SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
(X) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as
permitted by Rule 14a-6(e)(2))
( ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Section 240.14a-11(c)
or Section 240.14a-12
DYNAMIC ASSOCIATES, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
( ) 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: Common Stock
2) Aggregate number of securities to which transaction
applies: 22,473,413 shares
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): $0.11 per share (being the
average of the bid and ask price of the shares to be
received in the transaction as quoted on the OTCBB on May
12, 1999)
4) Proposed maximum aggregate value of transaction:
$2,472,075.40
5) Total fee paid: $494.42
( ) Fee paid previously with preliminary materials.
( ) 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:
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DYNAMIC ASSOCIATES, INC.
6955 E. Caballo Drive,
Paradise Valley, Arizona
85253
May 28, 1999
Dear Shareholder:
You are cordially invited to attend the annual meeting of
shareholders of Dynamic Associates, Inc., which will be held on
June 16, 1999 at 11:00 a.m., Pacific Standard Time at 101
Convention Center Drive, Suite 1200, Las Vegas, Nevada 89109.
Details of the business to be conducted at the annual meeting are
given in the attached Notice of Annual Meeting of Shareholders and
Proxy Statement.
Whether or not you attend the annual meeting it is important that
your shares be represented and voted at the meeting. Therefore, I
urge you to sign, date, and promptly return the enclosed proxy in
the enclosed postage-paid envelope. If you decide to attend the
annual meeting and vote in person, you will of course have that
opportunity.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in the affairs of the
Company.
Sincerely,
/S/ Jan Wallace
Jan Wallace
President
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DYNAMIC ASSOCIATES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
June 16, 1999
To the Shareholders:
Notice is Hereby Given that the Annual Meeting of the holders of
shares of Common Stock of Dynamic Associates, Inc. (the "Common
Stock") will be held at 101 Convention Center Drive, Suite 1200,
Las Vegas, Nevada 89109 on June 16, 1999 at 11:00 a.m., Pacific
Standard Time, for the following purposes:
1. To elect directors.
2. To approve the Agreement and Plan of Merger, dated March 30,
1999, by and among Dynamic Associates, Inc., Advanced Clinical
Systems, Inc., ACS2, Inc. and Dynamic Acquisition Corp., a wholly-
owned subsidiary of the Company;
3. To amend the Company's 1997 Incentive Stock Option Plan and 1997
Non-Statutory Stock Option Plan to increase the maximum aggregate
number of shares which may be optioned under these Plans to
7,000,000 in conformity with the requirements of the Merger
Agreement; and
4. To transact such other business as may properly come before the
meeting.
Only shareholders of record at the close of business on May 10,
1999 are entitled to notice of, and to vote at, this meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/S/ Grace Sim
Grace Sim, Secretary
May 28, 1999
IMPORTANT
Whether or not you expect to attend in person, we urge you to sign,
date, and return the enclosed Proxy at your earliest convenience.
This will ensure the presence of a quorum at the meeting. PROMPTLY
SIGNING, DATING, AND RETURNING THE PROXY WILL SAVE THE COMPANY THE
EXPENSE AND EXTRA WORK OF ADDITIONAL SOLICITATION. An addressed
envelope for which no postage is required if mailed in the United
States is enclosed for that purpose. Sending in your Proxy will not
prevent you from voting your stock at the meeting if you desire to
do so, as your Proxy is revocable at your option
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DYNAMIC ASSOCIATES, INC.
6955 E. Caballo Drive,
Paradise Valley, Arizona
85253
May 28, 1999
PROXY STATEMENT FOR ANNUAL MEETING
OF SHAREHOLDERS
TO BE HELD JUNE 4, 1999
This Proxy Statement, which was first mailed to shareholders on or
about May 28, 1999, is furnished in connection with the
solicitation of proxies by the Board of Directors of Dynamic
Associates, Inc. (the "Company"), to be voted at the annual meeting
of the shareholders of the Company (the "Annual Meeting"), which
will be held at 11:00 a.m. on June 16, 1999, at 101 Convention
Center Drive, Suite 1200, Las Vegas, Nevada 89109 for the purposes
set forth in the accompanying Notice of Annual Meeting of
Shareholders. Shareholders who execute proxies retain the right to
revoke them at any time prior to the exercise of the powers
conferred thereby, by delivering a signed statement to the
Secretary of the Company at or prior to the annual meeting or by
executing another proxy dated as of a later date. The cost of
solicitation of proxies is to be borne by the Company.
Shareholders of record at the close of business on May 10, 1999
will be entitled to vote at the meeting on the basis of one vote
for each share held. On May 10, 1999, there were 18,386,429 shares
of common stock outstanding, held of record by 559 shareholders.
The deadline for submittals of shareholder proposals for the next
regularly scheduled annual meeting will be not less than 120 days
prior to the release date of the proxy materials as received at the
Company's principal offices by that date. A shareholder proposal
submitted outside the processes of SEC Regulation Section 240.14a-8
will be considered untimely if received at the principal offices of
the Company on or after 45 days prior to the Company's release of
its proxy statement to shareholders.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY
STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES MADE
HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
ANY OTHER PERSON.
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MEETING
PLACE, DATE AND TIME
The Annual Meeting will be held at 101 Convention Center Drive,
Suite 1200, Las Vegas, Nevada 89109, on June 16, 1999 at 11:00 a.m.
Pacific Standard Time.
RECORD DATE; SOLICITATION OF PROXIES
The Board of Directors of the Company (the "Board") has fixed the
close of business on May 10, 1999 as the Record Date for the
determination of shareholders entitled to notice of and to vote at
the Annual Meeting. At the Record Date, there were 18,386,429
shares of Common Stock issued and outstanding and entitled to vote
at the Annual Meeting held by approximately 559 holders of record.
Holders of Common Stock are entitled to one vote at the Annual
Meeting for each share of Common Stock held of record at the Record
Date.
In addition to the solicitation of proxies by use of the mails,
proxies may also be solicited by the Company and its directors,
officers and employees (who will receive no additional compensation
therefor) by telephone, telegram, facsimile transmission or other
electronic communication, and/or by personal interview. The
Company will reimburse banks, brokerage houses, custodians and
other fiduciaries who hold shares of Common Stock in their name or
custody, or in the name of nominees for others, for their
out-of-pocket expenses incurred in forwarding copies of the proxy
materials to those persons for whom they hold such shares. The
Company will bear the costs of the Annual Meeting and of soliciting
proxies therefor, including the cost of printing and mailing this
Proxy Statement and related materials. Any questions or requests
for assistance regarding the Company's proxies and related
materials may be directed in writing to Grace Sim at 6955 E.
Caballo Drive, Paradise Valley, AZ 85253.
PURPOSE OF THE ANNUAL MEETING
At the Annual Meeting, holders of Common Stock of the Company will
be asked to elect directors, amend the Company's 1997 Incentive
Stock Option Plan and 1997 Non-Statutory Stock Option Plan to
increase the maximum aggregate number of shares which may be
optioned under these Plans, and approve a merger agreement between
Dynamic Acquisition Corporation, a newly formed, wholly owned
subsidiary of the Company and ACS2, Inc. ("ACS") whereby the
shareholders of ACS will become shareholders of the Company and the
operating subsidiaries of ACS will become wholly owned subsidiaries
of the Company ("Merger Agreement"). See "The Merger" Section
below for background and details of this transaction.
VOTE REQUIRED
Twenty Five Percent (25%) of the issued and outstanding shares of
Common Stock entitled to vote
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as of the Record Date, represented in
person or by proxy, is required for a quorum at the Annual Meeting.
The affirmative vote of a majority of those shares in favor of the
Merger Agreement and the proposed amendment to the Company's 1997
Incentive Stock Option Plan and 1997 Non-Statutory Stock Option
Plan will be necessary in order to approve the agreement and
amendment, and the nominees receiving the three highest number of
votes will be elected to the board of directors. Abstentions may
be specified and will be counted as present for the purpose of
determining the existence of a quorum.
Shares of Common Stock that are represented by properly executed
proxies, unless such proxies shall have previously been properly
revoked (as provided herein), will be voted in accordance with the
instructions indicated in such proxies. If no contrary
instructions are indicated, such shares will be voted FOR approval
of the Merger Agreement, FOR approval of the proposed amendment to
the Company's 1997 Incentive Stock Option Plan and 1997 Non-
Statutory Stock Option Plan, and FOR the nominees for the Board
named herein, and in the discretion of the persons named in the
proxy as proxy appointees, as to any other matter that may properly
come before the Annual Meeting (of which the Company is not
presently aware).
Under the rules of the NASD, although brokers who hold shares in a
street name have the authority to vote on certain items when they
have not received instructions from the beneficial owners, brokers
will not be entitled to vote on the approval of the Merger
Agreement absent specific instructions. Brokers who do not receive
instructions but who are present, in person or by proxy, at the
Annual Meeting will be counted as present for quorum purposes.
It is not expected that any matters other than those referred to in
this Proxy Statement will be brought before the Annual Meeting. If
other matters are properly presented, however, the persons named as
proxy appointees will vote in accordance with their best judgment
on such matters. The grant of a proxy also will confer
discretionary authority on the persons named as proxy appointees to
vote in accordance with their best judgment on matters incident to
the conduct of the Annual Meeting.
Any shareholder may revoke his, her or its proxy (other than an
irrevocable proxy coupled with an interest) at any time before it
is voted, by: (1) filing with the Corporate Secretary of the
Company an instrument revoking the proxy; (2) returning a duly
executed proxy bearing a later date; or (3) attending the Annual
Meeting and voting in person. Attendance at the Annual Meeting
will not by itself constitute revocation of a proxy. There are no
dissenters rights or remedies for shareholders who do not agree
with the outcome of the vote on the issues to be brought at this
Annual Meeting.
SHAREHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE
INFORMATION PRESENTED IN THIS PROXY STATEMENT, AND SHAREHOLDERS ARE
URGED TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED
PROXY IN THE ACCOMPANYING PREPAID ENVELOPE.
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ELECTION OF DIRECTORS
Three directors are to be elected at the Annual Meeting, to hold
office for one year until the next annual meeting of shareholders
(or, if sooner, until the change in composition of the Board
contemplated under the Merger Agreement and further described
herein in the section entitled "Issuance of Common Stock and
Composition of the Board") and until their successors are elected
and qualified. It is intended that the accompanying proxy will be
voted in favor of the following persons to serve as directors
unless the shareholder indicates to the contrary on the proxy.
Management expects that each of the nominees will be available for
election, but if any of them is not a candidate at the time the
election occurs, it is intended that such proxy will be voted for
the election of another nominee to be designated by the Board of
Directors to fill any such vacancy.
NOMINEES
Jan Wallace, 43, is a Director, the President and the Chief
Operating Officer of the Company. Ms. Wallace has been employed by
the Company since April 1995, when she was elected to the Board of
Directors and accepted the position of Chief Operating Officer.
Ms. Wallace was previously Vice President of Active Systems, Inc.
a Canadian Company. Prior to that she was President and Owner of
Mailhouse Plus, Ltd., an office equipment distribution company
which was sold to Ascom Company. She has also been in management
with Pitney Bowes-Canada and Bell Canada where she received its
highest award in Sales and Marketing. Ms. Wallace was educated at
Queens University in Kingston, Ontario and Carleton University,
Ottawa, Ontario in Political Science with a minor in Economics.
Ms. Wallace also sits on the board of directors of MW Medical,
Inc., a publicly held company.
Grace Sim, 38, has been Secretary-Treasurer of the Company since
October 10, 1997. Ms. Sim joined Dynamic in January 1997. Prior to
joining Dynamic, Ms. Sim owned an accounting consulting company in
Ottawa, Ontario, Canada. Ms. Sim received her Bachelor of
Mathematics with honors from the University of Waterloo in
Waterloo, Ontario. Ms. Sim also sits on the board of directors of
MW Medical, Inc., a publicly held company.
Elliot Smith, 65, is a Director of the Company. Mr. Smith began
his career with Prudential Securities in 1954 as a Registered
Representative in its Syracuse, New York, office. By 1966, Mr.
Smith was appointed Resident Manager of the firm's largest office
in New York City. He was named Manager, Marketing & Sales Division
at the Home Office in New York City in 1969, and in 1970, was
elected First Vice President and National Sales Manager. In 1973,
Mr. Smith was elected to the Board of Directors of Bache & Company,
Inc. In 1977, he was named Senior Officer of Commodity Division
and Metal Company and in 1980, was elected President of Bache Haley
Stuart Metal Company, Inc. In 1983, after leaving Prudential, Mr.
Smith served as Executive Vice President at R. Lewis Securities,
Inc., located in New York City, and from 1984 to 1995 was President
of Whale Securities Company, LP, also located in New York City.
Mr. Smith is also on the
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Boards of Pennington School and Jillians
Company. Mr. Smith is a former Member and Director of the Chicago
Board of Options Exchange; Governor of the American Stock Exchange
(AMEX); Governor and Chairman of the AMEX Commodities Exchange;
Director and Member of the Executive Committee of the Securities
Industry Automation Corp.; and Past President of the Association of
Investment Brokers.
Note that if the Merger is consummated, it is anticipated that
Grace Sim will resign as a Director from the Board.
INFORMATION REGARDING THE BOARD
The Company's Board of Directors (the "Board") has no Committees.
The Board met eleven times during the last fiscal year as issues
were raised. All directors attended 75% or more of the aggregate
number of Board meetings. The current Board includes Jan Wallace,
Elliot Smith and William Means. Basic information regarding Jan
Wallace and Elliot Smith is provided above under "Nominees", and
information on William Means is provided below.
William H. Means, Jr., 43, is a Director of the Company. Mr. Means
received his B.S. in Business Administration from Louisiana Tech
University in 1976 and his M.B.A. in Personnel Management from
Louisiana Tech in 1978. From 1978 to 1980, Mr. Means worked as an
Assistant Credit Manager, Salary Administrator and Commercial Loan
Review Analyst at Commercial National Bank in Shreveport,
Louisiana. From 1980 through 1984 he was the Vice President of
Commercial Loan Administration at Bossier Bank and Trust in Bossier
City, Louisiana. From 1984 through 1986 he was a Senior Vice
President at National Bank of Bossier and from 1986 through 1988 he
was a Senior Vice President at Bank of Mid-South in Bossier City,
Louisiana. From 1988 through 1989 he was a co-owner and Account
Executive at United Advertising Network and from 1989 through 1991
he was an Office and Site supervisor at McNeely Construction
Company. Mr. Means owned and operated Space Center Painting and
Construction Company, Space Center Mini Storage and Terrace Acres
Apartments from 1991 through 1994, when he joined Genesis as an
Executive Vice President. Mr. Means resigned all his positions
with Genesis and GCCA as of December 2, 1998.
Each of the current members of the Board have held office since the
last Annual Meeting of shareholders held in October of 1997.
Pursuant to agreements with the Company, the directors were each to
be paid $10,000 per year and $750 for each Board meeting where
their physical presence was required and they actually attended.
These amounts, however, have not been paid since the first quarter
of fiscal year 1998. At a meeting of the Board on March 24, 1999,
all Directors agreed to waive any rights they had to any such
compensation, including any accrued compensation through
consummation of the proposed merger (See discussion below regarding
terms of the proposed merger between ACS and Dynamic Acquisition
Corporation, a wholly owned subsidiary of the Company). Such
waiver will not effect any compensation earned by the Directors
following the Merger.
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The following table provides information on the annual compensation
received by the Executive Officers and Directors of the Company:
Annual Compensation Table
Annual Compensation Long-term Compensation
Name and Other Restricted
Principal Annual Stock Options LTIP All other
Position Year Salary Bonus Compensation Awards /SARs Payout Compensation
Jan Wallace 1998 $180,000 $ 0 $ 3,250 $ 0 $100,000(1) $ 0 $ 0
President,
CEO, Director
Grace Sim 1998 $105,067 $ 0 $ 0 $ 0 $ 50,000(1) $ 0 $ 0
Secretary/
Treasurer
Elliot Smith1998 $ 0 $ 0 $ 3,250 $ 0 $ 0 $ 0 $ 0
Director
William H.
Means Jr. 1998 $189,000 $ 0 $ 3,250 $ 0 $ 0 $ 0 $ 0
Director
There can be no assurance that the amounts of compensation
actually paid, or the persons to whom it is paid for 1999, will
not differ materially from the above 1998 amounts.
(1) Exercised in 1998.
Options
In 1998, there were no options granted or exercised by the
Company's Officers or Directors.
THE BOARD RECOMMENDS A VOTE IN FAVOR OF THE NAMED NOMINEES.
THE MERGER
GENERAL
The following information with respect to the Merger is qualified
in its entirety by reference to the complete text of the Merger
Agreement, a copy of which is included with this Proxy Statement as
Exhibit 2, and the Capital Contribution Agreement, a copy of which
is included in this Proxy Statement as Exhibit 1.
