<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or
Rule 14a-12
HEALTHSTAR CORP.
-----------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/ / No fee required.
/X/ Fee computed on table below per Exchange Act
Rules 14a-6(i) (1) and 0-11.
(1) Title of each class of securities to which transaction
applies:
NOT APPLICABLE
----------------------------------------------------------
(2) Aggregate number of securities to which transaction
applies:
NOT APPLICABLE
----------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how
it was determined):
Cash: $10,850,000; earnout (maximum payable): $1,250,000;
TOTAL: $12,100,000
----------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$12,100,000
----------------------------------------------------------
(5) Total fee paid:
$2,700
----------------------------------------------------------
/X/ Fee paid previously with preliminary materials (with
preliminary proxy statement filed on October 5, 1999).
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------
</TABLE>
<PAGE>
HEALTHSTAR CORP.
15720 North Greenway-Hayden Loop, Suite 1
Scottsdale, Arizona 85260
(480) 451-8575
Dear Stockholders:
You are cordially invited to attend the Annual Meeting of the Stockholders
of HealthStar Corp., a Delaware corporation (the "Company"), to be held on
Tuesday, April 25, 2000, at Turnberry Isle Resort and Club, 19735 Turnberry Way,
Aventura, Florida. The meeting will begin at 1:00 p.m. local time.
The formal notice of the Annual Meeting of Stockholders follows. No
admission tickets or other credentials will be required for attendance of the
meeting.
At the Annual Meeting, you will be asked to consider and vote upon numerous
proposals. These proposals include (i) the election of directors, and (ii) the
approval and adoption of a resolution authorizing the Stock Purchase Agreement
dated as of September 23, 1999 (as amended, the "Agreement") between the
Company, HealthStar, Inc. ("HSI") and Beyond Benefits, Inc. (the "Buyer"),
pursuant to which the Company proposes to sell (the "Proposed Sale") all of the
outstanding stock of HSI. HSI is the only operating subsidiary of the Company.
Through HSI, the Company operates the HealthStar Preferred Provider
Organization, a managed healthcare network consisting of over 2,000 hospitals
and in excess of 125,000 physicians. The Proposed Sale would be the sale of
substantially all of the Company's assets, after which the Company would no
longer be in the healthcare management business.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE PROPOSED SALE IS FAIR TO AND
IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS, HAS APPROVED AND
ADOPTED THE PROPOSED SALE (SUBJECT TO STOCKHOLDER APPROVAL) AND RECOMMENDS THAT
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE RESOLUTION AUTHORIZING THE
PROPOSED SALE. In arriving at its recommendation, the board of directors gave
careful consideration to a number of factors, as described in the enclosed Proxy
Statement, regarding the fairness to the Company and its stockholders of the
consideration to be received by the Company. The board of directors did not seek
or obtain a fairness opinion from an investment banking firm in connection with
the Proposed Sale.
DETAILS OF THE PROPOSED SALE APPEAR IN THE ACCOMPANYING PROXY STATEMENT.
PLEASE GIVE THIS MATERIAL YOUR CAREFUL ATTENTION.
Approval of the Proposed Sale requires the affirmative vote of the holders
of a majority of the Company's issued and outstanding shares of common stock.
The five persons receiving the greatest number of votes cast at the Annual
Meeting will be elected directors of the Company. Each share of common stock is
entitled to one vote on all matters to come before the Annual Meeting. The
common stock constitutes the only outstanding class of capital stock of the
Company.
It is important that your shares be represented at the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, please complete, sign and
date the enclosed proxy card and mail it promptly using the enclosed,
pre-addressed, postage-paid, return envelope. If you attend the Annual Meeting,
you may revoke the proxy given and vote in person if you wish, even if you have
previously returned your proxy card. Your prompt attention will be greatly
appreciated.
Sincerely,
Edward M. Chism
Chairman of the Board,
President and Chief Executive Officer
YOUR VOTE IS IMPORTANT
PLEASE RETURN YOUR PROXY PROMPTLY
Scottsdale, Arizona
April 3, 2000
<PAGE>
HEALTHSTAR CORP.
15720 North Greenway-Hayden Loop, Suite 1
Scottsdale, Arizona 85260
(480) 451-8575
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 25, 2000
------------------------
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of HealthStar
Corp. (the "Company") will be held at Turnberry Isle Resort and Club, 19735
Turnberry Way, Aventura, Florida at 1:00 p.m., local time, on Tuesday,
April 25, 2000. The purposes of the Annual Meeting are:
1. To elect five (5) directors to serve until their successors are elected
and shall duly qualify. The nominees for director are Edward M. Chism,
Dr. Michael D. Flax, Dr. Luis A. Queral, David J. Lewis and Isidor Buholzer, Jr.
2. To approve and adopt a resolution authorizing the Stock Purchase
Agreement dated as of September 23, 1999, as amended, between the Company,
HealthStar, Inc. ("HSI") and Beyond Benefits, Inc., pursuant to which the
Company proposes to sell (the "Proposed Sale") a substantial portion of its
assets consisting of all of the outstanding stock of HSI, the only operating
subsidiary of the Company; and
3. To consider any other matters which properly may come before the meeting
or any adjournments or postponements of the meeting.
The Board of Directors has fixed the close of business on March 23, 2000 as
the record date for the determination of the stockholders entitled to notice of,
and to vote at, the Annual Meeting or any adjournment thereof. Only stockholders
of record at the close of business on the record date are entitled to notice of,
and to vote at, the Annual Meeting. The stock transfer books will not be closed.
A list of stockholders entitled to vote at the Annual Meeting will be available
for examination at the offices of the Company for ten days prior to the Annual
Meeting. Approval of the Proposed Sale requires the affirmative vote of the
holders of a majority of the Company's common stock.
We have enclosed our 1999 Annual Report, including financial statements, and
the proxy statement with this notice of annual meeting.
Each stockholder is cordially invited to attend the Annual Meeting in
person. To assure representation at the Annual Meeting, however, stockholders
are urged to date, sign and return the enclosed proxy card as promptly as
possible in the postage-prepaid envelope enclosed for that purpose. Any
stockholder attending the Annual Meeting may vote in person even if he or she
had previously returned a proxy card.
Sincerely,
/s/ Edward M. Chism
Chairman of the Board,
President and Chief Executive Officer
Scottsdale, Arizona
April 3, 2000
<PAGE>
HEALTHSTAR CORP.
15720 North Greenway-Hayden Loop, Suite 1
Scottsdale, Arizona 85260
(480) 451-8575
ANNUAL STOCKHOLDERS MEETING
PROXY STATEMENT
---------------------
ANNUAL MEETING: Tuesday, April 25, 2000, at 1:00 p.m., local time, at
Turnberry Isle Resort and Club, 19735 Turnberry Way, Aventura, Florida.
RECORD DATE: Close of business on March 23, 2000. If you were a stockholder
at that time, you may vote at the meeting. Each share is entitled to one vote.
You may not cumulate votes. As of the record date, we had 4,345,872 shares of
our common stock outstanding.
AGENDA:
1. To elect five (5) directors to serve until their successors are elected
and shall duly qualify. The nominees for director are Edward M. Chism,
Dr. Michael D. Flax, Dr. Luis A. Queral, David J. Lewis and Isidor Buholzer, Jr.
2. To approve and adopt a resolution authorizing the Stock Purchase
Agreement dated as of September 23, 1999, as amended, between the Company,
HealthStar, Inc. and Beyond Benefits, Inc., pursuant to which the Company
proposes to sell (the "Proposed Sale") substantially all of its assets
consisting of all of the outstanding stock of HSI, the only operating subsidiary
of the Company; and
3. To consider any other matters which properly may come before the meeting
or any adjournments or postponements of the meeting.
PROXIES: Unless you tell us on the proxy card to vote differently, we will
vote signed returned proxies "for" the proposal to elect directors named in this
proxy statement, and "for" the resolution to authorize the sale of all of the
shares of the capital stock of HealthStar, Inc. which the Company owns. For
other matters that properly come before the Board, the Board will vote at its
discretion.
PROXIES SOLICITED BY: The Board of Directors.
MAILING DATE: We anticipate first mailing this proxy statement and the
accompanying proxy to stockholders on or about April 3, 2000.
REVOKING YOUR PROXY: You may revoke your proxy before it is voted at the
meeting. To revoke, follow the procedures described on page 31 under "Voting
Procedures/Revoking Your Proxy."
PLEASE VOTE--YOUR VOTE IS IMPORTANT
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Questions and Answers About Agreement With Beyond Benefits,
Inc....................................................... 3
Disclosure Regarding Forward-Looking Statements............. 4
*Proposal 1--Election of Directors.......................... 4
Board Information........................................... 7
Executive Compensation and Other Information................ 7
Security Ownership of Certain Beneficial Owners and
Management................................................ 10
Transactions with Related Parties........................... 10
Independent Auditors........................................ 11
Section 16(a) Beneficial Ownership Reporting Compliance..... 12
*Proposal 2--Approval and Adoption of Resolution Authorizing
the Stock Purchase Agreement.............................. 13
Voting Procedures/Revoking Your Proxy....................... 29
Submission of Stockholder Proposals......................... 29
Annual Report............................................... 30
Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................ 32
Stock Performance Data...................................... 38
Other Matters............................................... 39
Appendices.................................................. 40
</TABLE>
- ------------------------
* We expect to vote on these items at the meeting.
2
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE ANNUAL MEETING AND THE
AGREEMENT WITH BEYOND BENEFITS, INC.
Q. Who is soliciting my proxy?
A. The Board of Directors of HealthStar Corp.
Q. When and where is the Annual Meeting?
A. 1:00 p.m., local time, on Tuesday, April 25, 2000, at Turnberry Isle Resort
and Club, 19735 Turnberry Way, Aventura, Florida.
Q. What am I voting on?
A. Stockholders will vote on the election of five director-nominees: Edward M.
Chism, Dr. Michael D. Flax, Dr. Luis A. Queral, David J. Lewis, and Isidor
Buholzer, Jr. If elected, two of these director-nominees will serve a
one-year term, two will serve a two-year term, and one will serve a
three-year term.
Stockholders will also vote on a resolution authorizing the sale of the
capital stock of our wholly owned subsidiary, HealthStar, Inc., an Illinois
corporation ("HSI") to Beyond Benefits, Inc. If the transaction with Beyond
Benefits is consummated, the Company will receive $8,880,000 in cash at
closing. Through HSI, the Company operates the HealthStar Preferred Provider
Organization, a managed healthcare network consisting of over 2,000
hospitals and in excess of 125,000 physicians. The capital stock of HSI
constitutes substantially all of the assets of the Company. Following the
sale of the HSI stock, the Company will no longer be in the healthcare
management business.
Q. Who is purchasing the assets of HealthStar, Inc.?
A. Beyond Benefits, Inc. which is a privately-held managed healthcare company
based in Long Beach, California, that was formed during the first half of
1999. Beyond Benefits is owned by Mr. George Bregante, its chief executive
officer, Dr. Barbara Rodin, its president and Mr. Asim Ashary, its chief
financial officer, and three venture capital firms. None of HealthStar's
officers, directors or shareholders owns any capital stock of Beyond
Benefits.
Q. Why should the Company sell HSI?
A. The board of directors of the Company has thoroughly considered the
advantages and disadvantages of selling the stock of HSI at this time, as
compared to remaining as a provider of a managed healthcare network. As
described in greater detail in this proxy statement, the board of directors
believes that it is in the best interests of the stockholders and the
Company to convert the assets of the Company which are invested in HSI into
cash and redeploy that cash in connection with its future business plan. In
particular, the Company's future business plan includes the repayment of
existing Company debt and the possible acquisition of an Internet-related
business or businesses or other business or businesses.
Q. How do I know if the Company is receiving fair value for the stock of HSI?
A. Stockholders should consider a variety of factors in determining the fair
value of the stock of HSI, including (i) the Company's overall goals and
future business plans, (ii) the changing and highly competitive nature of
the managed healthcare industry in which HSI competes and management's
expectations regarding probable trends in the industry, as a result of which
management believes that the Company will not be able to compete effectively
in that industry, and (iii) the lack of additional offers to purchase the
HSI stock. Although an independent investment banking firm valuation has not
been obtained, the board of directors believes that the consideration to be
received from Beyond Benefits, Inc. in connection with the proposed sale of
the stock of HSI is fair.
3
<PAGE>
Q. Will any of the money received from the transaction be distributed to the
Company's stockholders?
A. No. The Company intends to use approximately $1,325,000 of the net proceeds
generated from the sale of the capital stock of HSI to repay outstanding
indebtedness owed to Harris Trust and Savings Bank. The Company intends to
use the remainder of the net proceeds to acquire an Internet-related
business or businesses or other business or businesses. See "The Proposed
Sale--Use of Proceeds; Plans for Future Operations After the Proposed Sale."
Q. Will stockholders have appraisal rights?
A. No. Stockholders of the Company will not have appraisal rights as a result of
this transaction.
Q. What should stockholders do now?
A. Stockholders should mail their signed and dated proxy card in the enclosed
envelope, as soon as possible, so that their shares will be represented at
the Company stockholders' meeting.
Q. Can stockholders change their vote after they have mailed a signed proxy
card?
A. Yes. Stockholders can change their vote in one of three ways at any time
before their proxies are used:
- stockholders can revoke their proxies by written notice;
- stockholders can complete new, later-dated proxy cards; and
- stockholders can attend the annual stockholders' meeting and vote in
person.
Q. How are shares held in a broker's name voted?
A. Brokers will vote shares nominally held in their name (or in what is commonly
called "street name") only if the beneficial stockholder provides the broker
with written instructions on how to vote. Absent such instructions, these
shares will not be voted. Stockholders are urged to instruct their brokers
in writing to vote shares held in street name for the proposed transaction.
Q. Whom should stockholders call with questions?
A. Stockholders who have questions about the transaction should call Steven A.
Marcus, the Company's Chief Financial Officer, at (480) 451-8575 ext. 4275.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains forward-looking statements including
statements containing the words "believes," "anticipates," "expects," "intends"
and words of similar import. These statements involve known and unknown risks
and uncertainties that may cause the Company's actual results or outcomes to be
materially different from those anticipated and discussed herein. Important
factors that the Company believes might cause such differences include but are
not limited to: (1) concentration of the Company's assets into one industry
segment; (2) the impact of changing economic conditions; (3) the actions of
competitors, including pricing and new product introductions; and (4) those
specific risks that are discussed in the cautionary statements accompanying the
forward-looking statements in this Proxy Statement and in the Risk Factors
detailed in the Company's previous filings with the Securities and Exchange
Commission. In assessing forward-looking statements contained herein,
stockholders are urged to read carefully all cautionary statements contained in
this proxy statement and in those other filings made by the Company with the
Securities and Exchange Commission.
PROPOSAL 1--ELECTION OF DIRECTORS
BOARD STRUCTURE AND BOARD NOMINEES: The Bylaws of the Company currently
provide that the board of directors shall have seven members until the board
shall determine otherwise. The board has nominated five persons to stand for
election as directors. The board does not intend at the present time to fill two
4
<PAGE>
vacancies on the board. Pursuant to amendments to the Company's Certificate of
Incorporation approved by stockholders at the 1998 annual meeting, the board of
directors is divided into three classes each consisting, as near as possible, of
the same number of directors. The directors serve for staggered terms. At the
1999 annual meeting, directors will be elected into each class to give effect to
the classified Board provision. The first class of directors for which Edward M.
Chism is nominated will serve a three year term which will end in 2002. The
second class of directors for which Dr. Michael Flax and Dr. Luis A. Queral are
nominated will serve two year terms which will end in 2001. The third class of
directors for which David J. Lewis and Isidor Buholzer, Jr. are nominated will
serve a one year term ending in 2000. At future annual meetings, directors in a
class whose term expires at that meeting will be elected for a full three year
term.
The following table sets forth certain information regarding the director
nominees of the Company. Each of the nominees has consented to serve as a
director if elected.
<TABLE>
<CAPTION>
DIRECTOR
TERM
NAME AGE CURRENT POSITION ENDS
- ---- -------- -------------------------------------- --------
<S> <C> <C> <C>
Edward M. Chism....................... 60 Chairman of the Board, Chief Executive 2002
Officer and President
Dr. Michael D. Flax................... 44 Director 2001
Dr. Luis A. Queral.................... 51 Director 2001
David J. Lewis........................ 40 Director 2000
Isidor Buholzer, Jr................... 39 Director 2000
</TABLE>
Edward M. Chism has been Chairman of the Board since July 1999. Mr. Chism is
a principal and the Chief Executive Officer and President of American Financial
Group, Inc., a capital management company based in Aventura, Florida ("AFG").
Mr. Chism has held that position since 1993.
Dr. Michael D. Flax has been a Director of the Company since July 1999.
Dr. Flax is an endodontist and has been in private practice in Coral Springs,
Florida since 1981. Dr. Flax is also an associate professor at the Nova
Southeastern University School of Dentistry.
Dr. Luis A. Queral has been a Director of the Company since July 1999.
Dr. Queral is Chief of Vascular Surgery at Mercy Medical Center in Baltimore,
Maryland and has held that position since 1997. Prior to that, Dr. Queral was in
private practice as a Vascular Surgeon.
David J. Lewis has been a Director of the Company since August 1999.
Mr. Lewis is President and Chief Executive Officer of Affinity Financial
Group Inc., a financial advisory company based in Toronto, Canada. Mr. Lewis has
held that position since 1991.
Isidor Buholzer, Jr. has been a Director of the Company since
November 1999. Mr. Buholzer is a vice president of AFG. He has held that
position since October 1998. Prior to that, he was general manager of Austro
Financial Services, Inc. from January 1998 to October 1998, a vice president of
Banque Nationale de Paris in Miami, Florida, from October 1996 through
December 1997, and a vice president of Clariden Asset Management (New
York), Inc. from January 1994 through December 1995.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THESE NOMINEES.
CHANGE IN BOARD MEMBERSHIP DURING 1999.
The current members of the board of directors, including the nominees named
above, were elected as directors between July 27 and November 12, 1999. Prior to
July 27, 1999, the board of directors was comprised of four directors, Gerald E.
Finnell, Gary L. Nielsen, Jon M. Donnell and Thomas S. O'Brien, who were not
employees of the Company or any of its subsidiaries, and Stephen J. Carder, who
was also the Company's President and Chief Executive Officer. The four
non-employee directors resigned as directors following a proposal by Forward
Looking Technologies Ltd., which is the beneficial owner of
5
<PAGE>
approximately 7.6% of the Company's outstanding capital stock, that the board
investigate the possibility of the Company acquiring an Internet-related
business or businesses or other business or businesses, following the
disposition of HSI's assets. None of the then-serving directors believed he had
the necessary technical or industry experience or background to evaluate the
merits of that type of endeavor, and the non-employee directors resigned and the
resulting board vacancies were filled by the election of Mr. Chism (who was also
elected chairman of the board) Dr. Queral, Dr. Flax and Mr. Brian McWilliams.
Mr. Carder remained on the board.
At the August 19, 1999 board meeting, Mr. Carder resigned as a board member
and as the Company's president and chief executive officer. He was replaced in
these positions by Thomas C. Ronk. Mr. McWilliams resigned as a director for
personal reasons, and the resulting vacancy was filled by the election of David
J. Lewis. Richard A. Yardley was also elected a director. At the August 19, 1999
meeting, the board also approved an investment by the Company in
Physiciansite.com, through the purchase of stock subscription rights held by
DocNet.com, Inc. Mr. Ronk was a shareholder in DocNet.com and Mr. Yardley was an
officer of Physiciansite.com.
As a result of accounting and valuation issues, the board decided in
September 1999 not to proceed with the proposed Physiciansite.com transaction,
and the Company and Physiciansite held discussions to determine whether they
could reach agreement on an investment in Physiciansite.com by the Company on
terms acceptable to both companies. The parties did not agree upon terms of a
proposed investment and terminated discussions on November 12, 1999. Mr. Ronk
and Mr. Yardley resigned their respective positions with the Company at a Board
meeting held on November 12, 1999. The board elected Mr. Chism the president and
chief executive officer of the Company at that meeting, and Mr. Buholzer was
elected a director to fill the vacancy that resulted from Mr. Yardley's
resignation. The board vacancy that resulted from the resignation of Mr. Ronk
remains unfilled. The board has no intention presently to fill the vacancy.
Although none of the current board members has experience in the Internet
industry, the Company does not believe that this is a negative factor as there
are two vacancies on the board and the Company is currently conducting a search
for individuals with the requisite industry experience.
The changes in the membership of the board on July 27, 1999 and thereafter
may constitute a change of control as defined by regulations of the Securities
and Exchange Commission. The proposal that the board investigate acquiring an
Internet-based business was initially made by Forward Looking Technologies,
which owns approximately 7.6% of the Company's voting stock. Mr. Chism is a
beneficial owner of 329,166 shares of the Company's common stock held by Forward
Looking Technologies. Forward Looking Technologies purchased 250,000 shares of
common stock from the Company in a private placement in March 1999, and acquired
an additional 179,166 shares in a private transaction with Mr. Carder in
June 1999. Forward Looking Technologies is a Bahamas-based private investment
fund, which used its own funds to make the purchase of the Company's stock.
OTHER EXECUTIVE OFFICER: The following biographical information is
furnished with respect to the executive officer of the Company who is not a
nominee for election as a director at the meeting.
Steven A. Marcus, age 39, joined the Company in August 1999 as Vice
President, Chief Financial Officer and Secretary. Prior to that Mr. Marcus was
President of Marcus Financial, Inc., a financial consulting firm based in
Scottsdale, Arizona. Mr. Marcus held that position since 1989. Mr. Marcus is
currently the President of the Company's subsidiary, HSI (a position he has held
since February 2000).
6
<PAGE>
BOARD INFORMATION
BOARD MEETINGS: During the Company's last fiscal year, the board of
directors held a total of four (4) regular meetings. Each then-director of the
Company attended at least 75% of the board meetings during the Company's last
fiscal year and all meetings of any board committees on which he served. None of
the current directors served as a director of the Company during the fiscal year
ended March 31, 1999.
BOARD COMMITTEES: The Board has an audit committee and a compensation
committee. David J. Lewis and Isidor Buholzer, Jr. comprise the members of the
audit committee. Edward M. Chism and Dr. Michael D. Flax comprise the members of
the compensation committee.
The audit committee recommends appointment of the Company's independent
auditors. It also approves audit reports and plans, accounting policies,
financial statements and internal controls, and meets with management and the
independent auditors to review the results and scope of the audit and the
services provided by the independent auditors. The audit committee met twice
during the Company's last fiscal year.
The compensation committee manages executive officer compensation and
administers the Company's compensation and incentive plans. The compensation
committee met once during the Company's last fiscal year.
The board of directors does not have a nominating committee. The entire
board performs those functions.
BOARD COMPENSATION: Non-employee directors receive a $12,000 annual
retainer. In addition, except as otherwise provided below, non-employee
directors receive $1,000 for each board meeting, and $500 for each committee
meeting that they attend. The fee for attendance at telephonic meetings is
one-half ( 1/2) of the applicable rate specified above. The Company also
reimburses directors for any expenses related to their board service. Directors
who also are officers of the Company do not receive any separate compensation
for serving as directors.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table summarizes information regarding compensation paid for
all services rendered to the Company in all capacities during the last three
completed fiscal years by the Company's chief executive officer and the
executive officers of the Company who received compensation in excess of
$100,000 during the fiscal year ended March 31, 1999 (collectively, the "Named
Officers). No other executive officers of the Company received compensation in
excess of $100,000 during the fiscal year ended March 31, 1999.
7
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION(1)
- --------------------------- ----------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Stephen J. Carder(2),......................... 1999 $186,458 $ 0 $12,000
Chief Executive Officer and Director 1998 135,000 20,000 12,000
1997 83,750 33,500 7,800
Darren T. Horndasch,(3).......................
Vice President, Chief Operating Officer 1999 139,618 0 44,250(4)
Steven L. Lange(5)............................ 1999 135,804 0 5,500
Vice President, Sales & Marketing 1998 110,000 10,000 2,425
1997 95,000 2,500 6,983
</TABLE>
- ------------------------
(1) The Company pays each of its executive officers an automobile allowance each
month and pays or reimburses its executive officers for business-related
expenses. The Company also provides certain health insurance benefits for
all full time employees, including its officers. The Company's officers do
not receive additional compensation for serving as directors of the Company.
(2) Mr. Carder resigned as a director and CEO in August, 1999 and resigned as
the President of the Company's wholly-owned subsidiary, HealthStar, Inc. in
February 2000.
(3) Mr. Horndasch served as the Company's Vice President and COO from July 8,
1998 to August 23, 1999, and as HSI's vice president and COO until he
resigned December 3, 1999.
(4) Includes $15,000 calculated as the fair market value of 5,000 shares of
stock awarded at the time of employment and a move allowance of $25,000.
(5) Mr. Lange served as the Company's Vice President of Sales & Marketing until
May 13, 1999, when his employment terminated.
The following table provides information concerning stock options granted to
the Named Officers during the fiscal year ended March 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE PRICE
NAME GRANTED (#)(1) IN FISCAL YEAR ($/SH) (1)
- ---- -------------------- ------------------------ --------------
<S> <C> <C> <C>
Stephen J. Carder........................... 0 0% N/A
Darren T. Horndasch......................... 30,000 31.3% $2.875
Steven L. Lange(2).......................... 20,000 20.8% 2.875
</TABLE>
- ------------------------
(1) As adjusted giving effect to the reverse stock split on November 16, 1998.
(2) Mr. Lange's options expired unexercised following his termination of
employment with the Company on May 13, 1999.
The options were awarded under the HealthStar Corp. 1998 Stock Option Plan
("the Plan"). The options awarded to Mr. Horndasch vest equally over two years.
Fifteen thousand options were also awarded to Gerald Finnell, Jon Donnell and
Gary Nielsen, who served as non-employee directors of the Company during the
fiscal year ended March 31, 1999. These options, which were scheduled to vest
equally over three years, have an exercise price of $2.875 and an expiration
date of October 8, 2008. Upon a change of control, as defined in the plan, all
options granted under the plan become fully vested and
8
<PAGE>
immediately exercisable. A change of control under the plan occurred in
July 1999 when Messrs. Finnell, Donnell and Nielsen resigned as directors and
all non-vested options thereupon vested.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises
during the fiscal year ended March 31, 1999 by the Named Officers and the value
of in-the-money options held by the Named Officers on March 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NUMBER OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
OF SHARES MARCH 31, 1999 MARCH 31, 1999
ACQUIRED ON VALUE --------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Carder.................. 0 0 0 0 0 0
Darren T. Horndasch................ 0 0 0 30,000 0 $13,125
Steven L. Lange(1)................. 0 0 0 20,000 0 8,750
</TABLE>
- ------------------------
(1) Mr. Lange's options expired unexercised following his termination of
employment with the Company on May 13, 1999.
No executive officer or director exercised options during the fiscal year
ended March 31, 1999.
EMPLOYMENT CONTRACTS AND ARRANGEMENTS
DARREN T. HORNDASCH: Mr. Horndasch served until December 3, 1999 as the
Vice President and Chief Operating Officer of HealthStar, Inc., pursuant to a
Compensation Agreement effective July 1, 1999, which sets forth the terms and
conditions of Mr. Horndasch's compensation for his service to HSI. The term of
this agreement is July 1, 1999 through June 30, 2000. Mr. Horndasch was paid an
annual salary of $180,000 under this agreement. The Compensation Agreement
provided that Mr. Horndasch would receive his salary for 90 days upon the
termination of his employment by the Company without cause. Mr. Horndasch
resigned in November 1999 effective December 3, 1999 to pursue other
opportunities. His resignation did not trigger the 90-day salary continuation
provision.
9
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of March 27, 2000, for
(i) each Named Officer; (ii) each director nominee of the Company; (iii) all
executive officers and director nominees as a group; and (iv) each person known
by the Company to be the beneficial owner of more than five percent (5%) of the
Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY OWNED(1) OUTSTANDING STOCK
Officers and Directors: ---------------------------- -----------------
<S> <C> <C>
Edward M. Chism (3)................................ 329,166 7.6%
Dr. Michael D. Flax................................ 45,000 1.0%
Dr. Luis A. Queral................................. 0 *
David J. Lewis..................................... 0 *
Isidor Buholzer, Jr................................ 0 *
Stephen J. Carder.................................. 0 *
Darren T. Horndasch................................ 0 *
Steven L. Lange.................................... 0 *
Steven A. Marcus................................... 0 *
All executive officers and directors as a group (6
persons)........................................... 374,166 8.6%
5% Holders(2):
Forward Looking Technologies Limited........... 329,166 7.6%
</TABLE>
- ------------------------
* Indicates less than one percent (1.0%).
(1) Beneficial ownership is determined under rules of the Securities and
Exchange Commission and generally includes shares in respect of which the
person has voting or investment power. Shares of common stock subject to
stock options and warrants currently exercisable or exercisable within
60 days are beneficially owned by the option or warrant holder and are
deemed to be outstanding for computing the percentage ownership of the
person holding such options or warrants and the percentage ownership of any
group of which the holder is a member, but are not deemed outstanding for
computing the percentage of any other person. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of capital stock shown beneficially owned by them.
(2) See "Transactions with Related Parties."
(3) The number of shares beneficially owned is given in reliance upon a
Schedule 13D filed with the Securities and Exchange Commission on
November 24, 1999 by Forward Looking Technologies, Ltd. Forward Looking
Technologies Ltd.'s principal place of business is 50 Shirley Street, Second
Floor, Nassau, Bahamas. Edward M. Chism, the Company's CEO, president and
chairman of the board of directors, has the power to vote these shares.
TRANSACTIONS WITH RELATED PARTIES
In June 1999, Stephen J. Carder, then the Company's president, chief
executive officer and a director, sold 179,166 shares of the Company's common
stock owned by him to Forward Looking Technologies, Ltd., at $4.00 per share.
