Gamble
----------------------------- -----------------------------
Lan C. Bentsen John C. Gamble
Title: Director Title: Director
Date: March 17, 1997 Date: March 17, 1997
By: /s/ Michael E. Herman By: /s/ David W. Kemper
----------------------------- -----------------------------
Michael E. Herman David W. Kemper
Title: Director Title: Director
Date: March 17, 1997 Date: March 17, 1997
By: /s/ John H. Robinson, Jr. By: /s/ Dennis R. Stephen
----------------------------- -----------------------------
John H. Robinson, Jr. Dennis R. Stephen
Title: Director Title: Director
Date: March 17, 1997 Date: March 17, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Seafield Capital Corporation:
We have audited the consolidated financial statements of Seafield Capital
Corporation and subsidiaries as listed in Item 14(a)(1). In connection with
our audits of the consolidated financial statements, we also have audited
the financial statement schedules as listed in Item 14(a)(2). These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules 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 and
the report of other auditors provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Seafield Capital Corporation and subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also in our opinion, the
related financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Kansas City, Missouri
March 14, 1997
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
- --------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 5,372 7,581
Short-term investments 55,208 75,632
Accounts and notes receivable 24,882 23,565
Deferred income taxes 3,058 1,540
Other current assets 20,604 8,850
---------------------
Total current assets 109,124 117,168
Property, plant and equipment 22,777 21,604
Investments:
Securities 4,019 4,026
Oil and gas 1,543 4,247
Intangible assets 118,917 19,477
Other assets 1,830 2,779
Net assets of discontinued real estate operations 30,466 42,215
---------------------
$ 288,676 211,516
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,599 6,370
Notes payable 7,847 --
Income taxes payable 724 (4,457)
Other current liabilities 10,768 5,859
---------------------
Total current liabilities 27,938 7,772
Notes payable 39,611 --
Deferred income taxes 17,237 (6,999)
Other liabilities 1,528 2,653
---------------------
Total liabilities 86,314 3,426
---------------------
Minority interests 28,338 21,006
---------------------
Stockholders' equity:
Preferred stock of $1 par value.
Authorized 3,000,000 shares; none issued -- --
Common stock of $1 par value.
Authorized 24,000,000 shares;
issued 7,500,000 shares 7,500 7,500
Paid-in capital 1,748 1,747
Equity adjustment from foreign currency translation (439) (447)
Retained earnings 195,329 208,098
---------------------
204,138 216,898
Less cost of 1,016,066 shares of treasury stock
(1995-1,038,939 shares) 30,114 29,814
---------------------
Total stockholders' equity 174,024 187,084
---------------------
Commitments and contingencies
---------------------
$ 288,676 211,516
=====================
See accompanying notes to consolidated financial statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
- --------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
(In thousands except
per share amounts)
REVENUES
Healthcare services $ 75,985 56,410 45,134
Insurance services 50,801 55,862 67,199
Other 2,446 7,272 11,945
----------------------------------
Total revenues 129,232 119,544 124,278
COSTS AND EXPENSES
Healthcare services 67,014 52,838 45,073
Insurance services 22,625 23,598 30,951
Other 2,771 6,357 11,780
Selling, general and administrative 36,680 42,300 40,767
----------------------------------
Earnings (loss) from operations 142 (5,549) (4,293)
Investment income - net 5,004 4,401 2,889
Interest expense (2,900) (124) (299)
Other income (expense) (411) (4,564) 366
----------------------------------
Earnings (loss) before income taxes 1,835 (5,836) (1,337)
----------------------------------
Taxes on income (benefits):
Current 3,380 (1,429) 2,486
Deferred 670 (5,134) (1,806)
----------------------------------
Total 4,050 (6,563) 680
----------------------------------
Earnings (loss) before minority interests (2,215) 727 (2,017)
Minority interests 1,329 1,475 (145)
----------------------------------
Loss from
continuing operations (3,544) (748) (1,872)
Loss from discontinued real
estate operations (1,452) (6,600) (2,904)
----------------------------------
NET LOSS $ (4,996) (7,348) (4,776)
==================================
Per share of common stock:
Loss from
continuing operations $ (.55) (.12) (.29)
Loss from discontinued real
estate operations (.22) (1.02) (.46)
----------------------------------
NET LOSS $ (.77) (1.14) (.75)
==================================
See accompanying notes to consolidated financial statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
(In thousands)
Common stock:
Balance, beginning and end of year $ 7,500 7,500 7,500
----------------------------------
Paid-in capital:
Balance, beginning of year 1,747 1,002 1,007
Exercise of stock options 1 745 (5)
----------------------------------
Balance, end of year 1,748 1,747 1,002
----------------------------------
Foreign currency translation:
Balance, beginning of year (447) (561) (350)
Net change during year 8 114 (211)
----------------------------------
Balance, end of year (439) (447) (561)
----------------------------------
Retained earnings:
Balance, beginning of year 208,098 223,169 235,583
Net earnings (loss) (4,996) (7,348) (4,776)
Dividends declared* (7,773) (7,723) (7,638)
----------------------------------
Balance, end of year 195,329 208,098 223,169
----------------------------------
Less treasury stock:
Balance, beginning of year 29,814 30,177 18,070
Net issuance pursuant to stock
option plans (1996-22,873;
1995-82,800; 1994-27,366) 300 (363) (845)
Shares purchased (1994-382,350) -- -- 12,952
----------------------------------
Balance, end of year 30,114 29,814 30,177
----------------------------------
STOCKHOLDERS' EQUITY $ 174,024 187,084 200,933
==================================
*Dividends per share amounted to $1.20 in 1996, 1995 and 1994.
See accompanying notes to consolidated financial statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Loss from continuing operations $ (3,544) (748) (1,872)
Adjustments to reconcile loss from
continuing operations to net cash provided
(used) by continuing operations:
Depreciation and amortization 12,553 12,210 15,099
Earnings applicable to minority interests 1,329 1,475 (145)
Change in trading portfolio, net 12,876 (11,766) 2,019
Change in accounts receivable 1,095 2,902 1,856
Change in accounts payable 1,341 (10) 1,643
Net advances to physician practices (6,846) -- --
Income taxes and other, net 7,107 (4,974) (2,126)
-----------------------------
Net cash provided (used)
by operations 25,911 (911) 16,474
-----------------------------
INVESTING ACTIVITIES
Sales of investments available for sale 4 83 --
Purchases of investments held to maturity (15,753) (65,569) (79,502)
Maturities of investments held to maturity 23,395 69,459 90,602
Proceeds of securitization -- 1,500 4,000
Additions to property, plant
and equipment, net (4,286) (4,370) (5,445)
Oil and gas investments (351) (391) (914)
Net increase (decrease) in notes receivable 183 (2,507) (6,456)
Purchase of stock in consolidated subsidiaries -- -- (722)
Acquisition of physician practices (52,683) -- --
Proceeds from sale of subsidiaries, net -- 12,054 --
Net cash provided (used) by discontinued
real estate operations 9,107 1,196 (2,023)
Other, net (27) (1,995) (812)
-----------------------------
Net cash provided (used) by
investing activities (40,411) 9,460 (1,272)
-----------------------------
FINANCING ACTIVITIES
Payments under line of credit agreements, net 681 (2,831) (1,725)
Proceeds from long-term debt 26,631 -- 59
Payment of principal on long-term debt (6,895) -- (98)
Payment of capital lease (66) (169) (367)
Dividends paid (7,773) (7,723) (7,638)
Purchase of treasury stock -- -- (12,952)
Net issuance of treasury stock pursuant to
stock option plans (299) 1,108 840
-----------------------------
Net cash provided (used) by
financing activities 12,279 (9,615) (21,881)
-----------------------------
Effect of foreign currency translation 12 21 (186)
-----------------------------
Net decrease in cash and cash equivalents (2,209) (1,045) (6,865)
Cash and cash equivalents at beginning of year 7,581 8,626 15,491
-----------------------------
Cash and cash equivalents at end of year $ 5,372 7,581 8,626
=============================
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 934 140 273
=============================
Income taxes, net $ (3,487) (1,693) 1,965
=============================
Effect of clinic acquisitions:
Intangible assets $ 103,308 -- --
Property and equipment 2,474 -- --
Accounts receivable 6,430 -- --
Other assets 4,643 -- --
-----------------------------
Total assets acquired, net of cash 116,855 -- --
Liabilities assumed (29,926) -- --
Issuance of notes payable (27,107) -- --
Change in minority interest (7,139) -- --
-----------------------------
Payments for clinic operating assets $ 52,683 -- --
=============================
See accompanying notes to consolidated financial statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Seafield Capital Corporation (Seafield or the Company) and all majority-
owned subsidiaries and joint ventures. Investments in affiliated companies
of 20% to 50% in which Seafield does not have a controlling interest are
accounted for by the equity method.
Two publicly-traded subsidiaries are included in the consolidated financial
statements of Seafield. LabOne, Inc. (LabOne) is 82% owned and Response
Oncology, Inc. (Response) is 56% owned at December 31, 1996. On February
26, 1997, Seafield converted its Response note receivable and accrued
interest into Response common stock. The conversion increased Seafield's
ownership to approximately 67% of Response shares outstanding.
During 1996, Response acquired certain assets and liabilities of ten
oncology and hematology medical practices. Simultaneous with the
consummation of the purchase transactions, Response entered into long-term
management services agreements with the sellers. These acquisitions are
accounted for using the purchase method of accounting. See Note 5 for
additional information.
On March 3, 1997, Seafield distributed to its shareholders all of the
outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation (SLH). In connection with this distribution and pursuant to a
Distribution Agreement between Seafield and SLH, Seafield transferred its
real estate and energy businesses and miscellaneous assets and liabilities,
including two wholly-owned subsidiaries, Scout Development Corporation
(Scout) and BMA Resources, Inc. (Resources), to SLH. The spinoff was
accounted for as a 1997 dividend with no gain or loss recognition. As a
result of the distribution, Seafield's principal assets consist of its
stock holdings in LabOne and Response. See Note 5 for additional
information.
All significant intercompany transactions have been eliminated in
consolidation. Certain 1995 and 1994 amounts have been reclassified for
comparative purposes with no effect on net earnings.
In 1992, Seafield's board of directors approved a plan for the
discontinuance of real estate. The real estate operations are presented as
discontinued in the accompanying consolidated financial statements. See
Notes 5 and 13 for additional information.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits in banks and overnight
investments that are stated at cost which approximates market value.
INVESTMENT SECURITIES
Investment securities consist of certificates of deposit, equity
securities, debt securities and debt obligations of the United States
government and state and political subdivisions. Short-term investments
are securities with maturities of less than one year.
The classification of debt and equity securities as trading, available for
sale or held to maturity is made at the time of purchase. Trading
securities are stated at fair value and unrealized holding gains and losses
are included in income. Marketable equity securities and all debt
securities which are classified as available for sale are stated at market
value, with unrealized gains and losses, if any, excluded from earnings and
reported in a separate component of stockholders' equity. Securities which
Seafield has the intent and ability to hold to maturity are stated at cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of all asset and liability financial instruments
(for which it is practical to estimate fair values) approximate their
carrying amounts at December 31, 1996. Fair value of a financial
instrument is defined as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The company
calculates the fair value of financial instruments using appropriate market
information and valuation methodologies. See note 9 for additional
information regarding investments for which it is not practical to estimate
fair values.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost with depreciation
provided over the useful lives. Upon sale or retirement, the costs and
related accumulated depreciation are eliminated from the accounts. Any
resulting gains or losses are included in net earnings. See Note 4 for
additional information on depreciation.
OIL AND GAS INVESTMENTS
Seafield's oil and gas investments are accounted for using the full cost
method. All costs incurred in acquisition and development are capitalized.
Depletion is computed on the units of production method based on all proved
reserves. All general operating costs are expensed as incurred.
INTANGIBLE ASSETS
Management service agreements consist of the costs of purchasing management
service agreements with physician practices. These costs are amortized
over the initial noncancelable 40-year terms of the related management
service agreements. The agreements are noncancelable except for
performance defaults. In the event a physician practice breaches the
agreement, or if Response terminates with cause, the physician practice is
required to purchase all tangible assets at fair market value and pay
substantial liquidating damages. The carrying value of the management
service agreements is reviewed for impairment at the end of each reporting
period.
Goodwill is recorded at acquisition as the excess of cost over fair value
of net assets acquired and is being amortized on a straight-line basis over
appropriate periods up to twenty years. On a periodic basis, Seafield
estimates the fair value of the business to which goodwill relates in order
to ensure that the carrying value of goodwill has not been impaired.
IMPAIRMENT OF LONG-LIVED ASSETS
When facts and circumstances indicate potential impairment, Seafield
evaluates the recoverability of carrying values of long-lived assets using
estimates of undiscounted future cash flows over remaining asset lives.
When impairment is indicated, any impairment loss is measured by the excess
of carrying values over fair values.
DISPOSITIONS
On March 3, 1997, Seafield distributed to its shareholders all of the
outstanding shares of common stock of its wholly-owned subsidiary, SLH. In
connection with this distribution and pursuant to a Distribution Agreement
between Seafield and SLH, Seafield transferred its real estate and energy
businesses and miscellaneous assets and liabilities, including two wholly-
owned subsidiaries, Scout and Resources, to SLH. See Note 5 for additional
information.
Seafield sold its 80.1% owned insurance premium finance subsidiary, Agency
Premium Resource, Inc., during the second quarter of 1995. The sale
generated an after-tax gain of $1.5 million.
Seafield completed an asset sale by its 79% owned real estate, personal
property and sales and use tax consulting subsidiary, Tenenbaum and
Associates, Inc., during the second quarter of 1995. This subsidiary then
distributed its assets to shareholders and filed for dissolution. The
effect of the sale, distribution and dissolution was an after-tax gain of
$500,000.
Seafield sold its 80% owned underwriting and policy administration services
subsidiary, International Underwriting Services, Inc., during the third
quarter of 1995. The sale generated an after-tax gain of $1 million.
Seafield's 74% owned radiopharmaceuticals subsidiary, Pyramid Diagnostic
Services, Inc. (Pyramid), entered voluntary bankruptcy in the fourth
quarter of 1995 as a result of an adverse judgment in a lawsuit. Seafield
fully reserved its investment in this subsidiary and recorded an after-tax
loss of $1.2 million. Seafield expects the Pyramid bankruptcy to be
finalized in 1997 with no further financial consequences to Seafield.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
OTHER ASSETS - CURRENT
The components of "Other Assets" in the current assets section of the
Consolidated Balance Sheets are as follows:
December 31, 1996 1995
- --------------------------------------------------------------------------
(In thousands)
Inventories $ 3,775 2,653
Prepaid expense 2,751 3,071
Unbilled revenue, net 82 1,942
Subsidiary's receivable from affiliated physicians 12,422 --
Other current assets 1,574 1,184
---------------------
$ 20,604 8,850
=====================
OTHER LIABILITIES
The components of "Other Liabilities" on the Consolidated Balance Sheets
are as follows:
December 31, 1996 December 31, 1995
Current Noncurrent Current Noncurrent
-----------------------------------------
(In thousands)
Accrued payroll and benefits $ 4,039 236 2,230 1,514
Accrued commissions and
consulting fees 403 -- 1,135 41
Other accrued expenses 5,360 -- 1,982 --
Other liabilities 966 1,292 512 1,098
----------------------------------------
$ 10,768 1,528 5,859 2,653
========================================
OTHER INCOME/(EXPENSE)
The components of "Other income/(expense)" on the Consolidated Statements
of Operations are as follows:
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands)
Loss on dispositions of subsidiaries $ -- (1,068) --
Provision for subsidiary bankruptcy -- (3,382) --
Other (411) (114) 366
---------------------------
$ (411) (4,564) 366
===========================
EARNINGS PER SHARE
Earnings per share of common stock are based on the weighted average number
of shares of common stock outstanding and the common share equivalents of
dilutive stock options, where applicable: 1996 - 6,481,943, 1995 -
6,454,068 and 1994 - 6,374,952.
NOTE 2 - BENEFIT PLANS
Effective January 1, 1991, Seafield and certain subsidiaries established a
savings plan qualifying under Section 401(k) of the Internal Revenue Code
and a money purchase pension plan. All salaried employees who have worked
500 hours within the first six months of employment are eligible to
participate in the plans. After the first 12-month period, eligibility is
measured on a plan-year basis. In 1995, Seafield sold three subsidiaries
which had been participating in the plans.
Participants in the 401(k) plan may contribute 2% to 10% of annual
compensation. Seafield and the participating subsidiaries contribute for
each participant an amount equal to 50% of the participant's contribution.
A participant is immediately fully vested with respect to the participant's
contributions. A participant is 100% vested with respect to the companies'
contributions after five years of service. Both the participants' and the
companies' contributions are invested by the trustees of the plan at the
direction of the participants in any one or more of six investment funds,
one of which is a Seafield Stock Fund. The matching contributions made by
Seafield and the participating subsidiaries amounted to $43,000 for 1996,
$109,000 for 1995 and $91,000 for 1994.
The money purchase pension plan is a defined contribution plan under which
Seafield and the participating subsidiaries contribute a percentage of a
participant's annual compensation. The companies contribute an amount
equal to 7% of base compensation up to the maximum social security wage
base ($62,700 in 1996, $61,200 in 1995 and $60,600 in 1994) and 12.7% of
earnings in excess of this amount up to an annual limit ($150,000 in 1996,
1995 and 1994). Participants become 100% vested after five years of
service, normal retirement at age 65, or in the event of disability or
death while employed by the companies. Contributions to this plan by
Seafield and the participating subsidiaries were $100,000 for 1996,
$143,000 for 1995 and $202,000 for 1994.
Seafield has a stock purchase plan which is open to all non-employee
directors of the Company and employees of the Company and participating
subsidiaries who are designated by the chairman of the board. The
directors may contribute an amount equal to all or part of their directors'
compensation. The designated employees may contribute the lesser of 10% of
their salary or $30,000. The Company matches each participant's
contribution at a rate of 50%. Seafield common stock is purchased on the
open market each month and each participant receives as many shares as the
participant's contribution, plus the Company's matching contribution, will
purchase. No employees are presently designated to participate. The
matching contributions made by Seafield amounted to $44,000, $39,000 and
$40,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
LabOne and Response maintain profit sharing plans qualifying under Section
401(k) of the Internal Revenue Code. LabOne also has a defined
contribution plan. These subsidiaries contributed $1,882,000, $1,774,000
and $1,666,000 to the plans for the years ended December 31, 1996, 1995 and
1994, respectively.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
In 1986, a lawsuit was initiated in the Circuit Court of Jackson County,
Missouri by Seafield's former insurance subsidiary (i.e., Business Men's
Assurance Company of America) against Skidmore, Owings & Merrill ("SOM")
which is an architectural and engineering firm, and a construction firm to
recover costs incurred to remove and replace the facade on the former home
office building. Because the removal and replacement costs had been
incurred prior to the sale of the insurance subsidiary, Seafield negotiated
with the buyer for an assignment of the cause of action from the insurance
subsidiary. In September 1993, the Missouri Court of Appeals reversed a
$5.7 million judgment granted in 1992 in favor of Seafield; the Court of
Appeals remanded the case to the trial court for a jury trial limited to
the question of whether or not the applicable statute of limitations barred
the claim. The Appeals Court also set aside $1.7 million of the judgment
originally granted in 1992. In July 1996, this case was retried to a
judge. On January 21, 1997, the judge entered a judgment in favor of
Seafield. The amount of that judgment, together with interest is
approximately $5.8 million. Although the judgment has been appealed,
counsel for the Company expects that it will be difficult for the
defendants to cause the judgment to be reversed. The final outcome is not
expected for at least another year. Settlement arrangements with other
defendants have resulted in payments to plaintiff which have offset legal
fees and costs to date of approximately $478,000. Future legal fees and
costs can not reliably be estimated. Pursuant to the Distribution
Agreement, this matter was assigned to SLH Corporation.
In 1988, a lawsuit was initiated in the United States District Court for
the District of New Mexico against Seafield's former insurance subsidiary
by Lyon Development Company and Jeanne Lyon, d/b/a Lyon and Associates
Realty, its former partners in the Quail Run real estate project in Santa
Fe, New Mexico. The plaintiffs alleged that the project partnership
agreement was improperly terminated, thus denying them an ongoing interest
in the project, and the loss of their exclusive real estate brokerage
arrangement. The plaintiffs were seeking approximately $11 million in
actual damages and unspecified punitive damages based upon alleged breaches
of contract and fiduciary duty and economic compulsion. After a trial in
July 1994, the jury returned a verdict absolving Seafield of any liability.
Subsequent to the trial, the judge awarded Seafield approximately $250,000
in connection with marketing expenses which the plaintiffs were to have
repaid, and approximately $64,000 in legal costs, with interest until paid.
Total legal fees and costs incurred by Seafield and its former insurance
subsidiary have aggregated approximately $3.6 million. In February 1996,
the United States Court of Appeals for the Tenth Circuit affirmed the
jury's verdict in Seafield's favor, reversed the trial judge's award for
marketing expenses, and affirmed the trial judge's award of legal costs.
The plaintiffs did not seek a rehearing or review of the Appeals Court
affirmation of the verdict. In April 1996, plaintiffs paid the legal costs
awarded by the trial judge and affirmed by the Court of Appeals
(approximately $68,000, including interest). Because the Quail Run project
was retained by Seafield in connection with the sale of its former
insurance subsidiary, Seafield defended the lawsuit under an
indemnification arrangement with the purchaser of the former insurance
subsidiary; all costs incurred and any judgments rendered in favor of the
plaintiff have been for the account of Seafield.
In the opinion of management, after consultation with legal counsel and
based upon current available information, neither of these lawsuits is
expected to have a material adverse impact on the consolidated financial
position or results of operations of Seafield.
Seafield has received notices of proposed adjustments (Revenue Agent's
Reports) from the Internal Revenue Service (IRS) with respect to 1986-1990
federal income taxes. These notices claim total federal income taxes due
for the entire five year period in the approximate net amount of
$13,867,000, exclusive of interest thereon.
The substantive issues raised in these notices for the years 1986-1990 are
primarily composed of the former television subsidiaries' amortization of
film rights, the sale of the stock of a former television station, certain
insurance company tax issues and a $27 million loss on the sale of a real
estate partnership interest.
The IRS' denial of film right amortization equates to approximately $10.5
million of the $13.9 million in additional taxes; provided that if the IRS
were to prevail on the amortization issues, the tax basis in the television
stations would be increased. This would have the effect of reducing income
taxes in connection with the stations' sales; all have been sold.
With respect to the loss on the sale of the real estate partnership
interest, the IRS has claimed that the sale did not occur during 1990, but
rather occurred after 1991. If the sale did not occur in 1990, then 1990
losses could not be carried back to 1987, to reduce Seafield's significant
taxable income in 1987.
Seafield has filed protests regarding the 1986-1990 notices of proposed
adjustments. Seafield is currently pursuing a compromise with the Appeals
Division of the IRS for the 1986-1989 years. The 1990 issues have not yet
been formally addressed at the Appeals Division but Seafield is advised by
IRS representatives that tax issues in all years under audit will be
addressed together. Resolution of these tax disputes may reasonably be
expected, but is not certain, during 1997.
In December 1996, the California state auditor sent Seafield an audit
report covering the 1987-1989 taxable years. The State of California has
determined to include, as a "unitary taxpayer," all majority owned non-life
insurance subsidiaries and joint ventures of Seafield. The auditor's
report has been forwarded to the California Franchise Tax Board for action.
The total amount of California state income taxes due for the 1987-1989
years is expected to be approximately $750,000. An accrual for the tax and
approximately $1 million of interest is included in Seafield's financial
statements at December 31, 1996. Pursuant to the Distribution Agreement,
SLH Corporation assumed all potential tax liabilities and interest thereon
regarding the California audit for the 1987-1989 tax years.
Pursuant to the Distribution Agreement, SLH Corporation assumed from
Seafield all of the contingent tax liabilities described above and acquired
all rights to refunds plus any interest related to these tax years. SLH
Corporation also assumed all contingent liabilities and refunds related to
any issues raised by the IRS for the years 1986-1990 whose resolution may
extend to tax years beyond the 1990 tax year. Seafield believes that
adequate accruals for these income tax liabilities have been made in the
accompanying consolidated financial statements.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT AND ACCOUNTS AND NOTES RECEIVABLE
A summary of property, plant and equipment is as follows:
Rate of December 31,
Depreciation 1996 1995
------------------------------------
(In thousands)
Property, plant and equipment 5% - 33% $ 68,885 65,681
Less accumulated depreciation 46,108 44,077
-----------------
$ 22,777 21,604
=================
A summary of accounts and notes receivable is as follows:
December 31,
1996 1995
-----------------
(In thousands)
Accounts receivable $ 27,417 26,146
Notes receivable 261 733
Allowance for doubtful accounts (2,796) (3,314)
-----------------
$ 24,882 23,565
=================
Interest rates on notes receivable were 5% to 9% in 1996 and 1995.
NOTE 5 - ACQUISITIONS AND DISPOSITIONS
On March 3, 1997, Seafield distributed to its shareholders all of the
outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation, on the basis of one share of common stock of SLH for each four
shares of Seafield common stock held. In connection with this distribution
and pursuant to a Distribution Agreement between Seafield and SLH, Seafield
transferred its real estate and energy businesses and miscellaneous assets
and liabilities, including two wholly-owned subsidiaries, Scout and
Resources, to SLH. The net assets distributed to SLH totaled approximately
$36 million at December 31, 1996. The spinoff was accounted for as a 1997
dividend with no gain or loss recognition. As a result of the
distribution, Seafield's principal assets consist of its stock holdings in
LabOne and Response.
During 1996, Seafield's subsidiary, Response, acquired stock in or certain
operating assets and assumed certain liabilities of ten oncology practices.
Response's consideration in exchange for the practice affiliations
consisted of $53 million in cash, $27 million in notes payable and 640,000
shares of Response common stock. The practice affiliations have been
accounted for as purchases and the accompanying consolidated financial
statements include the results of their operations from the respective
dates of acquisition.
In April 1996, Seafield loaned $10 million to Response which was converted
into 909,090 shares of Response common stock at the election of Seafield in
August 1996. In October 1996, Seafield provided to Response a $23.5
million credit facility to finance acquisitions and for working capital.
This credit facility was converted into Response common stock in February
1997, increasing Seafield's ownership to approximately 67%.
The following pro forma balance sheet as of December 31, 1996 and
statements of operations for the years ended December 31, 1996 and 1995
reflect the distribution of the assets and liabilities to SLH, the
acquisitions by Response of the medical practices and the conversion of the
Response notes to Response common stock. The pro forma balance sheet has
been prepared as if the Distribution had occurred on December 31, 1996.