As of March 30, 1999, the Company entered into a Capital
Contribution Agreement with ACS, Advanced Clinical Systems, Inc.
("Advanced") and Advanced-Dynamic, LLC ("LLC") under which the
Company contributed its operating subsidiaries, Genesis Health
Management Company ("Genesis") and Geriatric Care Centers of
America, Inc. ("GCCA"), and ACS contributed its
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subsidiary,
Advanced, and the operating subsidiaries of Advanced to the newly
formed LLC. In consideration of which, each of the Company and ACS
received a fifty percent (50%) equity interest in the LLC. Genesis
and GCCA are referred to together as the "Dynamic Subsidiaries" and
Advanced and all of the subsidiaries of Advanced are referred to
together as the "Advanced Subsidiaries". The Capital Contribution
Agreement and the contributions to the LLC were completed
contemporaneously as of March 30, 1999 with the parties' agreement
to the LLC's Operating Agreement. The LLC's Operating Agreement
sets forth the agreement of the Company and ACS with respect to the
ownership and management of the LLC, the Dynamic Subsidiaries and
the Advanced Subsidiaries pending consummation of a proposed merger
of ACS into Dynamic Acquisition Corporation ("DAC"), a newly formed
Nevada corporation and a wholly owned subsidiary of the Company
(the "Merger"). Until the Merger, the operations, assets and
liabilities of the Advanced Subsidiaries and the Dynamic
Subsidiaries will remain segregated even though all such
subsidiaries are owned by the LLC. The LLC's Operating Agreement
also sets forth the agreement of the Company and ACS to dissolve
the LLC and return the subsidiaries to their respective companies
in the event that the Merger (more fully described below) is not
consummated by December 15, 1999. The Capital Contribution
Agreement and the LLC's Operating Agreement are attached hereto as
Exhibits 1 and 3 respectively, and incorporated by this reference.
On the same date (March 30, 1999), the Company, DAC, ACS and
Advanced also entered into an Agreement and Plan of Merger (the
"Merger Agreement"). The Merger Agreement contemplates that upon
approval by the shareholders of the Company (and the satisfaction
or waiver of the other conditions of the Merger and Contribution
Agreements), the Merger between DAC and ACS will take place. Upon
completion of the Merger, DAC will be the surviving company and
remain a wholly-owned subsidiary of the Company. ACS will cease to
exist and the ACS shareholders will become shareholders of the
Company based on an exchange of shares that provides existing ACS
shareholders with newly issued common stock representing
approximately 55% of the outstanding shares of the Company.
Thereafter, the Company will, directly or indirectly, be the sole
controlling shareholder of all the Advanced and Dynamic
Subsidiaries. All the terms and conditions upon which the Merger
is to be effected are set forth in the Merger Agreement, attached
hereto as Exhibit 2, and incorporated by this reference.
The Company is currently negotiating the terms of an Amendment to
the Merger and Contribution Agreements that will make certain
clarifications and modifications to these Agreements. These
proposed changes are reflected herein to the extent already agreed
upon by both parties. To the extent that any material changes not
reflected herein are made to these Agreements, they will be
announced and discussed at the Annual Meeting.
The Company has also agreed to enter into a Registration Rights
Agreement with the ACS Stockholders upon closing of the Merger (the
"Registration Rights Agreement"). Under this agreement, the Company
will grant registration rights to the ACS Stockholders covering 50%
of the shares of the Company's common stock to be issued upon
consummation of the Merger. These rights will require the Company
to file a registration statement pursuant to the Securities Act of
1933
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("Securities Act") to qualify 25% of the shares issued to the
ACS stockholders within 90 days of closing of the Merger, and an
additional registration statement covering an additional 25% of the
shares within thirty (30) days after the one year anniversary of
the Merger. The form of Registration Rights Agreement is attached
as Exhibit 4 to this report and incorporated by this reference.
The number of shares of the Company issued to the ACS Shareholders
upon consummation of the Merger will be subject to adjustment based
on the fiscal performance of the Advanced Subsidiaries and the
Dynamic Subsidiaries for the year ending December 31, 1999. The
Company and the ACS Stockholders will therefore also enter into an
Escrow Agreement upon consummation of the Merger that sets forth
the terms of this adjustment (the "Escrow Agreement"). As part of
this Escrow Agreement, the Company will deposit four million,
eighty six thousand seventy three (4,086,073) shares of this common
stock with duly executed stock powers into an escrow to be held by
an escrow agent and distributed to the ACS shareholders in
accordance with the terms and provisions of the Escrow Agreement.
The Escrow Agreement is attached hereto as Exhibit 5 and described
more fully in the section entitled "Escrow Agreement" below.
The terms and conditions of the Capital Contribution Agreement, the
Operating Agreement, the Merger Agreement, the Registration Rights
Agreement and the Escrow Agreement were determined through arms-
length negotiations between the representatives of the Company and
ACS.
The preceding information is qualified in its entirety by reference
to the complete text of the Merger Agreement, a copy of which is
included with this report as Exhibit 2, the Capital Contribution
Agreement, a copy of which is included in this report as Exhibit 1,
the LLC's Operating Agreement, a copy of which is included in this
report as Exhibit 3, the Registration Rights Agreement, a copy of
which is included in this report as Exhibit 4, and the Escrow
Agreement, a copy of which is included in this report as Exhibit 5.
BACKGROUND OF MERGER
The following is a brief discussion of the history of the
transaction.
Reasons for Merger; Recommendation of the Board of Directors
At its meetings held on March 24, 1999, the Board determined
that the Merger was in the best interests of the Company and
its shareholders. Accordingly, at this meeting, the Board
authorized the Company's President to complete negotiations
and enter into the Contribution and Merger Agreements with
Advanced and ACS. These Agreements were then ratified by the
Board at its meeting on April 9, 1999 when it directed that
the Merger Agreement be submitted to the Company's
shareholders for approval.
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THE BOARD
RECOMMENDS THAT THE
COMPANY'S SHAREHOLDERS VOTE
FOR APPROVAL OF THE MERGER AGREEMENT.
The determination of the Board to approve the Merger Agreement
was based upon its consideration of a number of factors. The
following list includes some of the material factors
considered by the Board in its evaluation of the Merger:
(1) the Board's familiarity with the business, operations,
competitive position and prospects of the Company, and
the nature of the industry in which the Company
participates, both on a historical and a prospective
basis. In particular, the Board considered the impact of
recent regulatory changes to the health care management
business;
(2) the Board's consideration of, among other things,
information with respect to the financial condition,
results of operations and business of the Company, on
both a historical and a prospective basis, and the
influence of current industry, economic, market and
regulatory conditions. In particular, the Board
considered the current limitations of management of the
subsidiaries;
(3) the Board's consideration over the last several months of
a variety of strategic alternatives, including a number
of proposed business combination transactions, which
could not be consummated, and the Board's belief that
none of the various potential strategic alternatives
believed by the Board to be available to the Company at
the time the Merger Agreement was executed appeared to
the Board to be as favorable to the Company and its
shareholders as the Merger with ACS;
(4) the Board's review of the historical and prospective
market prices of the Company's Common Stock to be issued
to the ACS Stockholders as the Merger Consideration;
(5) the Board's review of presentations by, and discussion of
the terms and conditions of the Merger with, senior
executive officers of the Company, representatives of its
legal counsel and representatives of the Company's Note
Holders;
(6) the acceptance by the Company's Note Holders of an offer
to replace their 10% unsecured convertible notes with a
combination of 7.5% secured convertible notes, warrants
to purchase the Company's Common Stock and shares of the
Company's Common Stock.
In view of the wide variety of material factors considered in
connection with its evaluation of the Merger, the Board did
not find it practicable to, and did not attempt to, quantify
or
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otherwise attempt to assign relative weights to the
specific factors described above in reaching its
determination.
The vote of the directors was Director Wallace and Director
Smith in favor and Director Means opposed. Director Means
stated that he will vote his shares against the merger, but
will take no action to solicit proxies or other opposition
against the proposed merger. Directors Wallace and Smith have
stated that they will vote their shares of stock in favor of
the merger.
Letter Of Intent
Following extensive discussions, the Company executed a letter
of intent with Advanced (the "Letter of Intent"). The Letter
of Intent set forth the understanding between the Company and
Advanced regarding certain preliminary discussions and due
diligence investigations leading toward a proposed business
combination. The Letter of Intent was not legally binding on
either the Company or Advanced, with the exception of certain
covenants regarding confidentiality, access and expenses.
The Letter of Intent contemplated the merger of Advanced with
a subsidiary of the Company and the issue of a number of
common shares of the Company equal to 122% of its issued and
outstanding shares such that the shareholders of Advanced
would own 55% of the post-closing issued and outstanding
shares of the Company. The Letter of Intent stated that the
merger was subject to re-financing of the Dynamic convertible
unsecured debt such that the principal amount outstanding
after re-financing was no more than $10,000,000 bearing an
annual interest rate of no greater than 10% per annum.
The Company and Advanced determined to proceed with the two
stage merger transaction as set forth in the Contribution and
Merger Agreements instead of the merger transaction set forth
in the Letter of Intent. Among other things, this two stage
structure enables the Company and Advanced to pursue re-
financing of Advanced's existing debt with NationsCredit, as
discussed below in the section on "Conditions to the Merger",
based on their combined business operations.
Interim Management Agreement
The Company entered into an interim management agreement with
Advanced dated December 7, 1998 (the "Interim Management
Agreement"). The Interim Management Agreement was entered
into to enable the Company to continue the management of the
Genesis and GCCA businesses with minimal disruption upon the
resignation of certain members of the management of those
companies and while merger talks proceeded.
Under the Interim Management Agreement, Advanced agreed to
provide management and operation services for the geriatric
psychiatric health care business carried on by Genesis and
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GCCA pending execution of the Capital Contribution Agreement
and the Merger Agreement. The services involved supervision of
all day to day management and operation activities, with the
assistance of the staff of Genesis and GCCA. In
consideration, the Company agreed to pay to Advanced a fee
equal to $15,000 per month, pro-rated for any portion of a
month in which the services were provided. In addition, the
Company agreed to reimburse Advanced for reasonable expenses
incurred by it and paid to arms-length parties in providing
its management services, provided that the reimbursable
expenses were limited to a maximum of $6,000 per month. The
Company retained control and responsibility for all key
management decisions of Genesis and GCCA. Advanced agreed to
make recommendations to Dynamic for all key management
decisions, provided that Dynamic was not bound to carry out
any recommendations of Advanced. Advanced agreed to co-
ordinate all management and operational activities through Ms.
Jan Wallace, President of the Company and to keep Ms. Wallace
fully apprised of all management and operational activities
conducted by Advanced.
The Interim Management Agreement was terminated by agreement
of the parties upon execution of the Capital Contribution
Agreement, and, in a modified form, has been incorporated into
the Operating Agreement of the LLC (See "Capital Contribution
and the LLC Operating Agreement" below).
Re-Financing of the Company's Convertible Notes
As a condition preceding any merger under the Letter of
Intent, the Company was required to re-finance its 10%
convertible unsecured notes due September 30, 2006 (the
"Original Notes") to a principal amount of less than
$10,000,000. On February 1, 1999, the Company completed this
re-financing. Prior to this re-financing, the aggregate
outstanding principal amount of the Original Notes was
$17,001,500. The Company reduced this outstanding debt to
$8,676,500, consisting of secured convertible notes of
$8,325,000, as described below, and Original Notes in the
amount of $351,500.
As part of the re-financing, the holders of $16,650,000 of
Original Notes accepted the Company's offer to replace those
notes with the following for every two dollars of obligation
cancelled:
(1) one dollar of debt as represented by a 7.5% secured
convertible note due December 31, 2006 with interest
payable on June 30 and December 31 of each year until
maturity (the "Secured Notes"). The Secured Notes are
convertible into common shares of the Company at a price
of $1.00 per share at any time until maturity;
(2) two warrants to purchase two common shares of the Company
at a price of $1.50 per share, good until December 31,
2000 (the "Share Purchase Warrants"); and
(3) one share of the Company's common stock.
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<Page 14>
In aggregate, the Company issued to the holders of the
Original Notes a total of 4,162,500 shares of Common Stock,
Share Purchase Warrants to purchase a total of 8,325,000
shares of Common Stock and Secured Notes in the aggregate
principal amount of $8,325,000. A balance of $351,500 of the
Original Notes remain outstanding.
Capital Contribution and the LLC Operating Agreement
As of March 30, 1999, ACS, Advanced, the LLC and the Company
entered into the Capital Contribution Agreement. The Capital
Contribution Agreement is the Agreement under which the
Company and ACS contributed their operating subsidiaries to
the LLC in a form of joint venture. At the same time, the
parties entered into the LLC's Operating Agreement under which
the LLC was to be governed. This includes, in general, the
terms of the ownership and management of the LLC, the Dynamic
Subsidiaries and the Advanced Subsidiaries pending
consummation of the proposed merger.
ACS and the Company were given equal interests in the LLC in
exchange for their contribution of their respective
subsidiaries. The administration of the day-to-day business
and affairs of the LLC was delegated by the Members to four
Managers: a Chief Manager, a Vice Manager, an Advanced
Operations Manager, and a Dynamic Operations Manager. Kevin
Lee was designated the Chief Manager, Jan Wallace was
designated the Vice Manager, Andrew Miller was designated the
Advanced Operations Manager, and Clay Deardorff was designated
the Dynamic Operations Manager.
In general, the Chief Manager carries out the day-to-day
management and operations of the LLC in accordance with the
directions, and subject to the review, of the Members. The day
to day management and operation of the geriatric psychiatric
health care businesses carried on by the Dynamic Subsidiaries
is carried out by Advanced, with the assistance of the staff
of the Dynamic Subsidiaries. In consideration, the Dynamic
Subsidiaries pay to Advanced a fee equal to $7,000 per month,
payable in advance, pro-rated for any portion of a month in
which the services are provided. In addition, the Dynamic
Subsidiaries must reimburse Advanced for its reasonable
expenses incurred in providing its management and operations
services. These reimbursable expenses are limited to a
maximum of $6,000 per month. The Dynamic Subsidiaries may, in
their sole discretion, defer such monthly payments until June
30, 1999, upon which date all accrued sums become payable
unless the merger has been completed by that time (in which
case all such amounts are forgiven). See discussion on
Interim Management Agreement above.
Dynamic, through the Dynamic Operations Manager, will retain
control over and will continue to assume all responsibility
for all key management decisions of the Dynamic Subsidiaries.
Advanced will make recommendations to Dynamic and the Dynamic
Operations Manager for all key management decisions, provided
that Dynamic and the Dynamic Operations Manager are not bound
to carry out any recommendation of Advanced.
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<Page 15>
Advanced must carry out all management directions made by Dynamic,
provided they are within the scope of the applicable portions of
the LLC's Operating Agreement.
In addition, Advanced must co-ordinate all management and
operational activities through the Dynamic Operations Manager.
Advanced must keep Dynamic and the Dynamic Operations Manager
fully apprised of all management and operational activities
conducted by Advanced.
The LLC's Operating Agreement also sets forth the agreement of
the parties to dissolve the LLC in the event that the proposed
merger is not consummated by December 15, 1999. In such a
case, the subsidiaries are to be returned to the control of
their respective companies.
A copy of the LLC's Operating Agreement is attached hereto as
Exhibit 3.
INFORMATION REGARDING ACS
General
ACS, through its subsidiaries, operates outpatient and inpatient
behavioral health programs for hospitals and community mental
health centers. ACS' business emphasis is in managing behavioral
health services for geriatric patients. ACS was formed to operate
hospital-based, diagnostically-oriented pain management units, and
although that business is profitable, ACS intends to emphasize
behavioral healthcare in its future growth. ACS has 7 contracts
with hospitals for the operation of pain centers, 14 contracts for
the operation of mental health programs, and 32 practice management
agreements with clinicians.
Credit Facility
Entering into the Contribution Agreement breached the terms of ACS'
credit agreement (the "Credit Agreement") dated as of March 31,
1998 with certain lenders and NationsCredit Commercial Corporation
("NationsCredit"), as agent. By letter dated April 13, 1999
NationsCredit agreed to forbear until December 15, 1999 from
exercising its rights and remedies available to it under the
documents executed in connection with the above referenced loan.
ACS is in the process of identifying a lender or lenders who would
loan to ACS approximately $5,900,000 in order to replace the Credit
Agreement, since refinancing is a requirement for the Merger to be
consummated.
Industry Overview; Competition
The primary competition for ACS' behavioral health division is
provided by specialized managers similar to ACS that also contract
with hospitals to manage psychiatric programs. In almost every
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new business opportunity, ACS encounters competition from a
specialized manager. The competitive bidding usually occurs whether
the hospital already has a specialized manager under contract that is
subject to renewal or when a hospital is contemplating opening a
new psychiatry services unit. In ACS' pain management division,
the competition is relatively fragmented and is provided by
departments of competing hospital free-standing physician specialty
clinics and surgery centers.