Prior to this transaction, Forward Looking Technologies had purchased 150,000
shares of common stock at $2.50 per share from the Company in a private
placement in March 1999. As a result of its purchase from Mr. Carder, Forward
Looking Technologies increased its common stock ownership from 150,000 to
329,166 shares of common stock, and from approximately 3.9% to 7.9% of total
shares outstanding.
10
<PAGE>
On August 19, 1999, the board of directors authorized the Company to
purchase shares of Physiciansite.com for approximately $7 million, by assuming
rights under a stock subscription agreement between Physiciansite.com and
DocNet.com, Inc. The board also approved the issuance of 4 million shares of
common stock of the Company to DocNet.com, Inc. to purchase DocNet's rights
under the subscription agreement. At the same meeting, the board elected Richard
A. Yardley and Thomas C. Ronk to fill vacancies then existing on the board.
Mr. Yardley was an officer of Physiciansite.com and Mr. Ronk a shareholder in
DocNet. When the agreement with DocNet and the proposed investment in
Physiciansite.com was ultimately terminated on November 12, 1999, Mr. Yardley
and Mr. Ronk resigned their respective positions with the Company.
The President of InfoPlan Inc. entered into a Consulting Agreement with the
Company dated as of February 11, 2000 pursuant to which he provides consulting
services in connection with the sale of HSI (which have primarily involved
assisting in negotiations with Beyond Benefits for the sale of HSI) and such
other matters as may be requested by the Company. The Consulting Agreement will
terminate automatically upon the earlier of (i) the closing of the sale of HSI
to Beyond Benefits, or (ii) May 11, 2000, unless the Consulting Agreement is
extended pursuant to the written agreement of the parties. The Company is
obligated to pay compensation for such services in the sum of $1,000 per week
for the term of the Agreement and reimburse the consultant for reasonable
expenses incurred in connection with the performance of his services under such
Agreement. InfoPlan Inc. is a shareholder of 200,400 (approximately 4.6%) of the
outstanding shares of the Company. This number of shares is given in reliance
upon an amendment dated June 12, 1999 to Schedule 13D filed with the Securities
and Exchange Commission, with the shares reported in the amendment adjusted for
a 1-for-2 reverse stock split of the common stock effected on November 16, 1998.
InfoPlan Inc.'s principal place of business is 19 Hillsyde Court, Hunt Valley,
Maryland, 21030. In reliance upon an additional amendment dated June 12, 1999 to
Schedule 13D filed with the Commission, the Company understands that the number
of shares excludes 117,116 shares (2.7%) owned by the wife of InfoPlan Inc.'s
President (with respect to which she has sole dispositive power and no voting
power). Voting power with respect to such shares was assigned to the Company's
Board of Directors. The number of shares also excludes 30,000 shares issuable
upon the exercise of options granted to the President of InfoPlan, Inc. as
compensation for prior consulting services to the Company (15,000 shares at
$4.00 per share and 15,000 shares at $6.00 per share; fifty percent (50%) of
which become exercisable on December 17, 2000 with the remaining fifty (50%)
becoming exercisable on December 17, 2001).
INDEPENDENT AUDITORS
The Company's independent auditors, KPMG LLP ("KPMG"), notified the Company
on March 9, 2000 that it is resigning as independent auditors of the Company.
KPMG has served as the Company's auditors since May 29, 1997, and has issued
reports on the Company's financial statements for the fiscal years ended
March 31, 1999, 1998 and 1997. No replacement has been selected or recommended
as of this date because the Company is still continuing its search for a new
independent auditor. The report of the Company's prior independent auditors,
Dolan and Company, P.A. of Miami, Florida, on the Company's financial statements
for the fiscal year ended March 31, 1996, included a paragraph discussing the
Company's ability to continue as a going concern.
Dohan and Company was previously the principal accountants for Champion
Financial Corporation. On May 29, 1997, that firm's appointment as principal
accountants was terminated and KPMG was engaged as principal accountants. The
decision to change accountants was approved by the board of directors.
In connection with the audit of the fiscal year ended March 31, 1997, and
the subsequent interim period through May 29, 1997, there were no disagreements
with Dohan and Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
11
<PAGE>
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement.
The audit report of Dohan and Company on the financial statements of
Champion Financial Corporation as of and for the year ended March 31, 1996 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
A letter from Dohan and Company is attached as Exhibit A.
The audit report of KPMG on the consolidated financial statements of
HealthStar Corp. and subsidiaries as of March 31, 1999 and for the years ended
March 31, 1999 and 1998, did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles. In connection with the audits of the two fiscal years
ended March 31, 1999, and the subsequent interim period through March 9, 2000,
there were no disagreements with KPMG on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement. During the Company's fiscal year ended March 31, 1999 and any
subsequent interim period preceding this report, KPMG did not advise the Company
with respect to any of the matters described in paragraphs (a)(1)(v)(A) through
(D) of Item 304 of Regulation S-K. The Company has not yet selected a successor
accounting firm to KPMG and the Board of Directors of the Company has not
approved the engagement of any successor firm. The Company has provided KPMG
with a copy of the foregoing disclosures and has requested in writing that KPMG
furnish it with a letter addressed to the SEC stating whether or not it agrees
with such disclosures. A copy of such letter is attached as Exhibit B.
Representatives of KPMG are not expected to be present at the meeting.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based on a review of reports filed by our directors, executive officers and
beneficial holders of ten percent (10%) or more of our shares, and based upon
representations from those persons, all SEC stock ownership reports required to
be filed by those reporting persons during the Company's most recent fiscal year
were timely made.
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<PAGE>
PROPOSAL 2--APPROVAL AND ADOPTION OF A RESOLUTION
AUTHORIZING THE STOCK PURCHASE AGREEMENT
BETWEEN
HEALTHSTAR CORP., HEALTHSTAR, INC.
AND
BEYOND BENEFITS, INC.
At the Annual Meeting, holders of the common stock of the Company will
consider and vote upon a proposal to approve and adopt a resolution to authorize
the Stock Purchase Agreement dated as of September 23, 1999, as amended, between
the Company, HealthStar, Inc. and Beyond Benefits, Inc., a Delaware corporation
(the "Agreement"), pursuant to which the Company proposes to sell (the "Proposed
Sale") all of the capital stock of HSI, the only operating subsidiary of the
Company. The proposed transaction constitutes the sale of substantially all of
the Company's assets for purposes of Delaware law applicable to the Company. A
copy of the Agreement, as amended (without exhibits and schedules), is attached
as Appendix A to this Proxy Statement. Subject to certain indemnity obligations,
as consideration for the Proposed Sale under the terms of the Agreement, the
Company expects to receive $8,880,000 in cash at closing. See "The Agreement."
Pursuant to the applicable provisions of the Delaware General Corporation
Law, the Company is required to obtain the affirmative vote of a majority of the
outstanding shares of common stock prior to the sale of all or substantially all
of its property or assets.
The resolution that will be before the stockholders at the annual meeting
is: "RESOLVED, that HealthStar Corp., a Delaware corporation, is hereby
authorized to perform the transactions contemplated by that Stock Purchase
Agreement dated as of September 23, 1999, as amended, between HealthStar Corp.,
HealthStar, Inc., and Beyond Benefits, Inc., pursuant to which HealthStar Corp.
proposed to sell all of the capital stock of HealthStar, Inc."
THE BOARD OF DIRECTORS HAS APPROVED THE PROPOSED SALE (SUBJECT TO STOCKHOLDER
APPROVAL) AND RECOMMENDS A VOTE "FOR" APPROVAL OF THE RESOLUTION AUTHORIZING THE
PROPOSED SALE.
THE PROPOSED SALE
GENERAL
The Agreement, which was executed and delivered by the Company, HSI and
Beyond Benefits on September 23, 1999, as amended, provides for the sale of all
of the outstanding capital stock of HealthStar, Inc. (the "HSI Shares"). Subject
to certain indemnification obligations of the Company that will survive the
sale, the Company expects to receive $8,880,000 in cash at closing as
consideration for the sale of the HSI Shares.
HEALTHSTAR, INC.
As currently conducted, the Company operates in one industry segment,
healthcare cost containment, through HSI, its wholly-owned subsidiary. Through
HSI, the Company operates the HealthStar Preferred Provider Organization, a
managed healthcare network consisting of over 2,000 hospitals and in excess of
125,000 physicians. If the Proposed Sale is approved by the stockholders and the
sale of the capital stock of HSI to Beyond Benefits is consummated, the Company
will no longer operate the HealthStar Preferred Provider Organization and will
no longer be engaged in the healthcare management industry.
USE OF PROCEEDS; PLANS FOR FUTURE OPERATIONS AFTER THE PROPOSED SALE
The cash proceeds to the Company from the sale of the capital stock of HSI,
are expected to be $8,880,000, less estimated transaction expenses of
approximately $300,000, subject to the payment of any indemnity obligations. See
"The Agreement--Purchase Price." Approximately $1,325,000 of the estimated
13
<PAGE>
net proceeds from the Proposed Sale will be used by the Company to repay
outstanding indebtedness to Harris Trust and Savings Bank. This debt became due
by its terms on November 30, 1999, however, Harris Trust has extended the
maturity of this indebtedness to April 28, 2000. See "Background of the Proposed
Sale of the Stock of HSI" and "Recent Developments." The remaining net proceeds
will be used initially for working capital. As opportunities are identified, the
Company intends to use such proceeds for the acquisition of an Internet-related
business or businesses or other business or businesses. The Company intends to
structure any future acquisitions so that future subsidiaries will be wholly
owned. The Company is not presently a party to any binding agreement to acquire
any such interests.
Following the consummation of the Proposed Sale, the stockholders of the
Company will retain their equity interest in the Company. The Proposed Sale will
not result in any changes in the rights of the Company's stockholders. The
Company will not distribute any of the net proceeds of the sale of the capital
stock of HSI to its stockholders, and intends to use the proceeds in the conduct
of its business, including acquisitions as described in this proxy statement.
This strategy involves material risks and uncertainties, including those
described below.
- Management and the board of directors has complete discretion to identify
the company or companies in which the Company may make future
acquisitions, without any requirement that the stockholders approve any
such acquisition.
- The Company may seek to exchange shares of its common stock for securities
of the companies which it seeks to acquire. The issuance of shares of
common stock in these transactions would dilute the ownership interest of
existing stockholders in the Company.
- Management believes that, based upon reported general media data related
to publicly-traded companies, and based upon their experience and due
diligence with respect to the Physiciansite.com transaction, which was not
completed, Internet-related companies currently have valuations that are
generally in excess of the valuations of most non-Internet companies. The
cost of any future acquisition will be determined by negotiation and will
be determined in significant part by the Company's perception of the
future value of the target entity. The cost to the Company is likely to be
significantly in excess of the net book value per share of the target
tangible assets, which may result in the Company recording significant
amounts of goodwill on its books under generally accepted accounting
principles. The amortization of goodwill may adversely affect the
Company's operating results.
- No assurance can be provided that any company acquired by the Company will
be profitable or that such Company will not generate material losses for
the Company.
BACKGROUND OF THE PROPOSED SALE OF THE STOCK OF HSI
The Preferred Provider Organization ("PPO") sector of the managed healthcare
industry in which the Company operates is changing and highly competitive. The
Company competes for customers with numerous national, regional and local PPO
network providers. Many of these competitors have greater financial, technical
and marketing resources than the Company.
In response to competitive pressures, the PPO industry has been actively
consolidating during the last several years. The Company's customers are
increasingly seeking to limit the number of PPO networks which they access by
aligning themselves with networks that have a strong national presence. As a
result, regional PPO networks such as HSI are faced with either acquiring other
regional or local networks or risk losing business to PPO companies which have a
more national scope.
Beginning in 1997, the Company's senior management and board of directors
sought strategic Preferred Provider Organization acquisitions to complement the
core business of National Health Benefits & Casualty Corporation, a Nevada
corporation and wholly-owned subsidiary of the Company until its sale in
December 1999 ("NHBC"). Prior to and following the acquisition of HSI, the
Company provided
14
<PAGE>
its customers access through NHBC to independent PPO networks of healthcare
professionals and facilities in the U.S. In September 1997, the Company
identified HSI as a potential target acquisition. HSI was a regional PPO serving
primarily the geographic markets of the Midwest and Southeast and was owned by
one shareholder. After months of evaluation and due diligence, senior management
concluded that the acquisition of HSI would create a platform from which to
build a national PPO company. The Company acquired HSI in December 1997. Harris
Trust and Savings Bank lent the Company $2,500,000 of the purchase price for
HSI. Given the overall condition of HSI at the time of the acquisition, senior
management focused on reorganizing HSI's operations and improving the overall
quality of its management and staff. This process occupied a majority of
calendar year 1998.
In January 1999, the Company defaulted on one of the covenants contained in
its loan agreement with Harris Bank. The Company notified Harris Bank of the
covenant violation and the bank stated that it was interested in revising the
covenant to bring the Company into compliance.
The board of directors met in February 1999 at a regularly scheduled
meeting. Management and the board reviewed the Company's negotiations during
November and December 1998 with the investment banker representing First Health
in connection with its sale of its subsidiary ProAmerica, a PPO of similar size
to HSI. The Company made a bid to acquire ProAmerica in late 1998, but was not
the successful bidder and ProAmerica was acquired by United Payors and United
Providers. Management and the board discussed the Company's position in a
rapidly consolidating industry and the board decided to pursue a dual course of
evaluating potential acquisitions and assessing the Company's potential value as
a target. The board authorized Mr. Carder, then the Company's president and
chief executive officer, to survey the marketplace and attempt to fully evaluate
alternatives that may be available to the Company.
Shortly after the board meeting, the Company was approached by the president
and owner of a California-based PPO and its investment advisor to evaluate a
possible merger with HSI. After a series of meetings and discussions between the
companies and an investment bank, the parties determined that the merger was not
economically attractive and the discussions were terminated.
In March 1999, Mr. Carder engaged in meetings with five other investment
banking and financial institutions to evaluate the Company's business
environment and future opportunities.
In March 1999, the Company was approached by an Ohio-based PPO company to
evaluate a merger proposal. Mr. Carder and Mr. Horndasch, the Company's chief
operating officer, met with the vice-chairman and chief operating officer of the
Ohio PPO to discuss a possible transaction, and the Company and proposed
acquiror began their due diligence reviews. The Ohio-based company determined
that the merger was not economically attractive and discussions were terminated.
In April 1999, Mr. Carder was contacted by a New-York based managed
healthcare company. The president and chief executive officer, whom Mr. Carder
had met with approximately one year earlier, expressed an interest in acquiring
NHBC, and entered into a confidentiality agreement for the purpose of evaluating
NHBC. Shortly thereafter the potential buyer forwarded a letter of intent to the
Company. The letter of intent expired with no transaction having been agreed to
by the parties.
In April 1999, two PPO companies contacted Mr. Carder, expressing an
interest in evaluating a potential acquisition of HSI. Confidentiality
agreements were entered into by both parties and the appropriate information
made available. Both companies performed preliminary due diligence
investigations, but neither presented the Company with a proposed letter of
intent and discussions were terminated in May 1999.
In late April 1999, the Company was told by Harris Bank that the Company's
credit was being transferred to the Bank's Special Assets Department. This was
due in part to the fact that at March 31, 1999, the Company was in violation of
several financial covenants. At a meeting on May 6, 1999, representatives of the
Bank's Special Assets Department outlined an amendment to the credit agreement
15
<PAGE>
which would change the financial covenants and require the Company to repay its
loan on November 30, 1999, rather than on December 15, 2000, the original loan
maturity date.
In April 1999, Mr. Carder was contacted by Mr. George Bregante, chief
executive officer of Beyond Benefits, Inc. inquiring about a potential
acquisition of HSI. Mr. Carder and Mr. Bregante had become acquainted during
1998 when Mr. Bregante was the president of BeechStreet, an Irvine, California
based PPO. Mr. Bregante informed Mr. Carder that Beyond Benefits was in the
final stages of completing its first PPO acquisition, and it was their strategic
plan to become a PPO consolidator. The Company agreed to provide Beyond Benefits
with background and financial information upon the execution of a
confidentiality agreement. Mr. Carder met with Mr. Bregante and Dr. Barbara
Rodin, Beyond Benefits' President, at the offices of Beyond Benefits in Irvine,
California on May 10, 1999. Mr. Carder provided Mr. Bregante and Dr. Rodin with
a brief history of the Company. At the end of the meeting, Mr. Bregante
expressed Beyond Benefit's interest in moving forward and stated it would
provide a letter of intent.
On May 20, 1999, the Company's board at a regularly scheduled meeting, was
updated by Mr. Carder concerning the requirements of Harris Bank that the loan
be repaid on November 30, 1999. Mr. Carder also updated the board on the
proposed sale of NHBC and the expected offer from Beyond Benefits to purchase
HSI. Mr. Carder was directed by the Board to proceed with negotiating a possible
sale of either subsidiary and to keep the board informed of any significant
issues arising from these potential transactions.
On May 24, 1999, the Company received a letter of intent from Beyond
Benefits to acquire HSI for $15.5 million cash payable at closing. The letter of
intent was executed, and the Company and Beyond Benefits had a series of
meetings and discussions in conjunction with the due diligence process.
Upon conclusion of the due diligence process by Beyond Benefits in
July 1999, Mr. Carder and Mr. Marcus, then a financial consultant for the
Company, were invited to the offices of Beyond Benefits to discuss the results
of Beyond Benefits' financial due diligence review of HSI. Dr. Rodin expressed
concern about HSI's revenue deterioration and that the original offer of
$15.5 million was not in line given the present financial performance of HSI.
Beyond Benefits revised its letter of intent to reflect the following
purchase price changes: $10.0 million in cash payable at closing, a 5% equity
position in Beyond Benefits and a $1.25 million earn-out payable in part or in
full at the end of 12 months and/or 18 months. This new letter of intent was
executed on August 12, 1999.
During his meetings with executives of PPO companies and investment bankers
and based on his discussions with such executives and investment bankers,
Mr. Carder confirmed that PPO companies of a size similar to HSI were being sold
at prices that were generally in the range of .75 to 1.0 times revenue. The
Company did not verify this range through an independent examination. The only
comparable sale that the Company was aware of was United Healthcare
Corporation's sale of its wholly-owned subsidiary, ProAmerica, to United
Payors & United Providers, Inc. in late 1998 at a price that the Company
believes to have been within the range of .9 to 1.0 times revenue (based on the
Company's own evaluation of ProAmerica's financial statements in connection with
the Company's contemplated acquisition of ProAmerica and other information
regarding the purchase price which is generally available to the public). The
Company did not receive information from any other sources that indicated that
PPO companies of a similar size were being sold at prices within a different
range, except for information relating to an EBITDA-based ranged of valuation
received from and upon consultation with Gannon Consulting as expressly
described below. The purchase price under the purchase agreement between the
Company and Beyond Benefits (prior to subsequent amendments) was approximately
.85 times Fiscal Year 1999 revenue which would have included the collection of
the entire $1.25 million earn-out payment initially agreed upon by the parties.
No other potential acquiror of HSI made a formal offer for HSI's assets or its
capital stock.
16
<PAGE>
On August 19, 1999 at a regularly scheduled meeting, the Company's board
approved the transaction and authorized the Company's president and chief
executive officer to enter into a definitive agreement with Beyond Benefits.
Following the board meeting, the Company and Beyond Benefits negotiated the
definitive Stock Purchase Agreement for the sale of HSI's assets, and the
definitive agreement was executed by the parties on September 23, 1999. The
transaction was publicly announced on September 27, 1999.
On December 16, 1999, the Company and Beyond Benefits entered into an
amendment to the Stock Purchase Agreement to provide that the cash portion of
the purchase price be increased to $10,850,000 from $10,000,000 and to remove
from the purchase price 303,943 shares of Beyond Benefits' non-voting Series B
common stock. See "The Agreement--Purchase Price."
On or about January 20, 2000, the Company requested an extension of the
February 20, 2000 closing date under the Agreement because additional time was
required to obtain shareholder approval of the proposed transaction.
In late January, 2000 the Company received notice from its largest client
that such client would be terminating its relationship with the Company
effective May 1, 2000. Beyond Benefits was promptly notified of the loss of that
client.
On February 7, 2000, Beyond Benefits requested a teleconference or meeting
with the Company to discuss the Company's request for an amendment of the
Agreement (including an extension of the proposed closing date) and Beyond
Benefits' concerns regarding certain material changes in HSI's business (the
loss of HSI's largest client and resulting loss of revenue). On February 8,
2000, Beyond Benefits submitted a letter to senior management of the Company
which stated its request to revise the purchase price downward to $7,000,000 in
cash as a result of the loss of the Company's largest client. As an alternative,
the February 8, 2000 letter proposed cash consideration of $6,000,000 subject to
an amended earn-out schedule conditioned upon saving the account of the
Company's largest client or the Company's sale of additional business with no
other loss of existing business prior to the closing of the sale of HSI. In a
letter dated February 9, 2000, the Company's President, Edward Chism, rejected
the Beyond Benefits offer and request for a reduction of the purchase price. In
a letter dated February 10, 2000, Beyond Benefits requested a meeting with the
Company as soon as would be possible. Following the exchange of such letters,
the Company's management, together with a consultant acting on its behalf,
conducted discussions with Beyond Benefits' management to reach a mutually
agreeable revised purchase price for HSI. See "Transactions With Related
Parties." Beyond Benefits argued that the Company's revenues would be materially
reduced as a result of the loss of the Company's largest client and that as a
result a purchase price reduction was justified. While the Company did
acknowledge the circumstances underlying such request (including the Company's
significant claims backlog, the loss of its largest client and continued loss of
sales and account management staff), the Company believed that the proposed
price reduction to $7,000,000 was excessive. It also concluded that the
alternative offer of $6,000,000 in cash and an amended earn-out schedule was not
a viable alternative for the Company in view of its inability to compete
effectively in the changing and highly competitive managed health care industry.
See "--The Company's Reasons for the Proposed Sale; Recommendation of the Board
of Directors." The Company subsequently negotiated a revised purchase price of
$8,880,000 and Beyond Benefits submitted a draft of a proposed Second Amendment
to the Agreement to the Company on February 21, 2000.
On February 24, 2000, the Company held a telephonic meeting of the Board of
Directors to discuss the status of the sale of HSI to Beyond Benefits, Inc. and
recent developments affecting the Company's business. The board acknowledged
that the Agreement between the Company and Beyond Benefits had expired and could
be terminated by either party because the transaction had not been consummated
by February 20, 2000 as provided for in the Agreement. The board also
acknowledged that the Company's $1,325,000 term loan owed to Harris Bank was due
February 29, 2000. Mr. Steven Marcus, the Company's Vice President and Chief
Financial Officer informed the board that he was continuing to negotiate an
17
<PAGE>
extension agreement with Harris Bank and that the Bank had been informed that
the Agreement with Beyond Benefits had technically expired. Mr. Marcus indicated
that the Bank would be willing to extend the maturity date of the term loan if
the Company was able to continue and extend the agreement with Beyond Benefits.
Otherwise, the bank would expect timely and full repayment of the entire term
loan.
The Board also discussed the loss of the Company's largest customer and the
potential impact of the loss of revenue on the value of HSI. Mr. Marcus
explained that this customer accounted for approximately $1.3 million in annual
revenue and that the loss of business would have a material adverse effect on
the Company's future prospects.
The directors reviewed the terms of the proposed Second Amendment to the
Agreement that provided for a reduction in the cash portion of the purchase
price from $10,850,000 to $8,880,000 and that removed the $1.25 million earn-out
provision contained in the Agreement. The proposed Amendment also provided
(i) that the closing of the Beyond Benefits transaction would be held on or
before April 30, 2000; and (ii) that the Company will consult with and
coordinate with Beyond Benefits regarding operations and management of HSI from
the date of the Second Amendment until the transaction is closed (subject to the
terms set forth in the Second Amendment).
The Board also discussed possible alternatives to the sale of HSI to Beyond
Benefits including the rebuilding of the Company's business by current
management and the sale of the Company to a third party. The Board determined
that such a rebuilding of the Company's business was not a viable alternative
because of the lack of required funds and personnel. It also acknowledged that
the Company was unable to obtain any other viable offer for other transactions
involving the sale of HSI, or the Company, or any other similar transaction.
To obtain additional current information regarding the managed health care
industry and a report from a third party regarding the fairness and
reasonableness of the proposed sale of HSI to Beyond Benefits, the Board
approved the engagement of Gannon Consulting of St. Louis, Missouri. Prior to
such approval, the Board reviewed Gannon Consulting's qualifications which
included experience in the health care insurance and management industry.
Significantly, Gannon's experience included working on strategic and operational
initiatives with the Boards of Directors and management teams of provider
networks and health plans. These initiatives included conducting assessments of
the strengths and weaknesses of various health care networks and performing due
diligence with respect to merger and acquisition transactions. Gannon also has
experience in the areas of business valuation and financial budgeting, analysis
and reporting. Gannon was selected on the basis of a referral made by the
Company's counsel. The Board requested that Gannon's report be completed and
presented to the Board by March 2, 2000.
In order to continue the Agreement and extend the maturity date of the
Harris Bank debt, and following a discussion regarding the value of the HSI
stock, the Board authorized the Company's officers to negotiate and execute a
Second Amendment to the Agreement substantially as discussed at the meeting. It
was also noted that the Second Amendment would have to be signed by
February 29, 2000 and delivered to Harris Bank for review to extend the maturity
of the Harris Bank debt. The board requested that Mr. Marcus prepare an
additional analysis and discussion of the Company's current financial condition
and future prospects in order to assist the board in further review of the
purchase price reduction and terms of the Second Amendment. The board determined
that such additional review should be undertaken prior to the board's
recommending that shareholders approve the transaction.
The Second Amendment to the Agreement was executed by the Company as of
February 29, 2000.
On March 2, 2000, at a telephonic Board meeting, the Company's directors
participated in a discussion regarding the Company's financial condition, future
business prospects and recent developments affecting Company business. During
the meeting, the Board also reviewed different methods of evaluating the revised
purchase price of $8,880,000. Prior to the Board meeting, the directors received
and reviewed the written report of Gannon Consulting dated March 2, 2000
regarding the fairness and
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reasonableness of the proposed sale of HSI (the "Report"). Representatives of
Gannon were present by telephone at the March 2, 2000 Board meeting, at which
time they made an oral presentation of the contents of their Report and
responded to questions regarding their findings and conclusions. The Report was
prepared following the approval of Gannon's engagement by the Company's Board.
Gannon conducted a review of data and documentation provided by the Company
regarding HSI's operations, its provider network, its payor book of business,
the terms of the proposed sale of HSI to Beyond Benefits and relevant management
and Board reports concerning market positioning and strategic objectives. Gannon
also interviewed a number of persons including certain members of the Board and
management and Mr. Stephen Carder, the former President of HSI. To obtain
information on comparable investment opportunities in the Preferred Provider
Organization industry, an interview was conducted by Gannon on a confidential
basis with an investment banker familiar with that industry.
The instructions received by Gannon regarding the presentation of its report
were (i) to review the proposed sale of HSI to Beyond Benefits, and (ii) to
advise the Board as to the fairness and reasonableness of the Beyond Benefits
transaction in view of HSI's state of operations and competitive position in the
marketplace. With respect to limitations on its review, Gannon indicated that no
effort was made to validate the financial and market penetration data presented
by management describing the current condition of HSI's operations, and that
provider and payor contracts were not reviewed.
Gannon's findings included identification of certain strengths of HSI
including (i) a stable and loyal provider network in core states; (ii) network
strength in at least eleven states and a presence in a number more;
(iii) contracts with a number of major payors; (iv) a solid industry reputation;
and (v) competitive provider contract rates. Gannon also identified certain
weaknesses of HSI including (i) limited depth in business volume with major
payors; (ii) inadequate customer service capability to further business
penetration with existing payors; (iii) an inadequate marketing and sales team
to capitalize on strong networks in core states; (iv) an inefficient claims
system support and a lack of capital to improve or replace the system; (v) an
unfocused corporate marketing and sales strategy; and (vi) an undeveloped
quality management program. Gannon also noted the business consolidation
activity in the marketplace, a growing negative view of the managed care
industry and decreasing margins as competition grows in the industry. Gannon
added that HSI recently lost payor contracts resulting in HSI revenues being
reduced nearly 20% since the beginning of the current fiscal year and that the
loss of the Company's biggest client will further reduce monthly revenues by at
least 10% starting in May 2000. Gannon added further that (i) both the current
Board and management have been focused on completing the sale to Beyond Benefits
to obtain maximum value for the stockholders; (ii) the protracted sales process
has limited the availability of new capital and has distracted attention from
the ongoing business operations of the Company; and (iii) with the limited
capital currently available to address operational issues, the longer the sales
process takes the higher the probability of a diminution of HSI's business.
The Report notes (based on an interview with an investment banker familiar
with the industry) that the current benchmark in the industry is to value a
potential PPO acquisition at a multiple of five (5) to six (6) times earnings
before interest, taxes depreciation and amortization ("EBITDA"). Gannon
explained that (i) the investment community tends to target the multiple as a
function of specific organizational characteristics other than the provider
network itself, and (ii) it is generally assumed that the provider networks are
not significantly different between PPOs, but that the following factors do make
a material difference in value (because the stronger the PPO measures up to
these factors the greater the opportunity to value the company at a higher
multiple): (a) growing market share with expanding payor contracts and revenue
flow; (b) existence of contracts with the major payors in the PPO market and
continued penetration and business growth with each payor book of business;
(c) operational efficiencies including timely claims turnaround and customer
service response; (d) state of the art information technology with continued
investments leading to increased productivity and information flow with
customers; and (e) inter-state market penetration supporting continued
development of a national presence. Although HSI has its strengths in
inter-state market penetration, and the beginnings of a national presence as
well as
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relationships with many of the major payors in the market, it falters on growing
market share and "same payor" business growth and is lacking in operations and
information technology. Gannon concluded that these circumstances would tend to
value the multiple for HSI at the low end of the benchmark.