The pro forma statements of operations reflect the pro forma results of
operations, as adjusted, as if the Response transactions had occurred on
January 1, 1995. The pro forma financial information is not necessarily
indicative of what actual results of operations would have been had these
transactions been completed on January 1, 1995 or results which may be
obtained in the future.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Pro Forma Balance Sheet (Unaudited)
December 31, 1996
- --------------------------------------------------------------------------
Add
Less Response
SLH Physician Pro Forma Pro Forma
Historical Operations Practice Adjustments Results
---------- ---------- -------- ----------- --------
(In thousands)
ASSETS
Current assets:
Cash and cash
equivalents $ 5,372 186 -- -- 5,186
Short-term investments 55,208 6,229 -- (10,000)(a) 38,979
Accounts and notes
receivable 24,882 723 -- -- 24,159
Income taxes receivable -- (178) -- -- 178
Deferred income taxes 3,058 1,185 -- -- 1,873
Other current assets 20,604 236 -- -- 20,368
-------- -------- -------- -------- --------
Total current assets 109,124 8,381 -- (10,000) 90,743
Property, plant and
equipment 22,777 480 -- -- 22,297
Investments:
Securities 4,019 3,515 -- -- 504
Oil and gas 1,543 1,543 -- -- --
Intangible assets 118,917 113 -- -- 118,804
Other assets 1,830 1,350 -- -- 480
Net assets of discontinued
real estate operations 30,466 30,466 -- -- --
-------- -------- -------- -------- --------
$288,676 45,848 -- (10,000) 232,828
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,599 383 -- -- 8,216
Notes payable 7,847 -- -- -- 7,847
Income taxes payable 724 724 -- -- --
Other current
liabilities 10,768 1,825 -- -- 8,943
-------- -------- -------- -------- --------
Total current
liabilities 27,938 2,932 -- -- 25,006
Notes payable 39,611 -- -- -- 39,611
Deferred income taxes 17,237 6,140 -- -- 11,097
Other liabilities 1,528 817 -- -- 711
-------- -------- -------- -------- --------
Total liabilities 86,314 9,889 -- -- 76,425
-------- -------- -------- -------- --------
Minority interests 28,338 -- -- -- 28,338
-------- -------- -------- -------- --------
Stockholders' equity:
Preferred stock of
$1 par value. Authorized
3,000,000 shares;
none issued -- -- -- -- --
Common stock of
$1 par value. Authorized
24,000,000 shares;
issued 7,500,000
shares 7,500 -- -- -- 7,500
Paid-in capital 1,748 -- -- -- 1,748
Equity adj. from foreign
currency translation (439) -- -- -- (439)
Retained earnings 195,329 35,959 -- (10,000)(a) 149,370
-------- -------- -------- -------- --------
204,138 35,959 -- (10,000) 158,179
Less cost of 1,016,066
shares of treasury
stock 30,114 -- -- -- 30,114
------- -------- -------- -------- --------
Total stockholders'
equity 174,024 35,959 -- (10,000) 128,065
-------- -------- -------- -------- --------
$288,676 45,848 -- (10,000) 232,828
======== ======== ======== ======== ========
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Pro Forma Statement of Operations (Unaudited)
Year Ended December 31, 1996
- --------------------------------------------------------------------------
Add
Less Response
SLH Physician Pro Forma Pro Forma
Historical Operations Practice Adjustments Results
---------- ---------- -------- ----------- --------
(in thousands except per share amounts)
REVENUES
Healthcare services $ 75,985 -- 20,133 -- 96,118
Insurance services 50,801 -- -- -- 50,801
Other 2,446 2,446 -- -- --
-------- -------- -------- -------- --------
Total revenues 129,232 2,446 20,133 -- 146,919
COSTS AND EXPENSES
Healthcare services 67,014 -- 15,906 -- 82,920
Insurance services 22,625 -- -- -- 22,625
Other 2,771 2,771 -- -- --
Selling, general and
administrative 36,680 1,606 -- -- 35,074
-------- -------- -------- -------- --------
Earnings(loss) from
operations 142 (1,931) 4,227 -- 6,300
Investment income - net 5,004 1,375 -- -- 3,629
Interest expense (2,900) -- (1,512) -- (4,412)
Other income (expense) (411) (845) -- -- 434
-------- -------- -------- -------- --------
Earnings(loss) before
income taxes 1,835 (1,401) 2,715 -- 5,951
Income taxes (4,050) (249) -- -- (3,801)
-------- -------- -------- -------- --------
Earnings (loss) before
minority interests (2,215) (1,650) 2,715 -- 2,150
Minority interests (1,329) -- (792) -- (2,121)
-------- -------- -------- -------- --------
Earnings (loss) from
continuing operations $ (3,544) (1,650) 1,923 -- 29
======== ======== ======== ======== ========
Per share of common stock
based on 6,481,943 weighted
average shares outstanding:
Loss from
continuing
operations $ (.55) (.25) (.30) -- --
======== ======== ======== ======== ========
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Pro Forma Statement of Operations (Unaudited)
Year Ended December 31, 1995
- --------------------------------------------------------------------------
Add
Less Response
SLH Physician Pro Forma Pro Forma
Historical Operations Practice Adjustments Results
---------- ---------- -------- ----------- --------
(in thousands except per share amounts)
REVENUES
Healthcare services $ 56,410 -- 33,286 -- 89,696
Insurance services 55,862 -- -- -- 55,862
Other 7,272 1,963 -- -- 5,309
-------- -------- -------- -------- --------
Total revenues 119,544 1,963 33,286 -- 150,867
COSTS AND EXPENSES
Healthcare services 52,838 -- 30,610 -- 83,448
Insurance services 23,598 -- -- -- 23,598
Other 6,357 2,219 -- -- 4,138
Selling, general and
administrative 42,300 1,588 -- -- 40,712
-------- -------- -------- -------- --------
Earnings(loss) from
operations (5,549) (1,844) 2,676 -- (1,029)
Investment income - net 4,401 (200) -- -- 4,601
Interest expense . (124) -- (3,256) -- (3,380)
Other income (expense) (4,564) 22 -- -- (4,586)
-------- -------- -------- -------- --------
Earnings(loss) before
income taxes (5,836) (2,022) (580) -- (4,394)
Income taxes 6,563 388 -- -- 6,175
-------- -------- -------- -------- --------
Earnings (loss) before
minority interests 727 (1,634) (580) -- 1,781
Minority interests (1,475) -- 382 -- (1,093)
-------- -------- -------- -------- --------
Earnings (loss) from
continuing
operations $ (748) (1,634) (198) -- 688
======== ======== ======== ======== ========
Per share of common stock
based on 6,454,068 weighted
average shares outstanding:
Earnings (loss)
from continuing
operations $ (.12) (.25) (.02) -- .11
======== ======== ======== ======== ========
Notes to Pro Forma Financial Statements
(a) Represents the short-term investments transferred to SLH on the date
of distribution.
NOTE 6 - SEGMENT DATA
The following table shows segment information from continuing operations:
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
(In thousands)
REVENUES:
Healthcare services $ 75,985 56,410 45,134
Insurance services 50,801 55,862 67,199
Other 2,446 7,272 11,945
----------------------------------
Total revenues $ 129,232 119,544 124,278
==================================
OPERATING EARNINGS (LOSS):
Healthcare services $ (5,841) (3,989) (5,403)
Insurance services 11,138 4,912 7,364
Other (431) (3,858) (1,041)
Corporate investment and other income 4,593 4,091 3,327
Corporate expense (4,724) (6,868) (5,284)
Interest expense (2,900) (124) (300)
----------------------------------
Earnings (loss) before income taxes
and minority interests 1,835 (5,836) (1,337)
Income taxes (4,050) 6,563 (680)
Minority interests (1,329) (1,475) 145
----------------------------------
Loss from continuing operations $ (3,544) (748) (1,872)
==================================
IDENTIFIABLE ASSETS:
Healthcare services $ 154,581 39,035 35,683
Insurance services 34,543 36,396 55,761
Net assets of discontinued operations 30,466 42,215 50,011
Other 69,086 93,870 103,932
----------------------------------
Total identifiable assets $ 288,676 211,516 245,387
==================================
Operating earnings (loss) are revenues less expenses other than corporate
and interest expense, net of intersegment transactions. Depreciation and
amortization amounts for 1996, 1995 and 1994 were $10,468,000, $8,590,000
and $11,836,000, respectively. Goodwill amortization for 1996, 1995 and
1994 was $2,085,000, $3,620,000 and $3,263,000, respectively Capital
expenditures and depreciation and amortization expense for the significant
segments are as follows:
1996 1995 1994
----------------------------------
(In thousands)
Healthcare services:
Capital expenditures $ 1,702 3,032 3,194
==================================
Depreciation and amortization $ 4,995 3,381 2,761
==================================
Insurance services:
Capital expenditures $ 2,558 1,437 2,030
==================================
Depreciation and amortization $ 2,401 3,326 6,547
==================================
NOTE 7 - INCENTIVE STOCK OPTION PLAN
Seafield has three Stock Option Plans which provide for Qualified and
Nonqualified Stock Options, Stock Appreciation Rights (SAR's) and
restricted stock awards to key employees and directors. The plans entitle
the grantee to purchase shares at prices ranging from 75% to 110% of the
fair market value at date of grant during terms up to ten years. All
options have been awarded at 100% of fair market value. SAR's may be
issued in tandem with stock options and entitle the holder to elect to
receive the appreciated value in cash. Restricted stock awards were rights
to receive or retain shares in payment of compensation earned or to be
earned. During 1995, restricted stock awards of 60,604 shares became
vested and were issued. As of December 31, 1996, there were no restricted
stock awards outstanding. The following presents a summary of stock
options activity for the three years ended December 31, 1996:
Weighted Options
Number of Average Exercisable
Shares Exercise Price at Year-end
- --------------------------------------------------------------------------
Outstanding December 31, 1993 633,261 $ 23.528
Exercised 56,998 24.288
Terminated or forfeited 1,000 31.000
--------
Outstanding December 31, 1994 575,263 23.055 552,422
Exercised 392,263 23.509
--------
Outstanding December 31, 1995 183,000 28.368 173,665
Exercised 112,915 26.539
Terminated or forfeited 1,500 29.250
--------
Outstanding December 31, 1996 68,585 31.359 68,585
========
The following table summarizes information about stock options at December
31, 1996.
Options outstanding Options Exercisable
------------------------------------ ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (yrs) Price Exercisable Price
- -------- ------------------------------------ ---------------------
$ 28.000-28.000 1,000 1.11 $28.000 1,000 $28.000
28.250-28.250 1,000 .12 28.250 1,000 28.250
30.220-30.220 5,000 3.94 30.220 5,000 30.220
30.000-30.000 35,000 5.00 30.000 35,000 30.000
31.000-31.000 7,250 3.10 31.000 7,250 31.000
34.500-34.500 15,000 3.36 34.500 15,000 34.500
34.875-34.875 4,335 9.86 34.875 4,335 34.875
------- -------
$ 28.00-34.875 68,585 4.54 31.359 68,585 $31.359
======= =======
Options for 130,000 shares were available to be awarded at December 31,
1996. The difference between the per share exercise price and the cost per
share of the treasury stock issued for stock options exercised increased
paid-in capital by $1,000 in 1996 and $745,000 in 1995. Additionally,
Seafield maintains a Stock Purchase Plan under which each participant's
contribution is matched at a rate of 50%. Seafield common stock is
purchased on the open market each month. Of the 100,000 shares registered
under this plan, 62,904 shares were eligible for issuance at December 31,
1996.
Seafield accounts for stock options in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations (APB 25). As such, compensation
expense is recorded on the date of grant only if the current market price
of the underlying stock exceeds the exercise price. Effective December 31,
1995, Seafield adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," (FAS 123) which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternately, FAS 123 allows
entities to continue to apply the provisions of APB 25 and provide pro
forma net earnings and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the fair-
value-based method defined in FAS 123 had been applied. Seafield has
elected to continue to apply the provisions of APB 25 and provide the pro
forma disclosure provisions of FAS 123.
Seafield had no stock options granted in 1995 or 1996. However, both
LabOne and Response granted stock options in these years. Both
subsidiaries have elected to continue to apply APB 25 in accounting for
their plans and therefore, no compensation cost has been recognized for
their stock options in the financial statements. Had these subsidiaries
recorded compensation cost based on the fair value at the grant date for
their stock options under FAS 123, Seafield's consolidated net loss and net
loss per share would have been increased by approximately $894,000 or $.14
per share in 1996 and approximately $1,452,000 or $.23 per share in 1995.
Pro forma net losses reflect only options granted by LabOne and Response in
1996 and 1995. Therefore, the full impact of calculating compensation cost
for stock options under FAS 123 is not reflected in the pro forma net loss
amounts presented above because compensation costs are reflected over the
options' vesting period of five years for the 1996 and 1995 options.
Compensation costs for options granted prior to January 1, 1995 are not
considered.
NOTE 8 - LEASE COMMITMENTS
Seafield and subsidiaries lease office space, equipment, land and buildings
under various, noncancelable leases that expire over the next several
years. Rental expense for these leases during 1996, 1995 and 1994 amounted
to $3,723,000, $3,302,000 and $3,868,000, respectively.
Future minimum lease payments under these agreements, after giving effect
to the spinoff of SLH, as of December 31, 1996 are as follows:
Year Amount
-------------------------
(In thousands)
1997 $ 2,679
1998 1,898
1999 1,439
2000 1,200
2001 1,113
Thereafter 11,214
NOTE 9 - INVESTMENT SECURITIES
A summary of investment securities information relating to quoted market
values and holding gains and losses at December 31, 1996 and 1995 is in the
following table.
Amount at
Which
Amortized Market Shown in
Cost Value Balance Holding Holding
Sheet Gains Losses
- ---------------------------------------------------------------------------
(In thousands)
December 31, 1996
- -----------------
Available for Sale
- ------------------
Preferred stock $ 3,515 3,515 3,515 -- --
========================================================
Held to Maturity
- ----------------
Obligations of states
and political
subdivisions $ 2,506 2,500 2,506 -- (6)
Canadian
government notes 746 746 746 -- --
--------------------------------------------------------
$ 3,252 3,246 3,252 -- (6)
========================================================
December 31, 1995
- -----------------
Available for Sale
- ------------------
Common stock $ 4 4 4 -- --
Preferred stock 3,515 3,515 3,515 -- --
--------------------------------------------------------
$ 3,519 3,519 3,519 -- --
========================================================
Held to Maturity
- ----------------
Obligations of states
and political
subdivisions $ 6,848 6,840 6,848 3 (11)
Canadian
government notes 3,955 3,955 3,955 -- --
Certificate of
deposit 362 362 362 -- --
Notes receivable 183 183 183 -- --
--------------------------------------------------------
$ 11,348 11,340 11,348 3 (11)
========================================================
At December 31, 1996, debt securities will mature as follows:
Within Between 1
1 Year and 5 Years
--------------------------
(In thousands)
Available for sale $ 2,500 1,015
==========================
Held to Maturity 2,748 504
$ ==========================
Information about proceeds from sales of available for sale securities and
the gross realized gains and losses on those sales is summarized in the
following table. Cost is determined by specific identification for
computing realized gains and losses.
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands)
Proceeds $ 3 83 --
==================================
Gross realized gains $ -- 34 --
==================================
Gross realized losses (1) (3) --
$ ==================================
Trading securities primarily include United States treasury securities,
common stock, money market funds and obligations of states and political
subdivisions and totaled appoximately $52.5 million and $64.8 million at
December 31, 1996 and 1995, respectively. The changes in net unrealized
holding gains and losses on trading securities that have been included in
operations are losses of $7,000, $485,000 and $2.2 million for the years
ended December 31, 1996 1995 and 1994, respectively.
Included in the preferred stock available for sale is an investment in
Oclassen Pharmaceuticals, Inc. with a carrying value of $2.5 million at
December 31, 1996 and 1995. Oclassen was a privately owned pharmaceutical
manufacturer which entered into an agreement and plan of merger with a
wholly-owned subsidiary of Watson Pharmaceuticals, Inc. (Watson), a
publicly traded company. The merger was approved by stockholders on
February 26, 1997 and will result in Seafield owning approximatedly 184,000
shares of Watson. The market value per share of Watson on February 26,
1997 was 42.375. The other preferred stock investment is Norian
Corporation, a privately owned developer of proprietary bone substitute
technology with a carrying value of $1,015,000 at December 31, 1996 and
1995. There is no public market for this investment.
Seafield has investments in two majority-owned entities that are publicly-
traded. At December 31, 1996, based on the market prices of publicly
traded shares of these two subsidiaries, pretax unrealized gains of
approximately $163 million ($25.15 per share) on these investments were not
reflected in either Seafield's book value or stockholders' equity.
NOTE 10 - INCOME TAXES
Seafield and those subsidiaries that are eligible file a consolidated U.S.
federal income tax return. Prior to consolidation in Seafield's federal
income tax return, various subsidiaries generated taxable losses of
approximately $6.5 million. These net operating loss carryforwards are
usable only against future taxable income of the corporation that generated
the losses. Upon the disposition of the stock, in 1992, of the former
employee benefits consulting services subsidiary, $4.1 million of net
operating loss carryforwards were reattributed to Seafield. In 1994 and
prior years, Seafield utilized approximately $2.7 million of these
reattributed losses, thereby reducing income tax expense by $923,000. The
remainder of these net operating loss carryforwards will begin to expire in
the year 2006.
During 1996 and 1995, Seafield generated approximately $1 million and $6.6
million, respectively, in current capital losses that exceeded capital
gains. These losses expire in the year 2001 and 2000. Also, in 1995,
deferred capital losses of $5.7 million were generated on the write-off of
Seafield's radiopharmaceutical subsidiary. Deferred income tax assets have
been generated by these losses. Future realization of these tax assets or
any existing deductible temporary differences or carryforwards ultimately
depends on the existence of sufficient taxable income of the appropriate
character within the carryover period. When it becomes more likely than
not that a deferred tax asset will not be realized, a valuation allowance
is accrued against that deferred tax asset.
During 1996 and 1995, Response utilized approximately $830,000 and
$1,710,000 of available federal net operating loss carryforwards resulting
in tax benefits of $ 314,000 and $667,000, respectively. Response is not
included within Seafield's consolidated federal income tax return. Response
has remaining federal net operating loss carryforwards of approximately
$4.5 million that are limited by the Internal Revenue Code and are
available to offset only $475,000 of taxable income per year. These
limited federal net operating losses are available annually until 2005.
The use of net operating loss carryforwards, for income tax purposes, is
dependent upon the generation of future taxable income. A benefit for the
net operating loss carryforward has been provided for the reversal of
taxable temporary differences during the carryforward period.
Late in 1996, Seafield received a draft proposed adjustment from the state
of California for income taxes for the years 1987-1989. Seafield expects a
deficiency notice from California during early 1997. Accordingly, an
accrual for state income tax expense of $750,000 was made during the fourth
quarter to reflect this proposed adjustment. In addition, an interest
expense accrual of approximately $1 million for interest on the deficiency
was made during the fourth quarter. See further discussion under Item 3
"Legal Proceedings".
The components of the provision (benefit) for income taxes on income from
continuing operations are as follows:
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
(In thousands)
Current:
Federal $ 1,971 (1,785) 1,244
State 1,150 186 473
Foreign 259 170 769
----------------------------------
3,380 (1,429) 2,486
----------------------------------
Deferred:
Federal 104 (4,203) (1,674)
State 434 (1,025) 73
Foreign 132 94 (205)
----------------------------------
670 (5,134) (1,806)
----------------------------------
$ 4,050 (6,563) 680
==================================
The reconciliation of income tax attributable to continuing operations
computed at the federal statutory tax rate (34%) to income tax expense
(benefit) is as follows:
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
(In thousands)
Computed expected tax expense(benefit) $ 624 (1,984) (454)
State income taxes, net of federal
benefit and state valuation
allowance changes 1,045 (564) 348
Goodwill amortization 709 1,214 1,087
Tax exempt interest and dividends (45) (152) (302)
Tax benefits not available for
subsidiary losses 276 261 1,063
Losses on sale of subsidiaries -- (4,239) --
Deferred tax on unremitted earnings of
foreign subsidiaries -- 175 --
Foreign taxes on repatriation of
foreign source income 219 -- --
Other, net (69) (456) (799)
Increase in federal valuation
allowance, net 1,716 -- --
Utilization of federal net operating loss (539) (902) (389)
Foreign tax in excess of U.S. rate 114 84 126
----------------------------------
Actual income tax expense (benefit) $ 4,050 (6,563) 680
==================================
Effective rate 221% 112% (51%)
The significant components of deferred income tax assets and liabilities
are as follows:
December 31, 1996 1995 1994
- --------------------------------------------------------------------------
(In thousands)
Current deferred income tax assets (liabilities):
Valuation allowance on stock
investments $ 14 269 661
Allowance on accounts receivable 1,076 703 1,008
Excess book expense accruals 559 718 877
State income tax deficiency 248 -- --
Interest accrual on state income tax 382 -- --
Other 516 (22) 35
Federal net operating loss carryforwards 151 151 43
State net operating loss carryforwards 1,045 923 8
----------------------------------
Gross current deferred income tax assets 3,991 2,742 2,632
Current valuation allowance (933) (1,202) (866)
----------------------------------
Net current deferred income tax assets 3,058 1,540 1,766
----------------------------------
Non-current deferred income tax assets (liabilities):
Valuation allowances on investments 2,114 2,151 19
Excess book (tax) expense accruals 408 392 321
Excess book (tax)partnership expenses 396 123 244
Excess book (tax) oil and gas expenses 519 842 449
Excess book (tax) depreciation and
amortization 903 1,048 900
Alternative minimum tax credit 293 233 188
Management service agreements (25,126) -- --
Other (8) (150) (90)
Capital loss carryforwards 2,953 2,888 --
Federal net operating loss carryforwards 2,312 2,360 4,102
State net operating loss carryforwards 491 602 1,304
----------------------------------
Gross non-current deferred
income tax assets (14,745) 10,489 7,437
Valuation allowance for non-current
deferred income tax assets (2,492) (3,490) (5,722)
----------------------------------
Net non-current deferred
income tax assets (liabilities) (17,237) 6,999 1,715
----------------------------------
Net deferred income tax
assets (liabilities) $ (14,179) 8,539 3,481
==================================
The above deferred income tax liability of $25,126,000, relating to
management service agreements, was generated during 1996 by the purchases
of physician practices by Response. These purchases resulted in
differences between the assigned value of identifiable net intangible
assets (management services agreements) and the tax basis of these assets.
The differences, multiplied by the expected tax rate of 38 percent, creates
the deferred income tax liability, reduced by the elimination of the
valuation allowance on Response deferred tax assets. The Company's
valuation allowance was $3,425,000, $3,692,000 and $6,588,000 at December
31, 1996, 1995 and 1994, respectively. Approximately $3,515,000 of the
decrease in 1996 was recorded as a reduction of acquired intangibles in
accordance with the purchase method of accounting for acquisitions.
The valuation allowance as of January 1, 1994 was approximately $5,860,000.
The valuation allowance decreased during 1996 by $1,267,000, decreased
during 1995 by approximately $1,896,000, and increased by $728,000 during
1994.
NOTE 11 - INTANGIBLE ASSETS
The cost and accumulated amortization of intangible assets are as follows:
December 31, 1996 1995
- ---------------------------------------------------------------------------
(In thousands)
Goodwill - excess of cost over fair value
of net assets acquired $ 29,585 29,804
Less accumulated amortization 13,860 11,774
--------------------
15,725 18,030
--------------------
Laboratory patent, antibodies, antigens,
and nicotine screens 8,000 8,000
Less accumulated amortization 7,261 6,739
--------------------
739 1,261
--------------------
Service agreements 103,308 --
Less accumulated amortization 1,345 --
--------------------
101,963 --
--------------------
Other intangible assets 722 252
Less accumulated amortization 232 66
--------------------
490 186
--------------------
Intangible assets, net of accumulated amortization $ 118,917 19,477
====================
Any excess of the cost over the fair value of the net assets purchased is
being amortized on a straight line basis over 5 to 20 years. The laboratory
patent process is being amortized over 184 months from date of acquisition
while antibodies, antigens, and nicotine screens are being amortized over
their estimated remaining useful lives. Service agreements consist of the
costs of purchasing management service agreements with physician practices.
These costs are amortized over the initial noncancelable 40-year term of
the related management service agreements.
NOTE 12 - NOTES PAYABLE
Notes payable are as follows:
December 31, 1996 1995
- ---------------------------------------------------------------------------
(In thousands)
Credit Facility $ 20,861 --
Various subordinated notes payable to affiliated
physicians and physicians practices, bearing
interest ranging from 4% to 9%, with maturities
beginning in 1997. 26,466 --
Other notes payable collateralized by furniture
and equipment with interest rates between 8%
and 10% payable in monthly installments of
principal and interest through 2001. 131 --
----------------------
Total notes payable 47,458 --
Less current installments 7,847 --
----------------------
$ 39,611 --
======================
In May 1996, Response entered into a $27.5 million Bank Credit Facility to
fund Response's acquisitions and working capital needs and to repay an
existing facility. The Credit Facility, comprised of a $22 million
Acquisition Facility and a $5.5 million Working Capital Facility is
collateralized by the common stock of Response's subsidiaries. The
Acquisition Facility matures May 31, 1998 and bears interest at a variable
rate equal to LIBOR plus a spread between 1.5% and 2.625%, depending upon
borrowing levels. The Working Capital Facility matures May 30, 1997,
subject to a one year extension, and bears interest at a variable rate
equal to LIBOR plus a spread between 1.875% and 2.375%. At December 31,
1996, $20.9 million aggregate principal was outstanding under the Credit
Facility with a current interest rate of approximately 7.7%. Response's
available credit under the Credit Facility at December 31, 1996 was
$200,000. The Credit Facility contains affirmative and negative covenants
which, among other things, require Response to maintain certain financial
ratios, including minimum fixed charges coverage, funded debt to EBITDA,
net worth and current ratio. As of December 31, 1996, Response was in
compliance with the covenants included in the Credit Facility.
The installment notes payable to affiliated physicians and physician
practices were issued as partial consideration for the practice management
affiliations. Principal and interest under the long-term notes may, at the
election of the holders, be paid in shares of common stock of Response
based on conversion prices ranging from $13.75 to $17.50.
NOTE 13 - DISCONTINUED OPERATIONS
Operations of Discontinued Real Estate Segment
In 1992, Seafield's board of directors approved a plan to discontinue real
estate operations. As a result of this decision, a $6 million after-tax
loss provision for estimated write-downs and costs through final
disposition was included in the discontinued real estate's 1992 loss.
Additional after-tax losses of $2.9 million, $6.6 million, and $1.5 million
were recorded in 1994, 1995, and 1996, respectively. These losses resulted
from changes in estimated net realizable value based upon management's
analysis of recent sales transactions and other current market conditions.
The remaining real estate assets will be sold as soon as practicable.
On March 3, 1997, Seafield transferred its real estate assets to its
wholly-owned subsidiary, SLH Corporation (SLH) in connection with the
distribution of all of the outstanding shares of SLH to Seafield
shareholders. See Note 5 for additional information.
A summary of discontinued real estate operations follows:
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
(In thousands)
Revenues $ 16,365 11,486 11,991
===================================
Loss $ (2,200) (10,000) (4,400)
Income tax benefits (748) (3,400) (1,496)
-----------------------------------
Net loss $ (1,452) (6,600) (2,904)
===================================
Net Assets of Discontinued Real Estate Segment
A summary of the net assets of the discontinued real estate operations
follows:
December 31, 1996 1995
- --------------------------------------------------------------------------
(In thousands)
Assets
Current assets $ 264 281
Real estate - current 1,223 3,868
Real estate - non-current 24,202 31,153
Other non-current assets 6,645 8,979
--------------------
Total assets 32,334 44,281
-------------------
Liabilities
Current liabilities 1,868 777
Non-current liabilities -- 1,289
--------------------
Total liabilities 1,868 2,066
--------------------
Net Assets $ 30,466 42,215
====================
At December 31, 1996, real estate debt totaled $7.4 million, of which $6.2
million was recourse debt.