Services
Through its New Day and Pain Care divisions, ACS provides
management services to hospitals and community mental health
centers under long-term contracts for the development, staffing and
management of outpatient and inpatient specialty units, which units
are owned by such hospitals and community mental health centers.
These units are dedicated to the diagnosis and treatment of
individuals suffering with mental health or chronic pain
conditions.
Typically, ACS establishes a relationship with a hospital or
community mental health center by entering into a service agreement
or management agreement. This agreement normally requires ACS to
develop and operate mental health or pain management programs of
the hospital or community mental health center or to provide other
administrative services such as patient scheduling, billing and
collection. The agreements typically last for one to three years.
Some automatically renew from year to year. Among the services
and resources ACS commonly furnishes under these contracts are
management services, written material necessary to develop, market,
implement and operate a given program, and trained and experienced
health management professionals who serve as Program Directors,
Medical Directors, clinicians, social workers and in various other
capacities. The service agreements of ACS' behavioral health and
pain management divisions are very similar in content. The service
agreements of both divisions of ACS are substantially similar in
content to the agreements used by the Company for similar purposes.
ACS commonly establishes its relationship with Medical Directors
and certain other professional personnel by way of independent
contractor agreements. These agreements normally require the
independent contractor to render services at a designated location
managed by ACS in return for a monthly fee paid by ACS to the
contractor.
Operations -- Customers
The table below sets forth the percentage of operating revenues
derived from each payor source for the fiscal year ended June 30,
1998 and the nine month period ended March 31, 1999. The payor
sources below represent the distribution of amounts actually paid
to client hospitals, community health centers and physicians.
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Payor Source Year Ended 6/30/98 9 Months Ended 3/31/99
Medicare
Intermediaries 69% 71%
Workers
compensation
insurance
carriers 13% 14%
Commercial
Insurers 8% 11%
Others 10% 4%
----- -----
100% 100%
<Page 18>
Government Regulation
ACS, as a participant in the health care industry, is subject to
extensive federal, state and local regulation. The operations of
ACS's inpatient psychiatric and partial hospitalization programs
are subject to federal laws. Such programs may also be subject to
state laws governing hospitals, mental health facilities,
pharmacies, nursing services and certain types of home health
agency activities.
In recent years, various state and federal regulatory agencies have
stepped up investigative and enforcement initiatives with respect
to the health care industry in general, and many companies
providing health care services have received subpoenas and other
requests for information from these regulatory agencies in
connection with the health care services they provide. In
October, 1998, the Health Care Financing Administration ("HCFA")
and Medicare's investigative arm, the Office of Inspector General
of the Department of Health and Human Services ("OIG") announced
that partial hospitalization programs would become the focus of
intense governmental scrutiny, in the wake of findings that 90% of
partial hospitalization services provided at community mental
health centers across the country did not meet program
requirements. As a result of this initiative, ACS, along with
other providers of partial hospitalization services, has been asked
by the government for information about its programs. The OIG
initiated an audit of the partial hospitalization program that ACS
manages in Tomball, Texas. Management believes the OIG audit was
initiated as a random audit and that the Tomball, Texas hospital
program was selected because of a higher than average utilization
rate. ACS has retained experienced health care counsel to
represent it in connection with the audit, is responding to the
government's requests for documents and information, and is working
with the government investigators to move forward with the audit.
At this time, ACS has been informed by the OIG auditor performing
the audit at Tomball Texas that neither ACS nor the hospital is
currently the subject of an investigation. However, from time to
time ACS receives notices and subpoenas from various governmental
agencies concerning plans to audit ACS, or requesting information
regarding certain aspects of ACS' business. ACS cooperates with
the various agencies in responding to such requests. The
government has broad authority and discretion in enforcing
applicable laws and regulations, and therefore the scope and
outcome of these investigations and inquiries cannot be predicted
with certainty. Also, there is no certainty that the audit of the
Tomball, Texas program will not lead to an investigation, or that
there might not be future audits and/or investigations. ACS
expects to incur costs on an ongoing basis to secure competent and
experienced legal representation in connection with these
regulatory matters.
Healthcare law is an area of extensive and dynamic regulatory
change. Changes in laws or regulations or new interpretations of
existing laws or regulations can have a dramatic effect on
permissible activities, the relative costs associated with doing
business, and the amount and availability of reimbursement by
government and third-party payors. There can be no assurance that
either the federal, state or local governments will not impose
additional regulations upon the services ACS provides, which could
adversely affect ACS' ability to carry on each of its lines of
business as presently conducted.
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Year 2000 Disclosure
This section is a Year 2000 Readiness Disclosure for purposes of
the Year 2000 Information and Readiness Disclosure Act.
ACS has completed an assessment of its internal computer software
systems with potential Year 2000 ("Y2K") problems. ACS has
obtained assurances from its software vendors that all software
material to ACS' operation is Y2K compliant. ACS has employed a
director of information systems and has designated 18 individuals
to evaluate the software ACS uses to ensure that computer
processing can continue without system problems when the year 2000
arrives.
ACS is aware that its hospital and community mental health center
clients have assessed their systems and potential risks regarding
Y2K. ACS believes its clients are or will be prepared to deal with
any Y2K issues, and ACS does not expect any important computer
system problems to arise.
ACS can give no assurance that it will not encounter Y2K problems,
or that the third parties it does business with will adequately
address their Y2K problems. The failure of ACS clients or other
third parties to adequately address Y2K issues could have a
material adverse effect on ACS' business, results of operations or
financial condition.
Insurance
ACS' professional liability policies are on an occurrence basis and
are renewable annually with per claim coverage limits of up to
$1,000,000 per occurrence and $3,000,000 in the aggregate. ACS
also maintains general liability coverage with a limit of
$1,000,000 per occurrence and $3,000,000 in the aggregate. The
general liability policy also provides up to $50,000 coverage for
any one fire and $5,000 coverage for any one person. Furthermore,
ACS carries workers' compensation insurance with policy limits of
$100,000 for each employee or each accident, up to a $500,000
policy limit. Additionally, ACS carries property insurance for
which coverage varies by location.
There can be no assurance that any of ACS' insurance will be
sufficient to cover any judgments, settlements or cost relating to
any pending or future legal proceedings or that any such insurance
will be available to ACS in the future on satisfactory terms, if at
all. If the insurance carried by ACS is not sufficient to cover
any judgments, settlements or cost relating to pending or future
legal proceedings, ACS' business and financial condition could be
materially, adversely affected.
Employees
On May 1, 1999, ACS employed approximately 200 full-time and 60
part-time individuals. ACS believes that its employee relations
are good.
Management of ACS
ACS's Directors and Executive Officers are as follows:
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<Page 20>
Name Age Position
Kevin D. Lee 41 President; Director
Andrew W. Miller 55 Director
James T. Harper 49 Executive Vice-President
Lisa A. Manning Vice-President
Scott N. Mohler, Ph.D. Vice-President
Biographies
Kevin D. Lee has been the President and a member of the board of
directors of Advanced since July 1990. In that role, he is
responsible for the overall business development and management of
the company. Mr. Lee coordinates Advanced's business relationships
and contractual arrangements with hospitals and clinicians. From
1987 to 1990, he was president of The Rehab Group, Inc., a
privately-held company he co-founded that operates 26 comprehensive
outpatient rehabilitation clinics and contracts with 70 nursing
homes to provide physical therapists. From 1985 to 1987, Mr. Lee
was CFO of Rehability Corporation (acquired by Living Centers of
America, a publicly held company) that provides outpatient
rehabilitation services in several hundred locations. From 1983 to
1985, Mr. Lee was corporate controller of American Medical Centers,
Inc., an operator of 10 psychiatric hospitals and five medical-
surgical hospitals, which was sold in 1985 to Hospital Corporation
of America and other purchasers. Mr. Lee began his career in 1980
with Ernst & Young, an accounting and consulting firm.
Andrew W. Miller has been a member of Advanced's board of
directors since the company's formation in early 1990. In 1982,
Mr. Miller co-founded and served on the board of directors of
Surgical Care Affiliates, Inc., one of the nation's largest
operators of outpatient surgery centers which was recently acquired
by HealthSouth Corporation. From 1970 until 1982, Mr. Miller was
employed by Hospital Corporation of America ("HCA"). During his
time with HCA, he was president of the HCA Management Company, a
division of HCA which grew to manage 180 hospitals. Mr. Miller
serves on the board of directors of several health services
companies and has served as president of the Federation of American
Health Systems.
James T. Harper is the Executive Vice President of the New Day
Division of Advanced ("New Day"). From April 1993 to November 1994
(when New Day was acquired by Advanced) he was President of New
Day. He is responsible for developing and executing new contracts
with hospitals and community mental health centers. Prior to
working with New Day, Mr. Harper was administrator of the Center
for Psychiatric Medicine at the University of Alabama Medical
Center. From September 1989 to April 1991, Mr. Harper served as
Vice President of Operations for Innovative Health Systems, Inc.,
an operator of psychiatric and rehabilitation facilities. From
1984 to 1989, he held two hospital administrator positions with the
HCA Psychiatric Company, the latest at Parthenon Pavilion in
Nashville, Tennessee. Mr. Harper was administrator of Bridgewater
Hospital in North Little Rock, Arkansas for Qualicare, Inc. from
1979 to 1984. Mr. Harper received his MBA from the University of
Georgia and his BA in psychology from Mercer University.
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<Page 21>
Lisa A. Manning joined ACS as controller in January 1995. She is
responsible for all accounting and corporate-level administrative
support functions for ACS. She assists with operations management
by administrating contract compliance and providing business office
support including receivables management. From 1991 through 1994,
she was assistant controller of Rehability Corporation. Ms.
Manning began her career in 1986 with Kraft Bros. CPAs, a regional
accounting firm based in Nashville, Tennessee. Ms. Manning
received her bachelor's degree with a major in accounting from the
University of Tennessee in Knoxville in 1986 and is a certified
public accountant.
Dr. Scott N. Mohler joined ACS in September 1992 as program
director of its Lexington operation prior to its opening. The
program directors and other site managers in ACS' Pain Care
division are supervised by Dr. Mohler. He has extensive experience
in the development and management of new pain treatment programs.
Dr. Mohler continues to practice psychology on a part-time basis
in Pain Care's Lexington unit. Previously, Dr. Mohler was
psychology services coordinator of the Occupational Medicine Center
within Cardinal Hill Hospital's Pain Management Program. Dr.
Mohler also provided psychology services for Veteran's
Administration Medical Center in Lexington. He has published
several articles with other clinicians, some of which concern pain
management. Dr. Mohler received his masters and doctorate degrees
in psychology at Virginia Tech University in Blacksburg, Virginia.
General Description of ACS Capital StockDescription of ACS Capital
Stock
ACS is authorized to issue 10,000,000 shares of common stock, par
value $0.01 per share. As of May 13, 1999, there were 1,391,465
shares issued and outstanding. In addition, there were options,
warrants and stock appreciation rights outstanding to purchase
1,615,000 shares of common stock. Advanced is a privately held
company with 7 stockholders of the outstanding stock.
Approximately 88.8% is beneficially owned by Andrew W. Miller,
approximately 8.7% is owned by Kevin D. Lee and approximately 2.2%
is owned by James T. Harper.
Financial Information of ACS
The following is the unaudited, consolidated statement of income
for ACS and its subsidiaries:
Nine months Year ending June 30,
ending 3/31/99
(unaudited) 1998 1997
Net revenues $8,902,729 $12,925,752 $11,928,867
Operating
expenses $8,453,174 $11,523,749 $11,191,500
Other revenues
(expenses):
Merger-related
expenses (106,201) - -
Interest expense (421,809) (209,911) (145,819)
Investment income 29,224 18,297 57,329
Other 7,401 9,662 1,278
Total other
expenses (491,385) (181,952) (87,212)
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<Page 22>
Income before taxes (41,830) 1,220,051 650,155
Provision for income
taxes - 521,825 12,962
Net income (loss) $ 41,830 $ 698,226 $ 637,193
The following are the consolidated Balance Sheets for ACS and its
subsidiaries:
March 31,1999 June 30, June 30,
(unaudited) 1998 1997
Cash $ 428,704 $ 567,683 $ 412,986
Other current assets 3,091,589 2,933,473 2,579,690
Total current assets 3,520,293 3,501,156 2,992,676
Net property and
equipment 253,363 317,639 487,573
Other assets 828,272 915,396 832,414
Total assets 4,601,928 4,734,191 4,312,663
Current liabilities 1,921,371 1,601,666 1,286,294
Non-current liabilities 4,800,082 5,317,442 1,042,310
Paid-in capital 2,479,435 2,372,213 1,289,920
Retained earnings 1,350,535 1,392,365 694,139
Treasury stock at cost (5,949,495) (5,949,495) -
Total shareholder'
equity (2,119,525) (2,184,917) 1,984,059
Total liabilities and
shareholders' equity $ 4,601,928 $4,734,191 $4,312,663
CERTAIN TAX CONSEQUENCES OF THE MERGER
The contribution by Dynamic of the stock of GCCA and Genesis to the
LLC and the merger of DAC with ACS should not result in any income
tax consequences to the shareholders of the Company.
The contribution by the Company of its subsidiaries to the LLC will
require the Company and its subsidiaries to file separate income
tax returns (as opposed to consolidated income tax returns which
they currently file) until the effective date of the Merger. If
during the period after Contribution and
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<Page 23>
before the Merger, either
the Company or its subsidiaries has taxable income, they will be
required to pay federal income tax on that income and will not be
able to utilize the losses incurred during that period by the other
entities. After the Merger, the Company and its subsidiaries,
including its newly acquired subsidiaries obtained in the Merger,
will file a single consolidated tax return.
In the event the Merger is not consummated, the contribution by the
Company of the stock of its subsidiaries to the LLC should have no
impact. As long as the stock of its subsidiaries is returned to
the Company prior to December 31, 1999, the Company will take the
position that the contribution was rescinded and thus never
occurred for federal income tax purposes. There is some risk that
the IRS may successfully dispute this position, in which event the
tax consequences to the Company and its subsidiaries would be as
described above.
It should also be noted that Genesis and GCCA will pay management
fees to the Company in an amount equal to the interest due on the
Dynamic Secured Notes. If the IRS disallows the deduction for
these fees, it is likely that Genesis and/or GCCA will have taxable
income during the period their stock is held by the LLC. As a
result, they will be required to pay federal income tax on that
income for that period if they are required to file separate income
tax returns, as described above. It is also possible that the
deduction for the interest accruing on the Secured Notes during
this period will be of no tax benefit.
ANTICIPATED ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for by the
Company as a "purchase" for accounting and financial reporting
purposes. Under this method of accounting, the purchase price will
be allocated to assets acquired and liabilities assumed based on
their estimated fair values at the time the merger is consummated.
ACS will be treated as the purchaser for accounting and financial
reporting purposes due to the fact that the ACS Stockholders will
own in excess of 50% of the outstanding shares of the Company's
common stock upon completion of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Except as summarized below, none of the Company's directors or
executive officers has any material interest in or relation to the
Merger.
As of May 10, 1999, the current directors and executive officers of
the Company beneficially owned 650,000 shares (approximately 4.5%)
of the outstanding shares of the Company's Common Stock. Such
directors and executive officers have no right to acquire any
additional shares through the exercise of stock options or
otherwise.
Pursuant to the Merger Agreement, Jan Wallace, the Company's
President and Chief Executive Officer, and Grace Sim, the Company's
Secretary will enter into termination agreements with the Company
on consummation of the Merger (the "Termination Agreements").
Pursuant to the Termination Agreements, each of Ms. Wallace's and
Ms. Sim's employment agreements will be terminated effective upon
the consummation of the Merger. The Company will pay to Ms.
Wallace and Ms. Sim all accrued salary and reimbursable expenses
owing, but will not pay any termination fee or other bonus. Ms.
Wallace and Ms. Sim will agree to certain non-disclosure and non-
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<Page 24>
competition covenants in favor of the Company, and the Company will
agree to indemnify Ms. Wallace and Ms. Sim against any actions or
liabilities arising from their employment with the Company or their
activities as officers or directors of the Company and its
subsidiaries, except in the circumstance of fraud or intentional
misconduct.
Upon consummation of the Merger, the Company will enter into an
Employment Agreement with Mr. Kevin D. Lee to act as the Company's
President and Chief Executive Officer.