With respect to HSI, Gannon states in the Report that it estimated HSI's
EBITDA to be approximately $1.7 million (based on Gannon's analysis of HSI's
financial history for fiscal year 1999 and the current year to December 31,
1999). At the March 2, 2000 Board meeting, however, Gannon's representatives
explained that in an effort to be conservative, the $1.7 million EBITDA amount
described in their report was actually determined solely by using the financial
results of HSI for Fiscal Year 1999 (April 1, 1998 to March 31, 1999).
Accordingly, Gannon concluded that the revised purchase price of $8,880,000
represents an EBITDA-based multiple of 5.2 (purchase price of $8,880,000 divided
by EBITDA of $1.7 million). As a result, Gannon concluded that the $8,880,000 is
a fair and reasonable offer given HSI's current condition and the probability
that such condition will continue to deteriorate over time. Gannon also
concluded that absent a significant cash infusion and management change, HSI's
current condition would tend to drive the multiple to the low end of the
benchmark range (5 to 6 times EBITDA) or even lower. Gannon also stated its
opinion that without new capital infusion, a cohesive management team and
continued Board leadership, HSI has a high probability of failing. (After the
meeting, management informed Gannon that upon management's further review of the
financial statements of the Company and HSI for the fiscal year ended March 31,
1999 it had determined that the actual EBITDA amount for HSI during the fiscal
year ended March 31, 1999 was not approximately $1,700,000, as determined by
Gannon, but rather was approximately $1,575,000. Consequently, the EBITDA-based
multiple of 5.2 described in Gannon's Report would be increased to 5.6 (the
purchase price of $8,880,000 divided by EBITDA of $1,575,000). As a result,
management and the directors concluded, following additional telephonic
consultation with Gannon, that an increased EBITDA-based multiple of 5.6
provides further support for Gannon's conclusion that the terms of the Beyond
Benefits transaction are fair and reasonable in view of HSI's state of
operations and competitive position in the market place.)
A copy of the Report will be made available for inspection and copying at
the principal executive offices of the Company during the regular business hours
by any interested equity security holder of the Company or representative who
has been so designated in writing.
During the meeting, and following Gannon's presentation to the Board,
management questioned whether the 5.2 multiple of $1.7 million of EBITDA as
described in the Report adequately reflected HSI's historical financial
condition and the material adverse impact on HSI's business that will result
from the loss of the Company's biggest client. Although Gannon noted the loss of
this client in the Report, it was not clear from its responses during the Board
meeting that it provided sufficiently for such loss in its analysis.
Consequently, in a further attempt during the Board meeting to consider the
adequacy of the $8,880,000 purchase price, management reviewed this price on
both historic and adjusted multiple of revenues bases. Specifically, Mr. Marcus
explained that during calendar year 1999, HSI generated revenue of approximately
$12,225,000. Based on the revised purchase price of $8,880,000 in cash, the
Company was selling HSI to Beyond Benefits at a multiple of revenue of .73
(purchase price of $8,880,000 divided by revenue of $12,225,000). This multiple
falls slightly below the range of .75 to 1.0 times revenue. During calendar year
1999, based on actual revenues generated by this client and received by the
Company, as evidenced by the Company's accounting records, this client accounted
for approximately $1,300,000 in revenue or approximately 11% of the total
revenue of HSI for such period (which included $275,000 of revenue or
approximately 9.9% of the total revenue of HSI in the last quarter of calendar
year 1999). On a pro forma basis, excluding the revenue from this client, the
actual revenue for calendar year 1999 would have been $10,925,000. Therefore,
the revised multiple would be .81 (purchase price of $8,880,000 divided by
proforma revenue of $10,925,000). This multiple falls within the range of .75 to
1.0 times revenue.
In order to provide an additional view of the adequacy of the reduced HSI
purchase price, given the declining financial condition of the Company, the
Board also considered the effect of the loss of the Company's largest client on
an adjusted annualized revenue basis. In so doing, the Board assumed no
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further deterioration in the Company's revenues (in an effort to provide a best
case basis) even though such a result would be highly unlikely because of the
Company's deteriorating financial and competitive position. Specifically, the
Board considered the actual revenues for the last three months of calendar year
1999 which were approximately $2.8 million. Mr. Marcus noted that HSI's revenues
for the first three months of calendar year 1999 were approximately
$3.3 million representing a decrease of $500,000 or 15.0% between the two
periods. Mr. Marcus also noted that the Company experienced continuing
reductions in each successive quarter of calendar year 1999. Given the Board's
assumption of no further deterioration of HSI's revenues, the adjusted
annualized revenue for calendar year 2000 was computed to be approximately
$11.2 million. This was determined by annualizing the actual revenue of
$2.8 million for the last three months of 1999 which was the last completed
quarter and the quarter with the lowest revenues in calendar year 1999. After
subtracting the $1.3 million loss of revenue attributable to the known
termination of the Company's largest client, the adjusted annualized revenue for
calendar year 2000 was computed to be approximately $9.9 million. The
corresponding multiple of revenue based on the revised purchase price of
$8,880,000 was consequently computed to be .90 (purchase price of $8,880,000
divided by adjusted annualized revenue of $9.9 million).
The Board also reviewed the Company's competitive position in the PPO
industry and continued its discussion regarding possible alternatives to the
sale of HSI to Beyond Benefits including the rebuilding of the Company's
business by current management and the sale of the Company to a third party. The
Board reconfirmed its determination that the rebuilding of the Company's
business was not economically feasible because of the lack of funds and
personnel that would be required to finance such an effort. The Board also
reconfirmed that the Company was unable to obtain any other viable offer for
other transactions involving the sale of HSI, or the Company or any other
similar transaction. Mr. Marcus noted that the Company's deteriorating financial
condition over the last year had limited the amount of capital resources
available to invest in management talent, information systems and other
infrastructure necessary to remain competitive in the industry. In addition,
Mr. Marcus noted that many of the Company's customers are seeking to limit the
number of PPO networks which they access and are aligning themselves with PPO's
that are more national in scope than the Company. See "--The Company's Reasons
for the Proposed Sale; Recommendation of the Board of Directors."
The Company, through negotiations with Beyond Benefits, determined the
amount of consideration ($8,880,000) to be paid for HSI. Such amount has been
deemed by Gannon and the Board of Directors of the Company to be a fair and
reasonable purchase price for HSI in view of HSI's state of operations and
competitive position in the marketplace.
Pursuant to a letter agreement dated as of March 3, 2000, Harris Bank agreed
to extend the maturity of the loan amount to the earlier of (i) April 28, 2000
or (ii) the sale of HSI to Beyond Benefits (the "Target Date"). Specifically,
the letter agreement acknowledged that the Company was in default under the
terms of its loan agreement with Harris Bank because (i) it did not comply with
the financial covenant regarding the applicable fixed charges coverage ratio
(during the months of November and December 1999) and with the financial
covenant regarding the applicable minimum EBITDA (during the month of
December 1999), and (ii) it failed to pay the principal amount of $1,325,000
outstanding and owed to the bank on February 29, 2000. Under the terms of such
letter agreement, the Bank waived the defaults described above, only with
respect to the referenced periods, subject to the following conditions: (i) the
principal amount outstanding under the applicable note must be paid in full by
the Target Date; (ii) payment of a $10,000 fee; (iii) all things necessary to
effect the sale of HSI and repayment must be done by the Target Date; and
(iv) there must not occur any change in the condition or prospects of the
Company, financial or otherwise, that Harris Bank deems material and adverse.
In connection with its consideration of the Proposed Sale, the board of
directors considered various possible alternatives, including liquidating the
assets of the Company and making a distribution to the shareholders. The board
determined not to pursue such alternatives, because it believes that changing
the Company's direction to focus on an Internet-related business or businesses,
to the extent an acceptable
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opportunity in that industry is found, offers the best potential to increase
shareholder value. Notwithstanding this determination, the Company reserves its
right to invest in non-Internet businesses with all or part of the proceeds from
the Proposed Sale. In making its determination to focus on an Internet-related
business or businesses, the board considered the risks associated with entering
into an Internet-related business or businesses, including the following risks:
- The Company has no existing Internet business or products, and therefore
has no operating history or experience in that business upon which you may
base an evaluation of our strategic business plan and determine our
prospects for achieving our objective of entering the Internet e-commerce
field. Our business plan involves all of the risks, uncertainties,
expenses and difficulties frequently encountered by development stage
companies, particularly companies in the rapidly evolving Internet market.
- Our future success depends, in significant part, on our ability to
attract, hire and retain directors, management and other personnel with
the managerial, marketing and technical skills that may be required by the
Internet-related or other business or businesses that we acquire in the
future. Competition for personnel in the Internet and related technology
market is intense, and there are a limited number of persons with
knowledge of, and experience in, this industry. If we fail to timely
identify, recruit and hire qualified personnel, we may be unable to
compete effectively.
- To be successful in our planned acquisition of Internet businesses, we
will need to identify applications, technologies and businesses that are
complementary, and we may need to integrate disparate technologies and
corporate cultures and potentially manage a geographically dispersed
company. If we are able to make multiple acquisitions, later acquisitions
could divert our attention from other business concerns and expose us to
unforeseen liabilities or risks associated with entering new markets.
Integrating newly acquired organizations and technologies into our company
could be expensive, time consuming and may strain our resources. We
anticipate that we will face intense competition for acquisitions, and
that many of these competitors will be larger, better-funded
organizations. If we fail to execute our acquisition strategy successfully
for any reason, our business may be adversely affected. We do not have a
tested business model and we cannot be sure that any business model we
develop will yield positive results.
- We may pay for some of our acquisitions by issuing additional common stock
and this could dilute our stockholders. We may also use cash to buy
companies or technologies in the future. If we do use cash, we may need to
incur debt to pay for these acquisitions as well as to fund any operating
losses. Acquisition financing may not be available on favorable terms or
at all. In addition, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future
acquisitions, which would have an adverse affect on our results of
operations.
Following completion of the Proposed Sale, the Company will generally seek
to acquire an Internet related business or businesses or other business or
businesses which have a proprietary product, service or technology. Management
anticipates that a potential acquisition target may be an early stage company
and may have limited operating history.
The Company intends to identify potential acquisition candidates through
contacts with persons and entities including investment banks, accountants,
consultants, attorneys and other professionals. Affiliates of the Company,
including its officers and directors who are instrumental in identifying or
closing future acquisitions, may be compensated by payment of fees or in amounts
which are in addition to the amount of salary, bonus or directors fees which the
Company customarily pays such individuals. Any such additional compensation will
be determined on a case by case basis by the board of directors prior to or at
the time of the acquisition. As of this date the Company is not a party to any
agreement regarding the provision of such services or payments of such fees or
amounts.
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THE COMPANY'S REASONS FOR THE PROPOSED SALE; RECOMMENDATION OF THE BOARD OF
DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY BELIEVES THAT THE PROPOSED SALE IS IN
THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD
OF DIRECTORS HAS APPROVED THE PROPOSED SALE AND RECOMMENDS THAT THE COMPANY'S
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE RESOLUTION AUTHORIZING THE PROPOSED
SALE.
As described above under "Background of the Proposed Sale," the decision of
the board of directors to approve the Proposed Sale and the Agreement followed
months of exploring and analyzing the advantages and disadvantages of selling
HSI and redeploying the Company's assets. In making its recommendation to the
stockholders of the Company, the board considered a number of factors, including
those noted immediately below which were determined by the Board to favor a
decision to consummate the Proposed Sale and those set forth in the subsequent
paragraph which disfavored a decision to consummate the Proposed Sale:
(i) The lack of viable financing alternatives favored the decision to
sell HSI as a method to repay the Harris Bank indebtedness.
(ii) Based on recent sales of comparable PPO networks, it was determined
that the Company is receiving fair value for the stock of HSI at this time.
This determination was also made in view of the Company's inability to
compete effectively in the changing and highly competitive managed
healthcare industry. See "--Background of the Proposed Sale of the Stock of
HSI." Specifically, the Board believed that the Company's inability to
compete effectively would likely lead to a reduction in the value of HSI's
stock and that the sale of the HSI stock was fair to shareholders because it
also offered a reasonable manner in which to attempt to prevent a continuing
reduction and deterioration in the stock's value.
(iii) In addition to providing the necessary funds for the repayment of
the Harris Bank indebtedness, the sale of HSI will also generate between
approximately $7.0 million of cash, after payment of expenses, which will be
available to implement the Company's future business plan.
The board of directors also considered the following potentially negative
factors in its deliberations concerning the Proposed Sale: (i) the fact that HSI
has, in recent periods, contributed a majority of the Company's cash flow and
currently contributes all of the Company's cash flow; (ii) the significant costs
involved in connection with consummating the Proposed Sale (especially in light
of the need to obtain a stockholder vote); (iii) the substantial management time
and effort required to effectuate the sale and the related disruption to the
Company's operations; and (iv) the risks associated with concentrating the
Company's assets into an Internet-related business or businesses or other
business or businesses that, at the time the Company's investment is initially
made, may have minimal revenues and that may require significant expenditures
for operations, site development and advertising and promotion. The board did
not believe that the negative factors were sufficient, either individually or
collectively, to outweigh potential advantages of the Proposed Sale.
The foregoing discussion of the information and factors considered by the
board is not intended to be exhaustive, but includes all material factors
considered by the board. The board did not attempt to quantify or otherwise
assign relative weights to the specific factors it considered nor did it
determine that any factor was of particular importance. A determination of
various weightings would, in the view of the board of directors, be impractical.
In addition, individual members of the board may have given different weight to
different factors. Rather, the board viewed its position and recommendations as
being based on the totality of the information presented to, and considered by,
the board.
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REGULATORY APPROVALS
Consummation of the Agreement does not require any regulatory approvals
other than the federal filings required under applicable U.S. securities laws in
connection with this proxy statement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Proposed Sale will not have any federal income tax consequences to the
Company's stockholders because no distributions of sale proceeds will be made to
the stockholders.
Upon consummation of the Proposed Sale, the Company may recognize taxable
income based upon the excess of the Purchase Price it ultimately receives for
the HSI Stock over HealthStar's tax basis in the HSI Stock.
ACCOUNTING TREATMENT
This transaction will be recorded as a sale of the stock of HSI which is
equivalent to the sale of HSI's net assets.
EXPENSES AND OTHER FEES
Each party will bear its own expenses in respect of the proposed sale,
whether or not consummated.
ADDITIONAL INTEREST OF CHIEF FINANCIAL OFFICER IN PROPOSED SALE
When considering the recommendation of the Company's board, you should be
aware that the Company's Vice President and Chief Financial Officer, Steven A.
Marcus, has an interest in the proposed transaction that is different from or in
addition to yours. On August 19, 1999 in connection with Mr. Marcus' employment
by the Company, the board agreed to pay Mr. Marcus a bonus of $150,000 if the
proposed sale of HealthStar, Inc. is successfully completed.
THE AGREEMENT
The following is a brief summary of certain provisions of the Agreement.
THIS DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT
OF THE AGREEMENT AS AMENDED, A COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT
AS APPENDIX A AND IS INCORPORATED HEREIN BY REFERENCE. THE TERMS NOT OTHERWISE
DEFINED IN THIS SUMMARY OR ELSEWHERE IN THIS PROXY STATEMENT HAVE THE MEANINGS
SET FORTH IN THE AGREEMENT AS AMENDED. ALL STOCKHOLDERS ARE URGED TO CAREFULLY
READ THE AGREEMENT AS AMENDED IN ITS ENTIRETY.
PURCHASE PRICE
Pursuant to the terms of the Agreement as amended, in consideration of the
transfer to Beyond Benefits of all of the outstanding capital stock of
HealthStar, Inc. (the "HSI Shares"), Beyond Benefits has agreed to pay to the
Company $8,880,000 in cash at closing (the "Closing Purchase Price").
The Agreement originally provided for a purchase price of $10,000,000 plus
303,943 shares of Beyond Benefits non-voting Series B Common Stock. Those shares
would have represented five percent of Beyond Benefits' common equity as of the
Closing date of the Agreement. On December 16, 1999, the Company and Beyond
Benefits signed an amendment to the Agreement. The amendment removed all the
shares of Beyond Benefits' Series B common stock from the purchase price payable
under the agreement and increased the cash purchase price from $10,000,000 to
$10,850,000. The purchase price was subsequently reduced to $8,880,000 (and the
$1,250,000 earn out provision was eliminated) pursuant to the Second Amendment
to the Agreement dated as of February 29, 2000.
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THE CLOSING
The closing (the "Closing") of the Proposed Sale will take place on or about
April 27, 2000 or such other date as may be mutually agreed by the Company and
Beyond Benefits, if the Proposed Sale is approved by the stockholders of the
Company at the Annual Meeting.
THE HSI SHARES
The HSI Shares constitute all of the outstanding capital stock of HSI. The
Company acquired the HSI Shares on December 12, 1997 from Thomas Stateman, the
then sole stockholder of HSI, in an arm's-length transaction for approximately
$13,728,000.
Beyond Benefits will purchase the HSI Shares, thereby causing ownership of
HSI to be transferred from the Company to Beyond Benefits. Except as otherwise
specifically provided in the Agreement, all of HSI's rights, assets and
liabilities, known and unknown, will remain with HSI, and the Company will
retain no assets or liabilities of HSI. Except for any breaches of
representations, warranties or covenants made by the Company in the Agreement,
or any indebtedness of HSI arising or outstanding on or prior to the Closing
Date (as defined in the agreement), the Company's direct and indirect interest
in HSI will cease upon the Closing of the proposed transaction under the
Agreement.
REPRESENTATIONS AND WARRANTIES
The Agreement contains various representations and warranties of the Company
relating to HSI including, among others, representations and warranties related
to HSI's corporate organization and similar corporate matters; authorization and
enforceability; HSI's capital structure and the Company's ownership of all
outstanding shares of HSI's capital stock; non-contravention of transactions
contemplated by the Proposed Sale, HSI's articles of incorporation or bylaws,
and non-violation of laws and binding agreements; consents and approvals;
compliance with laws, licenses and permits pertaining to HSI; the accuracy of
certain financial statements provided to Beyond Benefits; absence of certain
changes since June 30, 1999; absence of legal proceedings; taxes and tax
returns; contracts; patents, trademarks and trade names; licenses and permits;
environmental matters; properties; labor matters; non-ownership or control of
subsidiaries; performance of services; related party transactions; knowledge of
listed individuals; healthcare matters; absence of powers of attorney; solvency;
accredited investors; date of acquisition of HSI; corporate name; employee
plans; insurance; major customers; absence of brokers; year 2000 compliance;
accredited investor representations, and the accuracy of information relating to
HSI and the Company contained in information delivered to Beyond Benefits.
The Agreement contains various representations and warranties of Beyond
Benefits including, among others, representations and warranties related to
corporate organization and similar corporate matters; authorization and
enforceability; noncontravention of transactions contemplated by the Proposed
Sale, Beyond Benefits' certificate of incorporation or bylaws, and non-violation
of laws and binding agreements; acquisition for investment; absence of brokers;
and consents and approvals.
INDEMNIFICATION
The Company has agreed to indemnify, defend and hold harmless Beyond
Benefits and its officers, directors, agents and affiliates from and against any
and all losses, damages, liabilities, costs and expenses (collectively,
"Losses") arising out of or due to, directly or indirectly, (i) any inaccuracy
in or breach of any of the representations, warranties, covenants, agreements or
undertakings of the Company and HSI contained in the Agreement or the attached
disclosure schedule or (ii) any indebtedness of HSI other than obligations
arising in the ordinary course of business obligations.
Notwithstanding the foregoing, the parties have agreed that the Company
shall not indemnify Beyond Benefits for any Losses (other than Losses occurring
as a result of a breach of warranty relating to
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(i) capitalization of HSI, (ii) the Company's ownership of HSI's stock,
(iii) taxes or (iv) brokers or finders) unless and until Beyond Benefits and its
affiliates shall have suffered Losses aggregating in excess of $150,000,
whereupon Beyond Benefits and its affiliates shall be entitled to
indemnification for the full amount of such Losses up to and including the first
$150,000 and not merely the portion of such damages exceeding $150,000;
provided, however, that no party shall be entitled to recover from the other
more than the Purchase Price, except in the case of fraud or intentional
misconduct.
The Company's obligation to indemnify for Losses resulting from breaches of
certain representations or warranties in the Agreement will remain in full force
and effect for a period of two (2) years from the Closing Date; provided
however, that representations and warranties regarding the corporate status of
HSI, the capitalization of HSI and the Company's ownership of HSI's stock will
remain in full force and effect for a period of five (5) years from the Closing
Date. The Company's obligation to indemnify for Losses resulting from breaches
of certain other representations or warranties survive for the applicable
statute of limitations period. All representations and warranties will survive
beyond the applicable period with respect to any inaccuracy therein or breach
thereof if notice shall have been given within the applicable time period.
Beyond Benefits has agreed to indemnify the Company for inaccuracy of any
representation or the breach of any warranty, covenant, undertaking or other
agreement of Beyond Benefits contained in the Agreement, subject to the same
limitations upon the Company's obligation to indemnify Beyond Benefits.
EXPENSES AND TRANSFER TAXES
Each party has agreed to bear its own fees and expenses in respect of the
Proposed Sale, and the Company will bear the cost of HSI's fees and expenses
related to the Proposed Sale.
CONDITIONS OF THE PROPOSED SALE
The obligations of the Company to effect the Proposed Sale are subject to
the following conditions: (i) the stockholders of the Company shall have
approved the Proposed Sale at the Annual Meeting; (ii) the representations and
warranties of Beyond Benefits contained in the Agreement shall be true and
correct on and as of the Closing Date and Beyond Benefits shall have performed
all agreements to be performed by the Closing Date; (iii) all required
authorizations, approvals or consents shall have been obtained; (iv) no suit,
action or other proceeding by any government authority shall have been
instituted which questions the validity or legality of the Proposed Sale;
(v) the Company shall have received an officers' certificate from Beyond
Benefits to the effect that the representation and warranties of Beyond Benefits
contained in the Agreement are correct on and as of the closing date and Beyond
Benefits shall have performed all agreements to be performed by the closing
date, and (vi) the Company shall have received the opinion of counsel to Beyond
Benefits with respect to matters typical in such transactions.
The obligations of Beyond Benefits to effect the Proposed Sale are subject
to the following conditions: (i) the representations and warranties of the
Company contained in the Agreement shall be true and correct on and as of the
Closing Date; (ii) the Company shall have performed all agreements to be
performed by the Closing Date; (iii) Beyond Benefits shall have received an
officers certificate from the Company regarding the accuracy of the Company's
representations and the performance of required Company obligations;
(iv) Beyond Benefits shall have received resignations from all of HSI's
directors and officers requested by Beyond Benefits effective as of the Closing
Date; (v) Beyond Benefits shall have received debt financing of at least
$2.0 million; (vi) there shall have been no material adverse effect with respect
to HSI's business, condition (financial or otherwise), assets, liabilities,
operations or financial performance since June 30 1999; (vii) Beyond Benefits
shall have received from counsel to the Company an opinion with respect to
matters typical in such transactions; (viii) HSI's indebtedness to Harris Trust
and Savings Bank shall have been paid in full; (ix) no suit, action or other
proceeding by any governmental authority shall have been instituted which
questions the validity or legality of the Proposed Sale; and (x) no
26
<PAGE>
court shall have directed that the Proposed Sale not be consummated or otherwise
impose any additional conditions on the consummation thereof. Beyond Benefits
has advised the Company that it has secured the required $2 million of debt
financing.
COVENANTS PENDING CLOSING
Pursuant to the Agreement as amended, the Company has agreed to conduct the
business of HSI prior to the Closing, in the ordinary course, consistent with
past practice. The Company has also agreed that it will consult with and
coordinate with Beyond Benefits regarding operations and management of HSI
commencing February 29, 2000, subject to the terms of the Second Amendment of
the Agreement.
In addition, the Company and Beyond Benefits have agreed (i) to use all
reasonable efforts to take, or cause to be taken, all actions necessary in order
to consummate and make effective the Proposed Sale, (ii) that for a period of
one year after the date of the Agreement, no public release or announcement
concerning the Proposed Sale will be issued by either party without the prior
written consent of the other party, except as such release or announcement may
be required by applicable law or any government authority, (iii) to cooperate
and provide information necessary to the preparation of tax returns and the
handling of tax matters; and (iv) that Beyond Benefits shall cease using any and
all trade names, trademarks, logos and trade dress belonging to Company or its
affiliates in its literature, inventory, products, labels, packaging, supplies
or other materials relating to HSI as soon as available supplies thereof are
exhausted and in any event within 90-days after the Closing Date.
NO COMPETITION
Pursuant to the Agreement, the Company has agreed for three (3) years
following the Closing not to own, operate or manage, either directly or through
a subsidiary any business in which HealthStar is engaged as of the Closing Date;
provided, however, that the Company's ownership and operation of NHBC was
excluded from the scope of the no competition provision.
NO SOLICITATION
Pursuant to the Agreement, the Company has agreed for two (2) years
following the Closing not to (a) induce or attempt to induce any employee to
leave the employ of Beyond Benefits or any other entity controlled by,
controlling or under common control with Beyond Benefits, (b) in any way
interfere with the relationship between Beyond Benefits and any of its
employees, (c) employ or otherwise engage as an employee, independent contractor
or otherwise, any employee of Beyond Benefits, or (d) induce or attempt to
induce any customer, supplier, licensee or business relation of Beyond Benefits
to cease doing business with it, or in any way interfere with the relationship
between any customer, supplier, licensee, or other relation of Beyond Benefits.
TERMINATION
The Agreement may be terminated and the transactions contemplated thereby
abandoned at any time prior to the Closing Date (i) by written consent of the
Company and the Beyond Benefits, (ii) by Beyond Benefits or the Company, if the
conditions to Closing are not fulfilled by April 30, 2000, (iii) by either party
if there has been an uncured material breach of a representation or warranty by
the other party or there has been any failure by such other party to perform in
all material respects the obligations to be performed by it, or (iv) by either
the Company or Beyond Benefits if any court of competent jurisdiction in the
United States or other United States government body shall have issued an order,
decree or ruling or taken any other action restraining, enjoining, or otherwise
prohibiting the consummation of the contemplated transactions and such order,
decree, ruling or other action has become final or non-appealable.
27
<PAGE>
CONSEQUENCES OF TERMINATION
In the event the Agreement is terminated by Beyond Benefits because of its
inability to obtain at least $2.0 million of debt financing then Beyond Benefits
will pay to the Company a cancellation fee of $100,000 in cash. If, however, the
Agreement is terminated by the Company because of Company's inability to obtain
the required stockholder consent the Company and HSI, jointly and severally,
will pay Beyond Benefits a cancellation fee of $100,000 in cash.
RECENT DEVELOPMENTS
On December 30, 1999, HealthStar Corp. sold all of the assets of NHBC to
Carlmont Capital Group, Inc., a privately held company based in Chula Vista,
California. This sale was made pursuant to the terms of an Asset Purchase
Agreement, dated December 28, 1999 by and among the Company, NHBC and Carlmont
Capital Group, Inc. In this transaction, the Company sold all of the assets of
NHBC and received as consideration $1,500,000 in cash at closing and an earnout
agreement that may provide up to an additional $300,000 in cash, based on cash
flows of NHBC over the next 18 months. The Company used $1,350,000 of the cash
proceeds to pay down indebtedness owed to Harris Trust and Savings Bank, which
has now been reduced to $1,325,000. In connection with the pay down, Harris Bank
agreed to extend the maturity date of the Company's credit facility to
February 29, 2000 and subsequently agreed (pursuant to a letter agreement dated
as of March 3, 2000) to extend the maturity date to the earlier of
(i) April 28, 2000 or (ii) the sale of HSI to Beyond Benefits. See "--Background
of the Proposed Sale of the Stock of HSI."
The Company executed the Second Amendment to the Agreement, effective
February 29, 2000, reducing the total purchase price of the Proposed Sale to
$8,880,000. See "--Background of the Proposed Sale of the Stock of HSI."
On March 20, the Company issued 200,000 shares of its Common Stock in a
private placement transaction. The shares were issued to an accredited investor
for consideration of $300,000. The Company did not pay any commissions or fees
with respect to such transaction. The shares were issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended, because the transaction
did not involve any public offering of shares by the Company, and did not
involve any general solicitation of the public or advertising with respect to
the offer and sale of such securities. In addition, the investor acknowledged
acquiring the shares for such investor's own account, as principal, for
investment and not with a view to the resale or distribution of all or any part
of the shares. The Company intends to use the proceeds of such transaction for
general corporate purposes, including payment of account's payable.
28
<PAGE>
VOTING PROCEDURES/REVOKING YOUR PROXY
VOTING
To be elected, directors must receive a plurality of the shares present and
voting in person or by proxy, provided a quorum exists. A plurality means
receiving the largest number of votes, regardless of whether that is a majority.
A quorum is present if at least a majority of the outstanding shares (4,345,872
shares) on the record date are present in person or by proxy. All matters
submitted to you at the meeting other than the election of directors will be
decided by a majority of the votes cast on the matter, provided a quorum exists,
except as otherwise provided by law or by our certificate of incorporation or
bylaws.
Those who fail to return a proxy or attend the meeting will not count
towards determining any required plurality, majority or quorum. Stockholders and
brokers returning proxies or attending the meeting who abstain from voting on a
proposition will count towards determining a quorum, plurality or majority for
that proposition.
The enclosed proxies will be voted in accordance with the instructions you
place on the proxy card. Unless otherwise stated, all shares represented by your
returned, signed proxy will be voted as noted on the first page of this proxy
statement.
REVOCABILITY OF PROXIES
Proxies may be revoked if you:
- Deliver a signed, written revocation letter, dated later than the proxy,
to the Secretary of the Company at the address set forth on the first page
of this proxy statement.