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized 1996 quarterly financial data is as follows:
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
Quarter Ended 1996 1996 1996 1996
- ---------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues $ 26,635 30,937 33,318 38,342
========================================
Earnings (loss) from
continuing operations $ (114) 186 696 (4,312)
Loss from discontinued real
estate operations -- -- -- (1,452)
----------------------------------------
Net earnings (loss) $ (114) 186 696 (5,764)
========================================
Per share:
Earnings (loss) from
continuing operations $ (.02) .03 .11 (.67)
Loss from discontinued real
estate operations -- -- -- (.22)
----------------------------------------
Net earnings (loss) $ (.02) .03 .11 (.89)
========================================
Dividends paid per share $ .30 .30 .30 .30
========================================
Stock prices:
High $ 38 39 1/2 37 3/4 39 1/2
Low $ 33 1/2 36 33 1/2 33 7/8
The 1996 fourth quarter loss includes a $750,000 accrual for estimated
state income tax and $1 million of estimated interest expense as a result
of an ongoing franchise tax audit of prior years. Also included in the
1996 fourth quarter loss is a net increase in deferred income tax valuation
allowances of $1.7 million.
Summarized 1995 quarterly financial data is as follows:
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
Quarter Ended 1995 1995 1995 1995
- ---------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues $ 33,428 32,764 28,226 25,126
========================================
Earnings (loss) from
continuing operations $ (567) 1,643 (1,591) (233)
Loss from discontinued real
estate operations -- -- -- (6,600)
----------------------------------------
Net earnings (loss) $ (567) 1,643 (1,591) (6,833)
========================================
Per share:
Earnings (loss) from
continuing operations $ (.09) .26 (.25) (.04)
Loss from discontinued real
estate operations -- -- -- (1.02)
----------------------------------------
Net earnings (loss) $ (.09) .26 (.25) (1.06)
========================================
Dividends paid per share $ .30 .30 .30 .30
========================================
Stock prices:
High $ 38 3/4 40 5/8 38 37 1/2
Low $ 32 1/8 34 33 33 1/4
See Note 5 regarding the distribution of SLH Corporation on March 3, 1997.
Stock prices shown above have not been adjusted to reflect effects of the
spinoff of SLH. See Note 13 for a description of discontinued operations
which affected the results of operations for the quarters shown above.
Quarterly earnings per share amounts may not add to the annual earnings per
share amounts due to the effect of common stock equivalents and the timing
of treasury stock purchases and net earnings.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts and Reserves
- ---------------------------------------------------------------------------
Additions
-----------------
Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts- End of
Description of Year Expenses Describe Deductions* Year
- ---------------------------------------------------------------------------
(In thousands)
Year ended December 31, 1996
Accounts and notes receivable -
allowance for
doubtful accounts $ 3,314 2,311 -- 2,830 2,795
Year ended December 31, 1995
Accounts and notes receivable -
allowance for
doubtful accounts 4,637 2,935 -- 4,258 3,314
Year ended December 31, 1994
Accounts and notes receivable -
allowance for
doubtful accounts 4,589 2,671 -- 2,623 4,637
* Uncollectible accounts written-off
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1996
(Page 1 of 2)
Costs Capitalized Gross Amount
Initial Cost Subsequent At Which Carried
to Company to Acquisition at December 31, 1996
----------------- ----------------- ----------------------
Buildings & Buildings &
Improve- Improve- Carrying Improve-
Description Land ments ments Costs Land ments Total
- ------------------------------- ----------------- ----------------------
(In thousands)
Land Investments/
Developments:
Houston, TX $ 6,158 49 977 1,553 4,283 -- 4,283
Ft Worth, TX 11,501 -- 91 -- 7,720 -- 7,720
Ft Worth, TX 11,289 -- -- 42 11,331 -- 11,331
Ft Worth, TX 1,000 -- -- -- 665 -- 665
Olathe, KS 3,292 -- 49 -- 2,659 -- 2,659
Parking:
Reno, NV -- 5,277 19 -- -- 5,296 5,296
Residential:
Juno Beach, FL 13,740 -- 33,233 2,723 1,313 6,601 7,914
Santa Fe, NM 4,576 -- 66,236 17,423 627 17,658 18,285
--------------------------------------------------------------
$ 51,556 5,326 100,605 21,741 28,598 29,555 58,153
==================================================
Reserves (31,435)
-------
Net real estate before depreciation 26,718
Accumulated depreciation (1,293)
-------
Net real estate 25,425
Less current portion (1,223)
-------
Real estate, net of current portion $ 24,202
=======
(1) Reserves have been established to reflect lower net realizable values
based on periodic evaluation of changes in market conditions, recent
sales prices, and appraisals.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1996
(Page 2 of 2)
Date
Accum. Tax Constr. Date Depr.
Description Reserves Depr. Basis Began Acquired Life
- ---------------------------------------------------------------------------
(In thousands)
Land Investments/
Developments
Houston, TX $ 2,065 -- 4,580 -- 1974 --
Ft Worth, TX 5,569 -- 7,495 -- 1986 --
Ft Worth, TX 10,559 -- 8,021 -- 1986 --
Ft Worth, TX 632 -- 665 -- 1986 --
Olathe, KS -- -- 2,438 -- 1991 --
Parking:
Reno, NV 947 1,293 4,385 -- 1989 20 yrs
Residential:
Juno Beach, FL 2,393 -- 5,557 1985 1983 --
Santa Fe, NM 9,270 -- 12,078 1987 1985 --
-------------------------
$ 31,435 1,293 45,219
=========================
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Schedule III
Real Estate and Accumulated Depreciation
Reconciliation Between Years
A) Reconciliations of total real estate carrying value for the three years
ended December 31, 1996 are as follows:
1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands)
Balance at beginning of year $ 36,314 39,665 38,921
Additions during year:
Improvements 5,377 13,975 11,689
Consolidate joint venture -- -- 3,292
----------------------------------
41,691 53,640 53,902
Deductions during year:
Value of real estate sold 12,773 9,891 9,837
Provision for loss on sale of
real estate 2,200 7,435 4,400
----------------------------------
14,973 17,326 14,237
----------------------------------
Balance at end of year $ 26,718 36,314 39,665
==================================
B) Reconciliations of accumulated depreciation for the three years ended
December 31, 1996 are as follows:
1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands)
Balance at beginning of year $ 1,293 1,081 868
Additions during year - depreciation -- 212 213
----------------------------------
1,293 1,293 1,081
Deductions during year - accumulated
depreciation of real estate sold -- -- --
----------------------------------
Balance at end of year $ 1,293 1,293 1,081
==================================
Exhibit 10.16
AMENDMENT TO SUPPLEMENTAL RETIREMENT AGREEMENT
This Amendment is made the 23rd day of January, 1997, by and between
Seafield Capital Corporation, a Missouri corporation ("Employer") and P.
Anthony Jacobs ("Employee").
WHEREAS, the parties entered into a Supplemental Retirement Agreement,
dated June 3, 1991 ("Supplemental Retirement Agreement"), which was
intended to be the embodiment of the supplemental retirement arrangement
between the parties as approved by the Employer's Board of Directors in
February, 1991, and
WHEREAS, a review of the Supplemental Retirement Agreement and the
resolution of Employer's Board of Directors respecting the supplemental
retirement arrangement between the parties has revealed that there is an
inconsistency, and
WHEREAS, for purposes of ensuring that the Supplemental Retirement
Agreement incorporates the concept intended in the resolution, the parties
desire to amend the Supplemental Retirement Agreement as herein provided,
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the parties acknowledge and agree as follows:
1. Paragraph numbered 2 of the Supplemental Retirement Agreement is
hereby deleted and in its place is substituted the follows:
"2. SUPPLEMENTAL BENEFIT. Effective immediately, Employer shall
establish and maintain on its books a Supplemental Retirement
Account (the "Account") to which it shall credit as of the first
day of each fiscal year, commencing January 1, 1991, the sum of
Twelve Thousand Dollars ($12,000), until the earlier of Employee's
attainment of age 65, the date Employee's employment with Employer
terminates or the date the parties agree in writing to terminate
this Agreement. The Account also shall be credited, as of the
last day of each of Employer's fiscal years ending prior to the
year in which the amounts credited to the Account are distributed
to Employee hereunder and as of the date of such distribution,
with interest at the rate of nine percent (9%) per annum.
The obligation of Employer to credit the Account and to make
payment hereunder is merely a contractual obligation, and neither
Employee nor any beneficiary or heir, nor any person claiming any
right on Employee's behalf, shall have any interest in the Account
or in any asset of Employer or otherwise, other than the right to
receive the benefits as set forth herein. Any and all such claims
shall be limited to the amount then credited to the Account at the
time of any claim. No amount credited to the Account or paid
hereunder shall be included as compensation to Employee for any
purpose, including any pension or profit sharing plan maintained
by Employer. Neither this Agreement nor the creation of the
Account hereunder is intended to be the creation or establishment
of a trust. Amounts credited to the Account hereunder shall
remain unfunded and unsecured and Employer shall be under no
obligation to invest or in any way accumulate or segregate monies
to fund the same."
2. Except to the extent modified and amended hereby, all of the terms
and provisions of the Supplemental Retirement Agreement shall remain in
effect and the Supplemental Retirement Agreement as amended shall be and
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have signed this Amendment as
of the date first above written.
SEAFIELD CAPITAL CORPORATION
By /S/ W. Thomas Grant II
-----------------------
Authorized Officer
EMPLOYER
/s/ P. Anthony Jacobs
-----------------------
P. Anthony Jacobs,
EMPLOYEE
Exhibit 10.19
PREPAYMENT
RELEASE AND DISCHARGE AGREEMENT
This Release and Discharge Agreement is made this 2nd day of January, 1997,
among Seafield Capital Corporation, a Missouri corporation ("Seafield") and
William D. Grant, an individual ("WDG") and Mary Grant, an individual and
the wife of WDG ("MG").
WHEREAS, WDG and Business Men's Assurance Company of America ("BMA") were
parties to a Supplemental Retirement Agreement for Senior Executive
Officers and an Amendment thereto, copies of both of which are attached
hereto as Exhibit A (collectively, the "Grant Supplemental Retirement
Agreement"); and
WHEREAS, pursuant to an Agreement dated June 29, 1992, among WDG, Seafield,
Generali-Assicurazioni Generali S.p.A. ("Generali") and affiliates of
Generali (the "Assumption Agreement"), Seafield assumed all of BMA's
obligations under the Grant Supplemental Retirement Agreement and WDG
released and discharged BMA and Generali with respect to obligations under
the Grant Supplemental Retirement Agreement; and
WHEREAS, the Grant Supplemental Retirement Agreement provides for a
monthly retirement benefit to WDG which amounts to $129,381.72 per year for
the life of WDG, and, if MG survives WDG, a monthly benefit in a lesser
amount to MG for her life; and
WHEREAS, neither WDG nor MG has any rights to receive any lump sum
settlement amount under the Grant Supplemental Retirement Agreement; and
WHEREAS, Seafield desires to prepay and discharge by way of a lump sum
payment all remaining obligations to WDG and MG under the Grant
Supplemental Retirement Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein set forth, the parties agree as follows:
1. Lump Sum Payment. As a prepayment of all future obligations under the
Grant Supplemental Retirement Agreement, both to WDG and MG, Seafield shall
pay to WDG and MG jointly the aggregate sum of $1,000,000, simultaneously
with the execution of this Agreement by WDG and MG.
2. Release and Discharge. WDG and MG each hereby acknowledges receipt of
the payment specified in paragraph 1 above, and agrees that said
consideration is in full and complete satisfaction of all obligations under
and with respect to the Grant Supplemental Retirement Agreement, whether
pursuant to the Assumption Agreement or otherwise, and, in consideration of
said payment by Seafield, WDG and MG each hereby releases and relinquishes
any and all claims, whether now existing or hereafter arising, which either
of them may have under or with respect to the Grant Supplemental Retirement
Agreement and forever discharges Seafield and its successors and assigns
from any further obligations or liabilities under or with respect to the
Grant Supplemental Retirement Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement or, in
the case of Seafield, caused this Agreement to be signed by its duly
authorized officer, all as of the date first above written.
SEAFIELD CAPITAL CORPORATION
By: /s/ James R. Seward
--------------------
Exec. Vice President
Chief Financial Officer
/s/ W. D. Grant
--------------------
/s/ Mary Grant
--------------------
Exhibit 10.49
RESPONSE ONCOLOGY, INC.
Borrower
LOAN AGREEMENT
$22,000,000.00 REVOLVING ACQUISITION LOAN
$5,500,000.00 REVOLVING WORKING CAPITAL LOAN
Dated as of May 31, 1996
NATIONSBANK OF TENNESSEE, N.A., AGENT
NATIONSBANK OF TENNESSEE, N.A.
UNION PLANTERS NATIONAL BANK
Lenders
TABLE OF CONTENTS
RECITALS 1
I. DEFINITIONS 1
1.1 Terms Defined in This Agreement. 1
1.2 Terms Generally. 17
II. LOANS 18
2.1 Acquisition Loan. 18
2.2 Use of Proceeds of Acquisition Loan. 18
2.3 Acquisition Loan Notes 18
2.4 Working Capital Loan. 18
2.5 Use of Proceeds of Working Capital Loan. 18
2.6 Working Capital Loan Notes 18
2.7 Separate Commitments of Lender 18
2.8 Advances of Loans. 18
2.9 Interest 21
2.10 Alternate Rate of Interest if LIBOR Unavailable 22
2.11 Change in Circumstances 23
2.12 Change in Legality of LIBOR Loans 24
2.13 Principal Repayment. 25
2.14 Prepayment of LIBOR Loans 25
2.15 Prepayment of Prime Rate Loans 26
2.16 Fixed Commitment Fees 26
2.17 Periodic Commitment Fee Based
on Use of Facilities 26
2.18 Agent's Fee 26
III. CONDITIONS PRECEDENT 26
3.1 Conditions to Initial Advance. 26
3.2 Conditions to Subsequent Loans. 29
IV. REPRESENTATIONS AND WARRANTIES 29
4.1 Capacity. 29
4.2 Authorization. 29
4.3 Binding Obligations. 29
4.4 No Conflicting Law or Agreement. 30
4.5 No Consent Required. 30
4.6 Financial Statements. 30
4.7 Fiscal Year. 30
4.8 Litigation. 30
4.9 Taxes; Governmental Charges. 30
4.10 Title to Properties. 31
4.11 No Default. 31
4.12 Casualties; Taking of Properties. 31
4.13 Compliance with Laws. 31
4.14 Compliance with Fraud and Abuse Laws. 31
4.15 ERISA. 31
4.16 Full Disclosure of Material Facts. 32
4.17 Accuracy of Projections 32
4.18 Investment Company Act. 32
4.19 Personal Holding Company. 32
4.20 Solvency. 32
4.21 Chief Executive Office. 32
4.22 Subsidiaries. 32
4.23 Ownership of Patents, Licenses, Etc. 32
4.24 Environmental Compliance. 32
4.25 Labor Matters. 33
4.26 OSHA Compliance. 33
4.27 Regulation U 33
4.28 Affiliate Transactions 33
V. AFFIRMATIVE COVENANTS 33
5.1 Payment of Obligations. 33
5.2 Maintenance of Existence and Business. 33
5.3 Financial Statements and Reports 34
5.4 Additional Information 35
5.5 Certain Additional Reporting Requirements 35
5.6 Taxes and Other Encumbrances. 36
5.7 Payment of Liabilities. 37
5.8 Compliance with Laws. 37
5.9 Maintenance of Property. 37
5.10 Compliance with Contractual Obligations 37
5.11 Further Assurances. 37
5.12 Security Interest; Setoff 38
5.13 Insurance. 38
5.14 Accounts and Records. 38
5.15 Official Records. 39
5.16 Banking Relationships. 39
5.17 Right of Inspection. 39
5.18 ERISA Information and Compliance. 39
5.19 Indemnity; Expenses. 39
5.20 Assistance in Litigation. 40
5.21 Name Changes. 41
5.22 Estoppel Letters. 41
5.23 Environmental Matters. 41
5.24 Opinions of Counsel 42
5.25 Additional Collateral Upon Certain Event 42
VI. NEGATIVE COVENANTS 43
6.1 Debts, Guaranties, and Other Obligations 43
6.2 Change of Management 44
6.3 Change of Ownership 44
6.4 Distributions 44
6.5 Encumbrances. 44
6.6 Investments 44
6.7 Sales and Leasebacks. 45
6.8 Change of Control. 45
6.9 Nature of Business. 45
6.10 Further Acquisitions, Mergers, Etc. 45
6.11 Advances. 45
6.12 Disposition of Assets. 45
6.13 Inconsistent Agreements. 45
6.14 Fictitious Names. 45
6.15 Subsidiaries and Affiliates. 46
6.16 Place of Business. 46
6.17 Adverse Action With Respect to Plans. 46
6.18 Transactions With Affiliates. 46
6.19 Constituent Document Amendments. 46
6.20 Adverse Transactions 46
6.21 Margin Securities. 46
6.22 Accounting Changes 46
6.23 Action Outside Ordinary Course. 46
VII. FINANCIAL COVENANTS 47
7.1 Current Ratio. 47
7.2 Total Funded Debt to Capital. 47
7.3 Total Funded Debt to Consolidated EBITDA 47
7.4 Fixed Charge Coverage. 47
7.5 Net Worth. 47
7.6 Capital Expenditures. 47
VIII. EVENTS OF DEFAULT 47
8.1 Events of Default. 47
8.2 Remedies. 50
IX. AGENT 50
9.1 Appointment of Agent 50
9.2 Powers of Agent 50
9.3 Duties of Agent 51
9.4 Indemnification of Agent 53
9.5 No Representations by Agent 53
9.6 Independent Investigations by Lenders 53
9.7 Notice of Default 54
9.8 Funding of Loans Pursuant to Borrowing Notices 54
9.9 Agent in its Individual Capacity 54
9.10 Holders 54
9.11 Successor Agent 55
9.12 Sharing of Payments, etc 55
9.13 Separate Liens on Collateral 55
9.14 Payments Between Agent and Lenders 55
9.15 Assignments and Participations 56
9.16 Bankruptcy Provisions 56
9.17 Foreclosure of Collateral 56
9.18 Procedures for Notices and Approvals 56
9.19 Amendments to Article IX 56
X. GENERAL PROVISIONS 57
10.1 Notices 57
10.2 Renewal, Extension, or Rearrangement. 58
10.3 Application of Payments. 58
10.4 Counterparts. 58
10.5 Negotiated Document. 58
10.6 Consent to Jurisdiction; Exclusive Venue. 58
10.7 Not Partners; No Third Party Beneficiaries. 59
10.8 No Reliance on Lenders' Analysis 59
10.9 No Marshaling of Assets. 59
10.10 Impairment of Collateral. 59
10.11 Business Days. 59
10.12 Participations. 59
10.13 Standard of Care; Limitation of Damages 59
10.14 Incorporation of Schedules. 60
10.15 Indulgence Not Waiver. 60
10.16 Cumulative Remedies. 60
10.17 Amendment and Waiver in Writing. 60
10.18 Assignment. 60
10.19 Entire Agreement. 60
10.20 Severability. 60
10.21 Time of Essence. 60
10.22 Applicable Law. 60
10.23 Captions Not Controlling. 61
10.24 Arbitration. 61
10.25 Facsimile Signatures. 62
LOAN AGREEMENT
This Loan Agreement is entered into as of the 31st day of May, 1996, by and
among RESPONSE ONCOLOGY, INC. ("Borrower"), a Tennessee corporation;
NATIONSBANK OF TENNESSEE, N.A. ("NationsBank"), a national banking
association, and UNION PLANTERS NATIONAL BANK ("Union Planters"), a
national banking association (collectively "Lenders"); and NATIONSBANK OF
TENNESSEE, N.A., in its capacity as Agent for Lenders ("Agent").
RECITALS
WHEREAS, Lenders have agreed to extend a revolving acquisition loan
facility and a revolving working capital facility to Borrower, on certain
terms and conditions, as set forth in detail in this Agreement; and
WHEREAS, Lenders wish to appoint Agent to administer the loans extended by
Lenders to Borrower; and
NOW, THEREFORE, as an inducement to cause Lenders to extend credit to
Borrower, and for other valuable consideration, the receipt and sufficiency
of which are acknowledged, it is agreed as follows:
I. DEFINITIONS
I.1 Terms Defined in This Agreement. As used below in this Agreement, the
following capitalized terms shall have the following meanings, unless the
context expressly requires otherwise:
"Acquisition EBITDA" means, with respect to a Practice acquired by a
Consolidated Entity and covered by a Service Agreement, (i) the pro forma
income to the Consolidated Entities that would have arisen under the
applicable Service Agreement preceding the effective date of the
acquisition, determined based upon the actual financial performance of the
acquired Practice over the period for which a calculation of Consolidated
EBITDA is made, without adjustment, (ii) less the pro forma amount of
expenses (other than interest, taxes, depreciation and amortization) that
the Consolidated Entities would have incurred over the same period on
account of the acquired Practice (including, but not limited to, additional
expense of administrative personnel), in each case calculated as if the
Practice had been acquired effective as of the beginning of the relevant
financial period.
"Acquisition Loan" means the revolving credit facility described by amount
and use in Sections 2.1 and 2.2 hereof.
"Affiliate" means, with respect to any Person, another Person that,
directly or indirectly through one or more intermediaries, Controls, or is
Controlled by, or is under common Control with, such Person.
"Agent" means NationsBank of Tennessee, N.A., in its capacity as described
in Article IX of this Agreement, its lawful corporate successors and any
successor agent appointed pursuant to Article IX hereof.
"Agreement" means this Loan Agreement (including all schedules and exhibits
hereto), as the same may be amended from time to time.
"Applicable Commitment Fee," "Applicable LIBO Rate Margin," and "Applicable
Prime Rate Margin" mean, with respect to Loans advanced under and the
commitment fee respecting the Acquisition Loan, during any Effective
Period, the percentage rates per annum set forth opposite the appropriate
test in the pricing grid below (ratio values shall be rounded to the
nearest one-hundredth, with any value of .005 rounded upward):
Total Funded Debt to Prime Rate LIBOR Commitment
Consolidated EBITDA Margin Margin Fee in Basis
- ------------------- ---------- ------ ------------
Less than or equal
to 1.00 .25% 1.50% 20bps
Greater than or
equal to 1.01 and
less than or equal
to 2.00 .50% 1.75% 25bps
Greater than or
equal to 2.01 and
less than or equal
to 3.00 .75% 2.125% 30bps
Greater than or equal
to 3.01 1.00% 2.625% 35bps
Additionally, with respect to Loans advanced under and the commitment fee
respecting the Working Capital Loan, "Applicable Commitment Fee,"
"Applicable LIBO Rate Margin," and "Applicable Prime Rate Margin" mean,
during any Effective Period, the percentage rates per annum set forth
opposite the appropriate test in the pricing grid below (ratio values shall
be rounded to the nearest one-hundredth, with any value of .005 rounded
upward):
Total Funded Debt to Prime Rate LIBOR Commitment
Consolidated EBITDA Margin Margin Fee in Basis
- ------------------- ---------- ------ ------------
Less than or equal
to 1.00 0% 1.25% 15bps
Greater than or
equal to 1.01 and
less than or equal
to 2.00 .25% 1.50% 20bps
Greater than or
equal to 2.01 and
less than or equal
to 3.00 .50% 1.875% 25bps
Greater than or equal
to 3.01 .75% 2.375% 30bps
The Total Funded Debt to Consolidated EBITDA ratio shall be established by
Agent on the basis of the consolidated quarterly financial statements of
and schedules prepared by Borrower delivered to Agent pursuant to this
Agreement and shall be calculated as set forth in Section 7.3 hereof.
Notwithstanding the foregoing, at the end of any Effective Period, and
during the existence and continuation of an Event of Default, and during
any period of time for which Pricing Values may be set by Agent pursuant to
Section 8.1.5 hereof, the Pricing Values with respect to the Loans shall
automatically become the highest values provided for in the applicable
pricing grid set forth above in respect of the two respective Credit
Facilities. Additionally, the Applicable Prime Rate Margin for Prime Rate
Loans and the Applicable LIBO Rate Margin for LIBOR Loans shall each be
reduced by one-fourth of one percent (1/4%) if Borrower shall receive
aggregate Net Equity Proceeds after the Closing Date from the public
offering of its equity securities of at least Thirty Million and No/100
Dollars ($30,000,000.00).
"Assumed Debt" means Purchase Money Debt assumed by a Consolidated Entity,
or Purchase Money Debt secured by a Purchase Money Security Interest in
Property acquired by a Consolidated Entity, whether or not the Purchase
Money Debt is contractually assumed, occurring in either case in the course
of a Permitted Acquisition.
"Banking Day" means a Business Day, subject to the following additional
convention. As to notices or payments received by Agent on a Business Day
at or before 12:00 p.m. (noon) Nashville time, the Banking Day shall
correspond to the Business Day of receipt. As to notices or payments
received by Agent on a Business Day after 12:00 p.m. (noon) Nashville time,
the Banking Day of receipt shall be deemed to be the next following
Business Day.
"Bankruptcy Code" means Title I of the Bankruptcy Reform Act of 1978, as it
may be amended from time to time.
"Best of Borrower's Knowledge" means the actual knowledge, information and
belief of the Chairman, Chief Executive Officer, Chief Financial Officer,
Controller or General Counsel of Borrower, with no duty of inquiry.
"Borrower" means Response Oncology, Inc., a Tennessee corporation, its
successors and assigns. This definition does not abrogate the requirements
set forth below restricting Borrower's ability to assign any rights under
this Agreement.
"Borrower's Portion" means the percentage of equity interest that Borrower
acquires in an entity acquired in or created in connection with a Permitted
Acquisition. Additionally, if an acquisition is of less than all of the
interest or assets of a Seller, or if a Seller had a declining number of
Practices over the relevant accounting period, the Borrower's Portion shall
include only such of the operations of the Seller as were acquired by a
Consolidated Entity in a Permitted Acquisition.
"Borrowing Base" means (i) Borrower's Consolidated EBITDA for the most
recent four fiscal quarters, as determined by the quarterly financial
statements and schedules delivered to Agent from time to time pursuant to
this Agreement, (ii) multiplied by 2.5.
"Borrowing Notice" has the meaning assigned in Section 2.8.1(b) hereof.
"Business Day" means any day on which Agent is open for the conduct of
ordinary business; provided however, that when used in connection with
determining the LIBO Rate, the term "Business Day" shall exclude any day on
which banks are not open for dealings in U.S. Dollar deposits in the London
Interbank Market.
"Capital Expenditures" means expenditures, determined according to GAAP on
a consolidated basis, that would be capitalized and depreciated over more
than one annual accounting period.
"Capital Lease" means a lease that would be characterized as a financed
sale or purchase under GAAP.
"Change of Control" means the occurrence, after the date of this Agreement,
of (i) any Person or two or more Persons acting in concert acquiring
beneficial ownership (within the meaning of Rule 13d-3 of the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as
amended), directly or indirectly, of securities of Borrower (or other
securities convertible into such securities) representing 51% or more of
the combined voting power of all securities thereof entitled to vote in the
election of directors; or (ii) during any period of up to 12 consecutive
months, commencing after the date of this Agreement, individuals who at the
beginning of such 12-month period were directors of Borrower ceasing for
any reason to constitute a majority of the Board of Directors thereof
unless the Persons replacing such individuals were nominated by the Board
of Directors of Borrower; or (iii) any Person or two or more Persons acting
in concert acquiring by contract or otherwise, or entering into a contract
or arrangement which upon consummation will result in its acquisition of,
or control over, securities of Borrower (or other securities convertible
into such securities) representing 51% or more of the combined voting power
of all securities of Borrower entitled to vote in the election of
directors.