Kevin D. Lee has been the President and a member of the board of
directors of Advanced since July 1990. In that role, he is
responsible for the overall business development and management of
the company. Mr. Lee coordinates Advanced's business relationships
and contractual arrangements with hospitals and clinicians. From
1987 to 1990, he was president of The Rehab Group, Inc., a
privately-held company he co-founded. At the time of his departure,
the Rehab Group operated 26 comprehensive outpatient rehabilitation
clinics and contracts with 70 nursing homes to provide physical
therapists. From 1985 to 1987, Mr. Lee was CFO of Rehability
Corporation (acquired by Living Centers of America, a publicly held
company) that provides outpatient rehabilitation services in
several hundred locations. From 1983 to 1985, Mr. Lee was
corporate controller of American Medical Centers, Inc., an operator
of 10 psychiatric hospitals and five medical-surgical hospitals,
which was sold in 1985 to Hospital Corporation of America and other
purchasers. Mr. Lee began his career in 1980 with Ernst & Young,
an accounting and consulting firm.
Under the Employment Agreement, Mr. Lee would be employed for a
period of 3 years at a salary of $150,000 per year. He would also
be entitled to a bonus, up to a maximum amount of $100,000 per
year, based on the Company's consolidated earnings. Mr. Lee would
also be entitled to purchase 1,000,000 shares of the Company's
Common Stock pursuant to a Non-Statutory Stock Option Agreement.
A copy of Mr. Lee's proposed Employment Agreement and Stock Option
Agreement are attached hereto as Exhibits 6 & 7, respectively.
ISSUANCE OF COMMON STOCK AND COMPOSITION OF THE BOARD
Upon consummation of the Merger, the Company will issue to the ACS
Stockholders pro-rata share certificates representing newly issued
common shares in the Company in an amount equal to 122% of the
currently issued and outstanding shares of the Company. This will
effectively give the ACS shareholders a combined voting strength of
55% following the merger. Each share certificate will be endorsed
with a legend confirming that such shares are restricted and may
not be offered or sold without registration or exemption under
federal and state securities laws, however, one-half of the shares
will become subject to the Registration Rights Agreement discussed
herein and attached hereto as Exhibit 4.
In addition, pursuant to the Merger Agreement and by resolution of
the Board, the number of members of the Board will be expanded from
three to five, one member of the current Board, Grace Sim will
resign, and three individuals designated by ACS will be appointed
to fill the three vacancies pursuant to the bylaws.The three
individuals that are expected to fill these vacancies are Kevin D.
Lee, Andrew W. Miller and James T. Harper. Information on the
background of Kevin D. Lee is
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<Page 25>
provided above. Information on the
background of Andrew W. Miller and James T. Harper is as follows:
Andrew W. Miller has been a member of Advanced's board of
directors since the company's formation in early 1990. In 1982,
Mr. Miller co-founded and served on the board of directors of
Surgical Care Affiliates, Inc., one of the nation's largest
operators of outpatient surgery centers which was recently acquired
by HealthSouth Corporation. From 1970 until 1982, Mr. Miller was
employed by Hospital Corporation of America ("HCA"). During his
time with HCA, he was president of the HCA Management Company, a
division of HCA which grew to manage 180 hospitals. Mr. Miller
serves on the board of directors of several health services
companies and has served as president of the Federation of American
Health Systems.
James T. Harper is the Executive Vice President of the New Day
Division of Advanced ("New Day"). From April 1993 to November 1994
(when New Day was acquired by Advanced) he was President of New
Day. He is responsible for developing and executing new contracts
with hospitals and community mental health centers. Prior to
working with New Day, Mr. Harper was administrator of the Center
for Psychiatric Medicine at the University of Alabama Medical
Center. From September 1989 to April 1991, Mr. Harper served as
Vice President of Operations for Innovative Health Systems, Inc.,
an operator of psychiatric and rehabilitation facilities. From
1984 to 1989, he held two hospital administrator positions with the
HCA Psychiatric Company, the latest at Parthenon Pavilion in
Nashville, Tennessee. Mr. Harper was administrator of Bridgewater
Hospital in North Little Rock, Arkansas for Qualicare, Inc. from
1979 to 1984. Mr. Harper received his MBA from the University of
Georgia and his BA in psychology from Mercer University.
TERMS OF THE MERGER
The terms of the Merger are set forth in the Merger Agreement that
appears as Exhibit 2 to this Proxy Statement, and the description
of the Merger Agreement contained herein is qualified in its
entirety by reference to the entire Agreement. Shareholders are
urged to review the Merger Agreement carefully.
General
The Merger Agreement sets forth the terms and conditions upon
which the Merger is to be effected. The Merger is contingent
upon the approval of the Merger Agreement by the holders of a
majority of the shares voting at the Annual Meeting and the
satisfaction or waiver of the other conditions contained in
the Merger Agreement.
At the Effective Time (as defined below), ACS will merge with
and into DAC, and thus DAC will be the surviving company in
the Merger. Pursuant to the Merger Agreement, each share of
ACS Common Stock issued and outstanding will be canceled and
converted into the right to receive the Merger Consideration
(as defined in the Merger Agreement).
Effective Time Of The Merger
As soon as practicable after satisfaction or, to the extent
permitted, waiver of all conditions
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<Page 26>
to the Merger set forth in
the Merger Agreement, a Certificate of Merger will be
executed, delivered and filed with the offices of Secretaries
of State of Nevada and Delaware. The "Effective Time" of the
Merger will be such time as the Certificates of Merger are
duly filed with the Nevada Secretary of State and the Delaware
Secretary of State, and any additional requirements are complied
with, or such later time as is specified in the Certificates of
Merger.
Merger Consideration
In the Merger, each share of Common Stock of ACS issued and
outstanding as of the Effective Time will be canceled and
converted into the right to receive the Merger Consideration
(as defined in Section 2.2 of the Merger Agreement attached
hereto as Exhibit 2).
Pursuant to the Merger Agreement, at least 90% of the
exercisable Stock Options, SARs and Warrants held by Advanced
and ACS shareholders, and any rights thereunder, outstanding
and unexercised immediately prior to the Effective Time will
be canceled on or prior to the Effective Time in exchange for
the right to receive a number of shares of the Company's
common stock. The formula for determining the amount of this
stock is contained in the Merger Agreement, but may be
modified based on current negotiations with ACS. Under the
Cancellation Agreements, all unvested Stock Options (including
those held by officers) will accelerate and become fully
vested immediately prior to consummation of the Merger.
Amendment, Extension and Waiver
Subject to the applicable provisions of the Nevada Revised
Statutes, the parties may amend or waive any provision of the
Merger Agreement if such amendment or waiver is in writing and
signed, in the case of an amendment, by all parties to the
Merger Agreement, and, in the case of a waiver, by the party
against whom the waiver is to be effective. After approval by
the shareholders of the Company, however, no such amendment or
waiver may, without further approval of such shareholders,
change the amount or kind of the Merger Consideration, change
the Articles of the Surviving Company, or change any terms of
the Merger Agreement if such change would adversely affect
such shareholders. The Merger Agreement may not be amended
unilaterally by any party.
At any time prior to the Effective Time, the parties may, by
action of the Board, to the extent legally allowed: (1) extend
the time for the performance of any of the obligations or acts
of the other parties under the Merger Agreement; (2) waive any
inaccuracies in the representations and warranties of the
other parties contained in the Merger Agreement or in any
document delivered pursuant to the Merger Agreement; (3)
agree not to proceed with the Merger; or (4) waive compliance
with any of the agreements or conditions of the other parties
contained in the Merger Agreement, other than approval of the
Company's shareholders. Any agreement by any of the parties
to such an extension or waiver shall be valid only if set
forth in writing and signed by the applicable party or
parties.
27
<Page 27>
Conditions to the Merger
The respective obligations of each party to consummate the
Merger are subject to the satisfaction or, where permissible,
waiver of the following conditions:
(1) The Contribution Agreement will have been previously
consummated and all deliveries to be made and obligations to
be performed at closing of the Contribution shall, to the
extent not completed at such closing, have been subsequently
completed.
(2) The Merger Agreement and the transactions contemplated
thereunder shall have been approved by shareholders of the
Company in the manner required by the applicable laws of the
State of Nevada and the Charter and Bylaws of the Company.
Further, the Original ACS Stockholders (as defined in the
Merger Agreement) will have executed and delivered such
documents and performed such acts as reasonably required to
effectuate the Merger.
(3) Each party to the Merger Agreement shall have received
from the other parties copies of all resolutions and/or
consent actions adopted by or on behalf of the boards of
directors and shareholders of such other parties to the Merger
Agreement, certified as of the date of closing of the Merger
and evidencing approval of the Merger Agreement and the
transactions contemplated under the Merger Agreement.
(4) No action or proceeding before a court or other
governmental body by any governmental agency or public
authority shall have been instituted or threatened to restrain
or prohibit the transactions contemplated under the Merger
Agreement or to obtain an amount of damages or other material
relief in connection with the execution of the Merger
Agreement or any related agreements or the consummation of the
Merger; and no governmental agency shall have given notice to
any party to the Merger Agreement to the effect that
consummation of the transactions contemplated under the Merger
Agreement would constitute a violation of any law or that it
intends to commence proceedings to restrain consummation of
the Merger.
(5) All consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission,
board or other regulatory body or any other third party
(including lenders and lessors) required in connection with
the execution, delivery and performance of the Merger
Agreement shall have been obtained or made.
(6) Advanced's lender, NationsCredit, shall have consented to
the Merger or have been paid and all obligations of Advanced
to NationsCredit satisfied in full. Advanced is indebted to
NationsCredit pursuant to a secured line of credit facility
which provides that any change of control of Advanced is a
default under the loan facility unless the prior written
consent of NationsCredit has been obtained. NationsCredit has
advised Advanced and ACS that it will not consent to the
Merger but has agreed to forebear on any default by Advanced
arising from the consummation of the Capital Contribution
Agreement until December 15, 1999. In order for the Merger to
be consummated, the Company, ACS and Advanced must arrange for
alternate financing which will pay out the debt of Advanced to
NationsCredit in full prior to or contemporaneously with the
consummation of the Merger. Note, NationsCredit has reserved
all rights with respect to other events of default and
Advanced must obtain its written consent before consummation
of the Merger.
28
<Page 28>
(7) The Company shall have settled any outstanding claims,
liabilities, actions or lawsuits against or by former
officers, directors, stockholders or related parties of
Dynamic or its subsidiaries to the satisfaction of ACS. Note
that this provision is subject to renegotiations between the
Company and ACS and may be changed by the time of the
Annual Meeting.
(8) The Company and each of Jan Wallace and Grace Sim shall
have entered into the Termination Agreement (as defined in the
"Interests of Certain Persons in the Merger" section above).
(9) The Company shall, prior to closing and on terms
acceptable to all parties, attempt to settle its obligations
to Genesis Merchant Group Securities LLC ("GMGS") regarding
its Agreement for a brokerage commission and issuance of its
Warrant under the terms and conditions provided in the Merger
Agreement. Note that this provision is subject to
renegotiations between the Company and ACS and may be changed
by the time of the Annual Meeting.
(10) At the Effective Time the Board of Directors of the
Company shall be composed of persons acceptable to the Company
and ACS.
(11) The capitalization of ACS and Advanced shall be as
reflected in the Merger Agreement Section 3.2(1) and Section
4.1 or arrangements satisfactory to the Company, ACS and
Advanced shall have been made regarding such capitalization.
The obligations of the Company, DAC, ACS and Advanced to
consummate the Merger are also subject to the satisfaction or
waiver of the following conditions: (i) delivery of
Cancellation Agreements representing at least 90% of the
issued and outstanding Options, Warrants and SAR's held by
Advanced Shareholders; (ii) the absence of any breach of
certain specified representations and warranties of the
Company contained in the Merger Agreement, when made and
immediately prior to the Effective Time, and the Company's
performance or compliance, in all material respects, of or
with each of its covenants and agreements in the Merger
Agreement; (iii) the execution and delivery to Kevin Lee of an
Employment Agreement and Stock Option Agreement as President
of the Company (the forms of which Employment Agreement and
Stock Option Agreement are attached hereto as Exhibits 6 and
7, respectively); and (iv) the accuracy as of the date of the
Merger Agreement and as of the Effective Time of the
representations and warranties of the Company contained in the
Merger Agreement, except where the failure of such
representations and warranties to be accurate would not, in
the aggregate, have a material adverse effect (as defined in
the Merger Agreement).
The obligations of the Company to consummate the Merger are
also subject to the satisfaction or waiver of the condition
that the representations and warranties of ACS and Advanced
contained in the Merger Agreement be true and correct as of
the date of the Merger Agreement and as of the Effective Time,
except where the failure of such representations and
warranties to be true and correct would not, in the aggregate,
have a material adverse effect on the Company and DAC.
29
<Page 29>
Conduct of Business Pending the Merger
The Company has agreed, pending the Effective Time, to
conduct, and to cause each of its subsidiaries to conduct,
their respective operations in the ordinary and usual course
of business and consistent with past practice, and to:
(1) Use its best efforts to do or cause to be done all such
acts and things as may be necessary to preserve, protect and
maintain intact the operation of its respective business and
assets as a going concern consistent with prior practice and
not other than in the ordinary course of business, including
preserving, protecting and maintaining the goodwill of the
suppliers, employees, clientele, patients and others having
business relations with such party.
(2) Use its best efforts to retain its employees in their
current positions up to closing of the Merger.
(3) Not acquire or sell or agree to acquire or sell by
merging or consolidating with, or by purchasing or selling a
substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any
corporation, partnership, association or other business
organization or division thereof.
(4) Use its best efforts to facilitate the consummation of
the Merger as contemplated under the Merger Agreement,
including obtaining requisite approval of stockholders and
third parties.
(5) Not issue, deliver or sell, or authorize or propose to
issue, deliver or sell, any shares of its capital stock of any
class, any voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities, except
for the exercise of any outstanding Warrants or Options or the
conversion of the Secured Notes.
(6) Not split, combine or reclassify any of its capital stock
or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for
shares of its capital stock, or repurchase, redeem or
otherwise acquire any shares of its capital stock.
(7) Not pay any dividend or distribution to its stockholders
as such, and not sell, discard or dispose of any of its
assets.
(8) Not dispose of, or cause the LLC to dispose of, a
significant part of any assets of the LLC, or its
subsidiaries, either currently owned or used or owned or used
after closing of the Merger, within five (5) years after the
Effective Time, other than dispositions in the ordinary course
of business.
30
<Page 30>
(9) Not make any change in its business or in the utilization
of its assets and not enter into any contract or commitment or
any other transaction with respect to its business or its
assets that is contrary to its representations, warranties and
obligations as set forth in the Merger Agreement.
(10) Not, without first obtaining the written consent of the
other parties to the Merger Agreement:
a) dispose of or encumber any asset or enter into any
transaction or make any contract commitment relating to its
properties, assets and business, other than in the ordinary
course of business or as otherwise disclosed in the Merger
Agreement;
b) enter into any employment contract which is not at will or
terminable upon notice of thirty (30) days or less, without
penalty;
c) enter into any contract or agreement: (i) that cannot be
performed within three months or less, or (ii) that involves
the expenditure of over $10,000.00;
d) subject to certain specified exceptions as set-forth in
Section 6.1 of the Merger Agreement, issue or sell, or agree
to issue or sell, any shares of capital stock or other
securities;
e) make any payment or distribution under any bonus, pension,
profit-sharing or retirement plan or incur any obligation to
make any such payment or contribution that is not in
accordance with usual past practice, or make any payment or
contributions or incur any obligation pursuant to or in
respect of any other plan or contract or arrangement of
providing for bonuses, executive incentive compensation,
pensions, deferred compensation, retirement payments, profit-
sharing or the like, establish or enter into any such plan,
contract or arrangement, or terminate any plan;
f) extend credit to anyone except in the ordinary course of
business consistent with prior practice;
g) guarantee the obligation of any person, firm or
corporation;
h) amend its operating agreement, charter or bylaws, or
applicable organizational documents;
i) set aside or pay any cash dividend or any other
distribution on or in respect of its capital stock or any
redemption, retirement or purchase with respect to its capital
stock or issue any additional shares of its capital stock; or
engage in any stock split, recapitalization, reorganization or
comparable transaction;
j) discharge or satisfy any lien, charge, encumbrance or
indebtedness outside the ordinary course of business;
k) institute, settle or agree to settle any litigation, action
or proceeding before any court or governmental body; Note that
this provision is subject to renegotiations between the
31
<Page 31>
Company and ACS and may be changed by the time of the Annual
Meeting.
l) authorize any compensation increase of any kind whatsoever
for any employee, consultant or other representative; or
m) engage in any extraordinary transaction.
(11) Prepare and file with the SEC a Proxy Statement, as
described in Section 6.5 of the Merger Agreement, relating to
the meeting of its shareholders to be held in connection with
obtaining approval to the Merger Agreement (the "Proxy
Statement").
(12) Convene and hold a meeting of its shareholders (the
"The Company Shareholders Meeting") in accordance with Nevada
law and the requirements of the NASDAQ Over-The-Counter
Bulletin Board for the purpose of obtaining the Company's
shareholder approval of the Merger and, through the Board,
recommend approval.