- Deliver a signed proxy, dated later than the first one to the Secretary of
the Company at the address set forth on the first page of this proxy
statement; or
- Attend the meeting and vote in person or by proxy. Attending the meeting
alone will not revoke your proxy.
SOLICITATION
The cost of this solicitation will be borne by the Company. In addition, the
Company may reimburse brokerage firms and other persons representing beneficial
owners of shares for expenses incurred in forwarding solicitation materials to
such beneficial owners. Proxies also may be solicited by certain of the
Company's directors and officers, personally or by telephone or telegram,
without additional compensation. The Company will reimburse brokerage firms,
banks and other custodians, nominees and fiduciaries for their expenses
reasonably incurred in forwarding solicitation material to the beneficial owners
of the Company's common stock.
NO DISSENTERS' RIGHTS
Stockholders of the Company who do not approve of the Proposed Sale are not
entitled to appraisal or any other rights with respect to the Proposed Sale
under Delaware law or the Company's certificate of incorporation.
SUBMISSION OF STOCKHOLDER PROPOSALS
From time to time, stockholders seek to nominate directors or to present
proposals for inclusion in the proxy statement and form of proxy, or otherwise
for consideration at the annual meeting. To be included in the proxy statement
or considered at an annual meeting, you must timely submit nominations of
directors or other proposals to the Company in addition to complying with
certain rules and regulations promulgated by the Securities and Exchange
Commission. We must receive proposals for the 2000 Annual
29
<PAGE>
Meeting of Stockholders no later than July 16, 2000, for possible inclusion in
the proxy statement, or before October 1, 2000, for possible consideration at
the meeting. Direct any proposals, as well as related questions, to the
Company's Secretary at the address set forth on the first page of this Proxy
Statement.
ANNUAL REPORT
The Company's 1999 Annual Report to Stockholders has been mailed to
stockholders concurrently with the mailing of this Proxy Statement. The Annual
Report is incorporated into this Proxy Statement and is to be considered to be a
part of the Company's proxy solicitation materials.
Upon request, the Company will provide, without charge to each stockholder
of record as of the record date specified on the first page of this Proxy
Statement, a copy of the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1999, as amended and as filed with the Securities and Exchange
Commission. Any exhibits listed in the Annual Report on Form 10-KSB also will be
furnished upon request at the actual expense incurred by the Company in
furnishing such exhibit. Any such requests should be directed to the Company's
Secretary at the Company's executive offices set forth on the first page of this
Proxy Statement.
WHERE YOU CAN FIND MORE INFORMATION
We file periodic reports, proxy statements, and other information with the
Securities and Exchange Commission. These SEC filings are available to the
public over the Internet at the SEC's web site (www.sec.gov). You may also read
and copy any document that either company files with the SEC at the SEC's public
reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World
Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain copies
of the documents at prescribed rates by writing to the Public Reference Section
of the SEC at 450 Fifth Street, N.W., Washington, D.C 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the operation of its public
reference facilities.
We "incorporate by reference" into this proxy statement/prospectus the
information in documents we file with the SEC, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this proxy
statement/ prospectus, and information that we file subsequently with the SEC
will automatically update this proxy statement/prospectus. We incorporate by
reference the documents listed below and any filings we make with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 after
the filing of this proxy statement/prospectus and before the sale is
consummated.
FOR HEALTHSTAR CORP.:
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999,
including all information incorporated by reference into that report from our
1999 Annual Report to Stockholders.
Amendment to Annual Report on Form 10-KSB/A for the fiscal year ended
March 31, 1999, as amended on March 9, 2000.
Quarterly Reports on Form 10-QSB for the quarters ended June 30, 1999,
September 30, 1999 and December 31, 1999.
Amendment to Quarterly Report on Form 10-QSB/A for the quarter ended
June 30, 1999, as amended on March 9, 2000.
Amendment to Quarterly Report on Form 10-QSB/A for the quarter ended
September 30, 1999, as amended on March 10, 2000.
Amendment to Quarterly Report on Form 10-QSB/A for the quarter ended
December 31, 1999, as amended on March 31, 2000.
30
<PAGE>
Current Reports on Form 8-K filed September 23, 1999, October 13, 1999,
November 22, 1999, January 14, 2000 and March 15, 2000 (two separate reports
were filed on March 15, 2000).
Amendment to Current Report on Form 8-K/A filed on March 14, 2000.
Amendment to Current Report on Form 8-K/A filed on March 31, 2000.
You may request a copy of these filings, other than an exhibit to a filing
unless the exhibit is specifically incorporated by reference into the filing, at
no cost by contacting us at the following address:
HealthStar Corp.
Steven A. Marcus
Vice President, Chief Financial Officer and
Corporate Secretary
15720 North Greenway-Hayden Loop, Suite 1
Scottsdale, Arizona 85260
(480) 451-8575, ext. 4275
IN ORDER TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST COPIES OF OUR SEC
FILINGS NO LATER THAN APRIL 11, 2000.
You should rely only on the information delivered with, or stated or
incorporated by reference in, this proxy statement/prospectus. Neither
HealthStar nor Beyond Benefits has authorized anyone else to provide you with
different information. You should not assume that the information in this proxy
statement/prospectus is accurate as of any date other than the date on the front
of this document.
31
<PAGE>
HEALTHSTAR CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Financial Statements are intended to show
the financial condition and the operating results of the remaining entity
assuming that the sales of HealthStar Corp.'s two subsidiaries occurred as of
the dates indicated. The Unaudited Pro Forma Condensed Consolidated Statements
of Operations set forth herein present the results of operations of HealthStar
Corp., assuming that the sale of HealthStar, Inc. occurred on April 1, 1998, for
the operating statements for the year ended March 31, 1999 and the nine months
ended December 31, 1999. The December 31, 1999 Unaudited Pro Forma Condensed
Consolidated Balance Sheet set forth herein presents the financial position of
the company assuming the sale of HealthStar Inc. occurred on December 31, 1999.
Adjustments necessary to reflect these assumptions and to restate the historical
consolidated balance sheet and results of operations are presented in the Pro
Forma Adjustments columns, which are further described in the Notes to Unaudited
Pro Forma Condensed Consolidated Financial Statements.
On December 30, 1999, the Company sold all of the assets of its wholly owned
subsidiary National Health Benefits & Casualty Corp. ("NHBC") to Carlmont
Capital Group, Inc., a California based company. The Company received $1,500,000
in cash at closing and an earnout agreement that may provide up to an additional
$300,000 in cash, based on the actual cash flows of NHBC over the next
18 months. The Company recorded a gain on the disposition of assets of
$1,145,746. The Unaudited Pro Forma Condensed Consolidated Statements of
Operations assume that the sale of NHBC occurred on April 1, 1998 and therefore,
the operating results of NHBC from that date through December 30, 1999 (the date
upon which the sale was consummated) have been excluded. The sale of NHBC has
been effected in the balance sheet at December 31, 1999.
The historical financial information for HealthStar Corp. is derived from
the consolidated financial statements of HealthStar Corp. as of and for the year
ended March 31, 1999, and the unaudited consolidated financial statements of
HealthStar Corp. as of and for the nine months ended December 31, 1999.
The Unaudited Pro Forma Condensed Consolidated Financial Statements are
based on certain assumptions and adjustments described in the related Notes to
Unaudited Pro Forma Condensed Consolidated Financial Statements and should be
read in conjunction with the Stock Purchase Agreement and the HealthStar Corp.
audited and unaudited historical financial statements and notes thereto.
32
<PAGE>
HEALTHSTAR CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
HEALTHSTAR INC.
PRO FORMA TOTAL
ACTUAL ADJUSTMENTS PRO FORMA
----------- --------------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 299,783 $ 8,880,000(1a)
(196,730)(1b,3a)
(300,000)(1c)
(1,325,000)(1d) 7,358,053
Trade accounts receivable, net................... 1,537,176 (1,437,176)(3b) 100,000
Other current assets............................. 372,906 (186,518)(3c) 186,388
----------- ------------ -----------
Total current assets......................... 2,209,865 5,434,576 7,644,441
Property and equipment, net...................... 1,893,835 (1,863,575)(3d) 30,260
Goodwill, net.................................... 7,674,809 (7,674,809)(3e) --
Other assets, at cost............................ 166,179 (32,823)(3f) 133,356
----------- ------------ -----------
Total assets................................. $11,944,688 $ (4,136,631) $ 7,808,057
=========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 509,064 $ (420,444)(3g) $ 88,620
Accrued expenses................................. 1,203,783 (779,861)(3h) 423,922
Current portion of long-term debt................ 1,525,000 (1,325,000)(1d) 200,000
----------- ------------ -----------
Total current liabilities.................... 3,237,847 (2,525,305) 712,542
Shareholders' equity:
Common stock, $.001 par value, 15,000,000 shares
authorized, 4,145,872 shares issued and
outstanding.................................... 4,146 4,146
Additional paid-in capital....................... 8,727,428 8,727,428
Accumulated deficit.............................. (24,733) 8,880,000(2a)
(300,000)(2b)
(10,191,326)(2c) (1,636,059)
----------- ------------ -----------
Total shareholders' equity................... 8,706,841 (1,611,326) 7,095,515
----------- ------------ -----------
Total liabilities and shareholders' equity... $11,944,688 $ (4,136,631) $ 7,808,057
=========== ============ ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements
33
<PAGE>
HEALTHSTAR CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
NHBC HEALTHSTAR INC.
PRO FORMA PRO FORMA TOTAL
ACTUAL ADJUSTMENTS TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Capitated fees............. $ 9,481,392 $ (152,372)(1) $ 9,329,020 $ (9,329,020)(4) $ --
Repricing fees............. 6,893,519 (2,480,084)(1) 4,413,435 (4,413,435)(4) --
Other income............... 540,381 (21,414)(1) 518,967 (518,967)(4) --
----------- ----------- ----------- ------------ ------------
16,915,292 (2,653,870) 14,261,422 (14,261,422) --
----------- ----------- ----------- ------------ ------------
Operating expenses:
Cost of services........... 2,434,238 (804,593)(1) 1,629,645 (1,629,645)(4)
Salaries and wages......... 8,202,561 (782,762)(1) 7,419,799 (7,057,803)(4) 361,996
General and
administrative........... 4,877,761 (346,936)(1) 4,530,825 (3,998,246)(4) 532,579
Depreciation and
amortization............. 1,214,204 (51,353)(1) 1,162,851 (1,149,617)(4) 13,234
----------- ----------- ----------- ------------ ------------
16,728,764 (1,985,644) 14,743,120 (13,835,311) 907,809
----------- ----------- ----------- ------------ ------------
Income (loss) from
operations................. 186,528 (668,226) (481,698) (426,111) (907,809)
Non-operating income
(expense)
Interest expense........... (397,165) (228)(1) (397,393) 394,832(4) (2,561)
Loss on sale of
investment............... (59,626) (59,626) (59,626)
----------- ----------- ----------- ------------ ------------
Income (loss) before income
taxes...................... (270,263) (668,454) (938,717) (31,279) (969,996)
Income tax expense
(benefit).................. (94,593) (233,959)(1) (328,552) (10,948)(4) (339,499)
----------- ----------- ----------- ------------ ------------
Net earnings (loss).... $ (175,670) $ (434,495) $ (610,165) $ (20,331) $ (630,497)
=========== =========== =========== ============ ============
Earnings (loss) per
share--basic and diluted... $ (0.05) $ (0.19) $ (0.20)
=========== =========== ============
Weighted average shares
outstanding--basic and
diluted.................... 3,216,676 3,216,676 3,216,676
=========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements
34
<PAGE>
HEALTHSTAR CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
NHBC HEALTHSTAR INC.
PRO FORMA PRO FORMA TOTAL
ACTUAL ADJUSTMENTS TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Capitated fees............... $ 6,201,906 $ (12,849)(1) $ 6,189,057 $(6,189,057)(4) $ --
Repricing fees............... 4,294,089 (1,825,285)(1) 2,468,804 (2,468,804)(4) --
Other income................. 222,138 (963)(1) 221,175 (221,175)(4) --
----------- ----------- ----------- ----------- ----------
10,718,133 (1,839,097) 8,879,036 (8,879,036) --
----------- ----------- ----------- ----------- ----------
Operating expenses:
Cost of services............. 1,401,696 (541,869)(1) 859,827 (859,827)(4)
Salaries and wages........... 5,570,288 (469,801)(1) 5,100,487 (4,832,060)(4) 268,427
General and administrative... 3,091,327 (243,859)(1) 2,847,468 (2,620,719)(4) 226,749
Depreciation and
amortization............... 937,513 (34,669)(1) 902,844 (898,965)(4) 3,879
----------- ----------- ----------- ----------- ----------
11,000,824 (1,290,198) 9,710,626 (9,211,571) 499,055
----------- ----------- ----------- ----------- ----------
Income (loss) from
operations................... (282,691) (548,899) (831,590) 332,535 (499,055)
Non-operating income (expense)
Interest expense............. (230,600) (1,203)(1) (231,803) 231,803(4) --
Gain on disposition of
assets..................... 1,145,748 (1,145,748)(1) --
Asset impairment charge...... (650,000) (650,000) 650,000(4) --
----------- ----------- ----------- ----------- ----------
Income (loss) before income
taxes........................ (17,543) (1,695,850) (1,713,393) 1,214,338 (499,055)
Income tax expense (benefit)... 223,893 (593,548)(1) (369,655) 425,018(4) 55,363
----------- ----------- ----------- ----------- ----------
Net earnings (loss)...... $ (241,436) $(1,102,302) $(1,343,738) $ 789,320 $ (554,418)
=========== =========== =========== =========== ==========
Earnings (loss) per
share--basic and diluted..... $ (0.06) $ (0.35) $ (0.14)
=========== =========== ==========
Weighted average shares
outstanding--basic and
diluted...................... 3,879,378 3,879,378 3,879,378
=========== =========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements
35
<PAGE>
HEALTHSTAR CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
HealthStar Corp. has entered into an agreement with Beyond Benefits, Inc. to
sell all of the stock of HealthStar Inc. to Beyond Benefits, Inc. for $8,880,000
in cash. The agreement is subject to the approval of the shareholders of
HealthStar Corp.
All pro forma adjustments have been prepared assuming that the sale of
HealthStar Inc. occurred on April 1, 1998 for the statements of operations and
on December 31, 1999 for balance sheet purposes. The financial statements as of
and for the nine-month period ended December 31, 1999 reflect $650,000 of asset
impairment charges that were made prior to the finalization of the current sales
price. As a result of the most recent amendment to the Stock Purchase Agreement,
the sale of HSI is expected to create a loss on sale of approximately
$1,600,000. The Company expects to take this loss as an additional asset
impairment charge in the quarter ending March 31, 2000.
On December 30, 1999 the Company sold the assets of NHBC to Carlmont Capital
Group, Inc., a privately-held company that is not affiliated with the Company,
for $1,500,000 cash. The Company also received an earnout agreement which may
generate an additional $300,000 through June 29, 2001. Management assigned no
value to the earnout provision. The Company recorded a gain on disposition of
assets of $1,145,746. The Unaudited Pro Forma Condensed Consolidated Statements
of Operations have been prepared in a manner consistent with the
HealthStar, Inc. sale. The sale of NHBC has been effected in the balance sheet
at December 31, 1999.
The unaudited pro forma condensed consolidated financial statements assume
the following:
<TABLE>
<CAPTION>
HEALTHSTAR INC.
--------------------------------
TRANSACTION DATE APRIL 1, 1998 DECEMBER 31,1999
- ---------------- ------------- ----------------
<S> <C> <C>
Cash........................................................ $ 8,880,000 $ 8,880,000
Transaction and related costs............................... (300,000) (300,000)
Net assets of HealthStar, Inc............................... (11,501,481) (10,191,326)
------------ ------------
Loss on sale................................................ ($ 2,921,481) ($ 1,611,326)
============ ============
</TABLE>
NHBC Adjustments:
(1) To record the effect of eliminating the results of NHBC, the net effect of
which is assumed to be tax effected at the expected rate of 35%.
HealthStar, Inc. Adjustments:
(1) To record cash received from sale and payment of debt:
<TABLE>
<S> <C>
(a) Cash received for sale of HealthStar Inc................ $ 8,880,000
(b) Elimination of HealthStar Inc. cash at December31,
1999...................................................... (196,730)
(c) Transaction and related costs........................... (300,000)
(d) Payoff Harris Bank indebtedness......................... (1,325,000)
-----------
$ 7,058,053
===========
</TABLE>
36
<PAGE>
(2) To record the loss on sale (no tax benefit is expected to be realized):
<TABLE>
<S> <C>
(a) Cash received from the sale of HealthStar Inc........... $ 8,880,000
(b) Transaction and related costs........................... (300,000)
(c) Net assets of HealthStar Inc............................ (10,191,326)
------------
($ 1,611,326)
============
</TABLE>
(3) To record the disposition of the assets and liabilities of HealthStar, Inc.
The composition of the December 31, 1999 net assets of HealthStar, Inc. is
as follows:
<TABLE>
<S> <C>
(a) Cash.................................................... $ 196,730
(b) Trade accounts receivable, net.......................... 1,437,176
(c) Other current assets.................................... 186,518
(d) Property and equipment, net............................. 1,863,575
(e) Goodwill, net........................................... 7,674,809
(f) Other assets............................................ 32,823
------------
Total assets.......................................... 11,391,631
(g) Accounts payable........................................ (420,444)
(h) Accrued expenses........................................ (779,861)
------------
Net assets............................................ $ 10,191,326
============
</TABLE>
(4) To record the effect of eliminating the results of HealthStar Inc., the net
effect of which is assumed to be tax effected at the expected rate of 35%.
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table reflects the historical net income (loss) per share from
the continuing operations after giving effect to the sale of the NHBC assets and
the planned sale of HealthStar, Inc. The information presented in this table
should be read in conjunction with the pro forma financial data appearing
elsewhere herein and the Company's consolidated financial statements included in
the Company's annual report on Form 10-KSB for the year ended March 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, 1999 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Net income (loss) per share................................. $(0.05) $(0.06)
Pro Forma income (loss) per share........................... (0.20) (0.14)
Historical book value per share............................. 0.25
Pro Forma book value per share.............................. 1.71
</TABLE>
Book value per share is computed at December 31, 1999 by measuring tangible
book value (historical shareholders' equity of $8,706,841 less goodwill of
$7,674,809 divided by 4,145,872 shares outstanding; and pro forma shareholders'
equity of $7,095,515 less goodwill of $0 divided by 4,145,872 shares
outstanding).
37
<PAGE>
STOCK PERFORMANCE DATA
MARKET INFORMATION
The Company's common stock is quoted on the Over-the-Counter Bulletin Board
market under the symbol "PPOS."
The following table sets forth the high and low sales prices per share of
the common stock on the Over-the-Counter Bulletin Board for the quarterly
periods presented. The Company has not paid cash dividends on shares of its
common stock.
The following table sets forth the approximate high and low closing sales
prices per share as reported by the Over-The-Counter Bulletin Board market for
the Company's common stock for the calendar periods indicated. The quotations do
not reflect retail markups, markdowns or commissions and may not reflect actual
transactions. On November 16, 1998, the Company effected a 1-for-2 reverse stock
split of the outstanding common stock. Share prices for periods prior to this
date have accordingly been restated.
<TABLE>
<CAPTION>
FISCAL QUARTER HIGH LOW
- -------------- -------- --------
<S> <C> <C>
Quarter Ending March 31, 2000
(through March 30, 2000).................................. $ 4.44 $ 2.56
Quarter Ending December 31, 1999............................ $ 7.13 $ 1.69
Quarter Ended September 30, 1999............................ $12.63 $ 3.88
Quarter Ended June 30, 1999................................. $ 7.72 $ 3.31
Quarter Ended March 31, 1999................................ $ 4.06 $ 2.00
Quarter Ended December 31, 1998............................. $ 4.44 $ 2.50
Quarter Ended September 30, 1998............................ $ 7.63 $ 2.25
Quarter Ended June 30, 1998................................. $11.72 $ 5.75
Quarter Ended March 31, 1998................................ $21.50 $ 5.50
Quarter Ended December 31, 1997............................. $24.25 $18.00
Quarter Ended September 30, 1997............................ $18.50 $10.00
Quarter Ended June 30, 1997................................. $14.00 $ 9.50
</TABLE>
There were approximately 740 stockholders of record and approximately 800
beneficial owners of the common stock as of March 31, 1999. The Company has
neither declared nor paid any cash dividends to date and is restricted by the
loan agreement with Harris Trust and Savings Bank from paying cash dividends.
RECENT MARKET PRICE
The following table sets forth the closing price and the high and low sales
prices per share of the common stock on the Over-The-Counter Bulletin Board on
September 24, 1999, the last trading day preceding the public announcement of
the Proposed Sale and on March 30, 2000, the latest practicable date trading
before the printing of this proxy statement. Stockholders are urged to obtain
current market quotations.
<TABLE>
<CAPTION>
DATE HIGH LOW CLOSING
- ---- -------- -------- --------
<S> <C> <C> <C>
September 24, 1999.......................................... $8.88 $4.56 $7.50
March 30, 2000.............................................. $2.88 $2.56 $2.56
</TABLE>
38
<PAGE>
NUMBER OF HOLDERS
As of the record date for the annual meeting, 4,345,872 shares of common
stock were issued and outstanding and were held of record by approximately 740
persons, including several holders who are nominees for an undetermined number
of beneficial owners. The Company believes that as of the record date there were
approximately 800 beneficial owners of common stock.
OTHER MATTERS
The Company does not know of any other matters that are to be presented for
action at the meeting. If any other matters are properly brought before the
meeting, the persons named in the accompanying proxy will vote the shares
represented by the proxy in accordance with their judgment on those matters.
HEALTHSTAR CORP.
Steven A. Marcus
Chief Financial Officer and Secretary
Scottsdale, Arizona
April 3, 2000
39
<PAGE>
APPENDICES
<TABLE>
<S> <C>
Appendix A Stock Purchase Agreement dated September 23, 1999 by and
among HealthStar Corp., HealthStar, Inc. and Beyond
Benefits, Inc., and amendments thereto.
</TABLE>
40
<PAGE>
APPENDIX A
STOCK PURCHASE AGREEMENT
AND
AMENDMENTS THERETO
41
<PAGE>
APPENDIX A
STOCK PURCHASE AGREEMENT
AND
AMENDMENTS THERETO
<PAGE>
STOCK PURCHASE AGREEMENT
BY AND AMONG
HEALTHSTAR CORP.,
A DELAWARE CORPORATION
HEALTHSTAR, INC.,
AN ILLINOIS CORPORATION
BEYOND BENEFITS, INC.
A DELAWARE CORPORATION
DATED AS OF SEPTEMBER 23, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page No.
--------
<S> <C>
ARTICLE I PURCHASE AND SALE................................................1
Section 1.1 Purchase and Sale..........................................1
Section 1.2 Purchase Price.............................................1
Section 1.3 Closing....................................................1
Section 1.4 Earnout Payments...........................................2
Section 1.5 Transfer Taxes.............................................4
Section 1.6 Further Assurances.........................................5
Section 1.7 Stockholder Distributions..................................5
Section 1.8 Lock-Up Agreement..........................................5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER........................5
Section 2.1 Organization...............................................5
Section 2.2 Capitalization.............................................5
Section 2.3 Ownership of Stock.........................................6
Section 2.4 Authorization; Validity of Agreement.......................6
Section 2.5 Consents and Approvals; No Violations......................6
Section 2.6 Financial Statements.......................................7
Section 2.7 No Undisclosed Liabilities.................................7
Section 2.8 Absence of Certain Changes.................................8
Section 2.9 Employee Benefit Plans; ERISA..............................8
Section 2.10 Major Customers...........................................11
Section 2.11 Litigation................................................12
Section 2.12 No Default; Compliance with Applicable Laws...............12
Section 2.13 Taxes.....................................................13
Section 2.14 Properties................................................14
Section 2.15 Intellectual Property.....................................14
Section 2.16 Contracts.................................................15
Section 2.17 Labor Matters.............................................15
Section 2.18 Environmental Matters.....................................16
Section 2.19 Subsidiaries..............................................16
Section 2.20 Broker or Finders.........................................16
Section 2.21 Year 2000.................................................16
Section 2.22 Performance of Services...................................17
Section 2.23 Insurance.................................................17
Section 2.24 Related Party Transactions................................18
Section 2.25 Healthcare Matters........................................19
Section 2.26 Full Disclosure...........................................19
Section 2.27 Powers of Attorney........................................20
Section 2.28 Solvency..................................................20
Section 2.29 Purchase Entirely for Own Account; Accredited Investors...20
Section 2.30 Date of Acquisition of HSI................................21
Section 2.31 Corporate Name............................................21
Section 2.32 Knowledge of Individuals..................................21
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER....................22
Section 3.1 Organization...............................................22
Section 3.2 Authorization; Validity of Agreement; Necessary Action.....22
Section 3.3 Consent and Approvals; No Violations.......................22
Section 3.4 Acquisition for Investment.................................23
Section 3.5 Brokers or Finders.........................................23
ARTICLE IV COVENANTS.......................................................23
Section 4.1 Tax Matters................................................23
Section 4.2 Publicity..................................................25
Section 4.3 Further Assurances.........................................25
Section 4.4 Use of Names...............................................25
Section 4.5 Non-competition............................................26
Section 4.6 Non-solicitation...........................................26
Section 4.7 Restrictions on Resale of Purchaser's Shares...............26
Section 4.8 Financial Statements.......................................26
Section 4.9 Proprietary Information....................................27
Section 4.10 Access to Information......................................27
ARTICLE V INDEMNIFICATION..................................................27
Section 5.1 Indemnification by Seller..................................27
Section 5.2 Indemnification by Purchaser...............................28
Section 5.3 Survival of Representations and Warranties;
Limitations on Indemnity.................................28
Section 5.4 Notice and Opportunity to Defend...........................29
Section 5.5 Mitigation of Loss.........................................29
Section 5.6 Subrogation................................................29
Section 5.7 Tax Indemnification........................................29
Section 5.8 Exclusive Remedy...........................................29
Section 5.9 Investigation..............................................30
Section 5.10 Setoff.....................................................30
ARTICLE VI PRE-CLOSING COVENANTS OF SELLER.................................30
Section 6.1 Access and Investigation...................................30
Section 6.2 Operation of Business......................................31
Section 6.3 Filings and Consents.......................................33
Section 6.4 Notification...............................................33
Section 6.5 No Negotiation.............................................34
Section 6.6 Best Efforts...............................................34
Section 6.7 Confidentiality; Publicity.................................34
Section 6.8 Purchase of Tail Coverage by Seller........................35
Section 6.9 Reclassification of Intercompany Account...................35
Section 6.10 Intercompany Transactions..................................35
ARTICLE VII PRE-CLOSING COVENANTS OF PURCHASER.............................35
Section 7.1 Best Efforts...............................................35
Section 7.2 Confidentiality; Publicity.................................35
Section 7.3 Financing Commitment.......................................36
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE VIII CONDITIONS....................................................36
Section 8.1 Conditions to Each Party's Obligation to Effect
the Closing..............................................36
Section 8.2 Conditions to the Obligations of Purchaser.................36
Section 8.3 Conditions to the Obligations of Seller....................37
ARTICLE IX TERMINATION.....................................................38
Section 9.1 Termination................................................38
Section 9.2 Effect of Termination......................................39
Section 9.3 Cancellation Fees; Expenses................................39
ARTICLE X MISCELLANEOUS....................................................39
Section 10.1 Knowledge.................................................39
Section 10.2 Governing Law and Consent to Jurisdiction.................40
Section 10.3 Amendment and Modification................................40
Section 10.4 Notices...................................................40
Section 10.5 Legends...................................................41
Section 10.6 Counterparts..............................................41
Section 10.7 Entire Agreement; Third Party Beneficiaries...............41
Section 10.8 Severability..............................................42
Section 10.9 Service of Process........................................42
Section 10.10 Specific Performance......................................42
Section 10.11 Assignment................................................42
Section 10.12 Expenses..................................................42
Section 10.13 Waivers...................................................42
Section 10.14 Attorney Fees.............................................43
</TABLE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
- - - - ---- -------
<S> <C>
Accredited Investor 2.30(e)
Acquisition Transaction 6.2(e)
Affiliates 2.13
Agreement Preamble
Business Plan 2.29
Cancellation Fee 9.3(a)
Closing 1.3
Closing Date 1.3
Closing Purchase Price 1.2
COBRA 2.9(f)
Code 2.9(a)
Earnout Payments 1.4
Employee Plan 2.9(a)
Encumbrances 1.1
ERISA 2.9(a)
GAAP 1.4
Governmental Entity 2.5
Hazardous Materials 2.18
HSI Preamble
HSI Contract 2.5
HSI Employees 4.2(b)
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
HSI Intellectual Property 2.15
Indemnifying Party 5.4
Indebtedness 5.1
Indemnitee 5.4
Intellectual Property 2.15
IRS 2.9(h)
Knowledge 10.1
</TABLE>
<TABLE>
TERM SECTION
- ------- -------
<S> <C>
Liability 2.22
Losses 5.1
Material Adverse Effect 2.8
Material Agreement 2.16
Notice 1.4(c)
Ordinary Course of Business 2.7
Permits 2.12(a)
Person 2.8
Pre-Closing Period 6.1
Proprietary Information 7.3
Purchase Price 1.2
Purchaser Preamble
Purchaser Cancellation 9.3(a)
Purchaser Plans 4.2(a)
Purchaser's Shares 1.2
Related Party 2.24(e)
Representatives 2.24(f)
Seller Preamble
Seller Cancellation 9.3(b)
Shares Recitals
Stateman Note 1.4(d)
Stateman Purchase Agreement 1.4(d)
Tax Returns 2.13
Taxes 2.13
Year 2000 Compliant 2.21
</TABLE>
iv
<PAGE>
STOCK PURCHASE AGREEMENT
Stock Purchase Agreement, dated as of September 23, 1999 (this
"AGREEMENT") by and among HealthStar Corp., a Delaware corporation ("SELLER"),
HealthStar, Inc., an Illinois corporation ("HSI"), and Beyond Benefits, Inc., a
Delaware^corporation ("PURCHASER").