"Closing Date" means the date of this Agreement.
"CMLTD" means scheduled principal payments in respect of long-term
Liabilities payable during the 12 months following the date of
determination.
"Collateral" means all Property now or hereafter securing the Obligations.
"Commitment" means the amount of each Lender's commitment to fund the
respective Credit Facilities. Each Lender's several Commitment for the
Acquisition Loan shall be as follows:
NationsBank Sixteen Million and No/100 Dollars ($16,000,000.00)
Union Planters Six Million and No/100 Dollars ($6,000,000.00)
Each Lender's several Commitment for the Working Capital Loan shall be as
follows:
NationsBank Four Million and No/100 Dollars ($4,000,000.00)
Union Planters One Million Five Hundred Thousand and No/100 Dollars
($1,500,000.00)
"Consolidated Capital" means Consolidated Net Worth plus Total Funded Debt.
"Consolidated Current Ratio" means current assets, determined on a
consolidated basis according to GAAP, divided by current liabilities,
determined on a consolidated basis according to GAAP.
"Consolidated EBITDA" means the EBITDA of the Borrower, determined on a
consolidated basis, and adjusted as follows with respect to acquisitions.
The positive Acquisition EBITDA of acquired Practices shall be included in
Consolidated EBITDA only if Agent is satisfied, in its reasonable
discretion, as to the accuracy and reliability of the financial information
related thereto. In assessing the accuracy and reliability of such
financial information, (i) unqualified audited financial statements
prepared by a regional or national accounting firm shall be acceptable, and
(ii) financial statements reviewed (but not audited) by such a firm shall
also be acceptable unless Agent in good faith determines that reviewed
statements for a particular enterprise are subject to material doubt as to
their accuracy. The negative Acquisition EBITDA for any Practice shall be
included in Consolidated EBITDA, based upon the best information available.
Notwithstanding any other provision hereof, the EBITDA attributed to Non-
Corporate Unperfected Subsidiaries shall not be included in Consolidated
EBITDA if Non-Corporate Unperfected Subsidiaries would account for more
than ten percent (10%) of total Consolidated EBITDA.
"Consolidated Entities" means Borrower and all Subsidiaries of Borrower,
from time to time.
"Consolidated Net Income" means net income, determined on a consolidated
basis according to GAAP.
"Consolidated Net Worth" means shareholders' equity, determined on a
consolidated basis according to GAAP.
"Control" or "Controlled" means that a Person has the direct or indirect
power to conduct or govern the policies of another Person, whether this
power exists as a matter of right or through economic compulsion.
"Credit Ceiling" means, with respect to a Credit Facility, the amount
determined by subtracting from the Borrowing Base the principal amount
outstanding under the other Credit Facility, to the effect that the total
principal amount outstanding under the Credit Facilities shall not in total
exceed the Borrowing Base at any time.
"Credit Facilities" means the Acquisition Loan and the Working Capital
Loan.
"Default Rate" means the Maximum Lawful Amount of interest that can be
charged.
"EBITDA" means the sum of net income before extraordinary items plus
Interest Expense and expenses for taxes, depreciation and amortization,
determined according to GAAP.
"Effective Period" means a period of up to one calendar quarter, determined
as follows. Pursuant to other provisions of this Agreement, Borrower's
financial information for each quarter-end is to be submitted during the
succeeding quarter, except that year-end financial statements are not due
until April 30 of the following year. The performance pricing provisions
of this Agreement reevaluate pricing quarterly, based upon those quarterly
financial results. An Effective Period imposing pricing based upon a
quarter other than the quarter ending December 31 shall begin on the later
of (i) the first day of the third month of the following fiscal quarter, or
(ii) if financial statements are submitted later than required under this
Agreement and Agent waives any Event of Default arising therefrom, five (5)
Business Days after the submission of required financial statements. An
Effective Period imposing pricing based upon the quarter ending December 31
shall begin "as of" the first day of the third month of the following
fiscal quarter, with a retroactive adjustment of interest to be made when
the year-end financial statements are timely submitted, if necessary to
reflect an increase or decrease of the interest rates or fees based upon
performance for the period ending December 31. If year-end financial
statements are not timely submitted, but are nonetheless accepted by Agent
and Agent waives any Event of Default arising therefrom, the Effective
Period imposing pricing based upon the quarter ending December 31 shall
begin "as of" five (5) Business Days after the submission of the required
annual financial statements. The Effective Period shall end on the last day
of the second month of each fiscal quarter following the quarter in which
the Effective Period was scheduled to begin. Therefore, assuming the
timely delivery of all required financial statements, the Effective Periods
will be determined as follows:
Financial Statements Due By Effective Period
May 15 June 1 - August 31
August 15 September 1 - November 30
November 15 December 1 - February 28/29
April 30 March 1 (retroactive) - May 31
An initial Effective Period shall commence on the Closing Date and continue
through the last day of August, 1996, and Pricing Values shall be
determined during this initial Effective Period based on the financial
reports as of and for the period ended March 31, 1996.
"Encumbrance" means any interest in Property in favor of one not the owner
thereof, whether voluntary or involuntary, including, but not limited to,
(i) the lien or security interest arising from a deed of trust, mortgage,
pledge, security agreement, conditional sale, Capital Lease, consignment,
or bailment for security purposes, and (ii) reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other such title encumbrances.
"Environmental Laws" means the Environmental Protection Act, the Resource
Conservation and Recovery Act of 1976, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Hazardous Materials
Transportation Act and any other federal, state or municipal law, rule or
regulation relating to air emissions, water discharge, noise emissions,
solid or liquid waste disposal, hazardous or toxic waste or materials, or
other environmental or health matters.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including (unless the context otherwise
requires) any rules or regulations promulgated thereunder.
"ERISA Affiliate" means any Person who for purposes of Title IV of ERISA is
a member of Borrower's controlled group, or under common control with
Borrower, within the meaning of Section 414 of the IRC, the regulations
promulgated pursuant thereto and the published revenue rulings issued
thereunder.
"ERISA Event" means (i) the occurrence of a reportable event, within the
meaning of Section 4043 of ERISA, unless the 30-day notice requirement with
respect thereto has been waived by the PBGC; (ii) the provision by the
administrator of any Plan of a notice of intent to terminate such Plan,
pursuant to Section 4041(a)(2) of ERISA (including any such notice with
respect to a plan amendment referred to in Section 4041(e) of ERISA);
(iii) the cessation of operations at a facility in the circumstances
described in Section 4068(f) of ERISA; (iv) the withdrawal by Borrower or
an ERISA Affiliate from a Multiple Employer Plan during a plan year for
which it was a substantial employer, as defined in 4001(a)(2) of ERISA;
(v) the failure by Borrower or any ERISA Affiliate to make a material
payment to a Plan required under Section 302(f)(1) of ERISA; (vi) the
adoption of an amendment to a Plan requiring the provision of initial or
additional security to such Plan, pursuant to Section 307 of ERISA; or
(vii) the institution by the PBGC of proceedings to terminate a Plan,
pursuant to Section 4042 of ERISA, or the occurrence of any event or
condition which might constitute grounds under Section 4042 of ERISA for
the termination of, or the appointment of a trustee to administer, a Plan.
"Event of Default" means the occurrence of any of the events specified in
Section 8.1 hereof, as to which any requirement for notice or lapse of time
has been satisfied.
"Financial Projections" means the financial projections prepared by
Borrower, a copy of which is attached hereto as Exhibit 1.1.
"Financial Statements" means the audited consolidated balance sheet, income
statement, and statement of cash flows for Borrower dated December 31, 1995
and the unaudited consolidated financial statements dated March 31, 1996
delivered by Borrower to Lender, and all notes thereto.
"Fixed Charge Coverage Ratio" means (i) Consolidated EBITDA, plus expenses
incurred under Operating Leases, and less a charge of Ten Thousand and
No/100 Dollars ($10,000.00) per year per wholly-owned IMPACT Center and
Five Thousand and No/100 Dollars ($5,000.00) per year for each IMPACT
Center that is not wholly-owned by a Consolidated Entity to allow for
maintenance Capital Expenditures, and less loans advanced to Providers,
divided by (ii) the sum of Interest Expense plus CMLTD (including implied
amortization calculated as one-seventh of the outstanding principal amount
of the Credit Facilities as of the end of the applicable period), plus
expenses incurred under Operating Leases. The values for the fixed charges
used in the calculation of this ratio will be determined on a pro forma
basis as though the acquisitions occurring during the period over which the
Fixed Charge Coverage Ratio is being determined had occurred as of the
beginning of that period, with such calculations to take into account,
along with other adjustments that Agent may approve, in its reasonable
discretion, (i) the exclusion of Interest Expense, CMLTD, Capital Lease
expense and Operating Lease expense of the target related to debts, leases
and obligations that were extinguished in connection with the acquisition,
(ii) the inclusion of Interest Expense, CMLTD, Capital Lease expense and
Operating Lease expense obligations of the target that survived the
acquisition, and (iii) the inclusion of Interest Expense, CMLTD, Capital
Lease expense and Operating Lease Expense arising from obligations incurred
in connection with the acquisition (including, but not limited to, added
Interest Expense arising from Seller Debt or from Loans advanced under this
Agreement incidental to the acquisition).
"Fraud and Abuse Laws" means Section 1128B(b) of the Social Security Act,
42 U.S.C. Section 1320a-7b(b) and Section 1877 of the Social Security Act,
42 U.S.C. Section 1877, as from time to time amended; any successor
statute(s) thereto; all rules and regulations promulgated thereunder; and
any other Law relating to the ownership of medical facilities by providers
of medical services or the referral of patients to medical facilities owned
by providers of medical services.
"GAAP" means generally accepted accounting principles pronounced by the
Financial Accounting Standards Board or any successor thereto, as in effect
from time to time.
"Governmental Authority" means any governmental or quasi-governmental
entity, court or tribunal including, without limitation, any department,
commission, board, bureau, agency, administration, service or other
instrumentality of any foreign or domestic governmental entity.
"Hazardous Substances" means those substances included from time to time
within the definition of hazardous substances, hazardous materials, toxic
substances, or solid
waste under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 as amended, 42 U.S.C. 9601 et seq.; the Resource
Conservation and Recovery Act of 1976, 42 U.S.C. 6901 et seq.; the
Hazardous Materials Transportation Act, 49 U.S.C. 1801 et seq.; the Clean
Water Act, 33 U.S.C. Section 1251 et. seq.; the Toxic Substances Control
Act, 15 U.S.C. Section 2601 et. seq., and in the regulations promulgated
pursuant to such acts and laws; and such other substances that are or
become regulated under any applicable local, state, or federal law or
regulation addressing environmental hazards.
"IMPACT Center" means a high dose chemotherapy cancer treatment center
operated by a Consolidated Entity.
"Interest Expense" means expenses for interest (and including the interest
portion of current charges on Capital Leases) and expenses for any interest
rate swaps or similar derivative contracts used for the management of
interest expense.
"Interest Payment Date" means, (i) as to Prime Rate Loans, the first day of
each month, and (ii) as to any LIBOR Loan, the last day of the Interest
Period applicable to such Loan and, in addition, in the case of a LIBOR
Loan with an Interest Period of six (6) or twelve (12) months' duration,
the numerically corresponding day (or, if there is no numerically
corresponding day, on the last day) in the calendar month that is 3, 6, 9
and 12 months, as applicable, after the commencement of the Interest
Period.
"Interest Period" means, as to any LIBOR Loan, the period commencing on the
date of such LIBOR Loan and ending on the numerically corresponding day
(or, if there is no numerically corresponding day, on the last day) in the
calendar month that is 1, 2, 3, 6 or 12 months thereafter, as Borrower may
elect; provided, however, that (x) if any Interest Period would end on a
day that is not a Business Day, such Interest Period shall be extended to
the next succeeding Business Day unless, with respect to LIBOR Loans, such
next succeeding Business Day would fall in the next calendar month, in
which case such Interest Period shall end on the next preceding Business
Day and (y) no Interest Period with respect to any Loan shall end later
than the Maturity Date. Interest shall accrue from and including the first
Banking Day of an Interest Period to but excluding the last Banking Day of
such Interest Period.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
time.
"Law" or "Laws" means all applicable constitutional provisions, statutes,
codes, acts, ordinances, orders, judgments, decrees, injunctions, rules,
regulations, and requirements of all Governmental Authorities.
"Lenders" means NationsBank and Union Planters, their respective successors
and assigns.
"Liability" means, with respect to any Person, an obligation, contingent or
otherwise, that would be classified under GAAP as a liability of that
Person including, but not limited to, any nonrecourse obligation secured by
Property of that Person.
"LIBO Rate" means, for any given Interest Period with respect to a given
LIBOR Loan, the rate per annum appearing on Telerate Page 3750 (or any
successor page) as the London interbank offered rate for deposits in
Dollars at approximately 11:00 a.m. (London time) two Business Days prior
to the first day of such Interest Period for a term comparable to such
Interest Period. If for any reason such rate is not available, the term
LIBO Rate shall mean, for any given Interest Period with respect to a given
LIBOR Loan, the rate per annum appearing on Reuters Screen LIBO Page as the
London interbank offered rate for deposits in Dollars at approximately
11:00 a.m. (London time) two Business Days prior to the first day of such
Interest Period for a term comparable to such Interest Period; provided,
however, if more than one rate is specified on Reuters Screen LIBO Page,
the applicable rate shall be the arithmetic mean of all such rates.
"LIBO Rate Reserve Percentage" means the reserve percentage applicable
during any Interest Period (or if more than one such percentage shall be so
applicable, the daily average of such percentages for those days in such
Interest Period during which any such percentage shall be so applicable)
under regulations issued from time to time by the Board of Governors of the
Federal Reserve System (or any successor) for determining the maximum
reserve requirement (including, without limitation, any emergency,
supplemental or other marginal reserve requirement) for Lenders with
respect to liabilities or assets consisting of or including LIBOR
Liabilities having a term equal to such Interest Period.
"LIBOR Liabilities" means deposit liabilities incurred through the London
Interbank Market.
"LIBOR Loan" means a Loan for which Borrower has elected application of an
interest rate based on the LIBO Rate.
"Loan" means a loan advanced under the Credit Facilities.
"Loan Documents" means, collectively, each writing delivered at any time by
Borrower to Lenders or Agent relating to the Credit Facilities.
"Material Adverse Change" means any material and adverse change in the
business, Properties, or operations of the Consolidated Entities.
"Material Adverse Effect" means any event or condition which, singly or in
the aggregate with other events or conditions, materially and adversely
affects the business, Properties, or operations of the Consolidated
Entities, considered collectively.
"Maturity Date" means May 31, 1998, with respect to the Acquisition Loan,
and May 31, 1997, with respect to the Working Capital Loan; provided,
however, that Borrower may extend the Maturity Date for the Working Capital
Loan to May 31, 1998, by giving Agent written notice of such election in
the form set forth in Exhibit 1.2 hereto and paying an extension fee of
Thirteen Thousand Seven Hundred Fifty and No/100 Dollars ($13,750.00), to
be apportioned to Lenders Pro Rata in accordance with their respective
Commitments for the Working Capital Loan.
"Maximum Lawful Amount" means the maximum lawful amount of interest, loan
charges, commitment fees or other charges that may be assessed under
Tennessee law or, if higher, under applicable federal law.
"Miami Debt" means the obligations of Borrower under that Non-Negotiable
Promissory Note made by Borrower dated January 2, 1996 in the original
principal amount of Five Million Nine Hundred Fifty-Nine Thousand Nine
Hundred Seventy-Two and No/100 Dollars ($5,959,972.00), and any
modification, extension or renewal thereof approved by Agent.
"NationsBank" means NationsBank of Tennessee, N.A., its successors and
assigns.
"Net Equity Proceeds" means the Net Proceeds of issuances of equity by
Borrower, less any amount of such Net Proceeds used to redeem existing,
outstanding equity securities of Borrower.
"Net Proceeds" means gross proceeds of a transaction less reasonable and
customary underwriter and brokerage fees and commissions, the fees and
expenses of trustees and attorneys, and other reasonable and customary
closing fees and expenses.
"Non-Corporate Subsidiary" means a Permitted Subsidiary that is other than
a corporation.
"Non-Corporate Unperfected Subsidiary" means a Non-Corporate Subsidiary,
Borrower's interest in which is not subject to a perfected security
interest to secure the Obligations.
"Note" means any of the Acquisition Loan Notes or the Working Capital Loan
Notes referred to in Sections 2.3 and 2.6 hereof, respectively.
"Obligations" means the obligations of Borrower to Lenders to repay the
Credit Facilities and all other obligations of Borrower and the
Consolidated Entities to Lenders and to Agent under this Agreement and the
other Loan Documents.
"Operating Leases" means leases that are not Capital Leases.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Permitted Acquisition" means the acquisition (by asset purchase, stock
purchase, merger or otherwise, subject to the other requirements of this
definition set forth below) by Borrower of the assets of a Practice in the
ordinary course of business (it being acknowledged that medical records and
certain other professional assets that are required by Law to be owned by a
physician Provider are not acquired in these transactions), which purchase
meets all of the following criteria:
(a) The form of the acquisition shall have been of the assets of a
Practice or, if for stock or other equity interest, the target acquired
shall become a Permitted Subsidiary concurrently with the closing of the
acquisition.
(b) Borrower shall have delivered to Lender, prior to closing the
acquisition, unaudited pro forma financial statements or certificates
demonstrating continued compliance with all covenants in this Agreement
following the acquisition.
(c) Agent shall have given its written consent to the acquisition prior
to the closing thereof, in the cases of those acquisitions (i) for which
the total consideration is greater than seven (7) times Acquisition EBITDA
over the previous twelve (12) months (with Acquisition EBITDA determined
for the purpose of this Subsection (i) only based upon the pro forma
financial performance of the acquired Practice over the twelve (12) -month
period, including adjustment for cost savings that Borrower can establish
will occur immediately following the transaction), (ii) for which the
portion of the purchase price consisting of cash, Assumed Debt and Seller
Debt exceeds three percent (3%) of Borrower's total assets as reported by
Borrower pursuant to this Agreement most recently prior to the date of
determination, (iii) in which the Acquisition EBITDA of the target is
negative for either of the previous two (2) fiscal years, (iv) of more than
three (3) Practices in a single transaction, or (v) which, together with
previous acquisitions within a single calendar year, total seven (7) or
more Practices.
"Permitted Encumbrances" means all of the following:
(a) Encumbrances securing the payment of any of the Obligations.
(b) Encumbrances securing taxes, assessments, or other governmental
charges not yet due or which are being contested in good faith by
appropriate action promptly initiated and diligently conducted, if Borrower
has made reserve therefor as required by GAAP.
(c) Mechanics', repairmen's, materialmen's, warehousemen's, landlords'
and other like liens arising by operation of law securing accounts that are
not delinquent.
(d) Encumbrances on real property used by Borrower not securing
monetary obligations, provided that the Encumbrances are of a type
customarily placed on real property and do not materially impair the value
of the affected property.
(e) Pledges or deposits in the ordinary course of business to secure
nondelinquent obligations under workman's compensation or unemployment laws
or similar legislation or to secure the performance of leases or contracts
entered into in the ordinary course of business.
(e) Purchase Money Security Interests, to the extent permitted by
Section 6.1.7 hereof.
"Permitted Subsidiary" means a Subsidiary that (i) is now or hereafter
becomes a Borrower or a guarantor under this Agreement, (ii) is owned, in
both economic interest and voting rights, by Borrower in an amount
exceeding 50%, (iii) is owned by Borrower in a proportion sufficient to
allow Borrower to Control the Subsidiary, including the right to cause the
Subsidiary to make lawful distributions of income, and the financial
interest of Borrower therein is, in Agent's reasonable judgment, freely
alienable by Borrower through a security interest granted therein or
otherwise, and (iv) as to which Borrower has granted to Agent as additional
security for the Loans, a first priority perfected security interest in its
stock or other equity interest in the Subsidiary pursuant to documentation
in form and substance acceptable to Agent and its counsel, with the
validity and perfection of the security interest and other matters as Agent
may reasonably require confirmed to Agent by an opinion of Borrower's
outside counsel satisfactory to Agent in all respects, and with all
expenses related to such documentation (including, but not limited to,
filing fees and taxes and the reasonable fees and expenses of Lenders' and
Agent's attorneys) to be paid by Borrower; provided, however, that Borrower
need not grant a perfected security interest in its equity interest in a
Non-Corporate Subsidiary in order for such Subsidiary to be a Permitted
Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization,
government, governmental agency or political subdivision thereof, or any
other form of entity.
"Plan" means any employee benefit or other plan established or maintained,
or to which contributions have been made, by Borrower or any Subsidiary and
covered by Title IV of ERISA or to which Section 412 of the IRC applies.
"Practice" means an oncology or hematology treatment center or an oncology
or hematology medical practice. Whenever in this Agreement "Practice" is
used in describing an acquisition by Borrower, and if the reference relates
to a medical practice, such reference is to the acquisition of the assets
used in the operation of the Practice that can lawfully be acquired by
Borrower or to the acquisition of an interest in an entity that owns, as of
the time of purchase, only those assets that can be lawfully acquired by
Borrower.
"Pricing Values" means the Applicable LIBO Rate Margin and Applicable Prime
Rate Margin for both of the Credit Facilities and the Applicable Commitment
Fee.
"Prime Rate" shall be that rate announced by Agent from time to time as its
Prime Rate and is one of several interest rate bases used by Agent.
Lenders and Agent lend at rates both above and below Agent's Prime Rate and
Borrower acknowledges that the Prime Rate is not represented or intended to
be the lowest or most favorable rate of interest offered by any Lender or
Agent.
"Prime Rate Loan" means a Loan for which Borrower has elected application
of an interest rate based on the Prime Rate.
"Pro Rata" or "Pro Rata Share" refer to the apportionment among Lenders
according to their respective total Commitments at the time of
determination; provided, however, if at a time of determination there are
principal amounts outstanding under either or both of the Credit
Facilities, and if any Lender has failed to fund any unrepaid Loan that was
funded by any other Lender or Lenders, this apportionment shall be
determined according to the respective total principal amounts of the
Credit Facilities held by the respective Lenders rather than by their
Commitments.
"Property" or "Properties" means any interest in any kind of property,
whether real, personal, or mixed, or tangible or intangible.
"Provider" means an oncologist, hematologist, radiologist or other medical
doctor whose specialty is complementary to the practice of oncology or
hematology and who performs professional services respecting a Practice
that is either managed by Borrower or the assets of which are owned by
Borrower.
"Purchase Money Debt" means a Liability that is secured by a Purchase Money
Security Interest.
"Purchase Money Security Interest" means an Encumbrance on specific
equipment (including the Encumbrance arising under a Capital Lease),
provided that (i) the Liability secured by any such Encumbrance shall have
arisen at the time of the acquisition thereof and shall not exceed 100% of
the cost of the equipment to the entity acquiring the same, and (ii) each
such Encumbrance shall attach only to the equipment so acquired with the
proceeds of the Liability secured thereby.
"Required Lenders" means Lenders holding at least 66 2/3% of the total
Commitments for the Credit Facilities; provided, however, if at a time of
determination there are principal amounts outstanding under either or both
of the Credit Facilities, and if any Lender has failed to fund any unrepaid
Loan that was funded by any other Lender or Lenders, this determination
shall be made according to Lenders holding the required percentage of
principal amounts of the Credit Facilities rather than by the outstanding
Commitments.
"Seafield Position" means the equity interest of Seafield Capital
Corporation in Borrower.
"Seller" means the former owner of a Practice that is acquired by a
Consolidated Entity.
"Seller Debt" means a Liability incurred in favor of one or more Sellers
representing part of the purchase price of a Practice.
"Service Agreement" means one of those service or management agreements now
in effect or hereafter entered into by Borrower and Providers in connection
with the management of oncology practices and/or IMPACT Centers.
"Significant Consolidated Entity" means (i) Borrower, or (ii) any
Consolidated Entity other than Borrower that accounts for more than five
percent (5%) of either Borrower's total assets determined on a consolidated
basis as of the end of the most recent fiscal quarter or of Borrower's
Consolidated EBITDA for the most recent fiscal quarter, from time to time;
provided, however, that for as long as any facts that would otherwise
constitute Events of Default exist with respect to more than one
Consolidated Entity at any time, such that the total contribution of all
affected Consolidated Entities exceeds more than five percent (5%) of
either Borrower's total assets determined on a consolidated basis as of the
end of the most recent fiscal quarter or of Borrower's Consolidated EBITDA
for the most recent fiscal quarter, each Consolidated Entity shall be
considered a Significant Consolidated Entity.
"Solvent" shall mean, as to any Person, that as of any date of
determination, (i) the then fair value of the assets of such Person is
(a) greater than the then total amount of liabilities (including
subordinated liabilities) of such Person and (b) greater than the amount
that will be required to pay such Person's probable liability on such
Person's then existing debts as they become absolute and matured, (ii) such
Person's capital is not unreasonably small in relation to its business, and
(iii) such Person has not incurred and does not intend to incur, or believe
or reasonably should believe that it will incur, debts beyond its ability
to pay such debts as they become due.
"Subordinated Debt" means any unsecured Liability that is subordinated as
to payment, liquidation, collection and collection in bankruptcy to the
obligations of Borrower to Lenders pursuant to subordination documentation
in form and substance acceptable to Agent and which has a maturity of no
earlier than six (6) months following the latest applicable Maturity Date.
The Miami Debt shall be regarded as Subordinated Debt for all purposes in
this Agreement at any time that the average (mean) closing bid price for
Borrower's stock is greater than Seventeen and 50/100 Dollars ($17.50) for
the ten market days prior to the date of determination.
"Subsidiary" means any present or future corporation, joint venture,
limited liability company, or partnership, at least a majority of whose
outstanding voting stock or other voting securities or interests shall at
the time be owned directly or indirectly by Borrower.
"Taxes" means all taxes and assessments, whether general or special,
ordinary or extraordinary, or foreseen or unforeseen, which at any time may
be assessed, levied, confirmed or imposed on the Consolidated Entities or
on any of their properties or assets or any part thereof or in respect of
any of their franchises, businesses, income or profits.
"Total Funded Debt" means all obligations for borrowed money, including,
but not limited to, advances under the Credit Facilities, all Seller Debt
and all Capitalized Leases, whether short-term or long-term. Subordinated
Debt is not included in Total Funded Debt.
"UCC" means the Uniform Commercial Code as adopted in Tennessee, as it may
be amended from time to time.
"Union Planters" means Union Planters National Bank, its successors and
assigns.
"Unmatured Default" means any event or condition that, but for the giving
of any required notice by Agent and/or the passing of time, would be an
Event of Default hereunder.
"Working Capital Loan" means the revolving credit facility described in
Sections 2.4 and 2.5 hereof.
I.2 Terms Generally.