(13) Comply with the provisions of Rule 144(c) under the
Securities Act in order that affiliates of ACS may resell the
Company common stock they receive in the Merger pursuant to
Rule 145(d) under the Securities Act, and make sure the
registration statements to be filed pursuant to the
Registration Rights Agreement (attached hereto as Exhibit 4)
will include such information as may be requested by ACS to
permit re-sales of such Company Common Stock by persons who
may be deemed to be underwriters of the Company common stock
pursuant to Rule 145 under the Securities Act.
(14) Not knowingly or negligently take or fail to take
any action that would jeopardize the treatment of the
Contribution Agreement as a tax-free contribution or the
treatment of the Merger as a "reorganization" within the
meaning of Section 368(a)(1)(A) of the Internal Revenue Code
(and any comparable provisions of applicable state law).
(15) Provide to ACS or Advanced any records or
information that may be relevant to the preparation of its tax
returns or other financial needs.
(16) Take all reasonable actions necessary to comply
promptly with all legal requirements that may be imposed on it
with respect to the Merger and promptly cooperate with and
furnish information to the other parties in connection with
any such requirements imposed in connection with the Merger.
(17) Refrain from taking any action that would render any
of its representations and warranties contained in the Merger
Agreement untrue, inaccurate or misleading as of the closing
of the Merger and the Effective Time.
(18) Promptly notify the other parties to the Merger
Agreement of any lawsuit, claim, audit, investigation,
administrative action or other proceeding asserted or
commenced against it that may involve or relate in any way to
another party to the Merger Agreement, and promptly notify
them of any facts or circumstances that come to its attention
and that cause,
32
<Page 32>
or through the passage of time may cause, any
of a party's representations, warranties or covenants to be
untrue or misleading.
(20) Notify the other parties of any changes, additions
or events of which it has knowledge that would cause any
material change in or material addition to the Contribution
Agreement or the Merger Agreement, promptly after the
occurrence of such change(s), addition(s) or event(s).
(21) Timely file or cause to be filed all reports and
claims of every kind, nature or description, required by law
or by written or oral contract to be filed with respect to the
purchase of services by third party payors, including, but not
limited to, Medicare, Medicaid and Blue Cross.
(22) Prepare and file its own tax returns that are due on
or before the closing of the Merger, and pay all taxes due.
(23) Maintain its books of account in the usual, regular
and ordinary manner on a basis consistent with prior years and
make no change in its accounting methods or practices.
(24) Comply with all applicable statutes, laws,
ordinances and regulations.
(25) Keep, hold and maintain all Licenses (as defined in the
Merger Agreement).
(26) Use reasonable efforts and cooperate fully with the
other parties to obtain all consents, stockholder and other
approvals, exemptions and authorizations of third parties,
whether governmental or private, necessary to consummate the
transactions contemplated under the Contribution Agreement and
the Merger Agreement.
(27) Make and cause to be made all filings, and give and
cause to be given all notices that may be necessary or
desirable on their part under all applicable laws and under
their respective contracts, agreements and commitments in
order to consummate the transactions contemplated under the
Contribution Agreement and the Merger Agreement.
(28) Maintain and cause to be maintained in full force
and effect, all its currently existing insurance and provide
at the closing of the Merger written evidence satisfactory to
the other parties that such insurance continues to be in
effect, that all premiums due have been paid.
Termination
The Merger Agreement may be terminated at any time prior to
the Effective Time, before or after the approval of this
Agreement by the shareholders of ACS and/or Dynamic, by the
mutual consent of the boards of directors of ACS and Dynamic.
In addition, the Merger Agreement may be terminated at any
time:
(1) Upon notice of a material change in, or material addition
to, the Contribution Agreement or Merger Agreement (including
but not limited to the Exhibits to those
33
<Page 33>
agreements), if the
effect of such change or addition would, individually or in
the aggregate with other such changes, constitute a material
adverse effect on the notifying party.
(2) If the Merger is not consummated by December 15, 1999, or
the approval of the transactions contemplated by the
Contribution and Merger Agreements by Dynamic's shareholders
is not obtained by December 1, 1999.
(3) If a United States federal or state court of competent
jurisdiction, or United States federal or state governmental,
regulatory or administrative agency or commission issues an
order, decree or ruling, or takes any other action permanently
restraining, enjoining or otherwise prohibiting the Merger .
(4) If, prior to the Effective Time: (a) there has been a
breach by ACS, Advanced or the Advanced Subsidiaries of any
representation or warranty contained in the Merger Agreement
that would have, or would be reasonably likely to have, a
material adverse effect on the operations of Advanced; or
(b) there has been a breach of any of the covenants or
agreements set forth in the Merger Agreement on the part of
ACS or Advanced, that is not curable or, if curable, is not
cured within thirty (30) days after written notice of such
breach is given by the Company to ACS.
(5) If prior to the Effective Time: (a) there has been a
breach by the Company, the LLC or the Dynamic Subsidiaries of
any representation or warranty contained in the Merger
Agreement which would have or would be reasonably likely to
have a material adverse effect on the operations of the
Company or the LLC, or (b) there has been a breach of any of
the covenants or agreements set forth in the Merger Agreement
on the part of the Company, the LLC or the Dynamic
Subsidiaries, that is not curable or, if curable, is not cured
within thirty (30) days after written notice of such breach is
given by ACS or Advanced to Dynamic.
REGISTRATION RIGHTS AGREEMENT
As part of the Merger and exchange of shares, the Company has
agreed to enter into a Registration Rights Agreement with the ACS
Stockholders upon the closing of the Merger (the "Registration
Rights Agreement"). Under this agreement, the Company will grant
registration rights to the ACS Stockholders covering 50% of the
shares of the Company's common stock to be issued upon consummation
of the Merger. These rights will require the Company to file a
registration statement pursuant to the Securities Act to qualify
25% of the shares issued to the ACS stockholders within 90 days of
closing of the Merger. The Company will file an additional
registration statement on the one year anniversary of the Merger to
qualify the balance of the shares to be registered. In the event
of an adjustment to the number of shares of the Company issued to
the ACS Stockholders pursuant to the Escrow Agreement, as discussed
below, the number of shares of the Company's common stock to be
registered will equal a total of 50% of the shares of the Company's
common stock actually delivered to the ACS Stockholders after
adjustment, less the amount of common stock previously registered.
The form of Registration Rights Agreement is attached as Exhibit
4 to this report, and incorporated by this reference.
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<Page 34>
ESCROW AGREEMENT
The number of shares of the Company issued to the ACS Stockholders
upon consummation of the Merger will be subject to adjustment based
on the financial performance of the Advanced Subsidiaries and the
Dynamic Subsidiaries for the year ending December 31, 1999. The
Company and the ACS Stockholders will therefore also enter into an
Escrow Agreement upon consummation of the Merger that sets forth
the terms of this adjustment (the "Escrow Agreement").
The adjustment will be based on the projected consolidated earnings
before interest, taxes, depreciation and amortization ("EBITDA") of
$2,400,000 for each of the Dynamic Subsidiaries and the Advanced
Subsidiaries. Under the terms of the Escrow Agreement, concurrent
with the closing of the Merger, the Company will deposit with an
escrow agent four million eighty six thousand seventy three
(4,086,073) shares of the Company's common stock, with duly
executed stock powers (collectively, the "Escrow Stock"),
constituting a portion of the Merger Consideration. The escrow
agent will hold and distribute the Escrow Stock in accordance with
the terms and provisions of the Escrow Agreement and the formula
contained therein.
If each of the Dynamic Subsidiaries and the Advanced Subsidiaries
achieves or fails to meet their projected EBITDA, there will be no
adjustment to the number of shares of the Company's common stock
delivered to the ACS Stockholders and the Escrow Stock will be
delivered to the ACS Stockholders. If the Dynamic Subsidiaries
achieves its projected EBITDA and the Advanced Subsidiaries fails
to achieve its projected EBITDA, then the Escrow Stock will be
returned to the Company for cancellation. If the Advanced
Subsidiaries achieves its projected EBITDA and the Dynamic
Subsidiaries fails to achieve its projected EBITDA, then the Escrow
stock will be delivered to the ACS Stockholders and the Company
will issue to the ACS Stockholders an additional 4,180,000 shares
of the Company's common stock.
The terms of the Escrow Agreement are contained in full in the form
of Escrow Agreement attached to this report as Exhibit 5, and
incorporated by this reference.
AMENDMENT TO THE COMPANY'S 1997 INCENTIVE STOCK OPTION PLAN AND
1997 NON-STATUTORY STOCK OPTION PLAN
As a condition of the Merger Agreement, the Company's shareholders
must approved an amendment to its 1997 Incentive Stock Option Plan
and 1997 Non-Statutory Stock Option Plan (the "Stock Option Plan")
to increase the pool of shares of the Company's common stock
available for issuance upon exercise of plan options to 7,000,000.
It is anticipated that following the consummation of the Merger
the newly composed Board will consider granting options to certain
individuals, including James T. Harper, Andrew W. Miller and Kevin
D. Lee who are all expected to become Directors. The terms of any
such options will be consistent with the Company's existing Stock
Option Plan as approved at the last annual meeting of shareholders
in October 1997. Subject to Board approval, it is anticipated that
new stock options will be issued to the following individuals in
the following amounts:
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<Page 35>
Individual Number of Shares to be Optioned
Kevin D. Lee 1,000,000 Shares
Andrew W. Miller 1,000,000 Shares
James T. Harper 1,000,000 Shares
THE BOARD RECOMMENDS A VOTE IN FAVOR OF THIS AMENDMENT.
MARKET PRICES AND DIVIDEND INFORMATION
The Common Stock of the Company is traded on the NASDAQ OTC
Bulletin Board under the trading symbol "DYAS". The Common Stock
is also listed on the Frankfurt and Berlin Exchanges in Germany,
under the trading symbol "DYA". As of April 13, 1999, the last
date on which the Common Stock was traded prior to the public
announcement of the signing of the Contribution and Merger
Agreements (through the Company's 8K filing on April 14, 1999), the
high and low sales prices of the Common Stock on the OTC Bulletin
Board were $0.22 per share and $0.13 per share, respectively. On
May 12, 1999, the latest practicable trading day before the
printing of this Proxy Statement, the high and low sales prices of
the Common Stock on the OTC Bulletin Board were $0.11 per share and
$0.11 per share, respectively.
As of December 31, 1998 there were 394 record holders of the
Company's common stock.
The Company has not previously declared or paid any dividends on
its common stock and does not anticipate declaring any dividends in
the foreseeable future.
The high and low sales price of the Common Stock on the OTC
Bulletin Board during the past two years by quarter are as follows:
High Low
1999 First Quarter 0.2812 0.1875
1998 Fourth Quarter 0.4200 0.1600
Third Quarter 1.0625 0.1875
Second Quarter 0.8750 0.3437
First Quarter 0.8750 0.7187
1997 Fourth Quarter 2.6300 1.0000
Third Quarter 4.5000 2.3800
Second Quarter 3.9300 2.0600
First Quarter 4.3800 2.6900
SELECTED FINANCIAL INFORMATION CONCERNING THE COMPANY
The selected summary consolidated financial data presented below
for each of the last five fiscal
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<Page 36>
years ended December 31, 1998 have been derived from the Company's
historical financial statements. This data should be read in
conjunction with the consolidated financial statements and notes
thereto of the Company included in the Annual Report on Form 10-K,
filed April 15, 1999 for the fiscal year ended December 31, 1998,
which is incorporated by reference into this Proxy Statement.
In Thousands (except per share amounts):
FISCAL YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
Total Revenue 12,499 14,620 1,123 0 0
Operating Income
(loss) (2,143) 826 (959) (618) 0
Income (loss) before
Income Tax Expense and
Extraordinary Item(6,015) (1,502) (1,185) (618) 0
Net income (loss) (6,142) (3,549) (957) (619) 0
Loss per share ($.43) ($.27) ($.11) ($.29) 0.00
Total assets 25,941 32,840 33,954 1,035 0
Current portion of
Notes Payable and
Long-Term Debt 4 109 3,224 220 0
Notes pay and
Long-Term
Debt, Less
Current Portion 17,012 17,348 14,662 0 0
Total Shareholder Equity
(Deficit) 7,262 13,153 13,200 697 0
Dividends Declared
and Paid 0 0 0 0 0
The following unaudited consolidated financial data for fiscal
year-end December 31, 1998 has been derived from the Company's
financial statements. This data should be read in conjunction with
the consolidated financial statements and notes thereto of the
Company included in the Annual Report on Form 10-K, filed April 15,
1999 for the fiscal year ended December 31, 1998, which is
incorporated by reference into this Proxy Statement.
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DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEET
December 31, 1998
Pro Forma Consolidated
Dynamic Advanced Adjustments ProForma
--------- --------- --------- ---------
ASSETS
CURRENT ASSETS
Cash $ 478,418 $ 534,620 $ $1,013,038
Accounts receivable
(less allowance
for doubtful accounts
of $2,552,100 and
$581,622 for Dynamic
and Advanced
respectively) 3,741,260 2,332,333 6,073,593
Loans receivable -
related parties 52,500 0 52,500
Other receivables 86,662 8,611 95,273
Income taxes receivable 0 285,165 285,165
Prepaid expenses
and other 109,950 31,040 140,990
Deferred tax benefit 300,000 303,286(1) (300,000) 303,286
--------- --------- --------- ---------
TOTAL CURRENT ASSETS 4,768,790 3,495,055 (300,000) 7,963,845
PROPERTY AND
EQUIPMENT 228,733 250,876 479,609
OTHER ASSETS
Deferred debt
issue costs 1,331,307 0 1,331,307
Investment -
restricted stock 17,000 0 17,000
Deferred tax benefit 0 334,905 334,905
Excess of cost over
fair value of net
assets acquired 0 457,586 457,586
Start-up costs and
loan fees 0 130,180 130,180
Other assets 410 44,560 44,970
Goodwill 19,594,775 0(1)(19,594,775)11,284,474
(3) 11,284,474
Deposits 410 0 410
--------- --------- --------- ---------
20,943,492 967,231 (8,310,301) 13,600,422
--------- --------- --------- ---------
$25,941,015 $4,713,162 $(8,610,301)$22,043,876
--------- --------- --------- ---------
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<Page 38>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEET (Continued)
December 31, 1998
Pro Forma Consolidated
Dynamic Advanced Adjustments ProForma
--------- --------- ---------- ---------
LIABILITIES & EQUITY
CURRENT LIABILITIES
Accounts payable $ 596,812 $ 350,265(4) $ $ 947,077
Accrued expenses 275,101 446,229 721,330
Accrued interest 791,851 0 791,851
Line of credit 0 500,000(2) 500,000
Current portion of
long-term debt
and capital leases 3,978 617,548 621,526
--------- --------- ----------- -----------
TOTAL CURRENT
LIABILITIES 1,667,742 1,914,042 3,581,784
Long-term debt 10,206 8,514 18,720
Convertible notes 17,001,500 0 17,001,500
Notes payable to
bank 0 4,796,860 4,796,860
--------- --------- ----------- -----------
17,011,706 4,805,374 21,817,080
--------- --------- ----------- -----------
TOTAL LIABILITIES 18,679,448 6,719,416 25,398,080
STOCKHOLDERS' EQUITY
Common stock $.001
par value: Authorized
- 25,000,000 shares
Issued and outstanding
14,223,929 shares 14,224 42,937(3) (42,937)
(2) 17,385 31,609
Additional paid-in
Capital 18,512,330 2,436,498(1)(22,440,055) 0
(2) (17,385)
(3) 1,508,612
Retained earnings
(deficit) (11,264,987) 1,463,806(3) 7,668,414
(4) (1,253,830) (3,386,597)
Treasury stock 0 (5,949,495)(3) 5,949,495 0
--------- ---------- ---------- -----------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) 7,261,567 (2,006,254) (8,610,301) (3,354,988)
--------- ---------- ---------- -----------
$25,941,015 $4,713,162 $(8,610,301) $22,043,876
--------- ---------- ---------- -----------
39
<Page 39>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
Year ended December 31, 1998
Pro Forma Consolidated
Dynamic Advanced Adjustments ProForma
---------- ---------- ----------- -----------
Management fee
income $12,498,922 $12,417,991 $ $24,916,913
---------- ---------- ----------- -----------
12,498,922 12,417,991 24,916,913
General and
administrative
expenses 9,845,647 10,575,117 20,420,764 20,957,968
Depreciation and
amortization 2,603,039 380,473(1)(2,545,280) 1,692,062
(4) 1,253,830
---------- ---------- ----------- -----------
Bad debts 2,193,300 537,204 2,730,504
---------- ---------- ----------- -----------
14,641,986 11,492,794 (1,291,450) 24,843,330
NET OPERATING
INCOME (LOSS) (2,143,064) 925,197 1,291,450 73,583
OTHER INCOME (EXPENSE)
Interest income 18,006 32,399 50,405
Interest expense (1,946,558) (449,515) (2,396,073)
Miscellaneous income 0 10,320 10,320
Bad debts -
former subsidiaries (2,169,806) 0 (2,169,806)
Disposition of
subsidiaries 256,493 0 256,493
Loss on disposal
of equipment (16,996) 0 (16,996)
Unrealized decline
in investment (12,800) 0 (12,800)
---------- ---------- ----------- -----------
(3,871,661) (406,796) (4,278,457)
---------- ---------- ----------- -----------
NET INCOME (LOSS)
BEFORE INCOME TAXES (6,014,725) 518,401 1,291,450 (4,204,874)
INCOME TAX EXPENSE 127,128 226,825 353,953
---------- ---------- ----------- -----------
NET INCOME (LOSS) $(6,141,853) $ 291,576 $ 1,291,450 $(4,558,827)
---------- ---------- ----------- -----------
Net income (loss)
per weighted
average share $ (.43) $ .08 $ (.14)
---------- ---------- ----------- -----------
Weighted average
number of common
shares used to
compute net income
(loss) per weighted
average share 14,185,573 3,581,692 31,608,731
---------- ---------- ----------- -----------
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
The preceding pro forma consolidated condensed balance sheet has
been derived from the balance sheets of the Company and Advanced
Clinical Systems, Inc. and Subsidiaries ("Advanced") at December
31, 1998. The balance sheet assumes that the Company acquired 100%
of the outstanding stock of Advanced on January 1, 1998.