RECITALS
A. Seller is the owner of all of the outstanding shares of capital stock of
HSI; and
B. Purchaser desires to purchase from Seller, and Seller desires to sell to
Purchaser, all of the issued and outstanding shares of capital stock of HSI (the
"SHARES"), subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements as set forth herein, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, hereby agree as
follows:
ARTICLE I
PURCHASE AND SALE
SECTION 1.1 PURCHASE AND SALE. Upon the terms and subject to the conditions
set forth in this Agreement, at the Closing (as hereinafter defined), Seller
shall sell, assign, transfer and deliver to Purchaser, and Purchaser shall
purchase from Seller, the Shares, free and clear of all options, pledges,
security interests, liens, claims, preemptive rights, imperfections of title,
conditions or restrictions of any nature, or other encumbrances, or restrictions
on voting or transfer ("ENCUMBRANCES"), other than restrictions imposed by
Federal or state securities laws.
SECTION 1.2 PURCHASE PRICE. On the Closing Date (as hereinafter defined)
and subject to the terms and conditions set forth in this Agreement, in
consideration of the sale, assignment, transfer and delivery of the Shares,
Purchaser shall deliver to Seller a stock certificate for Three Hundred and
Three Thousand, Nine Hundred and Forty-Three (303,943) shares of Purchaser's
non-voting Series B common stock, (the "PURCHASER'S SHARES") and pay Seller Ten
Million Dollars ($10,000,000) in cash (the "CLOSING PURCHASE PRICE"). The term
"PURCHASE PRICE" as used herein shall mean and include the Closing Purchase
Price, Purchaser's Shares and any Earnout Payments due on the terms and in the
amounts set forth in SECTION 1.4.
SECTION 1.3 CLOSING. The sale and purchase of the Shares contemplated by
this Agreement shall take place at a closing (the "CLOSING") to be held on or
before November 15, 1999 at the offices of Morrison & Foerster LLP, Twelfth
Floor, 19900 MacArthur Boulevard, Irvine, California 92612-2445, at 10:00 a.m.
Pacific Time or such other place, time or date on which Seller and Purchaser may
mutually agree in writing (the date on which the Closing takes place being the
"CLOSING DATE"), and effective as of 12:01 a.m. on the Closing Date.
(a) At the Closing, Seller shall deliver or cause to be delivered to
Purchaser (i) stock certificates evidencing the Shares, duly endorsed in blank
or accompanied by stock powers duly executed in blank, and (ii) all other
previously undelivered certificates and other documents required to be delivered
<PAGE>
by Seller to Purchaser at or prior to the Closing Date in connection with the
transactions contemplated hereby including those documents and certificates
required to be delivered by ARTICLE 8 hereof.
(b) At the Closing, Purchaser shall deliver to Seller (i) the Closing
Purchase Price by wire transfer of immediately available funds to an account or
accounts designated by Seller, (ii) stock certificates evidencing the
Purchaser's Shares, and (iii) all other previously undelivered certificates and
other documents required to be delivered by Purchaser to Seller at or prior to
the Closing Date in connection with the transactions contemplated hereby
including those documents and certificates required to be delivered by Article 8
hereof.
SECTION 1.4 EARNOUT PAYMENTS.
(a) As additional consideration for the purchase of the Shares
(collectively, the "EARNOUT PAYMENTS"), Purchaser shall pay Seller within one
hundred five (105) days first business day thereafter, subject to SECTION 1.4(c)
and 1.4(d) hereof, a payment calculated as follows:
(i) For the twelve (12) month period beginning on the first day of the
first full month following the Closing Date, the Earnout Payment shall be
equal to an amount determined as follows: Revenue (as defined below) for
such period shall be determined. The Earnout Payment shall equal the amount
that appears in Column B below opposite the applicable Revenue amount in
Column A below.
(ii) If the Earnout Payment under SECTION 1.4(a)(i) is less than One
Million Two Hundred and Fifty Thousand Dollars ($1,250,000), then at the
end of the eighteen (18) month period beginning on the first day of the
first full month following the Closing Date, the Earnout Payment shall be
equal to an amount determined as follows: Revenue for the twelve (12) month
period ending on the last day of such eighteen (18) month period shall be
determined. If the amount so determined is in excess of the amount
determined at the end of the twelve (12) month period in SECTION 1.4(a)(i),
then the Earnout Payment shall be an amount equal to the amount that
appears in Column B below opposite the applicable Revenue amount in Column
A below, less any amounts paid or payable as an Earnout Payment at the end
of the twelve (12) month period under SECTION 1.4(a)(i) above.
"REVENUE" means revenue accrued by HSI in accordance with GAAP for service
dates occurring during the applicable period from all clients with outstanding
client agreements in existence at Closing, PLUS revenue accrued from all
potential new HSI clients identified by Seller on SECTION 1.4 of the Disclosure
Schedule (as defined herein) which clients execute and deliver client agreements
that have effective dates within ninety (90) days of Closing; such aggregate
amount shall be rounded up or down, as the case may be, to the nearest One
Hundred Thousand Dollars ($100,000). Current or future clients common to both
HSI and Purchaser will be separately tracked and the HSI portion included in
Revenue. Revenue does not include any new business revenue generated by
Purchaser under any cross-access agreement between HSI and Purchaser or any of
its subsidiaries. Revenue shall be determined by Purchaser ninety (90) days
after the last day of the applicable measurement period, such that retroactive
adjustments to accrued revenue can be taken into account. "GAAP" shall mean
generally accepted accounting principles consistently applied.
2
<PAGE>
<TABLE>
<CAPTION>
Column A Column B
------------------------------ ---------------
If the Revenue for the Earnout
Payment measurement period is: Earnout Amount:
------------------------------ ---------------
<S> <C> <C>
$13,500,000 $1,250,000
$13,400,000 $1,050,000
$13,300,000 $850,000
$13,200,000 $600,000
$13,100,000 $400,000
$13,000,000 $300,000
$12,900,000 $200,000
$12,800,000 $0
</TABLE>
(b) In no event shall the total of all Earnout Payments under SECTION
1.4(a) exceed One Million Two Hundred and Fifty Thousand Dollars ($1,250,000).
(c) In the event that Seller disputes the amount of Revenue calculated by
Purchaser for either measurement period, Seller shall provide written notice
("Notice") to Purchaser within thirty (30) days of receipt by Seller of the
applicable Earnout Payment (or receipt by Seller of notice from Purchaser
stating that no Earnout Payment was due for such period). The Notice shall
specify Seller's reasons for disputing Purchaser's Revenue calculation and
provide an estimate that Seller believes is the correct amount of Revenue. After
receipt of the Notice, Purchaser shall make available to Seller copies of the
documentation used by Purchaser to calculate Revenue. Such information shall be
kept confidential by Seller and shall be used by Seller only with respect to
calculating Revenue and not for any other purpose. Seller and Purchaser agree
that Seller and Purchaser will meet within forty-five (45) days of receipt of
the Notice and use good faith efforts to resolve the dispute. If Purchaser and
Seller have not resolved the dispute regarding the calculation of Revenue within
thirty (30) days of the meeting specified above, Purchaser and Seller agree that
the dispute regarding the calculation of Revenue shall be settled by arbitration
under the Federal Arbitration Act in accordance with the commercial arbitration
rules of the American Arbitration Association, and judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. In arbitration proceedings under this paragraph, the arbitrator, in
rendering its decision, shall follow the substantive laws that would otherwise
be applicable and shall state the basis of its decision. The arbitration of any
dispute pursuant to this paragraph shall be held in the city of Long Beach,
California (or in such other location as Purchaser and Seller may agree).
(d) Purchaser shall withhold payment of any applicable Earnout Payment for
a period of twenty-one (21) months (the "HOLDBACK PERIOD") from the first full
day of the first full month following the Closing Date, as a contingency for any
potential losses and applicable offset in connection with any claims or
potential claims made by Thomas H. Stateman ("STATEMAN") regarding amounts due
pursuant to that certain Stock Purchase Agreement by and among Champion
Financial Corporation, HSI and Stateman dated as of December 8, 1997 (the
"STATEMAN PURCHASE AGREEMENT"), or the note payable to Thomas S. Stateman issued
in connection with the Stateman Purchase Agreement (the "Stateman Note");
PROVIDED, HOWEVER, that the Holdback Period shall be extended as follows: if any
suit, action or proceeding remains pending upon expiration of such twenty-one
(21) month period with respect to the amounts due under the Stateman Purchase
Agreement or Stateman Note, then the Holdback Period shall remain in effect
until there is a Final Resolution (as defined below) of any such suit, action or
proceeding.
3
<PAGE>
"Final Resolution" shall mean (i) any final judgment, including the
exhaustion of all avenues of appeal or the lapse of the relevant period of time
pursuant to which an appeal may be sought, entered by a court of law with
appropriate jurisdiction which judgment shall finally resolve a dispute over the
amounts due under the Stateman Purchase Agreement and Stateman Note, such that
any further claims by Stateman with respect to amounts due under the Stateman
Purchase Agreement and Stateman Note would be barred by principles of RES
JUDICATA; or (ii) any settlement or release entered into and binding upon
Stateman, which releases or settles any claim or potential claim by Stateman
with respect to amounts due under the Stateman Purchase Agreement and Stateman
Note.
SECTION 1.5 TRANSFER TAXES. All transfer taxes, fees and duties under
applicable law incurred in connection with the sale and transfer of the Shares
under this Agreement will be borne and paid by Seller and Seller shall promptly
reimburse Purchaser for any such tax, fee or duty which Purchaser is required to
pay under applicable law. All transfer taxes, fees and duties under applicable
law incurred in connection with the sale and transfer of the Purchaser's Shares
under this Agreement will be borne and paid by Purchaser and Purchaser shall
promptly reimburse Seller for any tax, fee or duty which Seller is required to
pay under applicable law.
SECTION 1.6 FURTHER ASSURANCES. From time to time after the Closing,
Seller, at the request of Purchaser, and Purchaser, at the request of Seller,
shall without further consideration execute and deliver further instruments of
transfer and assignment and take such other action as the requesting party may
reasonably require to more effectively transfer and assign to, and vest in,
Purchaser the Shares, and Seller the Purchaser's Shares, to be sold hereunder
and all rights thereto, respectively, and to fully implement the provisions of
this Agreement.
SECTION 1.7 STOCKHOLDER DISTRIBUTIONS. HSI has not, since June 30, 1999,
and shall not, from June 30, 1999 through the Closing, (a) declare, set aside or
pay any dividend or other distribution, whether payable in cash, stock or other
property, in respect of its capital stock, (b) directly or indirectly redeem,
purchase or otherwise acquire any shares of its capital stock or other
securities or shares of capital stock or other securities of any of its
subsidiaries, or (c) pay any principal or interest on any debts owed by HSI to
Seller.
SECTION 1.8 LOCK-UP AGREEMENT. In connection with any public offering of
securities by Purchaser, Seller shall, and shall cause its successors or assigns
to, execute a lock-up agreement in substantially the form entered into by the
directors, officers and major stockholders of Purchaser to restrict the sale by
Seller of the Purchaser's Shares for a period of one hundred eighty (180) days
from the effective date of a registration statement of Purchaser filed under the
Securities Act. The provisions of this Section 1.8 shall be effective for as
long as Seller owns any portion of the Purchaser's Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller and HSI, jointly and severally, represent and warrant to Purchaser
as follows:
4
<PAGE>
SECTION 2.1 ORGANIZATION. Each of Seller and HSI is a corporation duly
organized, validly existing and in good standing under the laws of the
respective jurisdiction of its incorporation and has all requisite power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted. HSI is duly qualified or licensed to do business
as a foreign corporation or other entity and is in good standing in each
jurisdiction in which the nature of the business conducted by it makes such
qualification or licensing necessary. Seller has made available to Purchaser a
complete and correct copy of the articles of incorporation and bylaws of HSI, as
currently in effect.
SECTION 2.2 CAPITALIZATION. SECTION 2.2 of the disclosure schedule of
Seller and HSI delivered to Purchaser on or before the date hereof (the
"DISCLOSURE SCHEDULE") sets forth the authorized, issued and outstanding capital
stock of HSI. The Shares constitute all of the issued and outstanding capital
stock of HSI. All the outstanding shares of capital stock of HSI are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. There are no existing (a) options, warrants, calls, subscriptions or
other rights, convertible securities, agreements or commitments of any character
obligating Seller or HSI to issue, transfer or sell any shares of capital stock
or other equity interest in HSI or securities convertible into or exchangeable
for such shares or equity interests; (b) contractual obligations of Seller or
HSI to repurchase, redeem or otherwise acquire any capital stock of HSI or (c)
voting trusts or similar agreements to which Seller or HSI is a party with
respect to the voting of the capital stock of HSI.
SECTION 2.3 OWNERSHIP OF STOCK. Except as set forth in SECTION 2.3 of the
Disclosure Schedule, the Shares are owned by Seller free and clear of all
Encumbrances, other than restrictions imposed by Federal and state securities
laws. Upon the consummation of the transactions contemplated hereby, Purchaser
will acquire title to the Shares free and clear of all Encumbrances, other than
restrictions imposed by Federal and state securities laws.
SECTION 2.4 AUTHORIZATION; VALIDITY OF AGREEMENT. Each of Seller and HSI
has the power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery and
performance by Seller and HSI of this Agreement, and the consummation by them of
the transactions contemplated hereby, have been duly authorized by their
respective Boards of Directors, and except for the adoption of this Agreement by
the requisite votes of the respective stockholders of Seller and HSI, no other
corporate action on the part of Seller and HSI is necessary to authorize the
execution and delivery by Seller and HSI of this Agreement and the consummation
by them of the transactions contemplated hereby. This Agreement has been duly
executed and delivered by Seller and HSI and, assuming due and valid
authorization, execution and delivery hereof by Purchaser, this Agreement
constitutes a valid and binding obligation of Seller and HSI, enforceable
against Seller and HSI in accordance with its terms, except that (a) such
enforcement may be subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws, now or hereafter in effect, affecting
creditors' rights generally and; (b) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
SECTION 2.5 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as set forth in
SECTION 2.5 of the Disclosure Schedule, neither the execution, delivery nor
performance of this Agreement by Seller and HSI nor the consummation by Seller
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and HSI of the transactions contemplated hereby will (a) violate any provision
of the certificate or articles of incorporation or bylaws of Seller or HSI; (b)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which Seller is a party or by which Seller or
any of its properties or assets may be bound; (c) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation or acceleration)
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which HSI is a party or by which HSI or any of its properties or assets may
be bound (each, an "HSI CONTRACT"); (d) violate any order, writ, judgment,
injunction, decree, law, statute, rule or regulation applicable to Seller, HSI
or any of their properties or assets, or (e) except for those filings required
pursuant to applicable state and federal securities laws, require on the part of
Seller or HSI any filing or registration with, notification to, or
authorization, consent or approval of, any court, legislative, executive or
regulatory authority or agency ("GOVERNMENT ENTITY").
SECTION 2.6 FINANCIAL STATEMENTS. Seller has delivered to Purchaser (a) the
unaudited balance sheets and related unaudited statements of income of HSI at
and for each of the years ending March 31, 1998 and March 31, 1999 and (b) the
unaudited balance sheets and related statements of income of HSI at and for the
three (3) month period ended June 30, 1999 (collectively, the "FINANCIAL
STATEMENTS"). The balance sheets included in the Financial Statements present
fairly, in all material respects, the financial position of HSI as of the
respective dates thereof, and the related statements of income included in the
Financial Statements present fairly, in all material respects, the results of
operations of HSI for the respective period or as of the respective dates set
forth therein, in each case in accordance with GAAP, consistently applied for
all periods presented except for the absence of footnote disclosures, statements
of changes in stockholders' equity, and report of independent accountants each
of which is required under GAAP; and, provided, however, that the liability
relating to the Stateman Note reported on the Financial Statements is a
liability of Seller rather than HSI, and appropriate actions have been taken by
Seller to remove such liability from HSI's balance sheet and to report same
solely as a liability of Seller.
SECTION 2.7 NO UNDISCLOSED LIABILITIES.
(a) Except as set forth in SECTION 2.7 of the Disclosure Schedule and
except (a) for liabilities and obligations incurred in the Ordinary Course of
Business (as hereinafter defined) after June 30, 1999, (b) for liabilities and
obligations disclosed in or covered by the Financial Statements, and (c) for
liabilities and obligations incurred in connection with the transactions
contemplated hereby or otherwise as contemplated by this Agreement, since June
30, 1999, neither Seller nor HSI has incurred any liabilities or obligations
that would be required to be reflected or reserved against in a balance sheet of
HSI, prepared in accordance with GAAP as applied in preparing the unaudited
balance sheets of HSI as included in the Financial Statements. Action taken by
or on behalf of HSI shall not be deemed to have been taken in the "ORDINARY
COURSE OF BUSINESS" unless such action is: (a) recurring in nature, consistent
with HSI's past practices and taken in the ordinary course of HSI's normal
day-to-day operations, as such practices and operations have been conducted
since December 12, 1997; (b) taken in good faith in accordance with sound and
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prudent business practices; and (c) not required to be authorized by HSI's
stockholders, HSI's board of directors or any committee of HSI's board of
directors, and does not require any other separate or special authorization of
any nature.
SECTION 2.8 ABSENCE OF CERTAIN CHANGES. Except as set forth in SECTION 2.8
of the Disclosure Schedule, since June 30, 1999, HSI has not (a) suffered any
change or changes constituting, in the aggregate, a Material Adverse Effect (as
hereinafter defined) and to Seller and HSI's Knowledge (as defined in Section
10.1), no event has occurred that is reasonably likely to have a Material
Adverse Effect; (b) suffered any loss, damage or destruction to, or any
interruption in the use of any of HSI's assets (whether or not covered by
insurance) that would constitute a Material Adverse Effect; (c) amended its
articles of incorporation or bylaws; (d) split, combined or reclassified the
Shares; (e) declared or set aside or paid any dividend or other distribution
with respect to the Shares, (f) changed its accounting principles, practices or
methods, except as required by GAAP or applicable law; (g) made any capital
expenditure in excess of Twenty Thousand Dollars ($20,000); (h) written off as
uncollectible, or established any extraordinary reserve with respect to, any
account receivable or other indebtedness; (i) pledged or hypothecated any of its
assets or otherwise permitted any of its assets to become subject to any
Encumbrance; (j) entered into any transaction outside the Ordinary Course of
Business; (k) incurred, assumed or otherwise become subject to any liability or
obligation, other than in the Ordinary Course of Business; (l) waived or
released any material right; (m) approved any material increase, direct or
indirect, or other material change in the compensation paid or payable to any
officer, director, employee, independent contractor or agent of HSI, or
established or created any employment, deferred compensation or severance
agreement or employee benefit plan or amended any of the foregoing; (n) suffered
any material loss of personnel, authorized any change in the terms and
conditions of the employment of senior members of management of HSI or incurred
any labor trouble; (o) made any arrangements relating to any royalty, dividend
or similar payment entered into by HSI based on the sales volume of HSI (other
than sales commission arrangements), other than in the Ordinary Course of
Business; (p) entered into any material agreement with respect to the
endorsement of products or services, other than in the Ordinary Course of
Business; (q) revalued any of its material assets; (r) amended or terminated of
any Material Agreement (as defined in SECTION 2.16); or (s) agreed, committed or
offered, and has not attempted, to take any of the actions referred to in
clauses (a) through (r).
As used in this Agreement, "MATERIAL ADVERSE EFFECT" means any material
adverse change in, or material adverse effect on, the business, financial
condition, prospects or operations of a Person (as hereinafter defined), taken
as a whole; PROVIDED, HOWEVER, that any adverse effect on a Person resulting
from the execution of this Agreement, the announcement of this Agreement and the
transactions contemplated hereby shall be excluded from the determination of
Material Adverse Effect. "PERSON" means a natural person or any partnership,
limited liability company, trust, estate, association, corporation, custodian,
nominee or any other individual or entity in its own or any representative
capacity or any other entity.
SECTION 2.9 EMPLOYEE BENEFIT PLANS; ERISA.
(a) All "EMPLOYEE BENEFIT PLANS" as defined by Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), all specified
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fringe benefit plans as defined in Section 6039D of the Internal Revenue Code of
1986, as amended (the "CODE"), and all other bonus, incentive compensation,
deferred compensation, profit sharing, stock option, stock appreciation right,
stock bonus, stock purchase, employee stock ownership, savings, life insurance,
group insurance, or fringe benefit plan, and any other employee compensation or
benefit plan, agreement, policy, practice, commitment, contract, or
understanding (whether qualified or nonqualified, currently effective or
terminated, written or unwritten, funded or unfunded), and any trust, escrow or
other agreement related thereto, that are maintained or contributed to by HSI,
have been maintained or contributed to in the last six (6) years by HSI, or with
respect to which HSI has incurred or could incur any liability (each, an
"EMPLOYEE PLAN") are, to the Knowledge of Seller or HSI, set forth in SECTION
2.9 of the Disclosure Schedule.
(b) With respect to the Employee Plans listed in SECTION 2.9 of the
Disclosure Schedule, HSI has made available to Purchaser true, accurate and
complete copies of (i) the documents comprising each such Employee Plan (or,
with respect to each such Employee Plan which is unwritten, a detailed written
description of the material terms of such Employee Plan), (ii) all trust
agreements, insurance contracts or any other funding instruments related to such
Employee Plans, (iii) all rulings, determination letters, no-action letters or
advisory opinions from any government agency that pertain to any such Employee
Plan and any open requests therefor, (iv) the most recent actuarial and
financial reports (audited and unaudited) and the annual reports filed with any
government agency with respect to each such Employee Plan during the current
year and each of the three (3) preceding years, (v) all collective bargaining
agreements pursuant to which contributions are being or have been made or
obligations incurred (including both pension and welfare benefits) with respect
to any such Employee Plan, (vi) all registration statements filed with respect
to any such Employee Plan, (vii) all contracts that relate to any such Employee
Plan, and (viii) all summary plan descriptions and all other written
communications regarding each such Employee Plan generally distributed to
participants and beneficiaries.
(c) Full payment has been made of all amounts which are required under the
terms of each Employee Plan to be paid as contributions or premiums on or before
their due dates.
(d) No Employee Plan is a multiemployer plan (within the meaning of Section
3 (37) or 4001(a)(3) of ERISA) or a single employer pension plan (within the
meaning of Section 4001(a)(15) of ERISA) for which HSI could incur liability
under Section 4063 or 4064 of ERISA. No Employee Plan is subject to Title IV of
ERISA.
(e) HSI does not have any liability, nor does it have any Knowledge of any
facts or circumstances that might give rise to any liability, and the
transactions contemplated by this Agreement will not result in any liability:
(i) for the termination of or withdrawal from any Employee Plan under Sections
4062, 4063 or 4064 of ERISA; (ii) for any lien imposed under Sections 302(f) of
ERISA or Section 412(n) of the Code; (iii) for any interest payments required
under Section 302(e) of ERISA or Section 412(m) of the Code; (iv) for any excise
tax imposed by Section 4971, 4972, 4980 or 4980B of the Code; (v) for any
minimum funding contributions under Section 302(c)(11) of ERISA or Section
412(c)(11) of the Code; or (vi) for withdrawal from any multi-employer plan
under Section 4201 of ERISA.
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(f) Except as disclosed on SECTION 2.9 of the Disclosure Schedule, HSI has
complied with the continuation coverage provisions of the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA") with respect to all
current employees and former employees and other "QUALIFIED BENEFICIARIES" (as
defined in Code Section 4980B(g)(1) and ERISA Section 607(3)). All Employee
Plans that are "GROUP HEALTH PLANS," as defined in Section 5000(b) of the Code,
have been operated in conformance with the Medicare as Secondary Payer
provisions of the Social Security Act, and no Person is subject to liability
under Section 5000(a) of the Code with respect to any such Employee Plan.
(g) The form of all Employee Plans is in compliance with the applicable
terms of ERISA, the Code and all other applicable laws, and such Employee Plans
have been operated in compliance with such laws and the written Employee Plan
documents.
(h) Each Employee Plan which is intended to be qualified under Section
401(a) of the Code has received a favorable determination letter from the
Internal Revenue Service ("IRS"), and HSI and Seller have no Knowledge of any
circumstances which will or could result in revocation of any such favorable
determination letter. Each trust created under any Employee Plan which is a
pension plan (as defined in Section 3(2) of ERISA) has been determined to be
exempt from taxation under Section 501(a) of the Code, and HSI and Seller are
not aware of any circumstance which will or could result in a revocation of such
exemption. Each Employee Plan which is an employee welfare benefit plan (as
defined in Section 3(1) of ERISA) that utilizes a funding vehicle described in
Section 501(c)(9) of the Code or is subject to the provisions of Section 505 of
the Code has been the subject of a notification by the IRS that such funding
vehicle qualifies for tax-exempt status under Section 501(c)(9) of the Code
and/or that the plan complies with Section 505 of the Code, unless the IRS does
not as a matter of policy issue such notification with respect to the particular
type of plan. With respect to each Employee Plan, no event has occurred which
will or could give rise to a loss of any intended tax consequence or to any tax
under Section 511 of the Code.
(i) There is no material pending or, to HSI's and Seller's Knowledge,
threatened legal or administrative proceeding relating to any Employee Plan
other than routine claims for benefits, nor is there any basis for any such
proceeding. Neither HSI nor any fiduciary of an Employee Plan has engaged in a
transaction with respect to any Employee Plan that, assuming the taxable period
of such transaction expired as of the date hereof, could subject HSI or
Purchaser to a tax or penalty imposed by either Section 4975 of the Code or
Section 502(l) of ERISA or a violation of Section 406 of ERISA. The transactions
contemplated by this Agreement will not result in the potential assessment of a
tax or penalty under Section 4975 of the Code or Section 502(l) of ERISA nor
result in a violation of Section 406 of ERISA.
(j) Except as set forth in SECTION 2.9 of the Disclosure Schedule, Seller
has maintained workers' compensation coverage on behalf of HSI as required by
applicable state law through purchase of insurance and not by self-insurance or
otherwise.
(k) Except as required by law, the consummation of the transactions
contemplated by this Agreement will not accelerate the time of vesting or the
time of payment, or increase the amount, of compensation due to any employee,
officer, former employee or former officer of HSI. There are no contracts or
arrangements providing for payments that could subject any Person to liability
for tax under Section 4999 of the Code.
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(l) Except for the continuation coverage requirements of COBRA, the
requirements of other applicable law, or benefits, the full cost of which is
borne by the current or former employee (or his or her beneficiary), HSI has no
obligations or potential liability for medical expenses incurred by employees
following termination of employment or retirement under any of the Employee
Plans.
(m) None of the transactions contemplated by this Agreement will result in
an amendment, modification or termination of any of the Employee Plans. No
written or oral representations have been made to any employee or former
employee of HSI promising or guaranteeing any employer payment or funding for
the continuation of medical, dental, life or disability coverage for any period
of time beyond the Closing (except to the extent of coverage required under
COBRA). No written or oral representations have been made to any employee or
former employee of HSI concerning the employee benefits of Purchaser.
(n) No trade or business, whether or not incorporated, which would be
treated as a single employer with HSI under Section 4001 of ERISA or Section
414(b), (c), (m) or (o) of the Code (a "MEMBER OF THE CONTROLLED GROUP")
maintains or contributes to, or within the past six years has maintained or
contributed to (i) a multiemployer plan (within the meaning of Section 3(37) or
4001(a)(3) of ERISA, or (ii) a plan that is subject to Title IV of ERISA. No
Member of the Controlled Group has any liability, nor have facts or
circumstances occurred that might give rise to any liability: (i) for any lien
imposed under Section 302(f) of ERISA or Section 412(n) of the Code; (ii) for
any interest payments required under Section 302(e) of ERISA or Section 412(m)
of the Code; (iii) for any minimum funding contributions under Section
302(c)(11) of ERISA or Section 412(c)(11) of the Code; or (iv) for withdrawal
from any multiemployer plan under Section 4201 of ERISA.
SECTION 2.10 MAJOR CUSTOMERS. SECTION 2.10 of the Disclosure Schedule
accurately identifies each such customer or other Person that accounted for more
than Fifty Thousand Dollars ($50,000) of the gross revenues of HSI during HSI's
fiscal year ending March 31, 1999. Except as set forth in SECTION 2.10 of the
Disclosure Schedule, neither Seller nor HSI has received any written notice or
other communication and neither Seller nor HSI has Knowledge indicating that any
customer of HSI or other Person described in SECTION 2.10 of the Disclosure
Schedule is reasonably likely to cease dealing with HSI, to change the
applicable payment methodology such that HSI revenues received from such
customer are reduced, or is reasonably likely to otherwise reduce the volume of
business transacted by such customer or other Persons or entity with HSI below
the levels set forth in SECTION 2.10 of the Disclosure Schedule.
SECTION 2.11 LITIGATION.
(a) Except as set forth in SECTION 2.11 of the Disclosure Schedule, there
is no action, suit, proceeding or investigation pending or, to the Knowledge of
Seller or HSI, threatened, involving HSI, by or before any Government Entity or
by any third party. There is no action, suit, proceeding or investigation which
HSI or Seller on behalf of HSI currently intends to initiate.
(b) Except as set forth in SECTION 2.11 of the Disclosure Schedule, HSI is
not subject to any continuing order of, consent decree, settlement agreement or
other similar written agreement with, or, to the Knowledge of Seller or HSI,
continuing investigation by, any Government Entity, or any judgment, order,
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writ, injunction, decree, or award of any Government Entity, court, or
arbitrator, including, without limitation, cease-and-desist or other orders.