I.2.1 Computations; Accounting Principles. Where the character or amount
of any asset or liability or item of income or expense is required to be
determined, or any consolidation or other accounting computation is
required to be made for the purposes of this Agreement, such determination
or calculation, to the extent applicable and except as otherwise specified
in this Agreement, shall be made in accordance with GAAP. If a change in
GAAP after the date of this Agreement would require a change affecting the
calculation of any requirement under this Agreement, then Agent and
Borrower shall negotiate in good faith for the amendment of the affected
requirements; provided, however, until and unless such an amendment is
agreed upon, the requirements of this Agreement shall remain as written and
compliance therewith shall be determined according to GAAP as in effect
prior to the change.
I.2.2 Gender and Number. Words used herein indicating gender or number
shall be read as context may require.
I.2.3 References Include Successors. References herein to specific Laws,
regulatory bodies, parties or agreements also refer to any successor Laws,
regulatory bodies, and parties, and to all modifications, extensions,
renewals and restatements of agreements.
I.2.4 References to This Agreement. "Herein," "hereof" and words of
similar import refer to this Agreement as a whole and not to any particular
provision hereof, unless otherwise expressly stated.
I.2.5 Limitations of Knowledge. Certain representations and warranties
are made herein the Best of Borrower's Knowledge. These limitations
reflect only Borrower's special interest in disclosing that no targeted
diligence has been performed as to these matters in connection with this
Agreement. Should any matter so represented or warranted be discovered to
be false, then, irrespective of the knowledge qualification, the
representation or warranty shall be deemed breached and shall constitute an
Event of Default or Unmatured Default hereunder, as may apply.
II. LOANS
Concurrently with the execution of this Agreement, Lenders agree on a
several basis, and not on a joint basis, in accordance with their
respective Commitments, to make the Acquisition Loan and the Working
Capital Loan to Borrower, under the following terms and conditions:
II.1 Acquisition Loan. The principal indebtedness of Borrower to Lenders
under the Acquisition Loan shall not exceed the lesser of (i) Twenty-Two
Million and No/100 Dollars ($22,000,000.00), or (ii) the Credit Ceiling in
effect from time to time.
II.2 Use of Proceeds of Acquisition Loan. The proceeds of the Acquisition
Loan shall be used by Borrower for (i) Permitted Acquisitions, (ii) other
Capital Expenditures, and (iii) the development of IMPACT Centers.
II.3 Acquisition Loan Notes. Borrower's obligations under the
Acquisition Loan shall be evidenced by Acquisition Loan Notes in favor of
the respective Lenders in the form included as Exhibit 2.3 hereto payable
to each Lender for its Commitment under the Acquisition Loan.
II.4 Working Capital Loan. The principal indebtedness of Borrower to
Lenders under the Working Capital Loan shall not exceed the lesser of (i)
Five Million Five Hundred Thousand and No/100 Dollars ($5,500,000.00), or
(ii) the Credit Ceiling in effect from time to time.
II.5 Use of Proceeds of Working Capital Loan. The proceeds of Loans
advanced under the Working Capital Loan shall be used by Borrower for (i)
working capital purposes, and (ii) to the extent that the Acquisition Loan
may be fully drawn, for the same purposes permitted under the Acquisition
Loan.
II.6 Working Capital Loan NotesError! Bookmark not defined.. Borrower's
obligations under the Working Capital Loan shall be evidenced by Working
Capital Loan Notes in favor of the respective Lenders in the form included
as Exhibit 2.6 hereto payable to each Lender for its Commitment under the
Working Capital Loan.
II.7 Separate Commitments of LenderError! Bookmark not defined.s.
Borrower acknowledges that each Lender's commitment to fund its portion of
the Credit Facilities is made by each Lender severally, and neither Agent
nor any Lender shall be liable for the failure of another Lender to timely
perform under this Agreement.
II.8 Advances of Loans. Subject to the terms and conditions of this
Agreement, Borrower may borrow, repay and reborrow Loans under the Credit
Facilities, provided that the outstanding principal balance of the
Acquisition Loan and the Working Capital Loan, respectively, shall not at
any time exceed the amounts permitted under Sections 2.1 and 2.4 above.
Loans shall be disbursed as follows:
II.8.1 Loans Advanced Pursuant to Borrowing Notices.
II.8.1(a) Applicability. Loans under the Credit Facilities may be LIBOR
Loans, Prime Rate Loans, or a combination thereof, and the funding thereof
shall be subject to this Section 2.8.1.
II.8.1(b) Borrowing Notices. As long as Borrower meets the conditions for
funding stated in this Agreement, Borrower may submit requests for Loans
("Borrowing Notices") to Agent. All requests shall be made in writing (or
by telephone, subject to such security procedures as Agent may require from
time to time, provided that all telephonic notices shall be confirmed by
written Borrowing Notices within one (1) Business Day) and shall specify
the proposed disbursement date for the requested Loan; the Credit Facility
from which the Loan is requested; the amount of the Loan; the purpose of
the Loan (characterized in accordance with Sections 2.2 and 2.5 above); the
type of Loan, i.e., LIBOR Loan or Prime Rate Loan; and if a LIBOR Loan, the
designated Interest Period. Each Borrowing Notice shall irrevocably
obligate Borrower to accept the Loan requested thereby. Borrowing Notices
shall be in the form of Exhibit 2.8.1(b) hereto or such other form as Agent
may from time to time require.
II.8.1(c) Funding of Loans. Lenders shall fund their respective portions
of requested Loans on the next following Banking Day after the Banking Day
of Agent's receipt of the Borrowing Notice, in the case of Prime Rate
Loans, and on the second (2nd) Banking Day following the Banking Day of
Agent's receipt of the Borrowing Notice, in the case of LIBOR Loans. All
funds shall be disbursed directly into an account maintained by Borrower
with Agent. Borrower agrees that if any Lender elects to fund any
requested Loan(s) sooner after requested than is required hereunder, the
Lender may nevertheless use the entire response period allowed hereunder
upon receipt of any subsequent request, at the Lender's sole option.
II.8.1(d) Prime Rate Loan Limitations. Individual Prime Rate Loans shall
be in the minimum amount of One Hundred Thousand and No/100 Dollars
($100,000.00) each. Any number of Prime Rate Loans may be outstanding at
any one time.
II.8.1(e) LIBOR Loan Limitations. Individual LIBOR Loans shall be in the
minimum amount of Five Hundred Thousand and No/100 Dollars ($500,000.00)
each. No more than three (3) LIBOR Loans may be outstanding under either
of the Credit Facilities (for a maximum total of six (6)) at any one time.
II.8.1(f) Additional Limitation on LIBOR Interest Periods.
Notwithstanding anything to the contrary in this Agreement, if an Event of
Default shall have occurred and be continuing, no additional LIBOR Loans
may be created or continued and no Prime Rate Loan may be converted into a
LIBOR Loan.
II.8.2 Conversion of Loans. Borrower shall have the right, on prior
irrevocable written notice to Agent given two (2) Banking Days prior to the
date of any requested conversion, to convert any Prime Rate Loan or LIBOR
Loan into a Loan of another type, or to continue any LIBOR Loan for another
Interest Period, subject in each case to the following:
II.8.2(a) Application of Loans. Each conversion shall be effected by
applying the proceeds of the new LIBOR Loan and/or Prime Rate Loan, as the
case may be, to the Loan (or portion thereof) being converted.
II.8.2(b) Notices of Conversions. Each notice pursuant to this Section
2.8.2(b) shall be irrevocable and shall refer to this Agreement and specify
the identity and principal amount of the particular Loan that Borrower
requests be converted or continued; if such notice requests conversion, the
date of such conversion (which shall be a Business Day); and if a Loan is
to be converted to a LIBOR Loan or a LIBOR Loan is to be continued, the
Interest Period with respect thereto. No LIBOR Loan shall be converted at
any time other than at the end of the Interest Period applicable thereto,
except in accordance with Section 2.9 hereof. Conversion notices shall be
in the form attached as Exhibit 2.8.1(b) hereto.
II.8.3 Absence of Election. If Borrower fails to give Agent notice to
continue any LIBOR Loan for a subsequent period, such LIBOR Loan (unless
repaid) shall automatically be converted into a Prime Rate Loan. If
Borrower fails to specify in any Borrowing Notice the type of borrowing or,
in the case of a LIBOR Loan, the applicable Interest Period, Borrower will
be deemed to have requested a Prime Rate Loan.
II.8.4 Implied Representations Upon Request for Loan. Upon making any
request for any Loan, Borrower shall be deemed to have warranted to Agent
and Lenders that all conditions to funding set forth in Article III hereof
are satisfied.
II.8.5 Advance Not Waiver. Either Lender's making of any Loan that it is
not obligated to make under any provision of Article III hereof or any
other provision hereof shall not be construed as a waiver of the Lender's
right to withhold future Loans, declare an Event of Default, or otherwise
demand strict compliance with this Agreement, acting through Agent as
permitted by the terms hereof.
II.8.6 Draws by Debit Memorandum. Agent may cause Lenders to draw amounts
that may be available under the Credit Facilities to pay any Obligation
that is not otherwise timely paid.
II.9 Interest. Interest shall accrue on each Loan as follows:
II.9.1 Prime Rate Loans. Interest shall accrue on each Prime Rate Loan at
an annual rate equal to the Prime Rate plus the Applicable Prime Rate
Margin, said rate to change contemporaneously with any change in the Prime
Rate.
II.9.2 LIBOR Loans. Interest shall accrue on each LIBOR Loan at a rate
equal to the LIBO Rate for the selected Interest Period plus the Applicable
LIBO Rate Margin.
II.9.3 Additional Interest on LIBOR Loans. In addition to the interest
described above, Borrower shall pay to Lenders, if and so long as Lenders
shall be required under regulations of the Board of Governors of the
Federal Reserve System to maintain reserves with respect to liabilities or
assets consisting of or including LIBOR Liabilities, additional interest on
the unpaid principal amount of each LIBOR Loan, from the date of such
advance until said principal amount is paid in full, at an interest rate
per annum equal at all times to the remainder obtained by subtracting (i)
the LIBO Rate for the Interest Period from (ii) the rate obtained by
dividing the LIBO Rate by a percentage equal to 100% minus the LIBO Rate
Reserve Percentage for such Interest Period. This additional interest
shall be payable on each date on which interest is payable. The amount of
additional interest shall be determined by each Lender, who shall notify
Borrower and Agent thereof and whose determination shall be conclusive,
absent manifest error.
II.9.4 Calculation of Interest. Interest for both Prime Rate Loans and
LIBOR Loans shall be computed on the basis of a 360-day year counting the
actual number of days elapsed. Interest shall accrue on the Business Day a
Loan is extended and shall accrue through the Business Day on which it is
repaid.
II.9.5 Default Rate. Notwithstanding the foregoing, upon the occurrence
of an Event of Default and during the continuation of such Event of
Default, interest shall be charged at the Default Rate, regardless of
whether Lenders have elected to exercise any other remedies available to
Lender, including, without limitation, acceleration of the maturity of the
outstanding principal of the Credit Facilities. All such interest shall be
paid without demand on the Interest Payment Dates applicable to Prime Rate
Loans.
II.9.6 Payment of Interest. Interest for Prime Rate Loans and LIBOR Loans
shall be due and payable in arrears, without notice, on each Interest
Payment Date.
II.9.7 Usury Savings Provision. It is the intention of the parties that
all charges under or in connection with this Agreement and the Obligations,
however denominated, and including (without limitation) all interest,
commitment fees, late charges and loan charges, shall be limited to the
Maximum Lawful Amount. Such charges hereunder shall be characterized and
all provisions of the Loan Documents shall be construed as to uphold the
validity of charges provided for therein to the fullest possible extent.
Additionally, all charges hereunder shall be spread over the full permitted
term of the Obligations for the purpose of determining the effective rate
thereof to the fullest possible extent, without regard to prepayment of or
the right to prepay the Obligations. If for any reason whatsoever,
however, any charges paid or contracted to be paid in respect of the
Obligations shall exceed the Maximum Lawful Amount, then, without any
specific action by Lenders, Agent or Borrower, the obligation to pay such
interest and/or other charges shall be reduced to the Maximum Lawful Amount
in effect from time to time, and any amounts collected by Lenders that
exceed the Maximum Lawful Amount shall be applied to the reduction of the
principal balance of the Obligations and/or refunded to Borrower so that at
no time shall the interest or loan charges paid or payable in respect of
the Obligations exceed the Maximum Lawful Amount. This provision shall
control every other provision herein and in any and all other agreements
and instruments now existing or hereafter arising between Borrower and
Lenders with respect to the Obligations.
II.10 Alternate Rate of Interest if LIBOR Unavailable. In the event, and
on each occasion, that on the date of commencement of any Interest Period
for a LIBOR Loan, a Lender shall have determined (i) that dollar deposits
in the amount of the requested principal amount of such LIBOR Loan are not
generally available in the London Interbank Market; (ii) that the rate at
which such dollar deposits are being offered will not adequately and fairly
reflect the cost to the Lender of making or maintaining such LIBOR Loan
during such Interest Period; or (iii) that reasonable means do not exist
for ascertaining the LIBO Rate, the Lender shall, as soon as practicable
thereafter, give written or telephonic notice of such determination to
Borrower. In the event of any such determination, any request by Borrower
for a LIBOR Loan under this Agreement shall, until the circumstances giving
rise to such notice no longer exist, be deemed to be a request for a Prime
Rate Loan. Each determination by the Lender hereunder shall be conclusive
absent manifest error.
II.11 Change in Circumstances.
II.11.1 Imposition of Requirements. Notwithstanding any other provision
herein, if after the date of this Agreement any change in applicable Laws
or in the interpretation or administration thereof by any Governmental
Authority charged with the interpretation or administration thereof
(whether or not having the force of Law) shall change the basis of taxation
of payments to a Lender under any LIBOR Loan made by the Lender or any
other fees or amounts payable hereunder (other than taxes imposed on the
overall net income, gross receipts or added value of a Lender by the
country in which the Lender is located, or by the jurisdiction in which a
Lender has its principal office, or by any political subdivision or taxing
authority therein), or shall impose, modify or deem applicable any reserve
requirement, special deposit, insurance charge (including FDIC insurance on
LIBOR Liabilities) or similar requirement against assets of, deposits with
or for the account of, or credit extended by, a Lender or shall impose on a
Lender or the London Interbank Market any other condition affecting this
Agreement or LIBOR Loans made by a Lender, and the result of any of the
foregoing shall be to increase the cost to the Lender of making or
maintaining its LIBOR Loan or to reduce the amount of any sum received or
receivable by a Lender hereunder (whether of principal, interest or
otherwise) in respect thereof by an amount deemed by the affected Lender to
be material, then Borrower will pay to such Lender such additional amount
or amounts as will compensate the Lender for such additional costs of
reduction.
II.11.2 Other Changes. If either (i) the introduction of, or any change
in, or in the interpretation of, any United States or foreign Law; or (ii)
compliance with any directive, guidelines or request from any central bank
or other United States or foreign Governmental Authority (whether or not
having the force of law) promulgated or made after the date hereof, affects
or would affect the amount of capital required or expected to be maintained
by a Lender (or any lending office of a Lender) or any corporation directly
or indirectly owning or controlling a Lender (or any lending office of a
Lender) based upon the existence of this Agreement, and the Lender shall
have determined that such introduction, change or compliance has or would
have the effect of reducing the rate of return on the Lender's capital or
on the capital of such owning or controlling corporation as a consequence
of its obligations hereunder (including its commitment) to a level below
that which the Lender or such owning or controlling corporation could have
achieved but for such introduction, change or compliance (after taking into
account that Lender's policies or the policies of such owning or
controlling corporation, as the case may be, regarding capital adequacy) by
an amount deemed by the Lender (in its sole discretion) to be material,
then, from time to time, Borrower shall pay to the Lender such additional
amount or amounts as will compensate the Lender for such reduction
attributable to making, funding and maintaining its commitment and Loans
hereunder.
II.11.3 Computation of Amounts. A certificate of a Lender setting forth
the basis and method of computation of such amount or amounts specified in
Sections 2.11.1 and 2.11.2 hereof as shall be necessary to compensate the
Lender (or its participating banks) as specified above, as the case may be,
shall be delivered to Borrower and shall be conclusive absent manifest
error; provided however, that Borrower shall be responsible for compliance
herewith and the payment of increased costs only to the extent that (i) any
change in Laws giving rise to increased costs occurs after the date of this
Agreement; and (ii) the Lender gives notice of the change giving rise to
increased costs within one hundred eighty (180) Business Days after the
Lender has, or with reasonable diligence should have had, knowledge of the
change, or else Lender can only collect costs from and after the date of
the notice. Subject to the foregoing, Borrower shall pay the affected
Lender the amount shown as due on any such certificate within ten (10)
Business Days after its receipt of such certificate.
II.11.4 No Duty to Contest. The protection of this Section 2.11 shall be
available to a Lender regardless of any possible contention of invalidity
or inapplicability of the Law or condition that shall have been imposed.
Should a Lender assess any charge to Borrower under this Section 2.11, and
provided that Borrower pays the assessment to the Lender, Borrower may
thereafter undertake, at Borrower's own expense, any contest of the matters
giving rise to the charge that may, in the opinion of Borrower's
independent counsel issued to the affected Lender, and concurred in by
counsel to the Lender, have a reasonable chance of success, provided
further that the contest would not require the assertion of any position
contrary to a position taken by the Lender generally with taxing
authorities or any other involved parties and that there does not exist any
other circumstance that would disadvantage the Lender in the event of such
contest, as the affected Lender may determine in its discretion. The
affected Lender shall offer reasonable participation to Borrower for the
purpose of enabling Borrower to pursue the contest of such issue, with all
expenses, including fees and expenses of the affected Lender's counsel, to
be paid by Borrower.
II.12 Change in Legality of LIBOR LoansError! Bookmark not defined..
Notwithstanding anything to the contrary herein contained, if any change in
any Law or in interpretation thereof by any Governmental Authority charged
with the administration or interpretation thereof shall make it unlawful
for a Lender to make or maintain any LIBOR Loan or to give effect to its
obligations as contemplated hereby, then, by written notice to Borrower,
the Lender may (i) declare that LIBOR Loans will not thereafter be made by
the Lender hereunder, whereupon Borrower shall be prohibited from
requesting LIBOR Loans from the Lender hereunder unless such declaration is
subsequently withdrawn; and (ii) require that all outstanding LIBOR Loans
made by it be converted to Prime Rate Loans, in which event (a) all such
LIBOR Loans shall be automatically converted to Prime Rate Loans (but
without imposition of any additional charge that would normally become due
under Section 2.11 hereof) as of the effective date of such notice, and (b)
all payments and prepayments of principal that would otherwise have been
applied to repay the converted LIBOR Loans shall instead be applied to
repay the Prime Rate Loans resulting from the conversion of such LIBOR
Loans. For purposes of this Section 2.12, a notice to Borrower by the
Lender pursuant to (a) above shall be effective, if lawful, on the last day
of the then current Interest Period; in all other cases, such notice shall
be effective on the date of receipt by Borrower.
II.13 Principal Repayment. Principal payments under the Credit Facilities
shall become due immediately and without notice at such time that the
outstanding principal balance of the Credit Facilities may exceed the
Credit Ceiling, in an amount sufficient to reduce the outstanding principal
balance to an amount no greater than the Credit Ceiling. All remaining
principal outstanding under the Credit Facilities shall become due on the
Maturity Date or the earlier acceleration of the Credit Facilities in
accordance with the terms of this Agreement.
II.14 Prepayment of LIBOR Loans.
II.14.1 Notice of LIBOR Loan Prepayment. Borrower may, upon two (2)
Banking Days' prior written notice to Agent, and upon payment of all
applicable premiums set forth in Section 2.14.3 hereof, prepay any
outstanding LIBOR Loans prior to any Interest Payment Date for such LIBOR
Loans, in whole or in part. Each notice of prepayment of any LIBOR Loan
shall specify the date and amount of such prepayment and shall be
irrevocable.
II.14.2 Amount of LIBOR Loan Prepayment. Each partial prepayment of any
LIBOR Loan shall be in an aggregate principal amount which is the lesser of
(i) the then outstanding principal balance of the one or more LIBOR Loans
to be prepaid, or (ii) Five Hundred Thousand and No/100 Dollars
($500,000.00) or an integral multiple thereof. Interest on the amount
prepaid accrued to the prepayment date shall be paid on such date.
II.14.3 LIBOR Loan Prepayment Premium. Upon prepayment of any LIBOR Loan
on a date other than the relevant Interest Payment Date for such borrowing,
Borrower shall pay to Lenders, in addition to all other payments then due
and owing Lenders, premiums which shall be equal to an amount, if any,
reasonably determined by Agent to be the difference between the rate of
interest then applicable to the relevant LIBOR Loan and the yield Lenders
would receive upon reinvestment of so much of the relevant LIBOR Loans as
is prepaid for the remainder of the term of the relevant LIBOR Loan or
Loans. Anything in this Section 2.14.3 to the contrary notwithstanding,
the premiums payable upon any such prepayment shall not exceed the amount,
if any, determined by Agent to be the difference between the rate of
interest then applicable to the relevant LIBOR Loan and the yield that
Lenders could receive upon reinvestment in the "Floor Reinvestment" of so
much of the relevant LIBOR Loan as is prepaid for the remainder of the term
of the relevant LIBOR Loan. For purposes hereof, "Floor Reinvestment"
shall mean an investment for the time period from the date of such
prepayment to the end of the relevant Interest Period applicable to such
LIBOR Loan at an interest rate per annum equal to the federal funds
"offered" rate as published in the Wall Street Journal on the date of such
prepayment. All determinations, estimates, assumptions, allocations and
the like required for the determination of such premiums shall be made by
Agent in good faith and shall be presumed correct absent manifest error.
II.15 Prepayment of Prime Rate Loans. Borrower may at any time prepay any
outstanding Prime Rate Loans prior to the Maturity Date in whole or in part
without premium or penalty.
II.16 Fixed Commitment Fees. Borrower shall pay a commitment fee to
Lenders on a Pro Rata basis upon the execution of this Agreement (i) with
respect to the Acquisition Loan, in the amount of One Hundred Ten Thousand
and No/100 Dollars ($110,000.00) and (ii) with respect to the Working
Capital Loan, in the amount of Thirteen Thousand Seven Hundred Fifty and
No/100 Dollars ($13,750.00). An additional commitment fee shall become due
with respect to the Working Capital Loan under certain circumstances as set
forth in the definition of "Maturity Date" above in this Agreement. These
commitment fees are not refundable or proratable.
II.17 Periodic Commitment Fee Based on Use of FacilitiesError! Bookmark
not defined.. Borrower shall pay to Agent for distribution to Lenders Pro
Rata an additional commitment fee for the unused portion of the Credit
Facilities. This fee shall be determined by applying the Applicable
Commitment Fee to the average daily unused balance of the Credit
Facilities. The commitment fee shall be paid in arrears on each Interest
Payment Date applicable to Prime Rate Loans. This commitment fee is not
refundable or proratable.
II.18 Agent's Fee. On the Closing Date, and on each subsequent
anniversary thereof excepting only an anniversary corresponding to the
Maturity Date, Borrower shall pay to Agent a fee of Five Thousand and
No/100 Dollars ($5,000.00) for each Lender (inclusive of Agent) then a
party to this Agreement. If any additional Lender becomes a party to this
Agreement between anniversary dates as to increase the total number of
Lenders, a like fee shall be paid to Agent with respect to that Lender upon
its entry, prorated to reflect the balance of the year remaining until the
next anniversary of the Closing Date.
III. CONDITIONS PRECEDENT
III.1 Conditions to Initial Advance. Lenders shall not be obligated to
make their initial Loan pursuant to this Agreement unless and until
Borrower satisfies the following conditions:
III.1.1 Loan Documents. Borrower shall have delivered to Lenders and to
Agent the following documents, fully executed and in form and substance
acceptable to the Agent:
III.1.1(a) Loan Agreement. This Agreement.
III.1.1(b) Acquisition Loan Notes. The Acquisition Loan Notes made by
Borrower payable to the order of the respective Lenders in the maximum
principal amounts of Sixteen Million and No/100 Dollars ($16,000,000.00)
and Six Million and No/100 Dollars ($6,000,000.00), respectively.
III.1.1(c) Working Capital Loan Notes. The Working Capital Loan Notes made
by Borrower payable to the order of the respective Lenders in the maximum
principal amounts of Four Million and No/100 Dollars ($4,000,000.00) and
One Million Five Hundred Thousand and No/100 Dollars ($1,500,000.00),
respectively.
III.1.1(d) Guaranties of Subsidiaries. Unconditional Continuing Guaranties
executed by all Subsidiaries of Borrower other than Non-Corporate
Subsidiaries.
III.1.1(e) Pledge of Stock of Subsidiaries. Stock Pledge Agreement,
Irrevocable Proxies and Blank Stock Powers evidencing a first priority
perfected security interest in all of the stock of Borrower's corporate
Subsidiaries and all dividends, distributions and other property related
thereto, together with the original certificates evidencing the pledged
stock.
III.1.1(f) Charters. Certified Copies of the Consolidated Entities'
corporate charters and all amendments thereto, issued by the Secretaries of
State for their states of domicile.
III.1.1(g) Bylaws. Certified Copies of Bylaws for the Consolidated
Entities.
III.1.1(h) Certificates of Good Standing. Certificates of good standing or
existence, as applicable, issued as to the Consolidated Entities by the
Secretaries of State for the states of their domicile.
III.1.1(i) Foreign Qualification. Certificates of Qualification issued by
the Secretaries of State for each state in which a Consolidated Entity is
required to qualify as a foreign corporation.
III.1.1(j) Resolutions. Certified Copies of Resolutions authorizing the
execution of all applicable Loan Documents on behalf of Consolidated
Entities.
III.1.1(k) Opinions of Borrower's Counsel. Opinions of counsel to the
Consolidated Entities addressed to Agent and Lenders, addressing matters
reasonably required by Lenders, Agent and their counsel.
III.1.1(l) UCC Searches. UCC search reports on Borrower from such
jurisdictions and filing offices as Lenders and Agent may require.
III.1.1(m) Closing Statement and Funding of Expenses. Loan Closing
Statement describing expenses and fees due in connection with the closing
of the Credit Facilities and payment thereof in immediately available
funds.
III.1.1(n) Other Documents. Such other documents as Lenders or Agent may
reasonably require.
III.1.1(o) Completion of Exhibits and Schedules. The completion of all
exhibits and schedules to this Agreement, which shall be satisfactory to
Agent, in its sole discretion.
III.1.2 Additional Conditions. Borrower shall have satisfied the
following additional conditions, to Lenders' and Agent's satisfaction:
III.1.2(a) Warranties. All warranties made in the Loan Documents must be
true in all material respects and shall be true in all material respects
taking into account the funding of the requested Loan.
III.1.2(b) Covenants. All covenants made in the Loan Documents must have
been complied with and shall have been complied with taking into account
the funding of the requested Loan.
III.1.2(c) Absence of Unmatured Default. No Event of Default or Unmatured
Default shall exist under this Agreement.
III.1.2(d) No Adverse Change. There must be no Material Adverse Change
since the date of the Financial Statements.
III.1.2(e) Regulatory Diligence. The completion of healthcare regulatory
diligence to the satisfaction of Agent and its counsel.
III.2 Conditions to Subsequent Loans. Lenders shall not be obligated to
make any Loan unless all of the following conditions are satisfied as of
the time of the request and of funding:
III.2.1 Conditions to Initial Advance. All of the conditions in Section
3.1 hereof must have been satisfied.
III.2.2 Warranties. All warranties made in the Loan Documents must be
true in all material respects and shall be true in all material respects
taking into account the funding of the requested Loan.