(1) Reflects removal of deferred tax asset, goodwill, and
amortization of goodwill of Dynamic. Treats Advanced as the
purchaser.
(2) Reflects issuance of 17,384,802 shares of stock to acquire
Advanced. Advanced shareholders end up with 55% of outstanding
stock.
40
<Page 40>
(3) Reflects adjustments necessary to remove treasury stock,
adjust stock and adjust retained deficit to be that of Advanced
plus Dynamic's 1998 loss and record goodwill associated with
this transaction.
(4) Reflects amortization of goodwill from this transaction
based on a ten year amortization period.
The preceding pro forma consolidated condensed statement of
operations has been derived from the statements of operations of
the Company and Advanced as of December 31, 1998, and assumes the
companies were consolidated as of the beginning of the period.
Advanced has a fiscal year end of June. The operations for
Advanced consist of the six (6) months ended June 30, 1998 added to
the six (6) months ended December 31, 1998. The audited net income
for Advanced for its fiscal year ended June 30, 1998 was $698,226.
SECURITY OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of the
Company's common stock held by all persons who, to the knowledge of
the Company, beneficially owned more than five percent (5%) of the
outstanding shares of the Company's common stock as of May 10,
1999, or, in certain instances as described in the footnotes below,
as of a date of the filing by such person of a Schedule 13G with
the Securities and Exchange Commission ("Commission"). According
to rules adopted by the Commission, a person is the "beneficial
owner" of securities if he or she has, or shares, the power to vote
them, or to direct their investment, or has the right to acquire
beneficial ownership of such securities within 60 days. Unless
otherwise indicated, all persons have sole voting and investment
power over all shares beneficially owned.
Class Name and Address Number of Shares Percent
of Beneficial Owner Beneficially Owned of Class
- --------- ------------------- ------------------ --------
Class A Common Vickie T. Lucky 2,370,000 12.9%
1613 Jimmie Davis Hwy.
Suite #1&2
Bossier City, LA 71112
The Company knows of no other person who is the beneficial owner
of more than five percent of the Company's common stock.
SECURITY OWNERSHIP OF CERTAIN MANAGEMENT OF THE COMPANY
The following table sets forth information, as of May 10, 1999,
concerning the Company's common stock owned by: (i) each director;
(ii) the Chief Executive Officer and the other executive officers
of the Company who earned more than $100,000 during fiscal 1998 and
were serving as executive officers at the end of fiscal 1998; and
(iii) all directors and officers of the Company as a group.
According to rules adopted by the Commission, a person is the
"beneficial owner" of securities if he or she has, or shares, the
power to vote them, or to direct their investment, or has the right
to acquire beneficial ownership of such securities within 60 days.
Unless otherwise indicated, all persons have sole voting and
investment power over all shares beneficially owned.
41
<Page 41>
Class Name and Address Number of Shares Percent
of Beneficial Owner Beneficially Owned of Class
- --------- ------------------- ------------------ --------
Class A Common Jan Wallace 550,000(2) 2.99%
(President & Director)
6929 East Cheney
Paradise Valley, AZ 85253
Class A Common William H. Means, Jr. 30,000 .16%
(Director)
1613 Jimmie Davis Hwy.
Suite #1&2
Bossier City, LA 71112
Class A Common Grace Sim 20,000 .11%
(Secretary/Treasurer)
7373 North Scottsdale Road,
Suite B169
Scottsdale, AZ 85253
Class A Common Elliot Smith 50,000 .27%
(Director)
7373 North Scottsdale Road,
Suite B169
Scottsdale, AZ 85253
Class A Common All officers and directors 650,000 3.54%
as a group (4 persons)
ADDITIONAL INFORMATION
INDEPENDENT ACCOUNTANTS
Upon appointment by the Board, Smith & Company, independent public
accountants, audited and reported on the consolidated financial
statements of the Company and its subsidiaries for the fiscal year
ended December 31, 1998. Such financial statements can be found in
the Company's 10K filed on April 15, 1999 and are incorporated by
reference in this Proxy Statement. Representatives of Smith &
Company are expected to be present at the Annual Meeting with the
opportunity to make a statement if they desire to do so and to
respond to appropriate questions.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by the Company with the Commission,
are incorporated herein by reference:
42
<Page 42>
(i) the Company's Annual Report on Form 10-K filed with the
Commission on April 15, 1999, for the fiscal year ended
December 31, 1998;
(ii) the Company's Form 8-K dated April 13, 1999 and filed
with the Commission on April 14, 1999
The following documents, attached hereto, are incorporated herein
by reference:
Exhibit Number Description
1 Capital Contribution Agreement
2 Agreement and Plan of Merger
3 Operating Agreement of Advanced-Dynamic, LLC
4 Registration Rights Agreement
5 Escrow Agreement
6 Employment Agreement of Kevin Lee
7 Stock Option Agreement of Kevin Lee
8 Consolidated Financial Statements of Advanced
Clinical Systems, Inc. and Subsidiaries
as of June 30, 1998
All reports and definitive proxy or information statements filed by
the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Proxy Statement and
prior to the date of the Annual Meeting shall be deemed to be
incorporated by reference into this Proxy Statement from the dates
of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated in this Proxy Statement
shall be deemed to be modified or superseded for purposes of this
Proxy Statement to the extent that a statement contained herein or
in any other subsequently filed document that also is or is deemed
to be incorporated by reference modifies or supersedes such
statement.
A copy of the documents incorporated herein by reference (excluding
exhibits unless such exhibits are specifically incorporated by
reference into the information incorporated herein) that are not
presented with this document or delivered herewith, will be
provided without charge to each person, including any beneficial
owner, to whom a Proxy Statement is delivered, upon oral or written
request of any such person and by first-class mail or other equally
prompt means. Requests should be directed to the Corporate
Secretary at the address set forth below in "Other Matters."
ANNUAL MEETING
The 1999 Annual Meeting of Shareholders of the Company will be held
on June 16, 1999 at 11:00 a.m., at 101 Convention Center Drive,
Suite 1200, Las Vegas, Nevada 89109.
OTHER MATTERS
The Board, as of May 10, 1999 was not aware of any matters to be
presented for action at the Annual Meeting other than the approval
of the Merger Agreement, the modification of the Company's Stock
Option Plan and the election of the directors, and do not intend to
bring any other matters before the Annual Meeting. If any other
matters properly come before the meeting, however, or any
43
<Page 43>
adjournment thereof, the person or persons voting the proxies will
vote in accordance with their best judgment.
A copy of the Company's 1999 Annual Report on Form 10-K,
incorporating the Company's audited financial statements for the
year ended December 31, 1998, as required to be filed with the
Commission will be provided upon written request without charge to
any shareholder whose proxy is being solicited by the Board. The
written request should be directed to the Secretary of the Company,
6955 E. Caballo Drive, Paradise Valley, Arizona 85253.
By Order of the Board of Directors
of Dynamic Associates, Inc.
/s/ Jan Wallace
_______________________________
JAN WALLACE
President and Chief Executive Officer
44
<Page 44>
DYNAMIC ASSOCIATES, INC.
PROXY
FOR ANNUAL MEETING OF THE SHAREHOLDERS OF DYNAMIC ASSOCIATES,INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints JAN WALLACE and GRACE SIM, and each
of them, with full power of substitution, as proxies to vote the
shares which the undersigned is entitled to vote at the Annual
Meeting of the Company to be held at 101 Convention Center Drive,
Suite 1200, Las Vegas, Nevada 89109, on June 16, 1999 at 11:00 a.m.
Pacific Standard Time, and at any adjournments thereof.
Please mark your votes as indicated [X]
This proxy when properly signed will be voted in the manner
directed herein by the undersigned shareholder. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 and 3.
1. Election of directors: Jan Wallace. Grace Sim and Elliot Smith.
FOR Election NOT FOR Election
of directors of directors
[_] [_]
Except vote withheld from following nominee(s) listed above.
___________________________ ________________________
2. Merger by and between Dynamic Acquisition Corporation and ACS2,
Inc.
FOR Merger NOT FOR Merger
[_] [_]
3. Amendment of the Company's Stock Option Plan to increase the
maximum aggregate number of shares which may be optioned under
these Plans to 7,000,000 in conformity with the requirements of the
Merger Agreement
FOR Amendment NOT FOR Amendment
[_] [_]
3. In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the meeting.
IMPORTANT - PLEASE SIGN AND RETURN PROMPTLY. When shares are held
by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee, or guardian, please give full
title as such. If a corporation, please sign in full corporate name
by President or other authorized officer. If a partnership, please
sign in partnership name by an authorized person.
Signature(s) Dated: ________________, 1999
___________________________ ___________________________
45
<Page 45>
EXHIBIT 1
CAPITAL CONTRIBUTION AGREEMENT
among
ACS2, INC.
"ACS2"
ADVANCED CLINICAL SYSTEMS, INC.
"Advanced"
DYNAMIC ASSOCIATES, INC.
"Dynamic"
and
ADVANCED-DYNAMIC, LLC
the "LLC"
<PAGE 46>
2
TABLE OF CONTENTS
ARTICLE I. THE CONTRIBUTION 1
1.1 The Capital Contribution 1
1.2 Effects of the Contribution 2
1.3 Resulting Ownership Structure of LLC 2
1.4 Closing; Effective Time of Contribution 2
1.5 Certificates of Incorporation and Bylaws 2
1.6 Managers, Directors and Officers 2
1.7 Outstanding Stock Appreciation Rights, Options and
Warrants 2
1.8 Securities Exemptions 3
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF ACS2 3
2.1 Organization; Authority 3
2.2 Absence of Default 3
2.3 Broker's or Finder's Fees 4
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ADVANCED 4
3.1 Organization, Qualification and Authority 4
3.2 Capitalization and Stock Ownership 5
3.3 Absence of Default 5
3.4 Financial Statements. 5
3.5 Operations Since June 30, 1998 6
3.6 Licenses 6
3.7 Medicare, Medicaid and Other Third-Party Payors 7
3.8 Contracts 7
3.9 Environmental Matters 7
3.10 Litigation 8
3.11 Employees 8
3.12 Insurance 8
3.13 Broker's or Finder's Fee 8
3.14 Conflicts of Interest 8
3.15 Employee Benefit Plans 9
3.16 Compliance with Healthcare and Other Laws 9
3.17 WARN Act 9
3.18 Tax Returns; Taxes 9
3.19 Tax Reorganization 10
3.20 Title to and Conditions of Assets 10
3.21 No Omissions or Misstatements 10
ARTICLE IV. REPRESENTATIONS AND WARRANTIES REGARDING LLC 11
4.1 Organization, Qualification and Authority 11
4.2 Capitalization and Stock Ownership 11
4.3 Absence of Default 11
4.4 Broker's or Finder's Fee 12
<PAGE 47>
3
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF DYNAMIC 12
5.1 Organization, Qualification and Authority 12
5.2 Capitalization and Stock Ownership 13
5.3 Absence of Default 14
5.4 Operations Since December 31, 1997 14
5.5 Licenses 15
5.6 Medicare, Medicaid and Other Third-Party Payors 15
5.7 Contracts 15
5.8 Environmental Matters 16
5.9 Litigation 16
5.10 Employees 17
5.11 Insurance 17
5.12 Broker's or Finder's Fee 17
5.13 Conflicts of Interest 17
5.14 Employee Benefit Plans 18
5.15 Compliance with Healthcare and Other Laws 18
5.16 WARN Act 18
5.17 Tax Returns; Taxes 18
5.18 Tax Reorganization 19
5.19 Title to and Conditions of Assets 19
5.20 SEC Information 19
5.21 Absence of Appraisal Rights 20
5.22 No Omissions or Misstatements 20
ARTICLE VI. COVENANTS OF PARTIES 20
6.1 Preservation of Business and Assets 20
6.2 Retention of Assets of LLC 21
6.3 Absence of Material Change 21
6.4 Material Transactions 21
6.5 [Omitted.] 22
6.6 Certain Tax Matters 23
6.7 Preserve Accuracy of Representations and Warranties 23
6.8 Notice of Subsequent Events 23
6.9 Medicare and Medicaid Reporting 23
6.10 Current Return Filing 24
6.11 Maintain Books and Accounting Practices 24
6.12 Compliance with Laws and Regulatory Consents 24
6.13 Maintain Insurance Coverage 24
6.14 Closing Deliveries 24
ARTICLE VII. CONDITIONS TO CLOSING 26
7.1 Conditions to Each Party's Obligation to Effect the
Merger 26
7.2 Further Conditions to Obligation of Dynamic and LLC
to Effect the Contribution 26
7.3 Further Conditions to Obligation of ACS2 to Effect
the Contribution 27
ARTICLE VIII. TERMINATION; AMENDMENT; EXTENSION AND WAIVER 28
<PAGE 48>
4
8.1 Termination by Mutual Consent 28
8.2 Termination by Either ACS2 or Dynamic 28
8.3 Effect of Termination and Abandonment 28
8.4 Failure to Consummate Merger 28
8.5 Extension; Waiver 28
ARTICLE IX. SURVIVAL OF PROVISIONS AND INDEMNIFICATION 29
9.1 Survival 29
9.2 Indemnification by Dynamic 29
9.3 Indemnification by ACS2 29
9.4 Indemnification by Advanced 29
9.5 Rules Regarding Indemnification 30
9.6 Exclusive Remedy 31
ARTICLE X. MISCELLANEOUS 31
10.1 Expenses 31
10.2 Notices 31
10.3 Confidentiality; Prohibition on Trading 32
10.4 Controlling Law 32
10.5 Headings 32
10.6 Benefit 32
10.7 Partial Invalidity 32
10.8 Counterparts and Facsimiles 33
10.9 Interpretation 33
10.10 Entire Agreement, Waivers 33
10.11 Legal Fees and Costs 33
<PAGE 49>
1
CAPITAL CONTRIBUTION AGREEMENT
THIS CAPITAL CONTRIBUTION AGREEMENT is entered into as of March
30, 1999, by and among ACS2, INC., a Delaware corporation ("ACS2"),
ADVANCED CLINICAL SYSTEMS, INC., a Delaware corporation and wholly
owned subsidiary of ACS2 ("Advanced"), DYNAMIC ASSOCIATES, INC., a
Nevada corporation ("Dynamic"), and ADVANCED-DYNAMIC, LLC, a newly-
formed Nevada limited liability company (the "LLC").
R E C I T A L S:
WHEREAS, the parties believe that a business combination
between ACS2 and Dynamic is in the best interest of the respective
corporations and their shareholders; and
WHEREAS, Dynamic has filed Articles of Organization in order
to form the LLC; and
WHEREAS, the parties intend to consummate a merger of ACS2
with and into a wholly owned Dynamic subsidiary as soon as
appropriate shareholder approval and other conditions are satisfied
(the "Merger"), as set forth in that certain Agreement and Plan of
Merger of even date herewith among the parties hereto (the "Merger
Agreement"); and
WHEREAS, the respective Boards of Directors of Dynamic and
ACS2 have approved both the transactions contemplated hereunder and
the Merger, upon the terms and conditions set forth in this
Agreement and the Merger Agreement and in accordance with the
Delaware General Corporation Law, and Chapter 78 "Private
Corporations" and Chapter 92A "Mergers and Exchanges of Interest"
of the Nevada Revised Statutes; and
WHEREAS, the parties intend the transactions contemplated
under this Agreement are to be treated as tax-free contributions
pursuant to Section 721 of the Internal Revenue Code of 1986, as
amended (the "Code"), and further, wish to adopt the Merger
Agreement and appropriate Certificates of Merger and Articles of
Merger, as a "plan of reorganization" within the meaning of Section
368(a) of the Code, and to cause the contemplated transactions to
qualify as a reorganization under the provisions of Section
368(a)(1)(A) of the Code.