SECTION 2.12 NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS.
(a) Except as set forth in SECTION 2.12 of the Disclosure Schedule, HSI is
not, nor has Seller or HSI received written notice or any similar communication
alleging that HSI may be, in default or violation of any term, condition or
provision of (i) its articles of incorporation or bylaws; (ii) any of the
Material Agreements (as defined in SECTION 2.16(a)); or (iii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, arbitration award or
material licenses, permits, consents, approvals and authorizations of a
Government Entity (collectively "PERMITS") applicable to HSI including, without
limitation, laws, rules and regulations relating to the environment, managed
care and insurance, occupational health and safety, employee benefits, wages,
workplace safety, equal employment opportunity, and race, religious or sex
discrimination, excluding from the foregoing clauses (ii) and (iii) defaults or
violations which become applicable as a result of the business or activities in
which Purchaser is or proposes to be engaged and in which HSI is not currently
engaged or as a result of any acts or omissions by, or the status of any facts
pertaining primarily to, Purchaser or its agents. Neither Seller nor HSI has
received any written notice since December 12, 1997 from any federal or state
regulatory authority alleging any violation described in clause (iii) or
directing Seller or HSI to take any remedial action in regard to HSI with
respect to such law, ordinance or regulation, except for any such notices where
HSI and Seller have conclusively resolved and settled all of the issues raised
by such notice with the Person issuing the notice, HSI and Seller have paid any
liability, fine or assessment resulting from such resolution or settlement and
no additional action is required by Seller or HSI with respect to any items
arising from such notice.
(b) HSI has all Permits necessary to conduct its business in the manner and
in the areas in which it is presently being conducted, and all such Permits are
valid and in full force and effect.
SECTION 2.13 TAXES.
(a) HSI has (i) timely filed all Tax Returns (as hereinafter defined)
required to be filed by it, and all such Tax Returns were true, correct and
complete in all material respects when filed and (ii) paid or accrued (in
accordance with GAAP) all Taxes (as hereinafter defined) whether or not shown to
be due on such Tax Returns other than such Taxes that are being contested in
good faith by HSI;
(b) Except as set forth on Section 2.13 of the Disclosure Schedule, neither
Seller nor HSI has received written notice of any ongoing federal, state, local
or foreign audits or examinations of any Tax Return of HSI;
(c) there are no outstanding written requests, agreements, consents or
waivers to extend the statutory period of limitations applicable to the
assessment of any material Taxes or deficiencies against HSI;
(d) HSI is not a party to any agreement providing for the allocation or
sharing of Taxes, except with Seller and its Affiliates (as defined below);
(e) there are no material statutory liens for Taxes upon the assets of HSI
which are not provided for in the Financial Statements, except liens for Taxes
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not yet due and payable and liens for Taxes that are being contested in good
faith and which are set forth on SECTION 2.13 of the Disclosure Schedule;
(f) the provisions for Taxes on the Financial Statements are sufficient in
all material respects for the payment of all accrued and unpaid federal, state,
county and local Taxes of any nature, and any applicable Taxes owing to any
foreign jurisdiction, whether or not assessed or disputed, as of such date; and
(g) all Taxes and other assessments and levies which HSI was or is required
to withhold or collect have been withheld and collected and have been or will be
paid over to the proper governmental authorities.
"AFFILIATE(S)" shall have the meaning set forth in Rule 12b-2 of the
Exchange Act of 1934, as amended.
"TAXES" shall mean any and all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, excise, real
or personal property, sales, withholding, social security, occupation, use,
service, service use, value added, license, net worth, payroll, franchise,
transfer and recording taxes, fees and charges, imposed by the United States
Internal Revenue Service or any taxing authority (whether domestic or foreign
including, without limitation, any state, local or foreign government or any
subdivision or taxing agency thereof (including a United States possession),
whether computed on separate, consolidated, unitary, combined or any other
basis; and such term shall include any interest, penalties or additional amounts
attributable to, or imposed upon, or with out respect to, any such Taxes,
charges, fees, levies or other assessments.
"TAX RETURN" shall mean any report, return, document, declaration or other
information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to Taxes.
SECTION 2.14 PROPERTIES. HSI does not own any real property. Except as set
forth in SECTION 2.14 of the Disclosure Schedule, HSI has good, valid and (if
applicable) marketable title to or valid leasehold interests in all assets
material to its business (except for Intellectual Property, as defined in
SECTION 2.15) and to those assets reflected on the Financial Statements (except
for assets disposed of, cash used and accounts receivable collected or written
down in ordinary course since March 31, 1999), free and clear of Encumbrances,
other than liens for taxes not yet delinquent, liens imposed by law for
obligations not past due to carriers, warehousemen, laborers, materialmen and
the like, liens in respect of pledges or deposits under workers' compensation
laws or similar legislation, purchase money security interests given in
connection with the acquisition of assets and minor liens and encumbrances that
do not materially detract from the value of the assets subject thereto or
materially impair the operations of HSI. All equipment included in such assets
which is necessary to the business of HSI is in good condition and repair
(ordinary wear and tear excepted) and all leases of real or personal property to
which HSI is a party are fully effective and afford HSI peaceful and undisturbed
possession of the property subject to the lease. The property and assets of HSI
are sufficient for the conduct of its business as presently conducted. To the
Knowledge of Seller and HSI, HSI is not in violation of any zoning, building or
safety ordinance, regulation or requirement or other law or regulation
applicable to the operation of its owned or leased properties, nor has HSI
received any notice of any such violation. There are no defaults by HSI or, to
the Knowledge of Seller and HSI, by any other party under any lease of real or
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personal property which might curtail in any material respect the present use by
HSI of its respective properties.
SECTION 2.15 INTELLECTUAL PROPERTY. Except as set forth in SECTION 2.15 of
the Disclosure Schedule, there are no pending or threatened claims of which
Seller or HSI has been given written notice, by any Person against HSI's use or
ownership of any trademarks, trademark registrations, trade names, trade
secrets, service marks, service names, logos, assumed names, copyrights and
copyright registrations, patents and all applications therefor, or other
intellectual property ("INTELLECTUAL PROPERTY"). HSI has such rights, by
license, lease or other agreement, with respect to the Intellectual Property
used in HSI's business as currently conducted (collectively, the "HSI
INTELLECTUAL PROPERTY") as are necessary to permit HSI to conduct its business
as currently conducted, except where the failure to have such rights,
individually or in the aggregate, would not have a Material Adverse Effect. HSI
has not received any notice or other communication (in writing or otherwise) of
and no inquiry by Seller or HSI has revealed any actual, alleged, possible or
potential infringement of any HSI Intellectual Property owned or used by any
other Person.
SECTION 2.16 CONTRACTS.
(a) Seller has delivered or made available to Purchaser copies of all
written Material Agreements, each of which is listed on SECTION 2.16 of the
Disclosure Schedule. Each Material Agreement is in full force and effect and is
valid and enforceable by HSI in accordance with its terms. To the Knowledge of
Seller or HSI, no other Person is in default in the observance or the
performance of any term or obligation to be performed by it under any Material
Agreement. As used in this Agreement, "MATERIAL AGREEMENT(S)" shall mean each
agreement, arrangement, instrument, bond, commitment, franchise, indemnity,
indenture, lease, license or understanding to which HSI is a party or to which
HSI or any of its respective properties is subject that (i) obligates HSI to pay
an amount in excess of Fifty Thousand Dollars ($50,000) in any twelve (12) month
period beginning after December 31, 1998; (ii) provides for the extension of
credit to an unaffiliated third party in an amount greater than Fifty Thousand
Dollars ($50,000); (iii) provides for a guaranty by HSI of obligations of others
in excess of Fifty Thousand Dollars ($50,000); (iv) constitutes an employment
agreement, consulting agreement or personal service contract not terminable on
less than sixty (60) days' notice without penalty; (v) expressly limits, in any
material respect, the ability of HSI to engage in any business, compete with any
Person or expand the nature or geographic scope of its business; (vi) pursuant
to which HSI is entitled to receive an amount in excess of Fifty Thousand
Dollars ($50,000) in any twelve month period beginning after December 31, 1998;
(vii) pursuant to which HSI leases real property; or (viii) constitutes a
contract between HSI and any healthcare provider; PROVIDED, HOWEVER, that any
such contract shall be deemed a Material Agreement only if (1) in the case of a
hospital, the dollar volume of medical claims processed during the twelve month
period ended August 31, 1999 exceeded $1,796,110 and (2) in the case of a
physician, the number of medical claims processed during the twelve month period
ended August 31, 1999 exceed Two Thousand (2,000).
(b) Seller has provided Purchaser with a copy of each of its current form
agreements for participating providers and contracted customers, as applicable.
SECTION 2.17 LABOR MATTERS. HSI is neither a party to, nor bound by, any
collective bargaining agreement, contract or other agreement or understanding
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with any labor union or labor or organization and there is no unfair labor
practice or labor arbitration proceeding pending or, to the Knowledge of Seller
or HSI, threatened against Seller or HSI relating to HSI. HSI is not delinquent
in payments to any of its employees for any wages, salaries, commissions,
bonuses or other direct compensation for any services performed for it or
amounts required to be reimbursed to such employees. Except as set forth in
SECTION 2.17 of the Disclosure Schedule, upon termination of employment of any
of said employees, no severance or other payments will become due. Except as set
forth in SECTION 2.17, of the Disclosure Schedule, HSI does not have any policy,
practice, plan or program of paying severance pay or any form of severance
compensation in connection with the termination of employment or services. HSI
is and heretofore has been in compliance with all applicable laws and
regulations respecting labor, employment, fair employment practices, terms and
conditions of employment, and wages and hours. There are no charges of
employment discrimination or unfair labor practices. There are no grievances,
complaints or charges that have been filed under any dispute resolution
procedure (including, but not limited to, any proceedings under any dispute
resolution procedure under any collective bargaining agreement).
SECTION 2.18 ENVIRONMENTAL MATTERS. HSI is not in violation of any
applicable statute, law or regulation relating to the environment or
occupational health and safety, and no material expenditures are or will be
required in order to comply with any such existing statute, law or regulation.
No Hazardous Materials (as defined below) are used or have been used, stored, or
disposed of by HSI or, to the Knowledge of Seller or HSI, by any other Person on
any property leased or used by HSI. For the purposes of the preceding sentence,
"HAZARDOUS MATERIALS" shall mean (a) materials which are listed or otherwise
defined as "HAZARDOUS" or "TOXIC" under any applicable local, state, federal
and/or foreign laws and regulations that govern the existence and/or remedy of
contamination on property, the protection of the environment from contamination,
the control of hazardous wastes, or other activities involving hazardous
substances, including building materials, or (b) any petroleum products or
nuclear materials. To the Knowledge of Seller or HSI, no site operated or leased
by HSI contains any asbestos or asbestos-containing material, any
polychlorinated biphenyls (PCBs) or equipment containing PCBs, or any urea
formaldehyde foam insulation.
SECTION 2.19 SUBSIDIARIES. HSI does not own or control any equity security
or other interest of any other corporation, limited partnership or other
business entity. Except as set forth in SECTION 2.19 of the Disclosure Schedule,
HSI is not a participant in any joint venture, partnership or similar agreement.
SECTION 2.20 BROKER OR FINDERS. Seller represents, as to Seller and HSI,
that no agent, broker, investment banker, financial advisor or other firm or
Person is or will be entitled to any broker's or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement.
SECTION 2.21 YEAR 2000. Attached to SECTION 2.21 of the Disclosure Schedule
is a disclosure letter by HSI detailing its Year 2000 Compliance (as defined
below) status. Seller and HSI represent and warrant that all of the statements
in such letter are true, correct and complete in all material respects.
"Year 2000 Compliance" or "Year 2000 Compliant" as used in this Agreement
and in the disclosure letter referred to in the paragraph above shall mean with
respect to any computer software or other microprocessor dependent equipment:
(i) the functions, calculations, and other computing processes of the equipment
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or software perform in a consistent and correct manner without interruption
regardless of the date on which the processes are actually performed, whether
before, on, or after January 1, 2000; (ii) the equipment or software accepts,
calculates, compares, sorts, extracts, sequences, and otherwise processes date
inputs and date values, and returns and displays date values, in a consistent
and correct manner regardless of the dates used whether before, on, or after
January 1, 2000; (iii) the equipment or software accepts, stores, displays and
responds to date information in a manner that resolves any ambiguities as to
century in a defined, predetermined, and appropriate manner; and (iv) leap years
will be determined by the following standard: (A) if dividing the year by 4
yields an integer, it is a leap year, except for years ending in 00, but (B) a
year ending in 00 is a leap year if dividing it by 400 yields an integer.
SECTION 2.22 PERFORMANCE OF SERVICES.
(a) To the Knowledge of Seller and HSI, except as set forth in SECTION 2.22
of the Disclosure Schedule, HSI will not incur or otherwise become subject to
any Liability (as defined below) arising directly or indirectly from any
services performed by or on behalf of, HSI on or at any time prior to the
Closing Date. "LIABILITY" shall mean any debt, obligation, duty or liability of
any nature (including any unknown, undisclosed, unmatured, unaccrued,
unasserted, contingent, indirect, conditional, implied, vicarious, derivative,
joint, several or secondary liability), regardless of whether such debt,
obligation, duty or liability would be required to be disclosed on a balance
sheet prepared in accordance with GAAP and regardless of whether such debt,
obligation, duty or liability is immediately due and payable.
(b) Since December 12, 1997, no customer or other Person has asserted or,
to the Knowledge of Seller or HSI, threatened to assert, any material claim
against HSI (i) under or based upon any warranty provided by or on behalf of
HSI, or (ii) under or based upon any other warranty relating to any services
provided by or on behalf of HSI. To the Knowledge of Seller and HSI, no event
has occurred, and no condition or circumstance exists, that might (with or
without notice or lapse of time) directly or indirectly give rise to or serve as
a basis for the assertion of any such claim, against either HSI or Purchaser.
SECTION 2.23 INSURANCE.
(a) SECTION 2.23(a) of the Disclosure Schedule sets forth, with respect to
each insurance policy maintained by or at the expense of, or for the direct or
indirect benefit of, HSI:
(i) the name of the insurance carrier that issued such policy and the
policy number of such policy;
(ii) whether such policy is a "CLAIMS MADE" or an "OCCURRENCES"
policy; and
(iii) the per incident and aggregate policy coverage limit.
SECTION 2.23(a) of the Disclosure Schedule also identifies (A) each pending
application for insurance that has been submitted by or on behalf of HSI, and
(B) each self-insurance or risk-sharing arrangement affecting HSI or any of its
assets. Seller and HSI have delivered to Purchaser accurate and complete copies
of all of the insurance policies identified in SECTION 2.23(a) of the Disclosure
Schedule (including all renewals thereof and endorsements thereto) and all of
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the pending applications identified in SECTION 2.23(a) of the Disclosure
Schedule.
(b) Each of the policies identified in SECTION 2.23(a) of the Disclosure
Schedule is valid, enforceable and in full force and effect, and has been issued
by an insurance carrier that is solvent, financially sound and reputable. All of
the information contained in the applications submitted in connection with said
policies was (at the times said applications were submitted) accurate and
complete, and all premiums and other amounts owing with respect to said policies
have been paid in full on a timely basis. The nature, scope and dollar amounts
of the insurance coverage provided by said policies are sufficient to adequately
insure HSI's business, assets, operations, key employees, services and potential
liabilities, including professional liability.
(c) There is no pending claim under or based upon any of the policies
identified in SECTION 2.23(a) of the Disclosure Schedule, and to the Knowledge
of Seller or HSI, no event has occurred, and no condition or circumstance
exists, that might (with or without notice or lapse of time) directly or
indirectly give rise to or serve as a basis for any such claim.
(d) Neither Seller nor HSI has received:
(i) any notice or other communication (in writing or otherwise)
regarding the actual or possible cancellation or invalidation of any of the
policies identified in Section 2.23(a) of the Disclosure Schedule or
regarding any actual or possible adjustment in the amount of the premiums
payable with respect to any of said policies;
(ii) any notice or other communication (in writing or otherwise)
regarding any actual or possible refusal of coverage under, or any actual
or possible rejection of any claim under, any of the policies identified in
SECTION 2.23(a) of the Disclosure Schedule; or
(iii) any indication that the issuer of any of the policies identified
in SECTION 2.23(a) of the Disclosure Schedule may be unwilling or unable to
perform any of its obligations thereunder.
SECTION 2.24 RELATED PARTY TRANSACTIONS.
(a) Except as set forth in SECTION 2.24 of the Disclosure Schedule, since
December 12, 1997, no Related Party (as defined below) has (i) entered into, or
has had any direct or indirect financial interest in, any HSI Contract,
transaction or business dealing of any nature involving HSI, (ii) had any direct
or indirect interest of any nature in any amount and in or otherwise relating to
HSI, or (iii) been indebted to HSI.
(b) Except as set forth in SECTION 2.24 of the Disclosure Schedule, since
December 12, 1997, no Related Party (or any employee of, consultant to or other
Representative (as defined below) of a Related Party) provides, or has provided,
any materials, services or support to HSI, whether or not for compensation.
(c) Except as set forth in SECTION 2.24 of the Disclosure Schedule, since
December 12, 1997, no Related Party presently acquires, or has acquired, any
materials, services or support from HSI, whether or not for compensation.
(d) Except as set forth in SECTION 2.24 of the Disclosure Schedule, no
Related Party has any claim or right against HSI. No event has occurred, and to
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the Knowledge of Seller or HSI, no condition or circumstance exists, that would
(with or without notice or lapse of time) directly or indirectly give rise to or
serve as a basis for any claim or right in favor of any Related Party against
HSI.
(e) A "RELATED PARTY" means any stockholder of Seller or HSI, any person
who is or has been a director or officer of HSI or Seller, any member of the
family of any such individual, or any entity that is an Affiliate of any one of
the foregoing.
(f) "REPRESENTATIVES" of a specified party shall mean officers, directors,
employees, attorneys, accountants, advisors and other representatives of such
party, including, without limitation, in the case of Seller, all subsidiaries of
Seller and all such Persons with respect to such subsidiaries.
SECTION 2.25 HEALTHCARE MATTERS. HSI has not entered into any provider or
other agreement with the Health Care Financing Administration ("HCFA"),
Medicare, CHAMPUS, TRICARE, any Medicaid agency or any other Government Entity.
HSI has not entered into any agreement, has not provided any network of
providers or particular provider to any Person that (a) provides services to
Medicare or Medicaid beneficiaries through managed care plans or health
maintenance organizations contracting with HCFA or Medicare including
MediChoice+ Plan or (b) provides services to any person whose health benefits
are paid by Medicare or any Medicaid agency as a secondary payor.
SECTION 2.26 FULL DISCLOSURE.
(a) None of this Agreement nor any schedule, exhibit or certificate
delivered pursuant hereto contains or will contain any untrue statement of
material fact, nor omits or will omit to state any fact necessary to make any of
the representations, warranties or other statements or information contained
herein and therein not materially misleading. To the extent such representations
permit omission of items within the Knowledge of Seller or HSI which would
otherwise be required to be discussed because they are not material or do not or
would not have a Material Adverse Effect, such omissions in the aggregate will
not and do not have a Material Adverse Effect on HSI or Purchaser.
(b) There is no fact within the Knowledge of Seller or HSI that (i) is
reasonably likely to have a Material Adverse Effect on HSI or on the ability of
HSI to comply with or perform any covenant or obligation under this Agreement,
or (ii) is reasonably likely to have the effect of preventing, delaying, making
illegal or otherwise interfering with any of the transactions contemplated
hereby.
(c) All of the information set forth in the Disclosure Schedule, and all
other information regarding HSI and its business, condition, assets,
liabilities, operations, financial performance and net income that has been
furnished to Purchaser or any of its Representatives by or on behalf of Seller
or HSI or any of Seller's or HSI's Representatives, including copies of HSI
Contracts, Material Agreements and other documents, is accurate and complete in
all material respects.
(d) Seller and HSI have provided Purchaser and Purchaser's Representatives
with full and complete access to all of Seller's and HSI's records and other
documents and data.
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SECTION 2.27 POWERS OF ATTORNEY. Seller and HSI have not given a power of
attorney to any person with respect to the business, operations or assets of
HSI.
SECTION 2.28 SOLVENCY. Upon consummation of the Closing, after giving
effect to the consummation of all of the transactions contemplated hereby,
including without limitation receipt of the payments to be made to Seller as
contemplated in this Agreement, Seller will not (a) be insolvent (either because
its financial condition is such that that sum of its debts is greater than the
fair value of its assets or because the present fair salable value of its assets
will be less than the amount required to pay its probable liability on its debts
as they become absolute and matured), (b) have unreasonably small capital with
which to engage in its business or (c) have incurred (and reasonably believes it
will not incur) debts beyond its ability to pay as they become absolute and
matured.
SECTION 2.29 PURCHASE ENTIRELY FOR OWN ACCOUNT; ACCREDITED INVESTORS.
(a) The Purchaser's Shares will be acquired for investment for Seller's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and Seller has no present intention of
selling, granting any participation in, or otherwise distributing the same.
Seller does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to any of Purchaser's Shares.
(b) Seller understands that Purchaser's Shares are not registered under the
Securities Act of 1933 (the "SECURITIES ACT") on the ground that the sale
provided for in this Agreement and the issuance of securities hereunder is
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof, and that the Purchaser's reliance on such exemption is predicated on
Seller's representations set forth herein. Seller realizes that the basis for
the exemption may not be present if, notwithstanding such representations,
Seller has in mind merely acquiring Purchaser's Shares for a fixed or
determinable period in the future, or for a market rise, or for sale if the
market does not rise. Seller has no such intention.
(c) Seller believes it has received all the information it considers
necessary or appropriate for deciding whether to purchase Purchaser's Shares.
Seller has had an opportunity to ask questions and receive answers from
Purchaser regarding the terms and conditions of the offering of Purchaser's
Shares and the business, properties, prospects, and financial condition of
Purchaser and to obtain additional information (to the extent Purchaser
possessed such information or could acquire it without unreasonable effort or
expense) necessary to verify the accuracy of any information furnished to Seller
or to which Seller had access. The foregoing, however, does not limit or modify
the representations and warranties of Purchaser in ARTICLE III of this Agreement
or the right of the Seller to rely thereon.
(d) Seller is experienced in evaluating and investing in private placement
transactions of securities of companies in a similar stage of development and
acknowledges that Seller is able to fend for itself, can bear the economic risk
of such investment, and has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the
investment in the Purchaser's Shares. Seller has not been organized for the
purpose of acquiring the Purchaser's Shares.
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(e) Seller is an accredited investor as such term is defined in Rule 501(a)
of Regulation D under the Securities Act.
SECTION 2.30 DATE OF ACQUISITION OF HSI. Seller acquired all of the
outstanding stock of HSI effective as of December 12, 1997.
SECTION 2.31 CORPORATE NAME. Since December 12, 1997, HSI has not done or
conducted business under, and currently is not conducting business under, any
name or other corporate identity other than "HealthStar, Inc."
SECTION 2.32 KNOWLEDGE OF INDIVIDUALS. The list of individuals in SECTION
10.1 of the Disclosure Schedule reflects best efforts by Seller and HSI to
include in such list those current officers, directors or employees
(collectively, the "Listed Individuals") that hold positions with Seller or HSI
such that the Listed Individuals, in the aggregate, have access to information
relating to, and responsibility for, the conduct and operation of HSI's
business. To the extent any of the Listed Individuals were not employed with HSI
prior to December 12, 1997, such Listed Individuals have made Reasonable Inquiry
(as defined in SECTION 10.1) into the conduct and operation of HSI's business
prior to such date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller and HSI as follows:
SECTION 3.1 ORGANIZATION. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as is now being
conducted. Purchaser is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so duly qualified or
licensed and in good standing would not have a Material Adverse Effect.
SECTION 3.2 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION.
Purchaser has the corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby and to make all
payments required to be made by Purchaser to Seller under this Agreement. The
execution, delivery and performance by Purchaser of this Agreement, and the
consummation of the transactions contemplated hereby, have been duly authorized
by all necessary corporate proceedings, and no other corporate action on the
part of Purchaser is necessary to authorize the execution and delivery by
Purchaser of this Agreement and the consummation by it of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Purchaser and, assuming due and valid authorization, execution and delivery
hereof by Seller, is a valid and binding obligation of Purchaser, enforceable
against it in accordance with its terms, except that (a) such enforcement may be
subject to applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws, now or hereafter in effect, affecting creditors' rights
generally, and (b) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
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SECTION 3.3 CONSENT AND APPROVALS; NO VIOLATIONS. Neither the execution,
delivery nor performance of this Agreement by Purchaser nor the consummation by
Purchaser of the transactions contemplated hereby will (a) violate any provision
of the certificate of incorporation or bylaws of Purchaser; (b) result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which Purchaser is a party or by which Purchaser or
any of its properties or assets may be bound; (c) violate any order, writ,
judgment, injunction, decree, law, statute, rule or regulation applicable to
Purchaser or any of its properties or assets, or (d) except for those filings
required pursuant to applicable state and federal securities laws, require on
the part of Purchaser any filing or registration with, notification to, or
authorization, consent or approval of any Government Entity.
SECTION 3.4 ACQUISITION FOR INVESTMENT. The Shares will be acquired for
investment for Purchaser's own account, not as a nominee or agent, and not with
a view to the resale or distribution of any part thereof, and Purchaser has no
present intention of selling, granting any participation in, or otherwise
distributing the same. Purchaser does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Shares.
SECTION 3.5 BROKERS OR FINDERS. Purchaser represents, as to itself, its
subsidiaries and its Affiliates, that no agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any broker's
or finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by the Agreement.
ARTICLE IV
COVENANTS
SECTION 4.1 TAX MATTERS.
(a) SELLER INDEMNIFICATION. Seller shall be liable for, and shall indemnify
and hold Purchaser harmless against, all Taxes of HSI payable for any taxable
year or taxable period ending on or before the Closing Date but only to the
extent such Taxes exceed the amount of Taxes that have been reserved for in the
Financial Statements. To appropriately apportion any income Taxes relating to
any taxable year beginning before and ending after the Closing Date, the parties
shall apportion such income Taxes to the taxable period ending on or before the
Closing Date by a closing of HSI's books consistent with their past practices
for reporting items, except that (i) exemptions, allowances or deductions that
are calculated on a time basis, such as the deduction for depreciation, shall be
apportioned on a time basis and (ii) all Taxes relating to actions outside the
Ordinary Course of Business, occurring after the Closing, on the Closing Date
shall be apportioned to the period ending after the Closing Date. To
appropriately apportion any non-income Taxes relating to any taxable year
beginning before and ending after the Closing Date, the parties shall apportion
such non-income Taxes to the taxable period ending on or before the Closing Date
as follows: (i) ad valorem Taxes (including, without limitation real and
personal property taxes) shall be accrued on a daily basis over the period for
which such Taxes are levied, or if it cannot be determined over the period such
Taxes are being levied, over the fiscal period of the relevant taxing authority
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in each case irrespective of the lien or assessment date of such Taxes, (ii) all
Taxes relating to actions outside the Ordinary Course of Business occurring
after the Closing on the Closing Date shall be apportioned to the period ending
after the Closing Date and (iii) franchise and other privilege Taxes not
measured by income shall be accrued on a daily basis over the period to which
the privilege relates.
(b) PURCHASER AND HSI INDEMNIFICATION. Purchaser and HSI shall be liable
for, and shall indemnify and hold Seller and any of its Affiliates harmless
against, any and all Taxes imposed on HSI relating or apportioned to any taxable
year or portion thereof ending after the Closing Date including, without
limitation, all Taxes relating to actions outside the Ordinary Course of
Business occurring after the Closing, on the Closing Date.
(c) PREPARATION OF TAX RETURNS. Seller shall prepare and file, or cause to
be filed, all Tax Returns (including amended Tax Returns) relating to HSI for
any Tax period ending on or prior to the Closing Date; PROVIDED, HOWEVER, that
HSI shall file all informational filings that relate to any tax period ending on
or prior to the Closing Date but which do not become due until after the Closing
Date.
(d) REFUNDS OR CREDITS. Purchaser or HSI shall promptly pay to Seller any
refunds or credits (including interest thereon) relating to Taxes for which
Seller may be liable under SECTION 4.1(a) hereof. For purposes of this SECTION
4.1(d), the terms "REFUND" and "CREDIT" shall include a reduction in Taxes and
the use of an overpayment of Taxes as an audit or other Tax offset. Receipt of a
refund shall occur upon the filing of a Tax Return or an adjustment therein
using such reduction, overpayment or offset, or upon the receipt of cash. Upon
the reasonable request of Seller, Purchaser shall prepare and file, or cause to
be prepared and filed, all claims for refunds relating to such Taxes; PROVIDED,
HOWEVER, that Purchaser shall not be required to file such claims for refund to
the extent such claims for refund would have a Material Adverse Effect in the
future or to the extent the claims for refund relate to a carryback of an item.
Purchaser shall be entitled to all other refunds and credits of Taxes; PROVIDED,
HOWEVER, Purchaser will not allow the amendment of any Tax Return relating to
any Taxes for a period (or portion thereof) ending on or prior to the Closing
Date or the carryback of an item to a period ending prior to Closing without
Seller's consent, which consent shall not be unreasonably withheld.