III.2.3 Covenants. All covenants made in the Loan Documents must have
been complied and shall have been complied with taking into account the
funding of the requested Loan.
III.2.4 Absence of Unmatured Default. No Event of Default or Unmatured
Default shall exist under this Agreement.
III.2.5 Material Adverse Change. There shall not have occurred a Material
Adverse Change.
IV. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lenders and Agent that:
IV.1 Capacity. Each Consolidated Entity is a corporation or other entity
as set forth in Schedule 4.1 hereof, and is duly organized, validly
existing and in good standing under the laws of the state of its domicile
as set forth in Schedule 4.1. Each Consolidated Entity is qualified or
authorized to do business in all jurisdictions in which its ownership of
property or conduct of business requires such qualification or
authorization or where the failure to be so qualified or authorized would
not have a Material Adverse Effect. Each Consolidated Entity has the power
and authority to own its Properties and to carry on its business as now
being conducted and as proposed to be conducted after the execution hereof,
to execute and deliver this Agreement and the other Loan Documents, and to
perform its obligations hereunder and under the other Loan Documents.
IV.2 Authorization. The execution, delivery and performance of this
Agreement and the other Loan Documents by each Consolidated Entity
executing such documents has been duly authorized by all requisite action.
IV.3 Binding Obligations. This Agreement is and the other Loan Documents,
when executed and delivered to Lender, will be, legal, valid and binding
upon each Consolidated Entity who is a party thereto, enforceable in
accordance with its respective terms, subject only to principles of equity
and laws applicable to creditors generally, including bankruptcy laws.
IV.4 No Conflicting Law or Agreement. The execution, delivery and
performance of this Agreement and the other Loan Documents by each
Consolidated Entity does not constitute a breach of or default under, and
will not violate or conflict with, any provisions of the corporate charter
or other constituent documents of a Consolidated Entity; any contract,
financing agreement, lease, or other agreement to which a Consolidated
Entity is a party or by which its Properties may be affected, the violation
of which could have a Material Adverse Effect; or any Law to which a
Consolidated Entity is subject or by which its Properties may be affected,
the violation of which could have a Material Adverse Effect; nor will the
same result in the creation or imposition of any Encumbrance upon any
Property of any Consolidated Entity, other than those contemplated by the
Loan Documents.
IV.5 No Consent Required. The execution, delivery, and performance of this
Agreement and the other Loan Documents by the Consolidated Entities do not
require the consent or approval of or the giving of notice to any Person
except for those consents which have been duly obtained and are in full
force and effect on the date hereof and others, if any, which by their
omission could not result in a Material Adverse Effect.
IV.6 Financial Statements. The Financial Statements are complete and
correct, have been prepared in accordance with GAAP, and present fairly the
financial condition and results of operations of the Consolidated Entities
as of the date and for the period stated therein, subject to year-end
adjustments. No Material Adverse Change has occurred since the date of the
Financial Statements. Borrower acknowledges that Lenders have advanced (or
shall advance) the Credit Facilities in reliance upon the Financial
Statements.
IV.7 Fiscal Year. Each Consolidated Entity's fiscal year ends on December
31 of each year.
IV.8 Litigation. Except as disclosed on Schedule 4.8 hereto, (i) there is
no litigation, arbitration, legal or administrative proceeding, tax audit,
investigation, or other action or proceeding of any nature pending against
any Consolidated Entity or any of its Properties, and (ii) there is no
litigation, arbitration, legal or administrative proceeding, tax audit,
investigation, or other action or proceeding of any nature threatened in
writing against a Consolidated Entity which, if adversely determined, could
have a Material Adverse Effect. No Consolidated Entity is subject to any
outstanding court, arbitral or administrative order, writ or injunction. To
the Best of Borrower's Knowledge, no facts exist under which third parties
have unasserted claims against any Consolidated Entity which, if adversely
determined, could have a Material Adverse Effect.
IV.9 Taxes; Governmental Charges. Each Consolidated Entity has filed or
caused to be filed or has lawfully extended the deadline for filing all tax
returns and reports required to be filed. Each Consolidated Entity has
paid, or made adequate provision for the payment of, all Taxes that have or
may have become due pursuant to such returns or otherwise, or pursuant to
any assessment received by it, except such Taxes, if any, as are being
contested in good faith by appropriate proceedings and for which adequate
reserves have been provided. To the Best of Borrower's knowledge, there is
no proposed material tax assessment against any Consolidated Entity. No
extension of time for the assessment of federal, state or local taxes of
any Consolidated Entity is in effect or has been requested, except as
disclosed in Schedule 4.9 hereto. Each Consolidated Entity has timely made
all required remittances of withholding deposits and other assessments
against payroll expenditures.
IV.10 Title to Properties. Each Consolidated Entity has good and
marketable title to its Properties, free and clear of all Encumbrances
except for Permitted Encumbrances.
IV.11 No Default. No Consolidated Entity is in default in any respect that
affects its business, Properties, operations, or condition, financial or
otherwise, under any indenture, mortgage, deed of trust, obligation to
equity holders, credit agreement, note, agreement, lease, sale agreement or
other instrument to which any Consolidated Entity is a party or by which
its Properties are bound, which default could have a Material Adverse
Effect. To the Best of Borrower's Knowledge, no other party to any
contract with any Consolidated Entity under which a default could have a
Material Adverse Effect is in default or breach thereof and no circum-
stances exist which, with the giving of notice and/or the passing of time
would constitute such default or breach. No Event of Default or Unmatured
Default exists under this Agreement.
IV.12 Casualties; Taking of Properties. Neither the business nor the
Property of any Consolidated Entity is presently impaired as a result of
any fire, explosion, earthquake, flood, drought, windstorm, accident,
strike or other labor disturbance, embargo, requisition or taking of
property, cancellation of contracts, permits, concessions by any domestic
or foreign government or any agency thereof, riot, activities of armed
forces or acts of God or of any public enemy, in any case as could have a
Material Adverse Effect.
IV.13 Compliance with Laws. No Consolidated Entity is in violation of any
Law to which it, its business or any of its Properties are subject, the
violation of which would likely have a Material Adverse Effect, and, to the
Best of Borrower's Knowledge, there are no outstanding citations, notices
or orders of noncompliance issued to any Consolidated Entity under any such
Law, the violation of which would likely have a Material Adverse Effect.
Each Consolidated Entity has obtained all licenses, permits, franchises, or
other governmental authorizations necessary to the ownership of its
Properties or to the conduct of its business, except for those which, if
not obtained, could not have a Material Adverse Effect.
IV.14 Compliance with Fraud and Abuse Laws. Without limiting any other
provision of this Agreement, no Consolidated Entity and no Provider is in
violation of any Fraud and Abuse Law, the violation of which could have a
Material Adverse Effect.
IV.15 ERISA. No ERISA Event has occurred with respect to any Plan or is
reasonably expected to occur with respect to any Plan.
IV.16 Full Disclosure of Material Facts. Borrower has fully advised
Lenders of all matters involving the financial condition, business,
operations and Properties of the Consolidated Entities that would be
reasonably expected to have a Material Adverse Effect. No information,
exhibit, or report furnished or to be furnished by Borrower to Lenders in
connection with this Agreement contains, as of the date thereof, any
misrepresentation of fact or failed or will fail to state any material
fact, the omission of which would render the statements therein materially
false or misleading.
IV.17 Accuracy of Projections. With respect to all business plans and
other forecasts and projections furnished by or on behalf of Borrower and
made available to Lenders relating to the financial condition, business,
operations or Properties of the Consolidated Entities, all facts stated as
such therein were true and complete in all material respects as of the time
made and all estimates and assumptions were made in good faith and believed
to be reasonable at the time made. As of the Closing Date, nothing has
since come to the attention of Borrower that has changed its assessment of
any such matters, except for changes that could not have a Material Adverse
Effect.
IV.18 Investment Company Act. No Consolidated Entity is an "investment
company" under the Investment Company Act of 1940, as amended.
IV.19 Personal Holding Company. No Consolidated Entity is a "personal
holding company" as defined in Section 542 of the IRC.
IV.20 Solvency. Each Consolidated Entity is Solvent as of the Closing Date
and will remain Solvent upon the consummation of the transactions
contemplated hereby.
IV.21 Chief Executive Office. The address designated herein to which
notices are to be sent under this Agreement is the Borrower's chief
executive office within the meaning of Tennessee Code Annotated Section 47-
9-103(3)(d).
IV.22 Subsidiaries. Borrower has no Subsidiaries, except for those listed
on Schedule 4.22 hereto.
IV.23 Ownership of Patents, Licenses, Etc. The Consolidated Entities own
all licenses, permits, franchises, registrations, patents, copyrights,
trademarks, trade names or service marks, or the rights to use the
foregoing, that are necessary for the continued operation of their business
except for such licenses, etc., which, if not held or owned, could not have
a Material Adverse Effect.
IV.24 Environmental Compliance. Each Consolidated Entity has duly complied
with, and their Properties are owned and operated in compliance with, all
Environmental Laws, the violation of which could have a Material Adverse
Effect. There have been no citations, notices or orders of non-compliance
issued to any Consolidated Entity or, to the Best of Borrower's knowledge,
relating to their business or Properties pursuant to any Environmental Law.
Each Consolidated Entity has obtained all required federal, state and
local licenses, certificates or permits relating to them and their
Properties as required by applicable Environmental Laws, except for those
which, if not obtained, could not have a Material Adverse Effect
IV.25 Labor Matters. No Consolidated Entity is subject to any collective
bargaining agreements or any decrees or orders requiring them to recognize,
deal with or employ any Person. No demand for collective bargaining has
been asserted against any Consolidated Entity by any union or organization.
No Consolidated Entity has experienced any strike, labor dispute, slowdown
or work stoppage due to labor dispute and, to the best knowledge of
Borrower, there is no such strike, dispute, slowdown or work stoppage
threatened against any Consolidated Entity. All Consolidated Entities are
in compliance in all material respects with the Fair Labor Standards Act of
1938, as amended.
IV.26 OSHA Compliance. All Consolidated Entities are in compliance in all
material respects with the Federal Occupational Safety and Health Act, as
amended, and all regulations under the foregoing.
IV.27 Regulation U. No Consolidated Entity is engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U issued by the Board of Governors of the
Federal Reserve System). No proceeds of any Loan will be used to purchase
or carry any margin stock (within the meaning of Regulation U issued by the
Board of Governors of the Federal Reserve System) in violation of
applicable law, including, without limitation, Regulation U issued by the
Board of Governors of the Federal Reserve System.
IV.28 Affiliate Transactions. No Consolidated Entity is a party to any
transaction, contract or agreement with any Affiliate, except for Service
Agreements, lease agreements and other agreements among Borrower and its
Subsidiaries and those other agreements described in Schedule 4.28 hereof.
V. AFFIRMATIVE COVENANTS
Borrower covenants that, during the term of this Agreement (and thereafter
where expressly stated herein):
V.1 Payment of Obligations. Borrower shall pay all amounts owed under the
Obligations when due.
V.2 Maintenance of Existence and Business. Except for transactions among
Consolidated Entities permitted under this Agreement, each Consolidated
Entity shall maintain its fundamental existence, name, rights, and
franchises, and shall maintain its qualification and good standing in all
states in which such qualification is necessary, and shall continue to
operate in the same type of business as such Consolidated Entity engages in
as of the date hereof.
V.3 Financial Statements and Reports. Borrower shall furnish to Agent the
following, all of which must be in form and substance satisfactory to
Lender (the financial reports below and all other reports required of
Borrower under this Agreement shall be delivered in sufficient counterparts
that each Lender and Agent may have an original counterpart thereof):
V.3.1 Monthly Financial Reports. As soon as available, and in any event
by the thirtieth (30th) day following the end of a month, Borrower shall
deliver to Agent a balance sheet, income statement and statement of cash
flows of Borrower for and as of the end of the preceding month, all
prepared by Borrower on a consolidated basis and certified by Borrower's
president or chief financial officer to be complete and correct and to
present fairly, in accordance with GAAP (excluding year-end adjustments and
required footnote disclosures), the consolidated financial condition of
Borrower as of the date of such statements and the consolidated results of
its operations and its cash flow for such period. Notwithstanding the
foregoing, if as of May 31, 1997, Borrower has met the Financial
Projections since the date hereof, the requirements of this Section 5.3.1
will terminate and monthly financial statements shall no longer be
required.
V.3.2 Quarterly Financial Reports. As soon as available, and in any event
by the forty-fifth (45th) day of each fiscal quarter except the fourth
fiscal quarter, Borrower shall prepare and deliver to Agent a consolidated
balance sheet, income statement and statement of cash flows of Borrower for
and as of the end of the preceding fiscal quarter, certified by Borrower's
President or Chief Financial Officer to be complete and correct and to
present fairly, in accordance with GAAP (excluding year-end adjustments and
required footnote disclosures), the consolidated financial condition of
Borrower as of the date of such statements and the consolidated results of
its operations and its cash flow for such period. Supplemental to such
basic financial statements, Borrower shall deliver to the Agent
calculations of all financial ratios; the certification of Borrower's
President or Chief Financial Officer as to the absence of any Event of
Default or Unmatured Default; a Borrowing Base certificate; and by-Practice
financial summaries addressing Practice revenues, expenses and fees to
Consolidated Entities in form and substance acceptable to Agent.
V.3.3 Annual Financial Reports. As soon as available, and in any event
within ninety (90) days after the end of each fiscal year, Borrower shall
deliver to Agent the audited consolidated balance sheet of Borrower as of
the end of such year and the related audited consolidated statements of
income, retained earnings and cash flows for such year, together with
supporting schedules, all such statements prepared in accordance with GAAP
and accompanied by an unqualified audit report prepared by an independent
"big six" certified public accountant acceptable to Agent showing the
consolidated financial condition of Borrower at the close of such year and
the consolidated results of its operations, changes in its retained
earnings and its cash flows for such year. Supplemental to the audited
year-end financial statements, Borrower shall deliver to Agent calculations
of all financial ratios as determined based upon the audited financial
statements and the certification of Borrower's President or Chief Financial
Officer as to the absence of any Event of Default or Unmatured Default.
V.3.4 Accountant Reports. Promptly upon the receipt thereof, Borrower
shall deliver to Agent a copy of each other report (other than work papers)
submitted to Borrower or any Subsidiary by its accountants in connection
with any annual, interim or special audit made by them, but Borrower shall
be obligated to deliver such report only if (i) the report advises Borrower
of a material weakness in internal controls, or (ii) Agent has requested
the report in writing based upon Agent's good faith belief that, based upon
its review of Borrower's financial statements or other information relating
to the operations and condition of the Consolidated Entities, a copy of
such report is needed in order for Agent and/or Lenders to thoroughly
assess the financial condition of the Consolidated Entities and/or their
continued compliance with this Agreement.
V.3.5 Acquisition Certification. In connection with any draw, Borrower
shall submit a Borrowing Base certificate to confirm the sufficiency of the
Borrowing Base for the requested advance.
V.3.6 Other Information. Borrower shall provide Agent with such
additional information regarding the financial condition, properties,
operations and prospects of the Consolidated Entities and their
consolidated entities as Agent may reasonably require.
V.4 Additional Information. Borrower shall provide such other information
respecting the condition or operations, financial or otherwise, of the
Consolidated Entities as Agent may from time to time reasonably request.
V.5 Certain Additional Reporting Requirements.
V.5.1 Owner Mailings. Promptly upon the sending thereof, Borrower shall
deliver to Agent a copy of each statement, report or notice sent to its
shareholders.
V.5.2 SEC Filings. Promptly upon the filing thereof, should such filings
become applicable, Borrower shall deliver to Agent copies of all regular,
periodic and special reports that any Consolidated Entity files with the
United States Securities and Exchange Commission or any successor thereto,
or any national securities exchanges or the National Association of
Securities Dealers.
V.5.3 Change in Accounting Policies. Borrower shall promptly notify Agent
in writing upon any material change in accounting policies or financial
reporting practices on the part of any Consolidated Entity.
V.5.4 Notice to Agent Upon Perceived Breach. Borrower agrees to give
Lender prompt written notice of any action or inaction by or on behalf of
Lender in connection with this Agreement or the Obligations that Borrower
believes may be actionable against Lenders or Agent or a defense to payment
of any or all Obligations for any reason, including, but not limited to,
commission of a tort or violation of any contractual duty or duty implied
by law provided, however, that Borrower's failure to give such notice, if
such failure is unintentional and does not arise from Borrower's gross
negligence, shall not foreclosure any such action or defense to be asserted
by Borrower.
V.5.5 Changes in Constituent Documents. Borrower shall promptly notify
Agent in writing of any change in the corporate charter or bylaws of
Borrower or the fundamental documents of any Subsidiary following the
encumbrance of the stock thereof in favor of Agent to secure Lenders as
required under this Agreement, and shall provide Agent with a copy of such
change (Consolidated Entities are restricted in the adoption of such
amendments as provided elsewhere in the Loan Documents, and nothing
contained in this Section shall be deemed a waiver of such restrictions).
V.5.6 Notice of Litigation. Borrower shall give Agent prompt written
notice of any litigation, arbitration, tax audit, administrative proceeding
or investigation that may hereafter be instituted or threatened in writing
in which Borrower would be a party or which otherwise may affect any
Consolidated Entity or any of their business, operations or Properties,
except for (i) actions seeking only monetary damages in an amount of less
than the amount equal to one-half percent (1/2%) of Borrower's Consolidated
EBITDA for the most recent four (4) fiscal quarters for which Borrower has
submitted financial statements to Agent, as of the time of determination,
and (ii) matters arising from premises or vehicular liability seeking only
monetary damages and which are fully covered by insurance, subject only to
any applicable deductible.
V.5.7 Other Notices. Borrower shall promptly notify Agent in writing if
Borrower learns of the occurrence of (i) any event that constitutes an
Event of Default or an Unmatured Default, together with a detailed
statement of the steps being taken as a result thereof, or (ii) any
Material Adverse Change.
V.6 Taxes and Other Encumbrances. Each Consolidated Entity shall make due
and timely payment or deposit of all federal, state and local taxes,
assessments or contributions required of it by law, and execute and deliver
to Agent, on demand, appropriate certificates attesting to the payment or
deposit thereof; provided, however, that the Consolidated Entities shall
not be required to pay or discharge any such tax, assessment, charge or
claim for as long as it is being diligently contested in good faith by
proper proceedings and for which appropriate reserves are being maintained.
V.7 Payment of Liabilities. Each Consolidated Entity shall pay all of its
Liabilities as and when the same becomes due in accordance with its terms.
V.8 Compliance with Laws. Each Consolidated Entity shall observe and
comply with all Laws (including, but not limited to, Fraud and Abuse Laws),
and shall maintain all certificates, franchises, permits, licenses, and
authorizations necessary to the conduct of its business or the operation of
its Properties, except for such Laws, certificates, etc., which, if
violated or not obtained and full penalties were imposed for such
violation, could not cause a Material Adverse Effect. Each Consolidated
Entity shall further use its best efforts to assure the compliance by all
Providers with all applicable Laws, including, but not limited to, medical
licensure and Fraud and Abuse Laws, relating to their providing of
professional services, except for those which, if violated and full
penalties were imposed for such violation, could not cause a Material
Adverse Effect.
V.9 Maintenance of Property. All Consolidated Entities shall maintain
their Property (and any Property leased by or consigned or held under title
retention or conditional sales contracts) in good and workable condition at
all times, subject to ordinary wear and tear, normal discards and
replacements due to functional and useful-life obsolescence, and shall make
all repairs, replacements, additions, and improvements to their Property
reasonably necessary and proper to ensure that the business carried on in
connection with their Property may be conducted properly and efficiently at
all times.
V.10 Compliance with Contractual Obligations. Each Consolidated Entity
will perform all of its obligations in respect of all material contracts to
which it is a party and will use its best efforts to keep, and to take all
action to keep, such contracts in full force and effect and not allow any
such contract to lapse or be terminated or any rights to renew such to be
forfeited or canceled, if such lapse, etc. could have a Material Adverse
Effect; provided, however, that any such contract may lapse or be
terminated or such renewal rights may be forfeited or canceled if in the
reasonable business judgment of the Consolidated Entities it is in their
best interests to allow or cause such lapse, termination, forfeiture or
cancellation.
V.11 Further Assurances. The Consolidated Entities shall promptly cure any
defects in the creation, issuance, or delivery of the Loan Documents. The
Consolidated Entities at their expense will execute (or cause to be
executed) and deliver to Agent upon request all such other and further
documents, agreements, and instruments in compliance with or accomplishment
of the covenants and agreements applicable to them in the Loan Documents,
or to evidence further and to describe more fully any Collateral intended
as security for the Obligations, or to correct any omissions in the Loan
Documents, or to state more fully the Obligations and agreements set out in
any of the Loan Documents, or to perfect, protect, or preserve any
Encumbrances created pursuant to any of the Loan Documents, or to make any
recordings, to file any notices, or to obtain any consents, all as may be
reasonably necessary or appropriate in connection therewith. Borrower
appoints Agent as Borrower's attorney-in-fact to execute any financing
statements or other instruments of perfection with respect to the
Collateral.
V.12 Security Interest; Setoff. In order to further secure the payment of
the Obligations, Borrower hereby grants to Agent and to each Lender a
security interest and right of setoff against all of Borrower's presently
owned or hereafter acquired monies, items, credits, deposits and
instruments (including certificates of deposit) presently or hereafter in
the possession of any Lender or Agent. By maintaining any such accounts or
other property with a Lender or Agent, Borrower acknowledges that Borrower
voluntarily subjects the property to the security interest arising
hereunder. Subject to the provisions in Article IX hereof, a Lender may
exercise its rights under this Section without prior notice (but with
prompt notice following the setoff) following an Event of Default.
Borrower agrees that neither Lenders nor Agent shall be liable for the
dishonor of any instrument after notice of setoff shall have been duly
given resulting from a Lender's exercise of its rights under this Section.
V.13 Insurance.
V.13.1 General Insurance Requirements. In addition to the other specific
requirements set forth in this Agreement and in other Loan Documents, the
Consolidated Entities shall maintain insurance on all insurable Properties
now or hereafter owned by them against such risks and to the extent
customary in their industry, and shall maintain or cause to be maintained
public liability and worker's compensation insurance to the extent
customary in the industry.
V.13.2 Practice-Related Insurance Requirements. The Consolidated Entities
shall maintain insurance for claims, however characterized, against them in
connection with the provision of medical services by Providers and/or
ancillary services provided by them at Practices covered by Service
Agreements, in an amount of at least Five Hundred Thousand and No/100
Dollars ($500,000.00) per occurrence and One Million and No/100 Dollars
($1,000,000.00) in the aggregate for Providers who are physicians, which
insurance shall name Lenders (or Agent on behalf of Lenders) as additional
insureds. The Consolidated Entities shall further cause each Provider to
maintain medical malpractice insurance of at least Five Hundred Thousand
and No/100 Dollars ($500,000.00) per occurrence and One Million and No/100
Dollars ($1,000,000.00) in the aggregate.
V.14 Accounts and Records. The Consolidated Entities shall maintain
current books of record and account, in which full, true, and correct
entries will be made of all transactions.
V.15 Official Records. The Consolidated Entities shall maintain current
corporate and official records, minute books and stock ledgers and other
records appropriate to their form of organization.
V.16 Banking Relationships. The Consolidated Entities shall maintain their
deposit accounts with Lenders or with other FDIC-insured depository
institutions.
V.17 Right of Inspection. The Consolidated Entities shall permit any
officer, employee, or agent of a Lender or Agent to visit and inspect
during ordinary business hours any of the their Property, to examine their
books of record and accounts and corporate records, to take copies and
extracts from such books of record and accounts, and to discuss the
affairs, finances, and accounts of the Consolidated Entities with their
respective officers, accountants, and auditors, all at such reasonable
times and as often as a Lender may reasonably desire and upon reasonable
advance notice absent an Event of Default. Without limiting Agent's right
to obtain equitable relief as to any other appropriate right in this
Agreement or in other Loan Documents, Borrower agrees that the rights in
this Section may be enforced by affirmative injunction and, to the extent
the right to review records may be denied, the right may be enforced by a
restraining order prohibiting the interference by Borrower with the
exercise of rights to review of the records pursuant to this Section.
Absent an Event of Default or Unmatured Default, all expenses of such
inspections, etc. shall be paid by Lenders, and in the presence thereof,
all expenses shall be paid by Borrower.
V.18 ERISA Information and Compliance. The Consolidated Entities shall
comply with ERISA and all other applicable laws governing any pension or
profit sharing plan or arrangement to which they are a party. The
Consolidated Entities shall (i) upon request, provide Agent with copies of
any annual report required to be filed pursuant to ERISA with respect to
any Plan or any other employee benefit plan; (ii) notify Agent upon the
occurrence of any ERISA Event or of any additional act or condition arising
in connection with any Plan which they believe might constitute grounds for
termination thereof by the PBGC or for the appointment of a trustee to
administer the Plan; and (iii) furnish to Agent, promptly upon request,
such additional information concerning any Plan or any other employee
benefit plan as Agent may request.
V.19 Indemnity; Expenses. Borrower agrees to indemnify, defend (with
counsel reasonably satisfactory to the indemnified party or parties) and
hold harmless Lenders and Agent against any loss, liability, claim or
expense, including reasonable attorneys' fees, that they may incur in
connection with the Loan Documents or the Obligations, except those losses,
etc. that may result from a Lender's or Agent's gross negligence or willful
misconduct. Without limiting the foregoing, upon demand by Agent, Borrower
will reimburse Lenders and/or Agent for the following reasonable expenses
if not paid by Borrower promptly after written demand by Agent:
V.19.1 Taxes. All taxes that Lenders or Agent may be required to pay
because of the Obligations or because of Lenders' or Agent's interest in
any property securing the payment of the Obligations, excepting taxes based
upon the net income of Lender or Agent.
V.19.2 Administration. All costs of the preparation of this Agreement and
any other related documents and the administration of the Obligations
(except for Lenders' and Agent's usual overhead incurred in the acceptance
and processing of payments, the routine review of financial statements,
certifications and reports, routine communications with Borrower, and other
ordinary activities that are not occasioned by an Unmatured Default, Event
of Default or by a request of Borrower to waive or vary the terms of this
Agreement).
V.19.3 Protection of Collateral. All costs of preserving, insuring,
preparing for sale (whether by improvement, repair or otherwise) or selling
any Collateral.
V.19.4 Costs of Collection. All court costs and other costs of collecting
any debt, overdraft or other obligation included in the Obligations.
V.19.5 Litigation. All reasonable costs arising from any litigation,
investigation, or administrative proceeding (whether or not Agent or a
Lender is a party thereto) that Agent or a Lender may incur as a result of
the Obligations or as a result of their association with any of the
Consolidated Entities, including, but not limited to, expenses incurred by
Agent or a Lender in connection with a case or proceeding involving any
Consolidated Entity under any chapter of the Bankruptcy Code or any
successor statute thereto.
V.19.6 Attorneys' Fees. Reasonable attorneys' fees incurred in connection
with any of the foregoing.
If a Lender or Agent pays any of the foregoing expenses, they shall become
a part of the Obligations and shall bear interest at the Maximum Lawful
Amount. This Section shall remain in full effect regardless of the full
payment of the Obligations, the purported termination of this Agreement,
the delivery of the executed original of this Agreement to Borrower, or the
content or accuracy of any representation made by Borrower to Lenders or
Agent; provided, however, Agent may terminate this Section by executing and
delivering to Borrower a written instrument of termination specifically
referring to this Section.