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained in this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound hereby,
agree as follows:
ARTICLE I. THE CONTRIBUTION
1.1 The Capital Contribution. Prior to the date hereof, the
LLC has been formed under Nevada law and Dynamic and ACS2 are its
sole members. At the Effective Time of the Contribution (as
defined in Section 1.4 hereof) and subject to and upon the terms
and conditions of this Agreement, Dynamic will contribute to the
LLC as a capital
<PAGE 50>
2
contribution all issued and outstanding common
stock of the "Dynamic Subsidiaries" (as such term is defined in
Section 5.1), and ACS2 will contribute to the LLC as a capital
contribution all outstanding common stock of Advanced (the
"Advanced Stock"), (collectively, the "Contribution").
1.2 Effects of the Contribution. At the Effective Time of
Contribution, the LLC will accept the Contribution and the Dynamic
Subsidiaries and Advanced will become the direct, wholly-owned
subsidiaries of the LLC, and each will, without any other action,
continue to possess all its respective assets, rights, privileges,
powers and franchises, of a public as well as of a private nature,
and be subject to all its respective restrictions, disabilities,
liabilities and duties as existed prior to the Contribution; and
all rights, privileges, powers and franchises of each such
corporation, and all property, real, personal and mixed of each
such corporation, and all debts due to each such corporation, on
whatever account, will remain vested in each such corporation.
1.3 Resulting Ownership Structure of LLC. Immediately prior
to the Contribution, the issued and outstanding units of the LLC
(the "LLC Units") will consist of two (2) LLC Units, one of which
will be held by each of ACS2 and Dynamic. As of the Effective Time
of the Contribution, Dynamic will receive an additional ninety-nine
(99) LLC Units in consideration for its capital contribution to the
LLC and ACS2 will receive ninety-nine (99) LLC Units in
consideration for its capital contribution to the LLC.
1.4 Closing; Effective Time of Contribution. The closing of
the Contribution (the "Closing") will take place on the date of
this Agreement, subject to satisfaction or waiver of the conditions
set forth in this Agreement, at the offices of Harwell Howard Hyne
Gabbert & Manner, P.C., Nashville, Tennessee. The Contribution
will be effective as of 12:01 a.m. on the first business day
following the Closing (the "Effective Time of Contribution").
1.5 Certificates of Incorporation and Bylaws. The Operating
Agreement of the LLC as in effect prior to the Effective Time of
Contribution will remain in effect following the Contribution,
unless and until amended in accordance with the provisions of
applicable law. The "Charter" (which term as used throughout this
Agreement will mean a corporation's charter, or comparable
document, such as "Articles of Incorporation" or "Certificate of
Incorporation") and Bylaws of each of the Dynamic Subsidiaries and
of Advanced as in effect prior to the Effective Time of
Contribution will remain in effect following the Contribution,
unless and until amended in accordance with the provisions of
applicable corporate law.
1.6 Managers, Directors and Officers. At the Effective Time
of Contribution, the respective managers, directors and officers of
each of the LLC, the Dynamic Subsidiaries and Advanced will be as
noted on Exhibit 1.6 attached hereto, and will remain as such until
their successors have been duly elected and qualified in accordance
with applicable corporate law. Each party will use its best
efforts to retain its managers, directors and/or officers, as the
case may be, until the Merger is consummated.
<PAGE 51>
3
1.7 Outstanding Stock Appreciation Rights, Options and
Warrants. All outstanding Advanced Warrants, Advanced Options and
Advanced SARs (as each is defined in Section 3.2(b)) will be
canceled pursuant to certain cancellation agreements, the forms of
which are attached hereto as Exhibit 1.7.
1.8 Securities Exemptions. The LLC Units already issued and
to be issued in connection with the Contribution are and will be
issued pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act") and Section 90.530(1) of the Nevada Uniform
Securities Act.
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF ACS2
As an inducement to Dynamic and LLC to enter into this
Agreement and to consummate the transactions contemplated
hereunder, ACS2 represents and warrants to Dynamic and LLC, which
representations will be true and correct at Closing, as follows:
2.1 Organization; Authority. ACS2 is a corporation duly
organized, validly existing and in good standing in the State of
Delaware, and is not required to be duly qualified to do business
as foreign corporation in any other jurisdiction. Since the date
of its organization and incorporation, ACS2 has consistently
observed and operated within the corporate formalities of the
jurisdiction in which it is incorporated, and has consistently
observed and complied with the general corporation law of such
jurisdiction. ACS2 does not own stock or equity interest in and
does not control, directly or indirectly, any corporation,
partnership, joint venture, association or business organization
other than those entities listed on Exhibit 2.1 attached hereto
(collectively, the "ACS2 Subsidiaries"). Except for the Advanced
Options, Advanced Warrants and Advanced SARs referred to elsewhere
herein, all outstanding shares of capital stock of the entities
listed on Exhibit 2.1 consist solely of common stock and are owned
by either ACS2 or Advanced free and clear of all liens, charges and
encumbrances. Subject to obtaining certain third party consents,
ACS2 has the full right, power and authority to execute, deliver
and carry out the terms of this Agreement and all documents and
agreements necessary to give effect to the provisions of this
Agreement. This Agreement and all other such agreements and
documents executed in connection herewith by ACS2, upon due
execution and delivery thereof, will constitute the valid and
binding obligations of ACS2, enforceable in accordance with their
respective terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization or similar laws effecting
creditors' rights generally and by general principles of equity.
The authorized capital stock of ACS2 consists of 10,000,000 shares
of common stock.
2.2 Absence of Default. Subject to obtaining certain third
party consents, the execution, delivery and consummation of this
Agreement, and all other agreements and documents executed in
connection herewith, by ACS2 will not constitute a violation of, be
in conflict with, or, with or without the giving of notice or the
passage of time, or both, result in a breach of, constitute a
default under, or create (or cause the acceleration of the maturity
of) any debt, indenture, obligation or liability or result in the
creation or imposition of any security interest, lien, charge or
other encumbrance upon any of the assets of ACS2
<PAGE 52>
4
under (a) the Charter or Bylaws of ACS2; (b) any contract, lease,
purchase order, agreement, document or other commitment, oral
or written, to which ACS2 is a party or by which ACS2 is bound;
(c) any judgment, decree, order, writ, injunction or rule of any
court or regulatory authority; or (d) to the knowledge of ACS2,
any law, statute, rule or regulation to which ACS2 is subject.
2.3 Broker's or Finder's Fees. ACS2 has not employed, and
is not liable for the payment of any fee to, any finder, broker or
similar person in connection with the transactions contemplated
under this Agreement.
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ADVANCED
As an inducement to Dynamic and LLC to enter into this
Agreement and to consummate the transactions contemplated
hereunder, Advanced represents and warrants to Dynamic and LLC,
which representations will be true and correct at Closing, as
follows. Any representation, warranty or covenant of or relating
to Advanced is hereby deemed to also be a representation, warranty
or covenant of or relating to any and all of the other ACS2
Subsidiaries, as applicable, but not of ACS2.
3.1 Organization, Qualification and Authority. Advanced is
a corporation duly organized, validly existing and in good standing
in the State of Delaware and is not required to be qualified as a
foreign corporation in any other jurisdiction. Each ACS2
Subsidiary is a corporation duly organized, validly existing, in
good standing and duly qualified as a foreign corporation in the
respective jurisdictions set forth in Exhibit 3.1 attached hereto.
Since the date of its organization and incorporation, Advanced has
consistently observed and operated within the corporate formalities
of the jurisdictions in which it is incorporated and/or conducts
its business, and has consistently observed and complied with the
general corporation law of such jurisdictions. True and complete
copies of the Charter and Bylaws, as currently in effect, of each
ACS2 Subsidiary have been previously delivered to Dynamic. No
amendments to any such Charter or Bylaws have been authorized.
Advanced has the full corporate power and authority to own, lease
and operate its properties and assets as presently owned, leased
and operated and to carry on its business as it is now being
conducted. Subject to obtaining certain third party consents,
Advanced has the full right, power and authority to execute,
deliver and carry out the terms of this Agreement and all documents
and agreements necessary to give effect to the provisions of this
Agreement. Subject to obtaining certain third party consents, the
execution, delivery and consummation of this Agreement and all
other agreements and documents executed in connection herewith by
Advanced have been duly authorized by all necessary corporate
action on the part of Advanced and no other action on the part of
Advanced or any other person or entity is necessary to authorize
the execution, delivery and consummation of this Agreement and all
other agreements and documents executed in connection herewith.
This Agreement and all other agreements and documents executed in
connection herewith by Advanced, upon due execution and delivery
thereof, will constitute the valid and binding obligations of ACS2,
enforceable in accordance with their respective terms, except as
enforcement may be limited by bankruptcy, insolvency,
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5
reorganization or similar laws affecting creditors' rights
generally and by general principles of equity.
3.2 Capitalization and Stock Ownership.
(a) Common Stock. The authorized capital stock of Advanced,
being ten million (10,000,000) shares, $0.01 par value, of common
stock, along with the securities referenced in clause (b) below,
constitutes all issued and outstanding securities of Advanced, and
is duly authorized, validly issued, fully paid and nonassessable.
The Advanced Stock is not subject to preemptive or comparable
rights. The Advanced Stock has been issued in accordance with all
applicable federal and state securities laws.
(b) Other Securities. As of the date hereof, 138,000 shares
of Advanced Stock (or shares of common stock of an ACS2 Subsidiary)
are reserved for issuance upon the exercise of outstanding warrants
(the "Advanced Warrants"), 386,000 shares of Advanced Stock are
reserved for issuance upon exercise of outstanding options (the
"Advanced Options"), and no other shares of Advanced Stock are or
need to be reserved for any other purpose. In addition, Advanced
has issued the Stock Appreciation Rights more fully described in
Exhibit 3.2(b) attached hereto (the "Advanced SARs"). Except for
the Advanced Warrants, the Advanced Options and the Advanced SARs
referenced in this clause (b), there are not any existing options,
warrants, calls, subscriptions or other rights or agreements or
commitments obligating Advanced to issue, transfer or sell any
capital stock of it or any ACS2 Subsidiary or any other security
convertible into or evidencing the right to subscribe for any such
stock.
(c) Related Agreements. There are no voting trusts, voting
agreements, shareholders' agreements or other comparable
commitments or understandings to which Advanced is a party or by
which Advanced is bound with respect to the voting of any Advanced
Stock or capital stock of any other ACS2 Subsidiary.
3.3 Absence of Default. Except as set forth on Exhibit 3.3
attached hereto, the execution, delivery and consummation of this
Agreement, and all other agreements and documents executed in
connection herewith by Advanced will not constitute a violation of,
be in conflict with, or, with or without the giving of notice or
the passage of time, or both, result in a breach of, constitute a
default under, or create (or cause the acceleration of the maturity
of) any debt, indenture, obligation or liability or result in the
creation or imposition of any security interest, lien, charge or
other encumbrance upon any of the assets of Advanced under: (a)
any term or provision of the Charter or Bylaws of Advanced; (b) any
material contract, lease, purchase order, agreement, document or
other commitment, oral or written, to which Advanced is a party or
by which Advanced is bound (collectively, the "Advanced Contracts")
(for purposes of categorizing contracts, "material" is defined to
exclude any contract, lease, purchase order, agreement, document or
commitment which both (y) in terms of payments, costs, services or
other measure does not exceed $10,000.00 in the aggregate, and (z)
is terminable without penalty upon ninety (90) days' written notice
or less); (c) any judgment, decree, order, writ, injunction or rule
of any court or regulatory authority; or (d) to the knowledge of
Advanced, any law, statute, rule or regulation to which Advanced is
subject.
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6
3.4 Financial Statements. Attached hereto as Exhibit 3.4
are true and correct copies of Advanced's audited balance sheets as
of June 30, 1998, and its income statements for the year then
ending (the "Advanced Fiscal Year Financial Statements"), and the
interim unaudited balance sheet and income statement of ACS2 for
the seven (7) month period ended January 31, 1999 (the "Advanced
Interim Financial Statements" which with the Advanced Fiscal Year
Financial Statements will be the "Advanced Financial Statements").
The Advanced Financial Statements are based on the books and
records of Advanced and present fairly and accurately the assets,
liabilities and financial position of Advanced as of, and the
results of its operations for, the respective periods specified.
Such financial statements do not pertain in any way to ACS2. The
Advanced Fiscal Year Financial Statements have been prepared in
accordance with generally accepted accounting principles.
3.5 Operations Since June 30, 1998. Except as set forth on
Exhibit 3.5 attached hereto, to the knowledge of Advanced, since
June 30, 1998, there has been no:
(1) change in the assets, liabilities or financial
condition of Advanced which has a material adverse effect on
Advanced's assets or business;
(2) material loss, damage or destruction of or to any of
the assets of Advanced, whether or not covered by insurance;
(3) sale, lease, transfer or other disposition by
Advanced of, or mortgages or pledges of or the imposition of any
lien, charge or encumbrance on, any material portion of the assets
of Advanced, other than those made in the ordinary course of
business;
(4) substantial increase in the compensation payable by
Advanced to any of its employees, directors, independent
contractors or agents, or increase in, or institution of, any
bonus, insurance, pension, profit-sharing or other employee benefit
plan or arrangements made to, for or with the employees, directors,
independent contractors or agents of Advanced;
(5) payment by Advanced of any dividend or other
distribution to its stockholders other than compensation as an
employee of ACS2 or Advanced;
(6) material change in the accounting methods or
practices employed by Advanced or change in adopted depreciation or
amortization policies; or
(7) strike, work stoppage or other labor dispute by or
with Advanced employees which materially adversely affects
Advanced's operations.
3.6 Licenses. Advanced has all local, state and federal
licenses, permits, registrations, certificates, contracts,
consents, accreditations and approvals (collectively, the
"Licenses") necessary for it to occupy, operate and conduct its
business, and there do not exist any waivers or exemptions relating
thereto. To the knowledge of Advanced, there is no material
default on the part of Advanced under any of the Licenses and there
exist no grounds for revocation, suspension or limitation of any of
the Licenses. Neither the
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7
execution and delivery of this Agreement
nor the consummation of any of the transactions contemplated
hereunder will result in any revocation or termination of any
License.
III.7 Medicare, Medicaid and Other Third-Party Payors.
Advanced is a party to contracts with parties who participate in
and are "providers" under the Medicare and Medicaid and other third
party payor Programs (the "Programs"). Advanced has materially
complied with all rules and regulations of the Programs and with
all statutes and regulations governing the Programs in the conduct
of the business carried on by Advanced, including conduct under any
Advanced Contracts related to the Programs. Advanced, without
inquiry, is not aware of any claims, actions or appeals pending or
threatened with respect to any such providers or of any
disallowances against any such providers which disallowances, in
the aggregate, exceed Ten Thousand and No/100 Dollars ($10,000.00),
including, but not limited to, material disallowances for any fees
charged by Advanced to such providers; and Advanced is not aware of
any such providers receiving notice of any pending, threatened or
possible decertification or other loss of participation in any of
the Programs.
3.8 Contracts.
(a) Dynamic has had an opportunity to review copies of
all written Advanced Contracts, including the contracts referenced
in Section 3.7. No Advanced Contract has been modified or amended
from the form which has been provided to Dynamic for review. No
event or condition has happened or presently exists which
constitutes a default or breach or, after notice or lapse of time
or both, would constitute a default or breach by Advanced under any
Advanced Contract provided that Advanced is in default under its
credit agreement with Nations Credit and this transaction will be
a default thereunder. Except as listed in Exhibit 3.8(a) attached
hereto, no Advanced Contract has been entered into with any
affiliate of Advanced. Subject to obtaining certain third party
consents, consummation of the transactions contemplated hereunder
will not default, alternate or terminate any of Advanced Contract.
(b) To its knowledge, Advanced has no claims as of the
date hereof against Dynamic, its affiliates or representatives with
regard to that certain Interim Management Agreement dated December
7, 1998, as amended (the "Interim Management Contract") other than
as set forth in Exhibit 3.8(b) attached hereto.
3.9 Environmental Matters.
(a) Hazardous Substances. As used in this Section, the
term "Hazardous Substances" means any hazardous or toxic
substances, materials or wastes, including but not limited to those
substances, materials, and wastes defined in Paragraph 101 of the
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), listed in the United States
Department of Transportation Table (49 CFR 172.101) or by the
Environmental Protection Agency as hazardous substances pursuant to
40 CFR Part 302, or which are regulated under any other
Environmental Law (as such term is defined herein), and any of the
following: hydrocarbons, petroleum and
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8
petroleum products, asbestos, polychlorinated biphenyls,
formaldehyde, radioactive substances (other than naturally
occurring materials in place), flammables and explosives.