(e) MUTUAL COOPERATION. As soon as practicable, but in any event within
fifteen (15) days after either Seller's or Purchaser's request, as the case may
be, Purchaser shall deliver to Seller or Seller shall deliver to Purchaser, as
the case may be, such information and other data relating to the Tax Returns and
Taxes of HSI and shall provide such other assistance as may reasonably be
requested, to cause the completion and filing of all Tax Returns or to respond
to audits by any taxing authorities with respect to any Tax Returns or taxable
periods or to otherwise enable Seller, Purchaser or HSI to satisfy their
accounting or Tax requirements. For a period of five (5) years from and after
the Closing, Purchaser and Seller shall, and shall cause their Affiliates to,
maintain and make available to the other party, on such other party's reasonable
request, copies of any and all information, books and records referred to in
this SECTION 4.1(e). After such five (5) year period, Purchaser or Seller may
dispose of such information, books and records, provided that prior to such
disposition, Purchaser or Seller shall give the other party the opportunity to
take possession of such information, books and records.
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(f) CONSENT. Whenever any taxing authority asserts a claim, makes an
assessment or otherwise disputes the amount of Taxes for which Seller is or may
be liable under this Agreement, Purchaser shall, if informed of such an
assertion, promptly inform Seller within five (5) business days, and Seller
shall have the right to control any resulting proceedings and to determine
whether and when to settle any such claim, assessment or dispute to the extent
such proceedings or determinations affect the amount of Taxes for which Seller
may be liable under the Agreement. If Purchaser fails to provide such notice and
such failure shall prejudice Seller's ability to defend such assessment, then
Seller's obligation under SECTION 4.1(a) shall be null and void with regard to
such assessment to the extent of such prejudice. Whenever any taxing authority
asserts a claim, makes an assessment or otherwise disputes the amount of Taxes
for which Purchaser is liable under this Agreement, Purchaser shall have the
right to control any resulting proceedings and to determine whether and when to
settle any such claim, assessment or dispute, except to the extent such
proceedings affect the amount of Taxes for which Seller may be liable under this
Agreement.
(g) SURVIVAL OF OBLIGATIONS. The obligations of the parties set forth in
this SECTION 4.1 shall be unconditional and absolute, and shall remain in effect
until thirty (30) days after the expiration of the applicable statute of
limitations.
SECTION 4.2 PUBLICITY. The initial press releases with respect to the
execution of this Agreement shall be reasonably acceptable to Purchaser and
Seller. For one (1) year after the date of this Agreement neither Purchaser nor
Seller nor any of their respective Affiliates shall issue or cause the
publication of any press release with respect to the transaction contemplated
hereby or this Agreement without the prior agreement of the other party which
agreement shall not be unreasonably withheld, except as may be required by law
or by any listing agreement with a national securities exchange and except for
any disclosure consistent with any other disclosure approved by the other party.
SECTION 4.3 FURTHER ASSURANCES. Each party agrees to use all reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement.
SECTION 4.4 USE OF NAMES. Purchaser shall cease using any and all trade
names, trademarks, logos and trade dress belonging to Seller or its Affiliates
in its literature, inventory, products, labels, packaging, supplies or other
materials relating to HSI as soon as available supplies thereof are exhausted
and in any event within ninety (90) days after the Closing Date. Purchaser shall
relabel (by sticker or other reasonable method) its products, literature and
other materials and supplies with its own trade name. Nothing contained in this
SECTION 4.4 shall diminish HSI's ownership of, and ability to freely use and
exploit, any and all trade names, trademarks, logos and trade dress including,
without limitation, those containing the words "HEALTHSTAR, INC." or "HSI" in
its literature, products, labels, packaging, suppliers or other materials
relating to HSI.
SECTION 4.5 NON-COMPETITION. Seller, together with all of its Affiliates
both now and in the future, shall not own, operate or manage, either directly or
through any subsidiary or affiliated company, in the United States for a period
of three (3) years from and after the Closing Date any business in which
HealthStar, Inc. is engaged as of the Closing Date; PROVIDED, HOWEVER, that it
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is understood that Seller owns National Health Benefits and Casualty ("NHBC")
and Seller's ownership of NHBC shall not constitute a violation of this Section
4.5.
SECTION 4.6 NON-SOLICITATION. For a period of two (2) years from and after
the Closing Date, Seller will not, either for itself or any other Person, (a)
induce or attempt to induce any employee to leave the employ of Purchaser or any
other entity controlled by, controlling or under common control with Purchaser,
(b) in any way interfere with the relationship between Purchaser (or any entity
controlling, under common control with or controlled by Purchaser) and any
employee of Purchaser (or such entity), (c) employ, or otherwise engage as an
employee, independent contractor or otherwise, any employee of Purchaser or any
entity controlling, under common control with or controlled by Purchaser, or (d)
induce or attempt to induce any customer, supplier, licensee, or business
relation of Purchaser or any entity controlling, under common control with or
controlled by Purchaser to cease doing business with Purchaser or such entity,
or in any way interfere with the relationship between any customer, supplier,
licensee, or business relation of Purchaser or such entity.
SECTION 4.7 RESTRICTIONS ON RESALE OF PURCHASER'S SHARES.
(a) Seller understands that the Purchaser's Shares may not be sold,
transferred, or otherwise disposed of without registration under the Securities
Act or an exemption therefrom, and that in the absence of an effective
registration statement covering the Purchaser's Shares or an available exemption
from registration under the Securities Act, the Purchaser's Shares must be held
indefinitely. In particular, Seller understands that Purchaser's Shares may not
be sold pursuant to Rule 144 promulgated under the Securities Act unless all of
the conditions of that Rule are met. Among the conditions for use of Rule 144
may be the availability of current information to the public about Purchaser.
Seller understands that such information is not now available and Purchaser has
no present plans to make such information available.
(b) Seller agrees not to make, without the prior written consent of the
Purchaser, any public offering or sale of the Purchaser's Shares although
permitted to do so pursuant to Rule 144(k) promulgated under the Securities Act,
until the earlier of (i) the date on which Purchaser effects its initial
registered public offering pursuant to the Securities Act or (ii) the date on
which it becomes a registered company pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended, or (iii) five (5) years after the
Closing Date.
SECTION 4.8 FINANCIAL STATEMENTS. As long as Seller owns all of the
Purchaser's Shares, Purchaser shall provide Seller with unaudited annual and
quarterly financial statements of Purchaser and HSI, which shall be delivered to
Seller within forty-five (45) days after the end of the applicable quarter or
seventy-five (75) days after year end, as the case may be, and will provide
audited annual financial statements as they become available.
SECTION 4.9 PROPRIETARY INFORMATION. Unless and until the Closing occurs,
each party shall keep and retain in confidence and shall not use for any purpose
other than to evaluate the transactions contemplated under this Agreement any
and all of the confidential and proprietary information respecting the other
parties set forth or referenced in the Disclosure Schedule or otherwise provided
to the receiving party by the disclosing party in connection with or in
anticipation of the Closing, irrespective of the form in which it is delivered
or when delivered (the "PROPRIETARY INFORMATION"). The preceding requirement
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shall not apply to Proprietary Information that (a) a party was in the
possession of, or was rightfully known by, the receiving party or its
Representatives, without an obligation to maintain its confidentiality prior to
receipt from the disclosing party or its Representatives, (b) is or becomes
generally known to the public without violation of this Agreement, (c) is
obtained by the receiving party or its Representatives in good faith from a
third party having the right to disclose it without an obligation of
confidentiality, or (d) is independently developed by the receiving party or its
Representatives without the participation of individuals who have had access to
the Proprietary Information. In the event the Agreement is terminated prior to
Closing for any reason, the receiving party agrees to either return to the
disclosing party all of the Proprietary Information subject to this SECTION 4.9
(including all copies) in its possession or under its control or to purge, shred
or otherwise destroy all such Proprietary Information not returned, at the
option of the disclosing party. The receiving party shall, and shall cause each
of its Representatives to, keep and maintain all Proprietary Information subject
to this SECTION 4.9 confidential in any case in which Closing does not occur and
not avail itself of or use any of such Proprietary Information for its own
benefit. The receiving party shall promptly certify its compliance with the
foregoing in the event of any termination of the Agreement.
SECTION 4.10 ACCESS TO INFORMATION. Purchaser shall from time to time prior
to or following the Closing Date provide such access to the financial data and
other relevant information of Purchaser as such may be reasonably requested by
Seller or its Representatives in connection with the preparation of a valuation
opinion regarding the Purchaser's Shares.
ARTICLE V
INDEMNIFICATION
SECTION 5.1 INDEMNIFICATION BY SELLER. Subject to the limits set forth in
this ARTICLE V, Seller agrees to indemnify, defend and hold Purchaser, HSI and
their respective officers, directors, agents and Affiliates, harmless from and
in respect of any and all losses, damages, Liability, costs and expenses
(including, without limitation, reasonable expenses of investigation and defense
fees and disbursements of counsel and other professionals) (collectively,
"LOSSES"), arising directly or indirectly out of or directly or indirectly due
to (a) any inaccuracy of any representation or the breach of any warranty,
covenant, undertaking or other agreement of Seller or HSI contained in this
Agreement or the Disclosure Schedule or (b) any Indebtedness of HSI arising or
outstanding on or prior to the Closing Date. "INDEBTEDNESS" shall mean any debt
owed to any Person, contingent or otherwise, short term or long term, except for
payroll obligations, accounts payable and similar obligations arising in the
Ordinary Course of Business.
SECTION 5.2 INDEMNIFICATION BY PURCHASER. Subject to the limits set forth
in this ARTICLE V, Purchaser agrees to indemnify, defend and hold Seller, its
officers, directors, agents and Affiliates, harmless from and in respect of any
and all Losses that arising directly or indirectly out of or directly or
indirectly due to any inaccuracy of any representation or the breach of any
warranty, covenant, undertaking or other agreement of Purchaser contained in
this Agreement.
SECTION 5.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; LIMITATIONS ON
INDEMNITY. The several representations and warranties of the parties contained
in this Agreement or in any instrument delivered pursuant to this Agreement will
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survive the Closing Date and will remain in full force and effect thereafter for
a period of two (2) years from the Closing Date; PROVIDED, HOWEVER, that the
representations and warranties contained in SECTIONs 2.1, 2.2 and 2.3 will
remain in full force and effect for a period of five (5) years from the Closing
Date; PROVIDED, FURTHER, that the representations and warranties contained in
SECTION 2.13 will remain in full force and effect for a period equal to the
applicable statute of limitations; and PROVIDED, FURTHER, that such
representations or warranties shall survive (if at all) beyond such period with
respect to any inaccuracy therein or breach thereof, notice of which shall have
been duly given within such time period in accordance with ARTICLE V. Anything
to the contrary contained herein notwithstanding, neither party shall be
entitled to recover Losses from the other unless and until the total of all
claims for Losses with respect to any inaccuracy or breach of any such
representations or warranties or breach of any covenants, undertakings or other
agreements, whether such claims are brought under this ARTICLE V or otherwise,
exceeds One Hundred Fifty Thousand Dollars ($150,000.00) in the aggregate. If
the total amount of such Losses exceeds One Hundred Fifty Thousand Dollars
($150,000.00), then the party entitled to recovery hereunder shall be entitled
to recover the full amount of such Losses and not merely the portion of such
damages exceeding One Hundred Fifty Thousand Dollars ($150,000.00); PROVIDED,
HOWEVER, that no party shall be entitled to recover from the other more than the
Purchase Price, except in the case of fraud or intentional misconduct; and
PROVIDED, HOWEVER, that (i) Purchaser shall be entitled to recover any Losses
directly or indirectly resulting from any inaccuracy of the representations and
warranties contained in SECTIONS 2.2, 2.3, 2.13, 2.20 and the covenant in
SECTION 8.2(g) or resulting from any suit, proceeding or action relating to the
Stateman Purchase Agreement or the Stateman Note and (ii) Seller shall be
entitled to recover any Losses directly or indirectly resulting from any
inaccuracy of the representation and warranty contained in SECTION 3.5, in each
instance without regard to any threshold, deductible or limitation.
SECTION 5.4 NOTICE AND OPPORTUNITY TO DEFEND. If an event occurs which a
party asserts is an indemnifiable event pursuant to SECTION 5.1 or 5.2, the
party seeking indemnification (the "INDEMNITEE") shall promptly notify the other
party obligated to provide indemnification (the "INDEMNIFYING PARTY"). If such
event involves (a) any claim or (b) the commencement of any action or proceeding
by a third Person, the Indemnitee will give such Indemnifying Party prompt
written notice of such claim or the commencement of such action or proceeding;
PROVIDED, HOWEVER, that the Indemnitee's failure to provide prompt notice as
provided herein will relieve the Indemnifying Party of its obligations hereunder
only to the extent that such failure prejudices the Indemnifying Party
hereunder. If any such action is brought against any Indemnitee and it notifies
the Indemnifying Party of the commencement thereof, the Indemnifying Party shall
be entitled to participate therein and, to the extent that it wishes, to assume
the defense thereof, with counsel reasonably satisfactory to the Indemnitee.
After notice from the Indemnifying Party to the Indemnitee of such election to
so assume the defense thereof, the Indemnifying Party shall not be liable to the
Indemnitee for any legal expenses of other counsel or any other expenses
subsequently incurred by the Indemnitee in connection with the defense thereof,
and the Indemnitee agrees to cooperate fully with the Indemnifying Party and its
counsel in the defense against any such asserted liability. The Indemnitee shall
have the right to participate at its own expense in the defense of such asserted
liability. In no event shall an Indemnifying Party be liable for any settlement
effected by the Indemnitee without the consent of the Indemnifying Party, which
will not be unreasonably withheld. In no event shall an Indemnifying Party
effect any settlement without the consent of the Indemnitee, which will not be
unreasonably withheld.
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SECTION 5.5 MITIGATION OF LOSS. Each Indemnitee is obligated to use
reasonable efforts to mitigate to the fullest extent practicable the amount of
any Loss for which it is entitled to seek indemnification hereunder.
SECTION 5.6 SUBROGATION. Upon making any payment of Losses of the
Indemnitee, the Indemnifying Party will, to the extent of such payment, be
subrogated to all rights of the Indemnitee against any third party in respect of
the Loss to which the payment relates; PROVIDED, HOWEVER, that until the
Indemnitee recovers full payment of its Loss, any and all claims of the
Indemnifying Party against any such third party on account of such payment are
hereby made expressly subordinated and subjected in right of payment of the
Indemnitee's rights against such third party. Without limiting the generality of
any other provision hereof, each such Indemnitee and Indemnifying Party will
duly execute upon request all instruments reasonably necessary to evidence and
perfect the above described subrogation and subordination rights.
SECTION 5.7 TAX INDEMNIFICATION. None of the provisions of ARTICLE V, with
the exception of SECTION 5.5, shall apply to the claims, obligations,
liabilities, covenants and representations under SECTION 4.1, which shall be
governed solely by the terms thereof.
SECTION 5.8 EXCLUSIVE REMEDY. Following the Closing, the indemnification
provided for in this ARTICLE V shall be the sole and exclusive remedy of the
parties and their respective officers, directors, employees, affiliates, agents,
Representatives, successors and assigns for any breach of or inaccuracy in any
representation or warranty or any breach, nonfulfillment or default in the
performance of any of the covenants or agreements contained in this Agreement
(but not any such covenants or agreements to the extent they are by their terms
to be performed after the Closing Date). The parties shall not be entitled to a
rescission of this Agreement or to any further indemnification rights or claims
of any nature whatsoever in respect thereof (whether by contract, common law,
statute, law, regulation or otherwise, including, without limitation, under the
Racketeer Influence and Corrupt Organizations Act of 1970, as amended), all of
which the parties hereby waive; PROVIDED, HOWEVER, nothing herein is intended to
waive any claims for fraud.
SECTION 5.9 INVESTIGATION. The representations, warranties, covenants and
obligations of the parties, and the rights and remedies that may be exercised by
the Indemnitees, shall not be limited or otherwise affected by or as a result of
any information furnished to, or any investigation made by or the knowledge of,
the other parties, any of the other Indemnitees or any of their Representatives.
SECTION 5.10 SETOFF. In addition to any rights of setoff or other rights
that Purchaser or any other Indemnitee may have at common law or otherwise,
Purchaser shall have the right to set off any amount that may be owed to it by
Seller under this ARTICLE V against any amount otherwise payable by Purchaser or
any other Indemnitee to Seller, including, but not limited to any amount payable
as an Earnout Payment.
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ARTICLE VI
PRE-CLOSING COVENANTS OF SELLER
SECTION 6.1 ACCESS AND INVESTIGATION. Seller shall ensure that, at all
times from the date hereof to and until the Closing Date (the "PRE-CLOSING
PERIOD"):
(a) Seller will provide Purchaser and its Representatives with free and
complete access at reasonable times and with reasonable notice to HSI's premises
and assets, and to all existing books, records, Tax Returns, work papers and
other documents and information relating to HSI;
(b) subject to standards and procedures reasonably acceptable to Seller,
Seller and its Representatives will provide Purchaser and its Representatives
the opportunity to meet with Seller's personnel and a reasonable number of
parties to HSI's Material Agreements;
(c) Seller and its Representatives will compile and provide Purchaser and
its Representatives with such additional financial, operating and other data and
information regarding HSI as Purchaser may request in good faith; and
(d) Seller and its Representatives will provide Purchaser with a monthly
accounting of any transactions between Seller and HSI.
SECTION 6.2 OPERATION OF BUSINESS. Unless Seller first obtains a written
waiver from Purchaser, Seller shall ensure that, during the Pre-Closing Period:
(a) HSI conducts its operations exclusively in the Ordinary Course of
Business and consistent with past practice and uses its best efforts to preserve
intact its current business organization, keep available the services of its
current officers and employees and maintain its relations and goodwill with all
suppliers, customers, landlords, creditors, licensors, licensees, employees and
other Persons having business relationships with HSI;
(b) Seller keeps in full force all insurance policies covering HSI
identified in SECTION 2.23 of the Disclosure Schedule;
(c) Seller's and HSI's officers confer regularly with Purchaser concerning
operational matters and otherwise report regularly to Purchaser concerning the
status of HSI's business, condition, assets, liabilities, operations, financial
performance and prospects;
(d) Seller and HSI immediately notify Purchaser of any inquiry, proposal or
offer from any Person relating to any Acquisition Transaction (as defined
herein); "ACQUISITION TRANSACTION" shall mean any transaction involving: (a) the
sale or other disposition of all or any portion of HSI's business or assets
(other than in the Ordinary Course of Business); (b) the issuance, sale or other
disposition of (i) any capital stock of HSI, (ii) any option, call, warrant or
right (whether or not immediately exercisable) to acquire any capital stock of
HSI, or (iii) any security, instrument or obligation that is or may become
convertible into or exchangeable for any capital stock of HSI; or (c) any
merger, consolidation, business combination, share exchange, reorganization or
similar transaction involving HSI.
(e) HSI does not effect or become a party to any Acquisition Transaction;
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(f) HSI does not form any subsidiary or acquire any equity interest or
other interest in any other Person;
(g) HSI does not make any capital expenditure in excess of Ten Thousand
Dollars ($10,000) or otherwise outside the Ordinary Course of Business;
(h) HSI does not enter into any contract involving annual payments by HSI
in excess of Twenty-Five Thousand Dollars ($25,000);
(i) HSI does not incur, assume or otherwise become subject to any
liability, except for current liabilities (of the type required to be reflected
in a balance sheet prepared in accordance with GAAP) incurred in the Ordinary
Course of Business;
(j) HSI does not establish or adopt any new Employee Plan, does not amend
any existing Employee Plan and does not pay any bonus or make any profit sharing
or similar payment to, or increase the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of its
directors, officers or employees, except for merit increases made to employees
in the Ordinary Course of Business;
(k) HSI does not change any of its methods of accounting or accounting
practices in any respect, except as required by GAAP or applicable laws;
(l) HSI does not make any Tax election;
(m) HSI does not commence any action, suit, litigation, arbitration,
proceeding (including any civil, criminal, administrative, investigative or
appellate proceeding and any informal proceeding), prosecution, contest,
hearing, inquiry, inquest, audit, examination or investigation that is or has
been commenced, brought, conducted or heard by or before, or that otherwise has
involved, any Government Entity or any arbitrator or arbitration panel;
(n) HSI does not (i) acquire, dispose of, transfer, lease, license,
mortgage, pledge or encumber any fixed or other assets, other than in the
Ordinary Course of Business; (ii) incur, assume or prepay any indebtedness,
liability or obligation or any other liabilities or issue any debt securities,
other than in the Ordinary Course of Business; (iii) assume, guarantee, endorse
or otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other Person (other than a wholly-owned
subsidiary), other than in the Ordinary Course of Business; or (iv) make any
loans, advances or capital contributions to, or investments in, any other
Person, other than in the Ordinary Course of Business;
(o) HSI pays debts and Taxes when due subject to good faith disputes
thereof, and pays or performs other obligations when due;
(p) HSI does not transfer to any Person or entity any Intellectual Property
or intangible asset other than in the Ordinary Course of Business;
(q) HSI does not enter into or amend any Material Agreements pursuant to
which any other party is granted distribution, marketing or other rights of any
type or scope with respect to any of its services, products or technology;
(r) HSI does not pay, discharge or satisfy in any amount in excess of Ten
Thousand Dollars ($10,000) in any one case or Thirty Thousand Dollars ($30,000)
in the aggregate, any claim, liability or obligation (absolute, accrued,
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asserted or unasserted, contingent or otherwise) arising other than in the
Ordinary Course of Business, other than the payment, discharge or satisfaction
of liabilities reflected or reserved against the Financial Statements or
reasonably incurred in connection with the transactions contemplated by this
Agreement;
(s) HSI gives all notices and other information required prior to the
Closing Date to be given to the employees of HSI and any applicable Government
Entity pursuant to applicable law in connection with the transactions provided
for in this Agreement; and
(t) HSI does not enter into any transaction or take any other action that
likely would cause or constitute a breach of any, representation, warranty or
covenant made by Seller or HSI in this Agreement.
SECTION 6.3 FILINGS AND CONSENTS.
(a) Seller covenants and agrees that each filing or notice required to be
made or given (pursuant to any applicable legal requirement, order or contract,
or otherwise) by Seller or HSI in connection with the execution and delivery of
this Agreement or in connection with the consummation or performance of any of
the transactions contemplated hereby shall be made or given as promptly as
practicable after the date of this Agreement.
(b) Seller shall use its best efforts to obtain or cause to be obtained
each consent required to be obtained (pursuant to any applicable legal
requirement, order or contract, or otherwise) by Seller or HSI in connection
with the execution and delivery of this Agreement or in connection with the
consummation or performance of any of the transactions contemplated hereby
(including each of the consents identified in SECTION 2.5 of the Disclosure
Schedule) as promptly as practicable after the date of this Agreement and each
of such consents shall remain in full force and effect through the Closing Date;
(c) Seller shall promptly deliver to Purchaser a copy of each filing made,
each notice given and each consent obtained by Seller during the Pre-Closing
Period; and
(d) During the Pre-Closing Period, Seller and its Representatives shall
cooperate with Purchaser and with Purchaser's Representatives, and prepare and
make available such documents and take such other actions as Purchaser may
request in good faith, in connection with any filing, notice or consent that
Purchaser is required or elects to make, give or obtain.
SECTION 6.4 NOTIFICATION.
(a) During the Pre-Closing Period, Seller shall promptly notify Purchaser
of:
(i) the discovery by Seller or HSI of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a breach of any representation or
warranty made by Seller or HSI in this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises or
exists after the date of this Agreement and that would cause or constitute
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a breach of any representation or warranty made by Seller or HSI in this
Agreement if (i) such representation or warranty had been made as of the
time of the occurrence, existence or discovery of such event, condition,
fact or circumstance, or (ii) such extent, condition, fact or circumstance
had occurred, arisen or existed on or prior to the date of this Agreement;
(iii) any breach of any covenant or obligation of Seller or HSI;
(iv) any event, condition, fact or circumstance that may make the
timely satisfaction of any of the conditions set forth in SECTION 8.1, or
SECTION 8.2 or SECTION 8.3 impossible or unlikely; and
(b) Seller shall have right to supplement any section of the Disclosure
Schedule prior to Closing with respect to any transaction permitted under
SECTION 6.2 or any matter described in SECTION 6.4(a) above which occurs during
the Pre-Closing Period. Such supplementation is not a waiver by Purchaser of any
breach of a representation or warranty as to the matter so supplemented.
SECTION 6.5 NO NEGOTIATION.
During the Pre-Closing Period, neither Seller, HSI nor any of their
Representatives directly or indirectly:
(a) shall solicit or encourage the initiation of any inquiry, proposal or
offer from any Person (other than Purchaser) relating to any Acquisition
Transaction;
(b) shall participate in any discussions or negotiations with, or provide
any non-public information to, any Person (other than Purchaser) relating to any
Acquisition Transaction; or
(c) shall consider the merits of any unsolicited inquiry, proposal or offer
from any Person (other than Purchaser) relating to any Acquisition Transaction.
SECTION 6.6 BEST EFFORTS. During the Pre-Closing Period, Seller shall use
its best efforts to cause the conditions set forth in SECTION 8.1 and SECTION
8.2 to be satisfied on a timely basis, and shall not take any action or omit to
take any action, the taking or omission of which would or could reasonably be
expected to result in any of the representations and warranties set forth in
SECTION 2 of this Agreement becoming untrue, in any of the conditions of Closing
set forth in SECTION 8.1 and SECTION 8.2 not being satisfied.
SECTION 6.7 CONFIDENTIALITY; PUBLICITY. During the Pre-Closing Period: (a)
Seller, HSI and their Representatives shall keep strictly confidential the
existence and terms of this Agreement prior to the issuance or dissemination of
any mutually agreed upon press release or other disclosure of the transactions
contemplated hereunder;
(b) neither Seller, HSI nor any of their Representatives shall issue or
disseminate any press release or other publicity or otherwise make any
disclosure of any nature (to any of HSI's suppliers, customers, landlords,
creditors or employees or to any other Person) regarding any of the transactions
contemplated by this Agreement, except as required by federal securities laws or
other applicable laws and except as otherwise agreed by the parties; and
(c) if Seller or HSI is required by law to make any disclosure regarding
the transactions contemplated by this Agreement, Seller shall advise Purchaser,
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at least two (2) business days prior to making such disclosure, of the nature
and content of the intended disclosure.
SECTION 6.8 PURCHASE OF TAIL COVERAGE BY SELLER. For any "claims made"
policy listed in SECTION 2.23(a) of the Disclosure Schedule, Seller will
purchase an endorsement that extends the reporting period for three (3) years
from the Closing Date with respect to claims arising during the period from
December 12, 1997 through the Closing Date.
SECTION 6.9 RECLASSIFICATION OF INTERCOMPANY ACCOUNT. At the Closing Date,
Seller shall reclassify as equity the entire amount of the intercompany account
reflected in the liability section of HSI's balance sheet.
SECTION 6.10 INTERCOMPANY TRANSACTIONS. Seller and HSI shall conduct all
intercompany transactions solely in the Ordinary Course of Business.
ARTICLE VII
PRE-CLOSING COVENANTS OF PURCHASER
SECTION 7.1 BEST EFFORTS. During the Pre-Closing Period, Purchaser shall
not take any action or omit to take any action, taking or omission of which
would or could reasonably be expected to result in any of the representations
and warranties set forth in SECTION 3 of this Agreement becoming untrue or in
any of the conditions of closing set forth in SECTION 8.1, SECTION 8.2 or
SECTION 8.3 not being satisfied.
SECTION 7.2 CONFIDENTIALITY; PUBLICITY. During the Pre-Closing Period:
(a) Purchaser and its Representatives shall keep strictly confidential the
existence and terms of this Agreement prior to the issuance or dissemination of
any mutually agreed upon press release or other disclosure of the transactions
contemplated hereunder;
(b) neither Purchaser nor any of its Representatives shall issue or
disseminate any press release or other publicity or otherwise make any
disclosure of any nature (to any of HSI's suppliers, customers, landlords,
creditors or employees or to any other Person) regarding any of the transactions
contemplated hereunder, except as required by federal securities laws or other
applicable laws and except as otherwise agreed by the parties; and
(c) if Purchaser is required by law to make any disclosure regarding the
transactions contemplated under this Agreement, Purchaser shall advise Seller,
at least two (2) business days prior to making such disclosure, of the nature
and content of the intended disclosure.
SECTION 7.3 FINANCING COMMITMENT. Purchaser shall use its best efforts
during the Pre-Closing Period to obtain from Bank of America debt financing of
Two Million Dollars ($2,000,000) (the "Acquisition Loan") to enable Purchaser to
consummate the Purchase of the Shares at Closing. Purchaser shall provide
Seller, not later than thirty (30) days after the execution of this Agreement,
with an executed commitment letter or other documents evidencing the commitment
by Bank of America to fund the Acquisition Loan on or prior to the Closing Date.
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ARTICLE VIII
CONDITIONS
SECTION 8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE CLOSING.
The obligations of Seller, on the one hand, and Purchaser, on the other to
consummate the Closing are subject to the satisfaction (or, if permissible,
waiver by the party for whose benefit such conditions exist) of the following
conditions:
(a) no arbitrator or Government Entity shall have issued any order, decree
or ruling, and there shall not be any statute, rule or regulation, restraining,
enjoining or prohibiting the consummation of the transactions contemplated by
this Agreement; provided that the parties shall have used their best efforts to
cause any such order, decree, statute, rule or regulation to be vacated or
lifted; and
(b) all authorizations, approvals or consents required to permit the
consummation of the transactions contemplated hereby, including the consent of
Seller's stockholders, shall have been obtained and be in full force and effect.
SECTION 8.2 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of
Purchaser to consummate the transactions contemplated hereby are subject to the
satisfaction (or waiver by Purchaser) of the following further conditions:
(a) the representations and warranties of Seller shall be true and accurate
as of the Closing Date as if made at and as of such time (other than those
representations, and warranties that address matters only as of a particular
date or only with respect to a specific period of time which need to be true and
accurate only as of such date or with respect to such period);
(b) Seller shall have performed in all material respects the obligations
hereunder required to be performed by it at or prior to the Closing Date;
(c) Purchaser shall have received a certificate signed by two executive
officers of Seller, dated as of the Closing Date, to the effect that, to the
best of their Knowledge, the conditions set forth in SECTION 8.2(a) and SECTION
8.2(b) have been satisfied;
(d) Purchaser shall have received duly executed resignations from all of
HSI's directors and such officers as requested by Purchaser effective as of the
Closing Date;
(e) Purchaser shall have received the proceeds of the Acquisition Loan;
(f) Purchaser shall have received an opinion letter from Bryan Cave, LLP,
as of the Closing Date, in the form of EXHIBIT 1 hereto.