V.20 Assistance in Litigation. Borrower covenants to, upon request,
cooperatively participate in any proceeding in which Borrower is not an
adverse party to Lenders or Agent and which concerns Lenders' or Agent's
rights regarding the Obligations or any Collateral.
V.21 Name Changes. Borrower shall give Agent at least thirty (30) days
prior written notice before any Consolidated Entity changes its name or
begins doing business under any trade name.
V.22 Estoppel Letters. Borrower covenants to provide Agent, within ten
(10) days after request, an estoppel letter stating (i) the balance of the
Obligations, (ii) whether Borrower has any defenses to payment of the
Obligations, and (iii) the nature of any defenses to payment of the
Obligations. Such balance as presented for confirmation and the non-
existence of defenses shall be presumed if Borrower fails to respond to
such a request within the required period.
V.23 Environmental Matters.
V.23.1 Compliance With Environmental Laws. All Consolidated Entities will
(i) employ in connection with their operations, appropriate technology and
compliance procedures to maintain compliance with any applicable
Environmental Laws, the violation of which would reasonably be expected to
have a Material Adverse Effect, (ii) obtain and maintain any and all
materials permits or other permits required by applicable Environmental
Laws in connection with its operations, excepting only such permits, etc.
which could not by their absence cause a Material Adverse Effect, and
(iii) dispose of any and all Hazardous Substances only at facilities and
with carriers reasonably believed to possess valid permits under any
applicable state and local Environmental Laws. All Consolidated Entities
shall use their best efforts to obtain all certificates required by law to
be obtained by them from all contractors employed by them in connection
with the transport or disposal of any Hazardous Substances.
V.23.2 Remedial Work. If any investigation, site monitoring, containment,
clean-up, removal, restoration or other remedial work of any kind or nature
with respect to any Consolidated Entity's Properties is required to be
performed by them under any applicable local, state or federal law or
regulation, any judicial order, or by any governmental or non-governmental
entity or Person because of, or in connection with, the current or future
presence, suspected presence, release or suspected release of a Hazardous
Substance in or into the air, soil, groundwater, surface water or soil
vapor at, on, about, under, or within any of a Consolidated Entity's
Property (or any portion thereof), Borrower shall within 30 days after
written demand for performance thereof (or such shorter period of time as
may be required under applicable law, regulation, order or agreement),
commence and thereafter diligently prosecute to completion, all such
remedial work.
V.23.3 Indemnification of Lenders and Agent. Borrower agrees to
indemnify, defend (with counsel reasonably satisfactory to the indemnified
party or parties) and hold harmless Lenders and Agent against any loss,
liability claim or expense, including attorneys' fees, that Lender or Agent
may incur as a result of the violation or alleged violation of any
Environmental Law by a Consolidated Entity or with respect to any other
violation of Environmental Laws with respect to any Consolidated Entity's
Properties. This covenant shall survive the repayment of the Credit
Facilities.
V.24 Opinions of Counsel. Borrower agrees that Agent may from time to
time, but not more frequently than once per calendar year absent an
Unmatured Default or an Event of Default, request in writing the opinion of
in-house counsel and/or outside healthcare counsel to the Consolidated
Entities as to the absence, except as disclosed in the opinion, of such
counsel's knowledge of any actual, threatened or asserted violation of any
Fraud and Abuse Law on the part of any Consolidated Entity and/or the
Providers, and the sufficiency of documentation then in use for the
acquisition of Practices as complying with Fraud and Abuse Laws. Absent
the existence of an Unmatured Default or and Event of Default, such
opinions shall require no special diligence on the part of the opining
attorney(s), but only requiring a report of matters then known to such
attorneys, unless Agent specifically inquires about facts that Agent
reasonably believes may raise a Fraud and Abuse Law issue. Such opinions
shall be in form and substance acceptable to Agent, shall be delivered to
Agent at Borrower's expense within fifteen (15) days of the date of request
and shall address specifically any facts inquired of in Agent's request.
V.25 Additional Collateral Upon Certain Event. If Borrower's Total Funded
Debt to Consolidated EBITDA Ratio (as calculated in Section 7.3 hereof)
exceeds 2.75 for any two (2) consecutive fiscal quarters, the Consolidated
Entities and all Subsidiaries of Borrower shall, upon demand by Agent,
execute and deliver to Agent such additional documents as Agent may require
on behalf of Lenders to grant to Lenders, or to Agent for the benefit of
Lenders, as Agent may require, a perfected security interest, subject only
to Permitted Encumbrances, in all of the Consolidated Entities' then owned
and thereafter acquired real property, personal property and fixtures,
including, but not limited to, all such equipment, inventory, accounts,
general intangibles, instruments, documents, chattel paper and fixtures,
and all products and proceeds thereof (all as defined in the UCC),
including insurance proceeds. Additionally, Borrower shall use its best
efforts to cause to be executed and delivered to Borrower opinions of
Borrower's outside counsel in form and substance acceptable to Agent,
Lenders and their counsel addressing the sufficiency of the security
documentation as to attachment, perfection and priority of the security
interest granted therein and such other documents as Agent, Lenders or
their counsel may require to evidence the continued compliance of Borrower
with all requirements of this Agreement. All of Agent's usual diligence
items relating to the applicable types of property shall be conducted at
Borrower's expenses, including, but not limited to, environmental surveys,
boundary surveys and other real estate diligence procedures. All expenses
of recordation of lien instruments, title insurance, document preparation
and other transaction costs, including, but not limited to, the reasonable
fees and expenses of Lenders' and Agent's attorneys, shall be paid by
Borrower.
VI. NEGATIVE COVENANTS
Borrower covenants and agrees that without the advance written consent of
Agent, until the Obligations are repaid in full:
VI.1 Debts, Guaranties, and Other Obligations. No Consolidated Entity
shall incur, create, assume, or in any manner become or be liable with
respect to any Liability, except the following:
VI.1.1 Obligations to Lenders. Any Obligations to Lenders under this
Agreement.
VI.1.2 Existing Liabilities. Liabilities, direct or contingent, of
Consolidated Entities existing on the date of this Agreement that are
reflected in Schedule 6.1.2 hereof.
VI.1.3 Endorsements. Endorsements of negotiable or similar instruments
for collection or deposit in the ordinary course of business.
VI.1.4 Trade Liabilities. Trade payables and accruals from time to time
incurred in the ordinary course of business.
VI.1.5 Taxes. Taxes, assessments, or other governmental charges that are
not delinquent or are being contested in good faith by appropriate action
promptly initiated and diligently conducted, if Borrower has made the
reserve therefor required by GAAP.
VI.1.6 Seller Debt. Seller Debt, which must be unsecured.
VI.1.7 Purchase Money Debt. Purchase Money Debt, including Assumed Debt,
not to exceed (i) Six Million and No/100 Dollars ($6,000,000.00) in the
aggregate, including all Purchase Money Debt of all Consolidated Entities,
(ii) Three Million and No/100 Dollars ($3,000,000.00) in the aggregate,
excluding for this Section (ii) all Purchase Money Debt owed by individual
Practices that have total Purchase Money Debt of less than One Hundred
Thousand and No/100 Dollars ($100,000.00) per Practice, or (iii) One
Million and No/100 Dollars ($1,000,000.00) as to any single Practice,
absent the prior written approval of Agent as to this Section (iii).
VI.1.8 Accounting Accruals. Liabilities arising from reserves and
accruals required by GAAP that do not reflect liquidated and mature
obligations to third parties, including, but not limited to, current
deferred income taxes.
VI.1.9 Liabilities Among Consolidated Entities. Liabilities incurred to
other Consolidated Entities incurred in the ordinary course of business.
VI.2 Change of Management. Borrower shall not allow or suffer any change
of management effecting a material change in the duties or change in the
personnel presently staffing the positions of Chief Executive Officer,
President or Chief Financial Officer, as set forth in Schedule 6.2 hereto.
Notwithstanding the foregoing, should any of the named managers cease such
active participation in Borrower's management due to their death or
disability, Agent shall allow Borrower a period of sixty (60) days
thereafter in which a management succession plan may be presented to Agent
so that Agent may, in its discretion, elect to accept new management in
lieu of prior management, subject to such revisions of this Agreement as
Agent may require. Additionally, Lenders have been advised that a change
is pending regarding the office of Chief Financial Officer. Borrower shall
give Agent written notice of this change when a proposal is available, and
Agent shall allow Borrower a period of sixty (60) days thereafter so that
Agent may, in its discretion, elect to approve the proposed change in
management.
VI.3 Change of Ownership. Borrower shall not cause or suffer to exist a
change of ownership or suffer the issuance of new stock or other event that
would result in the ownership of more than 25% of the stock of Borrower by
any Person not presently a shareholder thereof, except as may result from
the sale or disposition of the Seafield Position.
VI.4 Distributions. No Consolidated Entity shall declare or pay any
dividend or other distribution or redeem any of its capital stock except
for dividend payments and other distributions from Subsidiaries to
Borrower.
VI.5 Encumbrances. No Consolidated Entity shall create, incur, assume, or
permit to exist any Encumbrance on any of its Property (now owned or
hereafter acquired) except for Permitted Encumbrances, and shall not
undertake a commitment of any kind in favor of any Person (other than
Lenders) (i) requiring that any or all of such Consolidated Entity's
Property be or remain unencumbered, or (ii) requiring that a Consolidated
Entity grant an Encumbrance (other than a Permitted Encumbrance) in favor
of any Person (other than Lenders) on a Consolidated Entity's Property
under any circumstances whatsoever. No Consolidated Entity shall sign or
file under the Uniform Commercial Code a financing statement that names
such Consolidated Entity as debtor or the equivalent or sign any security
agreement authorizing any secured party thereunder to file any such
financing statement, except to secure Permitted Encumbrances.
VI.6 Investments. No Consolidated Entity shall make investments
(including but not limited to acquisitions or purchases of the obligations
or stock of, or any other or additional interest) in any person, firm,
partnership, joint venture or corporation except: (a) those investments in
existence as of the Closing Date, (b) general obligations of, or
obligations unconditionally guaranteed as to principal and interest by, the
United States of America maturing within fifteen (15) months of the date of
purchase, (c) commercial paper having a rating of not less than "A2" or
"P2" from Moody's or S & P, respectively, (d) Permitted Acquisitions, (f)
certificates of deposit and bankers acceptances issued by a Lender or
another banking institution with a minimum net worth of Five Hundred
Million and No/100 Dollars ($500,000,000.00) and having a letter of credit
rating of not less than "A" from Moody's or S & P, respectively, and (g)
such other investments as Agent may approve, in its discretion.
VI.7 Sales and Leasebacks. No Consolidated Entity shall enter into any
arrangement, directly or indirectly, with any Person other than another
Consolidated Entity by which such Consolidated Entity shall sell or
transfer any of its Property, whether now owned or hereafter acquired, and
by which a Consolidated Entity shall then or thereafter rent or lease as
lessee such Property or any part thereof or other Property that it intends
to use for substantially the same purpose or purposes as the Property sold
or transferred.
VI.8 Change of Control. Borrower shall not suffer or permit the occurrence
of a Change of Control.
VI.9 Nature of Business. No Consolidated Entity shall suffer or permit any
material changes to be made in the character of its business as carried on
at the Closing Date, except for the accomplishment of Permitted
Acquisitions.
VI.10 Further Acquisitions, Mergers, Etc. Except for Permitted
Acquisitions and transactions involving only Consolidated Entities, no
Consolidated Entity shall enter into any agreement to merge, consolidate,
or otherwise reorganize or recapitalize, or sell, assign, lease, or
otherwise dispose of (whether in one transaction or in a series of transac-
tions) all or substantially all of their Property (whether now owned or
hereafter acquired).
VI.11 Advances. No Consolidated Entity shall extend any loans to any other
Persons, except for (i) loans to other Consolidated Entities in the
ordinary course of business and (ii) advances to Providers not to exceed
Five Hundred Thousand and No/100 Dollars ($500,000.00) per Practice and
Three Million and No/100 Dollars ($3,000,000.00) in the aggregate at any
one time.
VI.12 Disposition of Assets. No Consolidated Entity shall dispose of any
of its assets other than in the ordinary course of their present business
upon terms standard in its industry.
VI.13 Inconsistent Agreements. No Consolidated Entity shall enter into any
agreement containing any provision which would be violated or breached by
the performance by Borrower of the Obligations.
VI.14 Fictitious Names. Borrower shall not use any name other than the
name used in executing this Agreement or any assumed or fictitious name.
VI.15 Subsidiaries and Affiliates. No Consolidated Entity shall create or
acquire any direct or indirect Subsidiary or Affiliate or divest itself of
any material assets by transferring them to any existing Subsidiary or
Affiliate other than Permitted Subsidiaries; nor shall Borrower enter into
any partnership, joint venture, or similar arrangement, or otherwise make
any material change in its corporate structure, except that Borrower may
acquire and create Permitted Subsidiaries from time to time in the ordinary
course of business.
VI.16 Place of Business. Borrower shall not transfer its executive
offices, or maintain records with respect to accounts at any locations
other than at the address for notices specified herein and at the locations
of Practices affiliated with Borrower, except as Agent may approve, in its
reasonable discretion.
VI.17 Adverse Action With Respect to Plans. No Consolidated Entity shall
take any action to terminate any Plan which could reasonably result in a
material liability of a Consolidated Entity to any Person.
VI.18 Transactions With Affiliates. No Consolidated Entity shall enter
into any transaction with any Affiliate except in the ordinary course of
business and on fair and reasonable terms no less favorable to the
Consolidated Entity than it would obtain in a comparable arms length
transaction with a Person not an Affiliate.
VI.19 Constituent Document Amendments. No Consolidated Entity shall amend
its corporate charter or bylaws, except as necessary to accomplish
corporate transactions that do not require Lenders' or Agent's specific
approval or transactions for which such approval is necessary and has been
granted.
VI.20 Adverse Transactions. No Consolidated Entity shall enter into any
transaction that materially and adversely affects or, to the best of its
knowledge, is likely to materially and adversely affect the Collateral or
Borrower's ability to repay the Obligations.
VI.21 Margin Securities. No Consolidated Entity shall own, purchase or
acquire (or enter into any contract to purchase or acquire) any "margin
security" as defined by any regulation of the Federal Reserve Board as now
in effect or as the same may hereafter be in effect.
VI.22 Accounting ChangesError! Bookmark not defined.. Borrower shall not
change its fiscal year or make any other significant change in consolidated
or consolidating accounting treatment and reporting practices, except as
required or permitted by GAAP or the Securities and Exchange Commission.
Any change in fiscal year shall be subject to Agent's prior written
approval.
VI.23 Action Outside Ordinary Course. No Consolidated Entity shall take
any other action outside the ordinary course of their business.
VII. FINANCIAL COVENANTS
VII.1 Current Ratio. Borrower shall maintain a Consolidated Current Ratio
of not less than 2.00:1.00, tested as of the end of each fiscal quarter.
VII.2 Total Funded Debt to Capital. Borrower shall maintain a ratio of
Total Funded Debt divided by Consolidated Capital of no greater than
.50:1.00, tested as of the end of each fiscal quarter.
VII.3 Total Funded Debt to Consolidated EBITDA. Borrower shall maintain a
ratio of Total Funded Debt divided by Consolidated EBITDA, measured as of
the end of each fiscal quarter for the previous four consecutive fiscal
quarters, of no greater than 3.00:1.00.
VII.4 Fixed Charge Coverage. Borrower shall maintain a Fixed Charge
Coverage Ratio of at least 1.25:1.00 for the previous four consecutive
fiscal quarters through the fiscal quarter ending December 31, 1996, and of
at least 1.50:1.00 thereafter.
VII.5 Net Worth. Borrower shall maintain a Consolidated Net Worth as of
the end of each fiscal quarter in an amount at least equal to the sum of
Nineteen Million Eight Hundred Forty-Three Thousand and No/100
($19,843,000.00), plus any Net Equity Proceeds, plus eighty-five percent
(85%) of the amount of net income for the fiscal quarter ending June 30,
1996 and for each fiscal quarter thereafter, without adjustment for net
losses.
VII.6 Capital Expenditures. Lender approval shall be required for Borrower
to expend Capital Expenditures in excess of 115% of an annual budget to be
approved by Lender. The proposed budget for each year shall be delivered
to Lender no later than sixty (60) days after the end of the previous
fiscal year.
VIII. EVENTS OF DEFAULT
VIII.1 Events of Default. Any of the following events shall be considered
an Event of Default under this Agreement:
VIII.1.1 Payments. Borrower's failure to make payment of any amount of
the Obligations within five (5) days after the date due.
VIII.1.2 Representations and Warranties. Any representation or warranty
made by Borrower or any other party in any Loan Document having been
incorrect in any material respect as of the date thereof.
VIII.1.3 Negative Covenants. The failure of Borrower to comply with any
of the requirements of Article VI hereof; provided, however, as to any such
event that is both (i) the result of an act by a third party absent the
cooperation of any Consolidated Entity, and (ii) reasonably susceptible to
being cured, the event shall not constitute an Event of Default unless the
event remains uncured for a period of twenty (20) days following the
earlier of (i) Borrower's knowledge of the facts giving rise thereto or
(ii) Agent's written notice to Borrower given in accordance with the
provisions hereof.
VIII.1.4 Financial Covenants. The failure of Borrower to comply with any
of the requirements of Article VII hereof, unless, on or before the date
that is the earlier of (i) twenty (20) days after the date on which the
breach is timely reported to Agent, or (ii) if the financial statements
disclosing the breach were submitted to Agent later than required by this
Agreement, twenty (20) days after the date on which such financial
statements were due, Borrower provides Agent with additional financial
statements demonstrating that the breach has been cured, which statements
may be as of any other date after the reporting date for which the breach
occurred (provided that such interim statements prepared for this purpose
must be accompanied by the same certifications as quarterly financial
statements and shall not disclose any additional breach of a financial
covenant).
VIII.1.5 Reporting Requirements. The failure of Borrower or any other
party to timely perform any covenant in the Loan Documents requiring the
furnishing of notices, financial reports or other information to Lender
within twenty (20) days of when due; and provided, however, that during any
period of time that a report is delinquent, Agent may at its option
increase the Pricing Values to their highest levels permitted under this
Agreement.
VIII.1.6 Other Covenants. The failure of Borrower to observe or perform
any covenant contained in any Loan Document, which covenant is not subject
to any specific provision in this Article VIII; provided, however, as to
any such breach that is reasonably susceptible to being cured, the
occurrence of such breach shall not constitute an Event of Default
hereunder if such breach is fully cured within twenty (20) days after the
earlier of Borrower's knowledge of the facts giving rise thereto or Agent's
written notice thereof to Borrower given in accordance with the provisions
hereof.
VIII.1.7 Involuntary Bankruptcy or Receivership Proceedings. The
appointment of a receiver, custodian, liquidator, or trustee for any
Significant Consolidated Entity, or for any of its Property, by the order
or decree of any court or agency or supervisory authority having
jurisdiction; or a Significant Consolidated Entity's adjudication as being
bankrupt or insolvent; or the sequestering of any of the Property of any
Significant Consolidated Entity by court order or the filing of a petition
against a Significant Consolidated Entity under any state or federal
bankruptcy, reorganization, debt arrangement, insolvency, readjustment of
debt, dissolution, liquidation, or receivership law of any jurisdiction,
whether now or hereafter in effect, and in each case without the
acquiescence of a Significant Consolidated Entity, unless dismissed within
sixty (60) days.
VIII.1.8 Voluntary Petitions. Any Significant Consolidated Entity's
filing of a petition in voluntary bankruptcy or to seek relief under any
provision of any bankruptcy, reorganization, debt arrangement, insolvency,
receivership, readjustment of debt, dissolution, or liquidation law of any
jurisdiction, whether now or hereafter in effect, or its acquiescence in
the filing of any petition against it under any such law.
VIII.1.9 Discontinuance of Business. Any Significant Consolidated
Entity's discontinuance of its usual business or its dissolution, except
pursuant to transactions permitted under this Agreement.
VIII.1.10 Default on Other Liabilities. Any Significant Consolidated
Entity's failure to make any payment when due on any Liabilities in excess
of One Hundred Thousand and No/100 Dollars ($100,000.00).
VIII.1.11 Undischarged Judgments. The existence of a final judgment or
judgments for the payment of money in excess of One Hundred Thousand and
No/100 Dollars ($100,000.00) by any court or other Governmental Authority
against a Significant Consolidated Entity, which is not paid, discharged,
stayed, dismissed through appropriate appellate proceedings or bonded
within thirty (30) days after entry.
VIII.1.12 Insolvency. Any Significant Consolidated Entity's no longer
being Solvent.
VIII.1.13 Attachment. The issuance of an attachment or other process
against any Property of any Significant Consolidated Entity, unless removed
(by bond or otherwise) within twenty (20) days.
VIII.1.14 Insurance. Any Consolidated Entity's failure to maintain any
insurance required herein or in any other Loan Document.
VIII.1.15 Contest. Any Consolidated Entity's challenge or contest of the
validity or enforceability of this Agreement or any other Loan Document or
the validity, priority or perfection of any security interest created
hereunder or under any other Loan Document in any action, suit or
proceeding.
VIII.1.16 Fraud and Abuse Laws. Receipt by one or more Consolidated
Entities of a notice from a Governmental Authority that it (i) intends to
disallow requested reimbursements, demand adjustment or repayment of past
reimbursements in excess of one-half of one percent (1/2%) of the gross
revenues of Borrower for the previous four (4) fiscal quarters in the
aggregate respecting amounts submitted for reimbursement or collected by
Borrower or a Provider, or (ii) intends to impose civil money penalties or
to seek to exclude Borrower or a Provider from participation in the
Medicare or Medicaid programs due to a failure to comply with Fraud and
Abuse Laws, if the gross revenues to Borrower arising from Borrower or
Provider exceed one-half of one percent (1/2%) of the gross revenues of
Borrower for the previous four (4) fiscal quarters in the aggregate.
VIII.2 Remedies. Upon the happening of any Event of Default:
VIII.2.1 Default Rate. Agent may declare the Obligations to thereafter
bear interest at the Default Rate.
VIII.2.2 Acceleration. Agent may declare the entire principal amount of
all Obligations then outstanding, including interest accrued thereon, to be
immediately due and payable without presentment, demand, protest, notice of
protest, or dishonor or other notice of default of any kind, all of which
are hereby expressly waived.
VIII.2.3 Setoff. Any Lender may exercise its lien upon and right of
setoff against any monies, items, credits, deposits or instruments that
such Lender may have in its possession and which belong to Borrower or to
any other person or entity liable for the payment of any or all of the
Obligations.
VIII.2.4 Other Remedies. Lenders and Agent may exercise any right that
they may have under any other document evidencing or securing the
Obligations or otherwise available to Lenders or Agent at law or equity.
VIII.2.5 Attorney-in-Fact. Borrower hereby irrevocably appoints Agent as
Borrower's attorney-in-fact to take any action to facilitate Agent's
exercise of remedies hereunder.
IX. AGENTError! Bookmark not defined.
IX.1 Appointment of Agent. Lenders hereby appoint Agent to act as
specified in this Article IX. Agent's duties hereunder are administrative
and ministerial in nature, and Agent's capacity is that of an independent
contractor for Lenders. Agent is not a trustee or other fiduciary for
Lenders, and Agent has no duties whatsoever to Lenders except as expressly
set forth in this Agreement.
IX.2 Powers of Agent.
IX.2.1 Administration of Credit Facilities. Except as otherwise provided
in this Section 9.2, Agent shall have the exclusive power and authority to
(i) give all consents and approvals, issue waivers and amendments, enforce
the Loan Documents (including, but not limited to, the power to enforce the
Loan Documents in any relevant case under the Bankruptcy Code) and
otherwise take all actions permitted of Agent under this Agreement or any
other Loan Document, (ii) give all consents and approvals, issue waivers
and amendments, enforce the Loan Documents (including, but not limited to,
the power to enforce the Loan Documents in any relevant case under the
Bankruptcy Code) and otherwise take all actions permitted of Lenders under
this Agreement or any other Loan Document, excepting only those matters
that the Loan Documents specifically reserve[d] for the respective Lenders
severally (such as the computation of LIBOR charges unique to the
circumstances of a given Lender), (iii) receive all payments, notices and
other deliveries and communications to be given Lenders or Agent under this
Agreement or any other Loan Document, and (iv) to perform such actions as
are incidental to any of the foregoing.
IX.2.2 Matters Reserved to Required Lenders. Absent the prior approval of
the Required Lenders, Agent shall not waive or amend any financial covenant
set forth in Article VII hereof or approve any acquisition for which
approval is necessary under the definition of Permitted Acquisitions set
forth in Article I hereof.
IX.2.3 Matters Reserved to all Lenders. Absent the prior approval of all
Lenders, Agent shall not forgive any principal included in the Obligations;
waive or amend any interest rate applicable to the Obligations; waive or
amend the Maturity Date; waive or amend the amount of any Lender's
Commitment; release or subordinate any security interest securing the
Obligations (other than releases thereof in connection with transactions
for which the approval of Lenders and/or Agent is not required, such as the
release of pledged stock of a Subsidiary in connection with the merger of
that Subsidiary into another Subsidiary); waive an Event of Default arising
from non-payment of any principal or interest due on the Obligations;
accelerate the maturity of the Obligations; or amend the definitions of Pro
Rata Share or Required Lenders.
IX.3 Duties of Agent.
IX.3.1 Specific Duties of Agent; Standard of Care. Agent shall (i) remit
to each Lender, with reasonable promptness, the appropriate Pro Rata Share
of payments received or other amounts collected on account of the
Obligations, (ii) forward to Lenders, with reasonable promptness,
counterparts or copies of Borrowing Notices, financial reports and other
information that may be delivered to Agent by Borrower pursuant to the
requirements of the Loan Documents, (iii) notify Lenders of any Unmatured
Default or Event of Default known to Agent, in accordance with Section 9.7
below, and (iv) otherwise administer the Credit Facilities through the
exercise of such of the powers granted herein as Agent deems appropriate
from time to time. Agent shall have no liability to Lenders for any action
or inaction relating to this Agreement or the other Loan Documents, except
for actual losses caused by its gross negligence or reckless or willful
misconduct.
IX.3.2 Limitations on Agent's Duties. Agent shall not be obligated to
take any action hereunder or under any other Loan Document (i) if such
action would, in the opinion of Agent, be contrary to applicable law, this
Agreement or the other Loan Documents, (ii) if it shall not first be
specifically indemnified to its satisfaction against any and all liability
and expense that may be incurred by it by reason of taking or continuing to
take any such action, (iii) if it would likely subject Agent to a tax in
any jurisdiction where it is not then subject to a tax, (iv) if it would
likely require Agent to qualify to do business in any jurisdiction where it
is not then so qualified, unless Agent receives security or indemnity
satisfactory to it against any tax or other liability in connection with
such qualification or resulting from the taking of such action in
connection therewith, or (v) if it would likely subject Agent to in
personam jurisdiction in any location where it is not then so subject.
IX.3.3 Agent's Right to Require Instructions in Performance of Duties. If
Agent, in its sole and absolute discretion, requests instructions from the
Required Lenders with respect to any act or action (including the failure
to act) in connection with this Agreement or any other Loan Document for
which the approval of the Required Lenders or all Lenders is not otherwise
required, Agent shall be entitled, at its option, to refrain from such
action, or to continue such inaction, unless and until Agent shall have
received such instructions, and Agent shall incur no liability by reason of
so acting or refraining from action. No Lender shall have any right of
action whatsoever against Agent as a result of Agent's acting or refraining
from acting hereunder or under any other Loan Document in accordance with
the instructions of the Required Lenders in such a case.
IX.3.4 Agent's Reliance on Others in Performance of Duties. Agent shall
be entitled to rely, and shall be fully protected in relying, upon any
note, writing, resolution, notice, statement, consent, certificate, telex,
teletype or facsimile message, order or other documentary, teletransmission
or telephone message believed by it in good faith to be genuine and correct
and to have been signed, sent or made by the proper Person. Agent may
consult with legal counsel (including counsel for Borrower), accountants
and other experts selected by it with respect to all matters pertaining to
this Agreement and the other Loan Documents and its duties hereunder and
thereunder and shall not be liable for any action taken or omitted to be
taken by it in good faith in accordance with the advice of such counsel
(including counsel for Borrower), accountants or experts.
IX.3.5 Sharing of Information. Except as otherwise expressly provided in
this Article IX, Agent shall have no duty or responsibility, either
initially or on a continuing basis, to provide any Lender with any credit
or other information concerning the business, prospects, operations,
properties, financial or other condition or creditworthiness of the
Consolidated Entities or any other Person that may come into its
possession, whether before the making of the initial Loans or at any time
or times thereafter. All notices to be given to Borrower by a Lender
hereunder shall be concurrently given to Agent and all other Lenders.
IX.4 Indemnification of Agent. To the extent Agent is not reimbursed by
or on behalf of Borrower, and without limiting the obligation of Borrower
to do so, Lenders will reimburse and indemnify Agent, from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses (including attorneys' fees and expenses)
or disbursements of any kind or nature whatsoever that may at any time
(including at any time following the indefeasible repayment in full of the
Loans) be imposed on, incurred by or asserted against Agent in any way
relating to or arising out of this Agreement or any other Loan Document or
the transactions contemplated thereby or any action taken or omitted by
Agent under or in connection with any of the foregoing, and in particular
will reimburse Agent for out-of-pocket expenses promptly upon demand by
Agent therefor; provided, however, that no Lender shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements finally
determined by a court of competent jurisdiction and not subject to any
appeal or pursuant to arbitration to have resulted from Agent's gross
negligence or reckless or willful misconduct. Agent may offset any amounts
due Agent by any Lender against obligations of Agent to that Lender.
IX.5 No Representations by Agent. Each Lender acknowledges that neither
Agent nor any of its officers, directors, employees, attorneys, accountants
or agents has made any representation or warranty to it regarding the
Consolidated Entities, the Credit Facilities, the Collateral or otherwise
relating to this Agreement. Agent shall not be responsible to any Lender
for any recitals, statements, information, representations or warranties
herein or in any other Loan Document or in any document, instrument,
certificate or other writing delivered in connection herewith or therewith
or for the execution, effectiveness, genuineness, validity, enforceability,
perfection, priority or sufficiency of this Agreement or any other Loan
Document or the financial condition of the Consolidated Entities or any
other Person, or be required to make any inquiry concerning either the
performance or observance of any of the terms, provisions or conditions of
this Agreement or any other Loan Document, or the financial condition of
the Consolidated Entities or any other Person or the existence or possible
existence of any Unmatured Default or Event of Default.
IX.6 Independent Investigations by Lenders. Each Lender acknowledges
that, independently and without reliance upon Agent or any other Lender and
based on such documents and information as it has deemed and may deem
appropriate, (i) it has made its own appraisal of and investigation into
the business, prospects, operations, properties, financial and other
condition and creditworthiness of the Consolidated Entities in connection
with its decision to enter into this Agreement and extend credit to
Borrower hereunder, and (ii) it will continue to make its own credit
analysis, appraisals and decisions in taking or not taking action
hereunder.
IX.7 Notice of Default. Agent shall not be deemed to have knowledge or
notice of the occurrence of any Unmatured Default or Event of Default,
other than any Unmatured Default or Event of Default arising out of the
failure to pay any principal, interest, fees or other amounts payable to
Agent for the account of the Lenders, unless Agent has received written
notice from Borrower or a Lender describing such Unmatured Default or Event
of Default and stating that such notice is a "notice of default." In the
event that Agent receives such a notice, Agent shall give notice thereof to
the Lenders as soon as reasonably practicable; provided, however, that if
any such notice has also been furnished to the Lenders, Agent shall have no
obligation to notify the Lenders with respect thereto. Each Lender shall
promptly give Agent such a notice upon its actual knowledge of an Unmatured
Default or an Event of Default; provided, however, that the failure of any
Lender to deliver such notice in the absence of gross negligence or
reckless or willful misconduct shall not affect its rights hereunder or
under the other Loan Documents.
IX.8 Funding of Loans Pursuant to Borrowing Notices. Promptly following
receipt of notice from Agent that a Borrowing Notice has been submitted,
and provided that all conditions to funding are believed to have been
satisfied, each Lender shall transfer to a designated account with Agent
that Lender's Pro Rata Share of the requested funding. The transfer of
funds shall occur within the time required for funding under this
Agreement. Should any Lender fail to timely fund its Pro Rata Share of a
requested Loan, Agent may, but shall be under no obligation whatsoever to,
advance to Borrower the defaulted Lender's Pro Rata Share of the requested
Loan. If such an advance is made, it shall be deemed an advance by Agent
for the account of the defaulting Lender and shall bear interest at the
rate applicable to the Loan funded by the advance, payable on demand.
IX.9 Agent in its Individual Capacity. With respect to its Commitments,
and the Loans made by it, Agent shall have the same rights and powers under
the Loan Documents as any other Lender or holder of a Note and may exercise
the same as though it were not performing the duties specified herein; and
the terms "Lenders," "Required Lenders," and any similar terms shall,
unless the context clearly otherwise indicates, include Agent in its
individual capacity as a Lender. Agent may accept deposits from, lend
money to and generally engage in any kind of banking, trust, financial
advisory or other business with the Consolidated Entities or any of their
respective Affiliates as if it were not performing the servicing duties
specified herein, and may accept fees and other consideration from Borrower
for services in connection with this Agreement and otherwise without having
to disclose or account for the same to Lenders.
IX.10 Holders. Agent may deem and treat the payee of any Note as the
holder thereof and Lender hereunder for all purposes hereof unless and
until a written notice of the assignment, transfer or endorsement thereof
purportedly executed by the payee, as the case may be, shall have been
filed with Agent. Any request, authority or consent of any Person that, at
the time of making such request or giving such authority or consent, is the
holder of any Note according to Agent's information, shall be conclusive
and binding on any subsequent holder, transferee, assignee or endorsee, as
the case may be, of such Note or of any Note or Notes issued in exchange
therefor.
IX.11 Successor Agent. Agent may resign at any time upon sixty (60) days'
prior written notice to Borrower and the Lenders. Agent may be removed
upon Agent's insolvency, liquidation or the appointment of a receiver for
Agent, by action of the Required Lenders, at any time upon sixty (60) days'
prior written notice to Borrower and Agent. Such resignation or removal,
as the case may be, shall take effect upon the appointment of a successor
Agent as provided herein. The Required Lenders will appoint from among the
Lenders a successor Agent. If no successor Agent shall have been appointed
within such sixty (60) day period, Agent may appoint, after consulting with
the Lenders and Borrower, a successor agent from among the Lenders, who
shall serve as Agent until such time, if any, as the Required Lenders shall
have appointed a successor Agent as provided hereinabove. Upon the written
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations
hereunder and under the other Loan Documents. After any retiring Agent's
resignation as Agent, the provisions of this Article shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Agent.
IX.12 Sharing of Payments, etc. Each Lender agrees that if it shall,
through the exercise of a right of banker's lien, set-off, counterclaim or
otherwise, obtain payment with respect to the Obligations which results in
its receiving more than its Pro Rata Share of the aggregate payments with
respect to all of the Obligations, then (a) such Lender shall be deemed to
have simultaneously purchased from the other Lenders a share in the
Obligations so that the amount of the Obligations held by each of the
Lenders shall continue to equal their respective Pro Rata Shares, and (b)
such other adjustments shall be made from time to time as shall be
equitable to insure that the Lenders share such payments ratably. No
Lender shall exercise its banker's lien, set-off or other right to
accomplish such payment absent Agent's prior consent.
IX.13 Separate Liens on Collateral. Each Lender agrees with the other
Lenders that, with the exception of security interests in deposit accounts
and like property in the possession of a Lender as expressly provided for
in this Agreement, it will not take or permit to exist any Encumbrance in
its favor on any of the Collateral or other property of any of the
Consolidated Entities other than Encumbrances securing the Obligations due
to all Lenders pursuant to the Loan Documents.
IX.14 Payments Between Agent and Lenders. All payments by Agent to any
Lender, and all payments by any Lender to Agent, under the terms of this
Agreement shall be made by wire transfer in immediately available funds to
the receiving party's address specified for notices in this Agreement. If
any of the Lenders fail to pay when due any sum payable to Agent, then,
except as otherwise provided in Section 9.8 hereof, such sum shall bear
interest until paid at the interest rate per annum for overnight borrowing
by the payee from the Federal Reserve Bank for the period commencing on the
date such payment was due and ending on, but excluding, the date such
payment is made.
IX.15 Assignments and Participations. Absent the approval of the other
Lenders, no Lender shall assign its interest in the Credit Facilities
without first offering to sell such Lender's interest to the other Lenders
to be closed Pro Rata to the Lender(s) who may elect to purchase such
interest. Such offers to sell shall be made in writing, shall provide the
other Lenders ten (10) days to accept or reject, and shall allow an
additional ten (10) days to close. Lenders may sell participation
interests in their interests in the Credit Facilities as long as the terms
of such participations establish that no participant will be regarded as a
Lender under this Agreement.
IX.16 Bankruptcy Provisions. Should any of the Consolidated Entities
become a party to a case under the Bankruptcy Code, each Lender shall be
entitled to file its own claim, to the extent such a filing may be
necessary. Agent shall review each claim before being filed by a Lender to
assure that the claim is filed on a basis consistent with Agent's records
and Agent's legal positions taken pursuant to this Agreement. Should any
of the Consolidated Entities become a party to a reorganization proceeding
under the Bankruptcy Code, each Lender shall be recognized as the holder of
a separate claim for the purpose of the approval or rejection of a Plan
under 11 U.S.C. 1126, may freely vote such claim, and the provisions of
that Section shall control the other provisions of this Agreement that
otherwise require the consent of the Required Lenders or all Lenders in
certain circumstances. Agent shall continue to administer the Credit
Facilities on behalf of Lenders, as they may be amended by any adopted Plan
of Reorganization.
IX.17 Foreclosure of Collateral. In the event of a foreclosure of any
Collateral, Agent may issue a credit bid for the account of all Lenders, up
to the amount of the then outstanding Obligations. Any Property acquired
at such a foreclosure (or acquired by Agent through a conveyance in lieu of
foreclosure) shall be held and administered by Agent for the benefit of all
Lenders pursuant to the terms of this Article IX.
IX.18 Procedures for Notices and ApprovalsError! Bookmark not defined..
All notices given among Lenders and Agent with respect to this Agreement or
the other Loan Documents shall be given in the manner provided in this
Agreement. Additionally, should Agent request Lenders' approval of any
matter, each Lender shall respond in writing within five (5) Business Days
after the Business Day on which the request was received. If a Lender
fails to so respond, it shall be deemed to have approved the action
proposed by the Agent.
IX.19 Amendments to Article IX. No provision of this Article IX may be
amended or waived absent the prior written consent of all Lenders and
Agent. Borrower's approval shall not be required for the amendment or
waiver of any provision of this Article IX; provided, however, Borrower's
written consent shall be required for any amendment of this Article IX that
would eliminate the position of Agent.
X. GENERAL PROVISIONS
X.1 Notices. All communications relating to this Agreement or any of the
other Loan Documents shall be in writing and shall effective when be
delivered by mail, overnight courier, special courier, telecopier or
otherwise to the following addresses:
if to Borrower:
Response Oncology, Inc.
Attn: John A. Good
1775 Moriah Woods Blvd.
Memphis, Tennessee 38117
Telecopier: (901) 683-7277
With a Copy To:
Baker, Donelson, Bearman & Caldwell
Attn: Mary L. Aronov, Esq.
165 Madison Ave.
20th Floor
Memphis, Tennessee 38103
Telecopier: (901) 577-2303
If to NationsBank or Agent:
NationsBank of Tennessee, N.A.
Attn: Cathy M. Wind
1 NationsBank Plaza
Nashville, Tennessee 37239
Telecopier: (615) 749-4951
With a Copy To:
Boult, Cummings, Conners & Berry
Attn: John E. Murdock III, Esq.
414 Union Street, Suite 1600
Nashville, Tennessee 37219
Telecopier: (615) 252-2380
If to Union Planters:
Union Planters National Bank
Attn: Leonard McKinnon
6200 Poplar Avenue
Memphis, Tennessee 38119
Telecopier: (901) 383-6681
With a Copy To:
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- --------------------
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Any party may change its address for receipt of notice by written direction
to the other parties hereto.
X.2 Renewal, Extension, or Rearrangement. All provisions of this Agreement
relating to Obligations shall apply with equal force and effect to each and
all promissory notes executed hereafter which in whole or in part represent
a renewal, extension for any period, increase, or rearrangement of any part
of the Obligations originally represented by any part of such other
Obligations.
X.3 Application of Payments. Amounts received with respect to the
Obligations shall be applied (i) first, to any expenses due Lenders or
Agent, (ii) second, to accrued and unpaid interest under any of the
Obligations, and (iii) third, to reduce the unpaid principal portion of the
Obligations, in such manner as determined by Agent.
X.4 Counterparts. This Agreement may be executed in counterparts with all
signatures or by counterpart signature pages, and it shall not be necessary
that the signatures of all parties be contained on any one counterpart.
Each counterpart shall be deemed an original, but all of them together
shall constitute one and the same instrument.
X.5 Negotiated Document. This Agreement and the other Loan Documents have
been negotiated by the parties with full benefit of counsel and should not
be construed against any party as author.
X.6 Consent to Jurisdiction; Exclusive Venue. Borrower hereby irrevocably
consents to the jurisdiction of the United States District Court for the
Middle District of Tennessee and of all Tennessee state courts sitting in
Davidson County, Tennessee, for the purpose of any litigation to which
Lenders or Agent may be a party and which concerns this Agreement or the
Obligations. It is further agreed that venue for any such action shall lie
exclusively with courts sitting in Davidson County, Tennessee, unless
Lenders and Agent agree to the contrary in writing. This election applies
only for the limited judicial proceedings that may apply as set forth in
the provision of this Agreement electing binding arbitration for the
resolution of disputes and does not impair the effect of that provision in
any way.
X.7 Not Partners; No Third Party Beneficiaries. The relationship of
Lenders and Borrower is that of lenders and borrower only, and neither is a
fiduciary, partner or joint venturer of the other for any purpose. This
Agreement has been executed for the sole benefit of Lenders, and no third
party is authorized to rely upon Lenders' rights or duties hereunder.
X.8 No Reliance on Lenders' Analysis. Borrower acknowledges and
represents that, in connection with the Obligations, Borrower has not
relied upon any financial projection, budget, assessment or other analysis
by Lenders or Agent upon any representation by Lenders as to the risks,
benefits or prospects of Borrower's business activities or present or
future capital needs incidental thereto, all such considerations having
been examined fully and independently by Borrower.
X.9 No Marshaling of Assets. Lenders and Agent may proceed against
collateral securing the Obligations and against parties liable therefor in
such order as they may elect, and neither Borrower nor any surety or
guarantor for Borrower nor any creditor of Borrower shall be entitled to
require Lenders or Agent to marshal assets. The benefit of any rule of law
or equity to the contrary is hereby expressly waived.
X.10 Impairment of Collateral. Lenders or Agent may, in their sole
discretion, release any Collateral securing the Obligations or release any
party liable therefor. The defenses of impairment of collateral and
impairment of recourse and any requirement of diligence in collecting the
Obligations are hereby waived.
X.11 Business Days. If any payment date under the Obligations falls on a
day that is not a Business Day, or if the last day of any notice period
falls on such a day, the payment shall be due and the notice period shall
end on the next following Business Day.
X.12 Participations. Lenders may, from time to time, in their sole
discretion, and with concurrent notice to Borrower, sell participations in
any credit subject hereto to such other investors or financial institutions
as it may elect. Lenders and Agent may from time to time disclose to any
participant or prospective participant such information as they may have
regarding the financial condition, operations, and prospects of Borrower.
X.13 Standard of Care; Limitation of Damages. Lenders and Agent shall be
liable to Borrower only for matters arising from this Agreement or
otherwise related to the Obligations resulting from such Lender's or
Agent's gross negligence or reckless or willful misconduct, and liability
for all other matters is hereby waived. Lenders and Agent shall not in any
event be liable to Borrower for special or consequential damages arising
from this Agreement or otherwise related to the Obligations.
X.14 Incorporation of Schedules. All Schedules and Exhibits referred to in
this Agreement are incorporated herein by this reference.
X.15 Indulgence Not Waiver. Lenders' or Agent's indulgence in the
existence of a default hereunder or any other departure from the terms of
this Agreement shall not prejudice Lenders' or Agent's rights to declare a
default or otherwise demand strict compliance with this Agreement.
X.16 Cumulative Remedies. The remedies provided Lenders and Agent in this
Agreement are not exclusive of any other remedies that may be available to
Lenders and Agent under any other document or at law or equity.
X.17 Amendment and Waiver in Writing. No provision of this Agreement can
be amended or waived, except by a statement in writing signed by the party
or parties against whom enforcement of the amendment or waiver is sought.
Waivers and amendments may be executed by Agent on behalf of Lenders,
subject to the requirements of Article IX hereof requiring the consent of
some or all of Lenders under certain circumstances.
X.18 Assignment. This Agreement shall be binding upon and inure to the
benefit of the respective successors and assigns of Borrower and Lenders,
except that Borrower shall not assign any rights or delegate any
obligations arising hereunder without the prior written consent of Lenders.
Any attempted assignment or delegation by Borrower without the required
prior consent shall be void.
X.19 Entire Agreement. This Agreement and the other written agreements
among Borrower, Lenders and Agent represent the entire agreement between
the parties concerning the subject matter hereof, and all oral discussions
and prior agreements are merged herein. Provided, if there is a conflict
between this Agreement and any other document executed contemporaneously
herewith with respect to the Obligations, the provision in this Agreement
shall control.
X.20 Severability. Should any provision of this Agreement be declared
invalid or unenforceable for any reason, the remaining provisions hereof
shall remain in full effect.
X.21 Time of Essence. Time is of the essence of this Agreement, and all
dates and time periods specified herein shall be strictly observed.
X.22 Applicable Law. The validity, construction and enforcement of this
Agreement and all other documents executed with respect to the Obligations
shall be determined according to the laws of Tennessee applicable to
contracts executed and performed entirely within that state.
X.23 Captions Not Controlling. Captions and headings have been included in
this Agreement for the convenience of the parties, and shall not be
construed as affecting the content of the respective Sections.
X.24 Arbitration. Any controversy or claim between or among the parties
hereto including but not limited to those arising out of or relating to
this instrument, agreement or document or any related instruments,
agreements or documents, including any claim based on or arising from an
alleged tort, shall be determined by binding arbitration in accordance with
the Federal Arbitration Act (or if not applicable, the applicable state
law), the Rules of Practice and Procedure for the Arbitration of Commercial
Disputes of J.A.M.S./Endispute or any successor thereof ("J.A.M.S."), and
the "Special Rules" set forth below. In the event of any inconsistency,
the Special Rules shall control. Judgment upon any arbitration award may
be entered in any court having jurisdiction. Any party to this Agreement
may bring an action, including a summary or expedited proceeding, to compel
arbitration of any controversy or claim to which this Agreement applies in
any court having jurisdiction over such action.
X.24.1 Special Rules. The arbitration shall be conducted in Nashville,
Tennessee and administered by J.A.M.S who will appoint an arbitrator; if
J.A.M.S. is unable or legally precluded from administering the arbitration,
then the American Arbitration Association will serve. All arbitration
hearings will be commenced within 90 days of the demand for arbitration;
further, the arbitrator shall only, upon a showing of cause, be permitted
to extend the commencement of such hearing for up to an additional 60 days.
X.24.2 Reservation of Rights. Nothing in this arbitration provision shall
be deemed to (i) limit the applicability of any otherwise applicable
statutes of limitation or repose and any waivers contained in this
arbitration provision; or (ii) be a waiver by any Lender of the protection
afforded to it by 12 U.S.C. Sec. 91 or any substantially equivalent state
law; or (iii) limit the right of any Lender (a) to exercise self help
remedies such as (but not limited to) setoff, or (b) to foreclose against
any real or personal property collateral, or (c) to obtain from a court
provisional or ancillary remedies such as (but not limited to) injunctive
relief, writ of possession or the appointment of a receiver. Lenders and
Agent may exercise such self help rights, foreclose upon such property, or
obtain such provisional or ancillary remedies before, during or after the
pendency of any arbitration proceeding brought pursuant to this instrument,
agreement or document. Neither this exercise of self help remedies nor the
institution or maintenance of an action for foreclosure or provisional or
ancillary remedies shall constitute a waiver of the right of any party,
including the claimant in such action, to arbitrate the merits of the
controversy or claim occasioning resort to such remedies.
X.25 Facsimile Signatures. This Agreement may be executed by facsimile
signatures, and shall be effective when Agent has received telecopy
transmissions of the signature pages executed by all parties hereto;
provided, however, that all parties shall deliver original executed
documents to Agent promptly following the execution hereof.
Executed as of the date first written above.
RESPONSE ONCOLOGY, INC.
By:
---------------------------
Title:
------------------------
NATIONSBANK OF TENNESSEE, N.A.
By:
---------------------------
Title:
------------------------
UNION PLANTERS NATIONAL BANK
By:
---------------------------
Title:
------------------------
EXHIBIT 1.2
Notice of Extension
[On letterhead of Borrower]
NationsBank of Tennessee, N.A., Agent
Attn: Cathy M. Wind
1 NationsBank Plaza
Nashville, Tennessee 37239
Re: Notice of Extension of Working Capital Loan Under Loan Agreement
Among NationsBank of Tennessee, N.A., Union Planters National Bank,
Response Oncology, Inc. and NationsBank of Tennessee, N.A., as Agent
Dated as of May 31, 1996 (the "Loan Agreement")
Ladies and Gentlemen:
Please accept this letter as our notice that Response Oncology, Inc. hereby
elects to extend the Maturity Date of the Working Capital Loan, as defined
in the Loan Agreement, until May 31, 1998. The required extension fee is
enclosed herewith. This election shall have the effect of making
applicable the optional May 31, 1998 Maturity Date in the Loan Agreement
and in the corresponding Working Capital Notes, as provided for therein.
Your acceptance of the enclosed fee does not waive any Unmatured Default,
Event of Default or other matter that may exist with respect to the Loan
Agreement.
Very truly yours,
RESPONSE ONCOLOGY, INC.
By:
---------------------
Title:
------------------
cc: Boult, Cummings, Conners & Berry
Attn: John E. Murdock III, Esq.
414 Union Street, Suite 1600
Nashville, Tennessee 37219
EXHIBIT 2.8.1(b)
BORROWING/CONVERSION NOTICE
TO: NationsBank of Tennessee, N.A., Agent
LENDERS: NationsBank of Tennessee, N.A. Date: ____, 199_
Union Planters National Bank
BORROWER: Response Oncology, Inc.
This notice is delivered under the Loan Agreement (as renewed, extended and
amended, the "Loan Agreement") dated as of May __, 1996, between Borrower
and Lender. Terms defined in the Loan Agreement have the same meanings
when used -- unless otherwise defined -- in this request.
Borrower requests a Loan under the Loan Agreement as follows:
The requested draw is from (select one): _____ Acquisition Loan _____
Working Capital Loan
Borrowing Date ___________, 199_
Amount of Borrowing $________________
Type of Borrowing _________________
For LIBOR Loans, the Interest Period __________ months
Select one:
____ The proceeds of the requested Loan shall be disbursed to Borrower as
provided in the Loan Agreement. The purpose of the requested Loan is
(select one for this Loan):
_____ New advance for a Permitted Acquisition
_____ New advance for capital expenditures other than Permitted
Acquisitions
_____ New advance for IMPACT Center development
_____ New advance for working capital
____ The proceeds of the requested LIBOR Loan shall be applied to the
payment of Borrower's existing Prime Rate Loan, this new Loan being a
conversion of a Prime Rate Loan to a LIBOR Loan
____ The proceeds of the requested LIBOR Loan shall be applied to the
payment of the following LIBOR Loan, subject to all requirements of the
Loan Agreement, this new Loan being a conversion of a LIBOR Loan to a
different LIBOR Loan:
Date:
Amount:
Interest Period:
____ The proceeds of the requested Prime Rate Loan shall be applied to the
payment of the following LIBOR Loan, subject to all requirements of the
Loan Agreement, this new Loan being a conversion of a LIBOR Loan to a Prime
Rate Loan:
Date:
Amount:
Interest Period:
Date:
Amount:
Interest Period:
Borrower certifies that on the date hereof and on the date of the
above Borrowing Date -- after giving effect to the requested Loan --
(a) all of the representations and warranties in the Loan Documents will be
true and correct in all material respects -- unless they speak to a
specific date or the facts on which they are based have been changed by
transactions contemplated or permitted by the Loan Agreement, (b) no Event
of Default or Unmatured Default will exist, and (c) all conditions to
Borrower's right to receive the requested Loan under the Loan Agreement
have been satisfied.
RESPONSE ONCOLOGY, INC., Borrower
By:
(Name)
(Title)
Same Banking Day for Prime Rate Loans, second following Banking Day for
LIBOR Loans
LIBOR or Prime Rate Loan.
1, 2, 3, 6 or 12 months.
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors Seafield Capital Corporation
We consent to incorporation by reference in the Registration Statements
(Nos.33-20298 and 33-28150) on Form S-8 of Seafield Capital Corporation of
our report dated March 14, 1997 relating to the consolidated balance sheets
of Seafield Capital Corporation and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows and related schedules for each of the
years in the three-year period ended December 31, 1996, which report
appears in the December 31, 1996 annual report on Form 10-K of Seafield
Capital Corporation.
KPMG Peat Marwick LLP
Kansas City, Missouri
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-K for the period ending December 31, 1996 and is qualified in
its entirety by reference to such 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,372
<SECURITIES> 55,208
<RECEIVABLES> 27,417
<ALLOWANCES> 2,796
<INVENTORY> 0
<CURRENT-ASSETS> 109,124
<PP&E> 68,885
<DEPRECIATION> 46,108
<TOTAL-ASSETS> 288,676
<CURRENT-LIABILITIES> 27,938
<BONDS> 0
0
0
<COMMON> 7,500
<OTHER-SE> 166,524
<TOTAL-LIABILITY-AND-EQUITY> 288,676
<SALES> 0
<TOTAL-REVENUES> 129,232
<CGS> 0
<TOTAL-COSTS> 129,090
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,311
<INTEREST-EXPENSE> 2,900
<INCOME-PRETAX> 1,835
<INCOME-TAX> 4,050
<INCOME-CONTINUING> (3,544)
<DISCONTINUED> (1,452)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,996)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> 0<F1>
<FN>
<F1>Computation not applicable
</FN>
</TABLE>