(g) Seller or an Affiliate of Seller shall have paid in full all
outstanding Indebtedness of HSI as of the Closing Date.
(h) There shall have been no Material Adverse Effect with respect to HSI's
business, condition (financial or otherwise), assets, liabilities, operations or
financial performance since June 30, 1999.
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(i) Since the date of this Agreement, there shall not have been commenced
or threatened against Purchaser or against any Person affiliated with Purchaser,
any Proceeding (i) involving any challenge to, or seeking damages or other
relief in connection with, any of the transactions contemplated hereunder, or
(ii) that are reasonably likely to have the effect of preventing, delaying,
making illegal or otherwise interfering with any of the transactions
contemplated hereunder or having a material adverse effect on the Purchaser.
(j) Seller shall have delivered to Purchaser on or prior to the Closing
Date, copies of Uniform Commercial Code filings executed by Harris Trust and
Savings Bank ("Harris") releasing all of the liens filed in any jurisdictions by
Harris against any of the assets of HSI or the Shares.
(k) Seller and HSI shall have obtained the consents necessary to ensure, on
and after the Closing Date, the continuation in full force of the leases in
Chicago and Atlanta referenced in SECTION 2.5 of the Disclosure Schedule or
shall have arranged pursuant to a sublease or otherwise to ensure that HSI shall
be entitled to all of the same rights and benefits of such leases after the
Closing Date as HSI is entitled to immediately before the execution of this
Agreement.
SECTION 8.3 CONDITIONS TO THE OBLIGATIONS OF SELLER. The obligations of
Seller to consummate the transactions contemplated hereby are subject to the
satisfaction (or waiver by Seller) of the following conditions:
(a) the representations and warranties of Purchaser shall be true and
accurate as of the Closing Date as if made at and as of such time (other than
those representations and warranties that address matters only as of a
particular date or only with respect to a specific period of time which need to
be true and accurate only as of such date or with respect to such period);
(b) Purchaser shall have performed in all material respects all of the
obligations hereunder required to be performed by Purchaser, at or prior to the
Closing Date;
(c) Seller shall have received a certificate signed by two executive
officers of Purchaser, dated as of the Closing Date, to the effect that, to the
best of their Knowledge. the conditions set forth in SECTION 8.3(a) and SECTION
8.3(b) have been satisfied;
(d) Seller shall have received an opinion letter from Morrison & Foerster
LLP, as of the Closing Date, in the form of EXHIBIT 2 hereto.
ARTICLE IX
TERMINATION
SECTION 9.1 TERMINATION. This Agreement may be terminated and the
transactions contemplated hereby abandoned at any time prior to the Closing
Date, whether before or after approval by the stockholders of Seller:
(a) by mutual written consent of Seller and Purchaser;
33
<PAGE>
(b) by either Seller or Purchaser if the transactions contemplated hereby
shall not have been consummated within ninety (90) days following the date of
this Agreement;
(c) by Seller if there shall have been any material breach of a
representation and warranty or material obligation of Purchaser hereunder and,
if such breach is curable, such default shall have not been remedied within ten
(10) days after receipt by Purchaser of notice in writing from Seller specifying
such breach and requesting that it be remedied; PROVIDED, that such ten (10) day
period shall be extended for so long as Purchaser shall be making all reasonable
attempts to cure such breach, unless the breach is not susceptible of a cure;
(d) by Purchaser if there shall have been any material breach of a
representation and warranty or material obligation of Seller or HSI hereunder
and, if such breach is curable, such default shall not have been remedied within
ten (10) days after receipt by Seller of notice in writing from Purchaser
specifying such breach and requesting that it be remedied; PROVIDED, that such
ten (10) day period shall be extended for so long as Seller shall be making all
reasonable attempts to cure such breach, unless the breach is not susceptible of
a cure; or
(e) by either Seller or Purchaser if any Governmental Entity shall have
issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the consummation of the transactions
contemplated hereby and such order, decree, ruling or any other action shall
have become final and non-appealable.
SECTION 9.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided above, this Agreement shall forthwith become of no further
effect and, except for a termination resulting from a breach by a party of this
Agreement, there shall be no liability or obligation on the part of any party or
their respective officers or directors (except as set forth in SECTION 7.3
hereof which shall survive the termination). Moreover, in the event of
termination of this Agreement pursuant to SECTION 9.1(c) or 9.1(d), nothing
herein shall prejudice the ability of the non-breaching party from seeking
damages from any other party for any breach of this Agreement, including,
without limitation, attorneys' fees and the right to pursue any remedy at law or
in equity.
SECTION 9.3 CANCELLATION FEES; EXPENSES.
(a) If this Agreement is terminated by Purchaser pursuant to SECTION 8.2(e)
("Purchaser Cancellation"), then Purchaser shall pay to Seller a fee of One
Hundred Thousand U.S. Dollars ($100,000) in cash (the "CANCELLATION FEE").
(b) If this Agreement is terminated by Seller pursuant to Section 8.1(b)
(failure to obtain the consent of Seller's stockholders) ("Seller
Cancellation"), then Seller and HSI, jointly and severally, shall pay to
Purchaser the Cancellation Fee.
(c) The Cancellation Fee as provided for in SECTIONS 9.3(a) and (b) above
shall be paid by Seller and HSI, jointly and severally, or Purchaser, as
applicable, within ten (10) days of a Seller Cancellation or Purchaser
Cancellation, as the case may be. If Seller and HSI, or Purchaser, as
applicable, fails to pay any amount pursuant to this SECTION 9.3 when due,
Seller and HSI, or Purchaser, as applicable, shall pay interest thereon, from
the date due until the date paid in full, at the Prime Rate as announced from
34
<PAGE>
time to time by Bank of America or any successor thereto and shall reimburse the
non-terminating party for all reasonable attorneys' fees and other costs and
expenses incurred by such party in collecting such amount from the terminating
party. Each party agrees that in the event of a Purchaser Cancellation or Seller
Cancellation, it would be impracticable or extremely difficult to fix the actual
damages resulting from such breach, and therefore, the applicable party shall
pay to the other party, as liquidated damages and not as a penalty, the
Cancellation Fee, which sum represents a reasonable endeavor by the parties to
estimate a fair compensation for the foreseeable losses that might result from a
Purchaser Cancellation or Seller Cancellation. The non-breaching party's sole
remedy for a Purchaser Cancellation or Seller Cancellation shall be the
liquidated damages provided for in this SECTION 9.3.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 KNOWLEDGE. The term "Knowledge" as used in this Agreement with
respect to Seller or HSI shall mean the actual knowledge of any of the Listed
Individuals after Reasonable Inquiry. "Reasonable Inquiry" with respect to any
Listed Individual shall mean such inquiry and investigation as are reasonable
and customary under the circumstances, which circumstances shall include the
proposed sale of all of HSI's stock, based upon the nature and scope of such
individual's specific position and responsibilities with Seller or HSI.
SECTION 10.2 GOVERNING LAW AND CONSENT TO JURISDICTION. The laws of the
State of California (irrespective of its choice of law principles) shall govern
all issues concerning the validity of this Agreement, the construction of its
terms and the interpretation and enforcement of the right and duties of the
parties. Each party irrevocably submits to the exclusive jurisdiction of the
courts of the State of California and the Federal courts of the United States of
America located in California (and the California state and Federal courts
having jurisdiction over appeals therefrom) in respect of the transaction
contemplated by this Agreement, the other agreements and documents referred to
herein and the transactions contemplated by this Agreement and such other
documents and agreements.
SECTION 10.3 AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified and supplemented in any and all respects only
by written agreement duly executed and delivered by all of the parties.
SECTION 10.4 NOTICES. All notices, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly given (a)
when delivered by hand or by Federal Express or a similar overnight courier; (b)
five (5) days after being deposited in any United States Post Office enclosed in
a postage prepaid, registered or certified envelope addressed; or (c) when
successfully transmitted by telecopier (with a confirming copy of such
communication to be sent as provided in clauses (a) or (b) above), to the
receiving party at the address or telecopier number set forth below (or at such
other address or telecopier number for a party as shall be specified by like
notice); provided however, that any notice of change of address or telecopier
number shall be effective only upon receipt:
35
<PAGE>
(a) if to Purchaser, to:
Beyond Benefits, Inc.
301 E. Ocean Blvd., Suite 900
Long Beach, CA 92802
Telephone: (949) 788-7918
Telecopy: (949) 790-6944
Attention: Barbara Rodin, Ph.D.
with a copy (which shall not constitute notice) to:
Morrison & Foerster LLP
Twelfth Floor
19900 MacArthur Boulevard
Irvine, CA 92612-2445
Telephone: (949) 251-7500
Telecopy: (949) 251-0900
Attention: Tamara P. Tate, Esq.
(b) if Seller, to:
HealthStar Corp.
9495 E. San Salvador Drive
Scottsdale, AZ 85258
Telephone: (480) 614-4275
Telecopy: (480) 451-9087
Attn: Steve Marcus
with a copy (which shall not constitute notice) to:
Bryan Cave LLP
Two North Central Avenue, Suite 2200
Phoenix, Arizona 85004-4406
Telephone: (602) 364-7454
Telecopy: (602) 364-7070
Attn: Joseph P. Richardson, Esq.
SECTION 10.5 LEGENDS. To the extent applicable, each certificate or other
document evidencing any of the Purchaser's Shares shall be endorsed with the
legends substantially in the form set forth below:
(i) The following legend under the Securities Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR
OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED."
(ii) Any legend imposed or required by Purchaser's certificate of
incorporation or bylaws or applicable state securities laws.
SECTION 10.6 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, all of which shall together be considered out and the same
agreement.
36
<PAGE>
SECTION 10.7 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement
(including the documents and the instruments referred to herein), the
Confidentiality Agreement between HealthStar Corp and Beyond Benefits, Inc. and
the Disclosure Schedule (a) constitute the entire agreement and supersede any
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof and (b) except as expressly provided
herein, are not intended to confer upon any Person other than the parties herein
any rights or remedies hereunder.
SECTION 10.8 SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
SECTION 10.9 SERVICE OF PROCESS. Each party irrevocably consents to the
service of process outside the territorial jurisdiction of the courts referred
to in SECTION 10.2 hereof in any such action or proceeding by mailing copies
thereof by registered United States mail, postage prepaid, return receipt
requested, to its address as specified in or pursuant to SECTION 10.4 hereof.
However, the foregoing shall not limit the right of a party to effect service of
process on the other party by any other legally available method.
SECTION 10.10 SPECIFIC PERFORMANCE. Each party acknowledges and agrees that
in the event of any breach of this Agreement each nonbreaching party would be
irreparably and immediately harmed and could not be made whole by monetary
damages. It is accordingly agreed that the parties will (a) waive, in any action
for specific performance, the defense of adequacy of a remedy at law and (b) be
entitled, in addition to any other remedy to which they may be entitled at law
or in equity, to compel specific performance of this Agreement in any action
instituted in accordance with SECTION 10.2.
SECTION 10.11 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by either party (whether by
operation of law or otherwise) without the prior written consent of the other
party. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of, and be enforceable by the parties and their respective
permitted successors and assigns.
SECTION 10.12 EXPENSES. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated hereby, this
Agreement and the consummation of the transactions contemplated hereby shall be
paid by the party incurring such costs and expenses, whether or not the
transactions contemplated hereby is consummated; PROVIDED THAT Seller shall be
responsible for all costs and expenses of HSI.
SECTION 10.13 WAIVERS. Except as otherwise provided in Agreement, any
failure of either party to comply with any obligation, covenant, agreement or
condition herein may be waived by the party or parties entitled to the benefits
thereof only by a written instrument signed by the party granting such waiver,
but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
SECTION 10.14 ATTORNEY FEES. In the event of a dispute with respect to the
subject matter of this Agreement, the prevailing party in any proceeding,
37
<PAGE>
including arbitration commenced to resolve such disputes, shall be entitled to
an award of its reasonable attorney fees and court or arbitration costs incurred
in resolving or settling the dispute, in addition to any and all other damages
or relief which the court or arbitrator may deem proper.
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be signed by their respective officers thereunto duly authorized as
of the date first written above.
HealthStar Corp.,
a Delaware corporation
By: /s/ Steven A. Marcus
-----------------------------------
Title: Vice President and Chief Financial Officer
HealthStar Inc.,
an Illinois corporation
By: /s/ Stephen J. Carder
-----------------------------------
Title: President
Beyond Benefits, Inc.,
a Delaware corporation
By: /s/ Barbara E. Rodin
-----------------------------------
Title: President
72
38
<PAGE>
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
HealthStar Corp.:
We have audited the accompanying consolidated balance sheet of HealthStar Corp.
and subsidiaries as of March 31, 1999 and the related consolidated statements of
operations and retained earnings, and cash flows for the years ended March 31,
1999 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HealthStar Corp. and
subsidiaries at March 31, 1999, and the results of their operations and their
cash flows for the years ended March 31, 1999 and 1998 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Phoenix, Arizona
May 28, 1999
<PAGE>
AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS AMENDMENT dated as of December 16, 1999 (this "Amendment"), by and
among HealthStar Corp., a Delaware corporation ("SELLER"), HealthStar, Inc., an
Illinois corporation ("HSI"), and Beyond Benefits, Inc., a Delaware corporation
("PURCHASER"), is made to that certain Stock Purchase Agreement (the
"Agreement") dated as of September 23, 1999 by and among Seller, HSI and
Purchaser. All capitalized terms not defined herein shall have the meaning
provided in the Agreement.
WHEREAS, Section 9.1(b) of the Agreement provides that either party may
terminate the Agreement if the transactions contemplated by the Agreement are
not closed within ninety days of the date of the Agreement; and
WHEREAS, Seller does not anticipate complying with the provisions of
Section 8.1(b) of the Agreement within the above-referenced ninety-day period;
and
WHEREAS, the parties desire to extend the ninety-day period to
consummate the transactions contemplated under the Agreement; and
WHEREAS, the parties desire to amend the Purchase Price to alter the
amount and type of consideration to be delivered at the Closing;
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements as set forth herein, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, hereby agree as
follows.
1. Section 1.2 of the Agreement shall be amended to read in its
entirety as follows:
"Section 1.2 Purchase Price. On the Closing Date (as hereinafter
defined) and subject to the terms and conditions set forth in this Agreement, in
consideration of the sale, assignment, transfer and delivery of the Shares,
Purchaser shall pay Seller Ten Million Eight Hundred Fifty Thousand Dollars
($10,850,000) in cash (the "CLOSING PURCHASE PRICE"). The term "PURCHASE PRICE"
as used herein shall mean and include the Closing Purchase Price and any Earnout
Payments due on the terms and in the amounts set forth in SECTION 1.4."
2. Section 1.3 of the Agreement shall be amended to read in its
entirety as follows:
"Section 1.3 Closing. The sale and purchase of the Shares
contemplated by this Agreement shall take place at a closing (the "CLOSING") to
be held on or before November 15, 1999 at the offices of Morrison & Foerster
LLP, Twelfth Floor, 19900 MacArthur Boulevard, Irvine, California 92612-2445, at
10:00 a.m. Pacific Time or such other place, time or date on which Seller and
Purchaser may mutually agree in writing (the date on which the Closing takes
place being the "CLOSING DATE"), and effective as of 12:01 a.m. on the Closing
Date.
<PAGE>
(a) At the Closing, Seller shall deliver or cause to be
delivered to Purchaser (i) stock certificates
evidencing the Shares, duly endorsed in blank or
accompanied by stock powers duly executed in blank,
and (ii) all other previously undelivered
certificates and other documents required to be
delivered by Seller to Purchaser at or prior to the
Closing Date in connection with the transactions
contemplated hereby including those documents and
certificates required to be delivered by ARTICLE 8
hereof.
(b) At the Closing, Purchaser shall deliver to Seller (i)
the Closing Purchase Price by wire transfer of
immediately available funds to an account or accounts
designated by Seller, and (ii) all other previously
undelivered certificates and other documents required
to be delivered by Purchaser to Seller at or prior to
the Closing Date in connection with the transactions
contemplated hereby including those documents and
certificates required to be delivered by ARTICLE 8
hereof."
3. All references in the Agreement to "Purchaser's Shares" shall be
deleted, including the deletion of Sections 1.8, 2.29, 4.7, 4.8, 4.10 and 10.5
in their entirety and all other representations, warranties and covenants by any
party, solely to the extent such representations, warranties and covenants
relate to the Purchaser's Shares, shall be deleted, null and void.
4. The opinion letter from Morrison & Foerster LLP to be delivered at
the Closing pursuant to Section 8.3(d) of the Agreement shall be appropriately
modified to delete any opinions, of portions thereof, which relate to the
authorization and issuance of the Purchaser's Shares.
5. Section 9.1(b) shall be amended to read in its entirety as follows:
"by either Seller or Purchaser if the transactions contemplated hereby
shall not have been consummated by February 20, 2000."
6. Nothing in this Amendment shall be construed as a waiver of, or
amendment to, any term or condition of the Agreement other than as expressly set
forth herein.
7. This Amendment may be executed in multiple counterparts, all of
which shall together be considered one and the same agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
HEALTHSTAR CORP.,
A DELAWARE CORPORATION
By:/s/ STEVEN A. MARCUS
---------------------------
Name: Steven A. Marcus
Title: Vice President and CEO
HEALTHSTAR INC.,
AN ILLINOIS CORPORATION
By:/s/ STEPHEN J. CARDER
-------------------------
Name: Stephen J. Carder
Title: President
BEYOND BENEFITS, INC.,
A DELAWARE CORPORATION
By:/s/ BARBARA E. RODIN
--------------------------
Name: Barbara E. Rodin
Title: President
3
<PAGE>
SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS SECOND AMENDMENT dated as of February 29, 2000 (this "Second
Amendment"), by and among HealthStar Corp., a Delaware corporation ("SELLER"),
HealthStar, Inc., an Illinois corporation ("HSI"), and Beyond Benefits, Inc., a
Delaware corporation ("PURCHASER"), is made to that certain Stock Purchase
Agreement (the "Agreement") dated as of September 23, 1999 by and among Seller,
HSI and Purchaser as amended by an amendment dated December 16, 1999 (the
"Amendment"). All capitalized terms not defined herein shall have the meaning
provided in the Agreement.
WHEREAS, Section 9.1(b) of the Agreement provided that either party may
terminate the Agreement if the transactions contemplated by the Agreement are
not closed within ninety days of the date of the Agreement;
WHEREAS, the parties, pursuant to the Amendment, extended the
ninety-day period to consummate the transactions contemplated under the
Agreement until February 20, 2000;
WHEREAS, the parties wish to extend the period provided in Section
9.1(b) until April 30, 2000, change the Purchase Price, eliminate the Earnout
and make certain other amendments;
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements as set forth herein, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, hereby agree as
follows:
1. Article I of the Agreement, as amended, is hereby amended in its
entirety as follows:
ARTICLE I
PURCHASE AND SALE
SECTION 1.1 PURCHASE AND SALE. Upon the terms and subject to the
conditions set forth in this Agreement, at the Closing (as hereinafter defined),
Seller shall sell, assign, transfer and deliver to Purchaser, and Purchaser
shall purchase from Seller, the Shares, free and clear of all options, pledges,
security interests, liens, claims, preemptive rights, imperfections of title,
conditions or restrictions of any nature, or other encumbrances, or restrictions
on voting or transfer ("ENCUMBRANCES"), other than restrictions imposed by
Federal or state securities laws.
<PAGE>
SECTION 1.2 PURCHASE PRICE. On the Closing Date (as hereinafter
defined) and subject to the terms and conditions set forth in this Agreement, in
consideration of the sale, assignment, transfer and delivery of the Shares,
Purchaser shall pay Seller Eight Million Eight Hundred and Eighty Thousand
Dollars ($8,880,000) in cash (the "PURCHASE PRICE").
SECTION 1.3 CLOSING. The sale and purchase of the Shares contemplated
by this Agreement shall take place at a closing (the "CLOSING") to be held on or
before April 30, 2000 at the offices of Morrison & Foerster LLP, Twelfth Floor,
19900 MacArthur Boulevard, Irvine, California 92612-2445, at 10:00 a.m. Pacific
Time or such other place, time or date on which Seller and Purchaser may
mutually agree in writing (the date on which the Closing takes place being the
"CLOSING DATE"), and effective as of 12:01 a.m. on the Closing Date.
(a) At the Closing, Seller shall deliver or cause to be delivered to
Purchaser (i) stock certificates evidencing the Shares, duly endorsed in blank
or accompanied by stock powers duly executed in blank, and (ii) all other
previously undelivered certificates and other documents required to be delivered
by Seller to Purchaser at or prior to the Closing Date in connection with the
transactions contemplated hereby including those documents and certificates
required to be delivered by ARTICLE 8 hereof.
(b) At the Closing, Purchaser shall deliver to Seller (i) the Purchase
Price by wire transfer of immediately available funds to an account or accounts
designated by Seller, and (ii) all other previously undelivered certificates and
other documents required to be delivered by Purchaser to Seller at or prior to
the Closing Date in connection with the transactions contemplated hereby
including those documents and certificates required to be delivered by ARTICLE 8
hereof.
SECTION 1.4 TRANSFER TAXES. All transfer taxes, fees and duties under
applicable law incurred in connection with the sale and transfer of the Shares
under this Agreement will be borne and paid by Seller and Seller shall promptly
reimburse Purchaser for any such tax, fee or duty which Purchaser is required to
pay under applicable law.
SECTION 1.5 FURTHER ASSURANCES. From time to time after the Closing,
Seller, at the request of Purchaser, and Purchaser, at the request of Seller,
shall without further consideration execute and deliver further instruments of
transfer and assignment and take such other action as the requesting party may
reasonably require to more effectively transfer and assign to, and vest in,
Purchaser the Shares, to be sold hereunder and all rights thereto, respectively,
and to fully implement the provisions of this Agreement.
2
<PAGE>
SECTION 1.6 STOCKHOLDER DISTRIBUTIONS. HSI has not, since June 30,
1999, and shall not, from June 30, 1999 through the Closing, (a) declare, set
aside or pay any dividend or other distribution, whether payable in cash, stock
or other property, in respect of its capital stock, (b) directly or indirectly
redeem, purchase or otherwise acquire any shares of its capital stock or other
securities or shares of capital stock or other securities of any of its
subsidiaries, or (c) pay any principal or interest on any debts owed by HIS to
Seller.
2. Section 9.1(b) is amended to read in its entirety as follows:
"by either Seller or Purchaser if the transactions contemplated hereby
shall not have been consummated by April 30, 2000;"
3. Section 4.10 of the Agreement shall be deleted in its entirety.
4. The phrase "including, but not limited to any amount payable as an Earnout
Payment" shall be deleted at the end of Section 5.10.
5. Each reference to Bryan Cave, LLP, shall be deemed to be a reference to
Ruben & Aronson. The address for notices to Ruben & Aronson as provided in
Section 10.4 shall be Ruben & Aronson, 3299 K Street, Northwest, Suite 403,
Washington, DC 20007 at the fax number of (202) 965-3700.
6. Pursuant to Section 8.2(j), the parties understand and agree that such
condition may be satisfied through use of the Purchase Price payable to
Seller by Purchaser at Closing through an agreeable escrow with appropriate
escrow instruction; provided, however, that if the amount of Indebtedness
to be paid exceeds the Purchase Price, then Seller shall pay such funds at
closing through escrow as a condition to Closing of this transaction.
7. Seller shall consult with and coordinate with Purchaser regarding
operations and management of HSI from the date of this Second Amendment,
until the Closing. From and after the date of this Second Amendment, (i)
any management or operations decision in which Purchaser has advised HSI,
after the date of this Second Amendment and Purchaser's advice has been
timely implemented by HSI shall not be deemed to be an event described in
Sections 2.8(a) , 2.8(b), 2.8(h) or 2.8(n) of the Agreement; (ii) any
capital expenditure described in Section 2.8(g) of the Agreement must first
be approved by Purchaser; and (iii) Section 2.10 is amended by adding the
following sentence at the end of said section: Notwithstanding the
foregoing, if a customer listed on Schedule 2.10 determines to terminate
the services of HSI, such event shall not be considered to have a Material
Adverse Effect if HSI enters into an agreement (prior to the termination
date of the canceled arrangement) with another company of similar size in a
geographic region served by Purchaser or HSI that produces the same or
greater revenue for a similar period of time as the customer arrangement
that has been cancelled.
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<PAGE>
8. Nothing in this Second Amendment shall be construed as a waiver of, or
amendment to, any term or condition of the Agreement other than as
expressly set forth herein.
9. This Second Amendment may be executed in multiple counterparts, all of
which shall together be considered one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
HealthStar Corp.,
a Delaware corporation
By: /s/ EDWARD M. CHISM
- ---------------------------
Name: Edward M. Chism
Title: President
HealthStar Inc.,
an Illinois corporation
By: /s/ STEVEN A. MARCUS
- ---------------------------
Name: Steven A. Marcus
Title: President
Beyond Benefits, Inc.,
a Delaware corporation
By:/s/ BARBARA E. RODIN
- ---------------------------
Name: Barbara E. Rodin
Title: President
4
<PAGE>
EXHIBIT A
[DOHAN AND COMPANY LETTERHEAD]
May 29, 1997
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for Champion Financial Corporation
and, under the date of July 10, 1996, we reported on the financial statements of
Champion Financial Corporation as of and for the year ended March 31, 1996. On
May 29, 1997, our appointment as principal auditors was terminated. We have read
Champion Financial Corporation's statements included under Item 4 of its
Form 8-K dated May 29, 1997, and we agree with such statements.
Very truly yours,
/s/ Stan H. Dohan, CPA
Dohan and Company
<PAGE>
EXHIBIT B
[KPMG LLP LETTERHEAD]
One Arizona Center
400 E. Van Buren Street
Suite 1100
Phoenix, AZ 85004
March 15, 2000
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for HealthStar Corp. and, under the
date of May 28, 1999, we reported on the consolidated financial statements of
HealthStar Corp. and subsidiaries as of March 31, 1999 and for the years ended
March 31, 1999 and 1998. On March 9, 2000, we resigned. We have read HealthStar
Corp.'s statements included under Item 4 of its Form 8-K dated March 15, 2000
and we agree with such statements, except that we are not in a position to agree
or disagree with the statements in Paragraphs 4(a)(1)(iii) and 4(a)(2).
Very truly yours,
/s/ KPMG, LLP
<PAGE>
[KPMG LLP LETTERHEAD]
[LOGO]
One Arizona Center
400 E. Van Buren Street
Suite 1100
Phoenix, AZ 85004
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
HealthStar Corp.:
We have audited the accompanying consolidated balance sheet of HealthStar
Corp. and subsidiaries as of March 31, 1999 and the related consolidated
statements of operations and retained earnings, and cash flows for the years
ended March 31, 1999 and 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion of
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthStar
Corp. and subsidiaries at March 31, 1999, and the results of their operations
and their cash flows for the years ended March 31, 1999 and 1998 in conformity
with generally accepted accounting principles.
KPMG LLP
Phoenix, Arizona
May 28, 1999
<PAGE>
HEALTHSTAR CORP.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 25, 2000
The undersigned, having received the Notice of Annual Meeting and Proxy
Statement dated April 3, 2000, appoints Edward M. Chism, Dr. Michael D. Flax,
Dr. Luis A. Queral, David J. Lewis and Isidor Buholzer, Jr., and each of them,
as proxies with full power of substitution to represent the undersigned and to
vote all shares of common stock of HealthStar Corp. which the undersigned is
entitled to vote at the Annual Meeting of Stockholders, to be held on April 25,
2000, and at any adjournment or adjournments thereof.
Your vote is important! Please sign and date on the reverse and return
promptly to Atlas Stock Transfer in the enclosed envelope, so that your shares
can be represented at the meeting.
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IT WILL BE
VOTED "FOR" THE PROPOSALS SET FORTH BELOW. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE "FOR" THE FOLLOWING PROPOSALS.
The undersigned hereby directs this Proxy to be voted as follows:
<TABLE>
<CAPTION>
FOR ALL NOMINEES
PLEASE MARK YOUR VOTES IN THE FOLLOWING MANNER, (EXCEPT AS MARKED TO WITHHOLD
USING DARK INK ONLY: /X/ THE CONTRARY BELOW) ALL NOMINEES
<S> <C> <C> <C>
1. Election of five (5) Directors to serve until their successors are / / / /
elected and shall duly qualify. NOMINEES: Edward M. Chism, Dr. Michael D.
Flax, Dr. Luis A. Queral, David J. Lewis and Isidor Buholzer, Jr.
FOR, except vote withheld from the following nominee(s):
-------------------------------------------------------------------------
</TABLE>
(CONTINUED AND TO BE SIGNED ON THE REVERSE)
<PAGE>
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
2. A proposal to approve and adopt a resolution authorizing the Stock / / / / / /
Purchase Agreement, dated as of September 23, 1999, as amended, between
HealthStar Corp. (the "Company"), HealthStar, Inc. ("HSI") and Beyond
Benefits, Inc. ("BBI"), pursuant to which the Company will sell to BBI
all of the capital stock of HSI.
3. Any other matter or matters which may properly come before the meeting or
any adjournment or adjournments thereof in the discretion of the proxy
holders.
</TABLE>
Dated: _________________________, 2000
______________________________________
______________________________________
Signature
______________________________________
Signature
Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as a fiduciary or for an estate, trust, corporation or partnership,
your title or capacity should be stated.