(b) Compliance with Laws and Regulations. All
operations or activities of Advanced on, and any use or occupancy
by Advanced of, the real estate necessary to operate the business
of Advanced are in material compliance with any and all laws,
regulations, orders, codes, judicial decisions, decrees, licenses,
permits and other applicable requirements of governmental
authorities with respect to Hazardous Substances, pollution or
protection of human health and safety (collectively, "Environmental
Law"), including but not limited to the release, emission,
discharge, storage and removal of Hazardous Substances. To the
knowledge of Advanced, without inquiry, all prior owners, operators
and occupants of such real estate complied with Environmental Law.
Advanced is not aware of any pending or threatened claim, lawsuit,
investigation or inquiry regarding non-compliance with
Environmental Law pertaining to the operations of, or real estate
leased by, Advanced.
3.10 Litigation. Except as set forth in Exhibit 3.10
attached hereto, there are no lawsuits, proceedings, actions,
arbitrations, governmental investigations, claims, inquiries or
proceedings pending or, to the knowledge of Advanced, threatened
involving Advanced. Advanced believes that none of the matters
listed on Exhibit 3.10 would, singly or in the aggregate,
reasonably be expected to materially adversely affect Advanced or
its operations.
3.11 Employees.
(a) Exhibit 3.11 attached hereto sets forth a complete
list of all Advanced officers, with their rates of pay, job titles
and employment start dates.
(b) Advanced is not a party to any labor contract,
collective bargaining agreement, contract, letter of understanding,
or any other arrangement, formal or informal, with any labor union
or organization which obligates it to compensate its employees at
prevailing rates or union scale, nor are any of such employees
represented by any labor union or organization. There is no
pending or, to the knowledge of Advanced, threatened labor dispute,
work stoppage, unfair labor practice complaint, strike,
administrative or court proceeding or order between Advanced and
any of its employees. There is no pending or, to the knowledge of
Advanced, threatened suit, action, investigation or claim between
Advanced and any of its present or former employees. Advanced
knows of no labor union organizing activity at any location of
Advanced within the last three (3) years.
3.12 Insurance. Advanced has in effect and has
continuously maintained since February 22, 1998 insurance coverage
for all of its operations, personnel and assets. Exhibit 3.12
attached hereto sets forth a summary of Advanced's current
insurance coverage (listing type, carrier and limits), and includes
a list of any pending insurance claims relating to Advanced.
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9
3.13 Broker's or Finder's Fee. Advanced has not employed,
and is not liable for the payment of any fee to, any finder, broker
or similar person in connection with the transactions contemplated
under this Agreement.
3.14 Conflicts of Interest. To the knowledge of Advanced,
none of the following is either a supplier of goods or services to
Advanced (other than as an employee), or directly or indirectly
controls or is a director or officer of any corporation, firm,
association, partnership or other business entity that is a
supplier of goods or services to Advanced: (a) any director or
officer of Advanced or, (b) any entity under common control with
Advanced.
3.15 Employee Benefit Plans. Other than health and
comparable insurance, Advance does not maintain or contribute to,
or is required to maintain or contribute to, any "employee welfare
benefit plan" or any "employee pension benefit plan" as each is
defined in the Employee Retirement Income Security Act of 1974 as
amended. Further, no such benefit plans covered employees of
Advanced during the period of their employment with any predecessor
of Advanced, including any multi-employer pension plan as defined
under the Code. Accordingly, there are no unfunded liabilities of
Advanced under any benefit plans.
3.16 Compliance with Healthcare and Other Laws. The
business of Advanced has been and is currently operated in material
compliance with all applicable laws, rules and regulations of each
jurisdiction in which the business of Advanced is conducted.
Advanced has not made any kickback, bribe or payment to any person
or entity, directly or indirectly, for referring, recommending or
arranging business or patients with, to or for Advanced which
action could have a material adverse effect on the business of
Advanced. No bulk sales or similar statute under the laws of the
State of Tennessee applies to the transactions contemplated under
this Agreement. The transactions contemplated under this Agreement
comply with any applicable antitrust or similar laws of the State
of Tennessee. To the knowledge of Advanced, none of the Advanced
Contracts and no activity of Advanced violates Section 1877 of the
Social Security Act or any similar provision of applicable state
law in any material respect. To the knowledge of Advanced, none of
the Advanced Contracts and no activity of Advanced violates
provisions of applicable state law relating to kickbacks, self-
referrals, fee-splitting or the corporate practice of medicine in
any material respect.
3.17 WARN Act. Since ninety (90) days prior to Closing,
Advanced has not temporarily or permanently closed or shut down any
single site of employment or any facility or any operating unit,
department or service within a single site of employment, as such
terms are used in the Worker Adjustment and Retraining Notification
Act, 29 U.S.C. 2102, et seq. ("WARN").
3.18 Tax Returns; Taxes.
(a) Advanced has filed all federal, state and local tax
returns and tax reports required by such authorities to be filed as
of the date hereof. Advanced has paid all taxes, assessments,
governmental charges, penalties, interest and fines due or claimed
to be due as of the time of Closing (including, without limitation,
taxes on properties,
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10
income, franchises, licenses, sales and
payrolls) by any federal, state or local authority. Additionally,
the reserves for taxes reflected in the Advanced Financial
Statements are adequate to cover all tax liabilities accrued as of
the respective dates thereof. There is no pending tax examination
or audit of, nor any action, suit, investigation or claim asserted
or, to the knowledge of Advanced, threatened against Advanced by
any federal, state or local authority; and Advanced has not
requested or been granted any extension of the limitation period
applicable to any tax claims.
(b) Advanced has complied with all applicable laws,
rules and regulations relating to the payment and withholding of
taxes and has timely withheld from employee wages and paid over to
the proper governmental authorities all amounts required to be so
withheld and paid over. No agreements have been made by Advanced
to waive the statute of limitations for the assessment or payment
of any taxes. To the knowledge of Advanced, Advanced has not
committed any violation of any federal, state or local tax laws.
3.19 Tax Reorganization. Advanced has neither taken nor
failed to take any action which would prevent the Contribution from
being treated as tax-free contributions under Section 721 of the
Code, or the Merger from constituting a reorganization within the
meaning of Section 368(a)(1)(A) of the Code.
3.20 Title to and Conditions of Assets. Advanced is the
sole legal and beneficial owner of the personal property used in
operating its business, including all personal property reflected
in the Advanced Financial Statements, and all such personal
property is owned by Advanced free and clear of all liens, security
interests, charges and encumbrances, except as disclosed in the
Advanced Financial Statements or Exhibit 3.20(a) attached hereto.
Advanced owns no real property, but is in lawful possession of the
real estate it leases. Advanced is in material compliance with
respect to all leases of real estate entered into for the conduct
of its business. All equipment owned or leased by Advanced
performs the respective functions they are supposed to perform and
are in good working order, ordinary wear and tear accepted. The
inventory of Advanced is, in the aggregate, of a quality and
quantity customarily used in the ordinary course of business. All
trademarks, service marks, trade names, inventions, patents,
processes, copyrights and applications therefor, registered or at
common law (collectively, the "Intellectual Property") owned or
used by Advanced are listed and described in Exhibit 3.20(b)
attached hereto. Advanced is the sole legal and beneficial owner
of such Intellectual Property. No proceedings have been instituted
or pending or, to the knowledge of Advanced, threatened which
challenge the validity of the ownership or use by Advanced of any
such Intellectual Property. Advanced has not licensed a third party
to use any such Intellectual Property, and Advanced has no
knowledge of the unlawful use or infringement of any such
Intellectual Property by any other person. Advanced possesses
adequate and enforceable licences to use all Intellectual Property
currently used but not owned by Advanced.
3.21 No Omissions or Misstatements. There is no fact
material to the assets, businesses, liabilities or prospects of
Advanced as a whole which has not been set forth or described in
this Agreement or in the Exhibits hereto and which is material to
the conduct, prospects, operations or financial condition of the
LLC. None of the information included in this Agreement and
Exhibits hereto, or other documents furnished or to be
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11
furnished by Advanced contains any untrue statement of a material
fact or is misleading in any material respect or omits to state any
material fact necessary in order to make any of the statements herein
or therein not misleading in light of the circumstances in which they
were made. Copies of all documents referred to in any Exhibit
hereto have been delivered or made available to Dynamic and
constitute true, correct and complete copies thereof and include
all amendments, exhibits, schedules, appendices, supplements or
modifications thereto or waivers thereunder.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES REGARDING LLC
As an inducement to ACS2 and Advanced to enter into this
Agreement and to consummate the transactions contemplated
hereunder, Dynamic hereby represents and warrants to ACS2 and
Advanced, which representations and warranties will be true and
correct on the date of Closing, as follows with respect to the LLC:
4.1 Organization, Qualification and Authority. The LLC is
a limited liability company duly organized, validly existing and in
good standing in the State of Nevada, and is not required to be
qualified to do business as a foreign corporation in any other
jurisdiction. Since the date of its formation, LLC has
consistently observed and operated within the corporate formalities
of the jurisdictions in which it is formed and/or conducts its
business, and has consistently observed and complied with the
applicable law of such jurisdictions. LLC does not own stock or
equity interests in and does not control, directly or indirectly,
any corporation, partnership, joint venture, association or
business organization prior to the Effective Time of Contribution.
LLC will conduct no operations, will enter into no agreements, and
will own no assets prior to the Closing. LLC has the full right,
power and authority to execute, deliver and carry out the terms of
this Agreement and all documents and agreements necessary to give
effect to the provisions of this Agreement, to consummate the
transactions contemplated on the part of LLC hereby, and to take
all actions necessary to permit or approve the actions LLC takes in
connection with this Agreement. The execution, delivery and
consummation of this Agreement and all other agreements and
documents executed in connection herewith by LLC has been duly
authorized by all necessary corporate action on the part of LLC.
No other action on the part of LLC or any other person or entity
is necessary to authorize the execution, delivery and consummation
of this Agreement and all other agreements and documents executed
in connection herewith. This Agreement and all other agreements
and documents executed in connection herewith by LLC, upon due
execution and delivery thereof, will constitute the valid and
binding obligations of LLC, enforceable in accordance with their
respective terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally and by general principles of equity.
4.2 Capitalization and Stock Ownership. The units of the
LLC, being two (2) units, constituted all issued and outstanding
securities of LLC. These two (2) units, along with the additional
units to be issued upon Closing of the Contribution (collectively,
the "LLC Units"), are (or will be) duly authorized, validly issued,
fully paid and nonassessable, and are (or will be ) owned free and
clear of any liens, charges, encumbrances, security
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12
interests, pledges or any other restrictions whatsoever. The LLC
Units are not, and will not be, subject to preemptive or comparable
rights. The LLC Units are and will be issued to Dynamic and ACS2 in
accordance with all applicable federal and state securities laws,
and will continue to be held solely by Dynamic and ACS2 through
Closing.
4.3 Absence of Default. The execution, delivery and
consummation of this Agreement, and all other agreements and
documents executed in connection herewith by LLC will not
constitute a violation of, be in conflict with, or, with or without
the giving of notice or the passage of time, or both, result in a
breach of, constitute a default under, or create (or cause the
acceleration of the maturity of) any debt, indenture, obligation or
liability or result in the creation or imposition of any security
interest, lien, charge or other encumbrance upon any of the assets
of LLC under: (a) any term or provision of the Operating Agreement
of LLC; (b) any contract, lease, purchase order, agreement,
document or other commitment, oral or written, to which LLC is a
party or by which LLC is bound; (c) any judgment, decree, order,
writ, injunction or rule of any court or regulatory authority; or
(d), to the knowledge of LLC or Dynamic, any law, statute, rule or
regulation to which LLC is subject.
4.4 Broker's or Finder's Fee. LLC has not employed, and is
not liable for the payment of any fee to, any finder, broker or
similar person in connection with the transactions contemplated
under this Agreement.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF DYNAMIC
As an inducement to ACS2 and Advanced to enter into this
Agreement and to consummate the transactions contemplated
hereunder, Dynamic hereby represents and warrants to ACS2 and
Advanced, which representations and warranties will be true and
correct on the date of Closing, as follows. Any representation,
warranty or covenant of or relating to Dynamic is hereby deemed to
also be a representation, warranty or covenant of or relating to
any and all of the Dynamic Subsidiaries (as defined in Section
5.1), and the LLC, as applicable.
5.1 Organization, Qualification and Authority. Dynamic is
a corporation duly organized, validly existing and in good standing
in the State of Nevada, and is not required to be qualified to do
business as a foreign corporation in any other jurisdiction. Since
the date of its organization and incorporation, Dynamic has
consistently observed and operated within the corporate formalities
of the jurisdictions in which it is incorporated and/or conducts
its business, and has consistently observed and complied with the
general corporation law of such jurisdictions. Dynamic does not
own stock or equity interests in and does not control, directly or
indirectly, any corporation, partnership, joint venture,
association or business organization other than the LLC and the
entities set forth on Exhibit 5.1 attached hereto (collectively,
the "Dynamic Subsidiaries"). Each Dynamic Subsidiary is a
corporation duly organized, validly existing, in good standing and
duly qualified as a foreign corporation in the respective
jurisdictions set forth in Exhibit 5.1. All outstanding and
securities of the Dynamic Subsidiaries consist solely of common
stock and have been validly issued in accordance with all
applicable federal, state and foreign securities laws
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13
and are owned by Dynamic, free and clear of all liens, charges,
encumbrances, claims and options of any nature. True and complete
copies of the Charters and Bylaws, as currently in effect, of
Dynamic and each Dynamic Subsidiary have been previously delivered
to ACS2 and Advanced. Other than the amendments attached hereto as
part of Exhibit 5.1, no amendments to any such Charters or Bylaws
have been authorized since January 1, 1998. Dynamic has the full
corporate power and authority to own, lease and operate its
properties and assets as presently owned, leased and operated
and to carry on its business as it is now being conducted.
Dynamic has the full right, power and authority to execute,
deliver and carry out the terms of this Agreement and all
documents and agreements necessary to give
effect to the provisions of this Agreement, to consummate the
transactions contemplated on the part of Dynamic hereby, and to
take all actions necessary to permit or approve the actions Dynamic
takes in connection with this Agreement. The execution, delivery
and consummation of this Agreement and all other agreements and
documents executed in connection herewith by Dynamic (other than
the Merger Agreement and documents related thereto, for which
requisite shareholder approval must be obtained) has been duly
authorized by all necessary corporate action on the part of
Dynamic. No other action on the part of Dynamic or any other
person or entity is necessary to authorize the execution, delivery
and consummation of this Agreement and all other agreements and
documents executed in connection herewith (other than the Merger
Agreement and documents related thereto, for which requisite
shareholder approval must be obtained). This Agreement and all
other agreements and documents executed in connection herewith by
Dynamic, upon due execution and delivery thereof, will constitute
the valid and binding obligations of Dynamic, enforceable in
accordance with their respective terms, except as enforcement may
be limited by bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally and by general
principles of equity.
5.2 Capitalization and Stock Ownership.
(a) Common Stock. The authorized capital stock of
Dynamic (the "Dynamic Stock"), consists of 100,000,000 shares,
$0.001 par value, of common stock, of which 18,386,929 shares are
issued and outstanding as of the date hereof. These shares of
Dynamic Stock, along with the securities referenced in clause (b)
below and the original and replacement convertible notes referenced
in Section 6.5, constitutes all past and current issued and
outstanding securities of Dynamic, and are duly authorized, validly
issued, fully paid and nonassessable. Dynamic Stock is not subject
to preemptive or comparable rights. The Dynamic Stock and any
other currently or previously outstanding securities of Dynamic
have been issued in accordance with all applicable federal, state
and foreign securities laws.
(b) Other Securities. As of the date hereof, 8,575,000
shares of Dynamic stock are reserved for issuance upon the exercise
of outstanding warrants (the "Dynamic Warrants"), 117,500 shares of
Dynamic Stock are reserved for issuance upon exercise of
outstanding options (the "Dynamic Options"), all of which have been
granted under the 1997 Stock Option Plan, 8,325,000 shares of
Dynamic stock are reserved for issuance upon conversion of those
certain replacement 7.5% convertible subordinated notes in the
aggregate principal amount of $8,325,000 (the "Dynamic Secured
Notes") and no other
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14
shares of Dynamic Stock are or need to be
reserved for any other purpose. Dynamic has issued the Dynamic
Secured Notes in the aggregate principal amount of $8,325,000.00,
which notes are convertible into that number of shares of Dynamic
Common Stock equal to the principal amount of such notes divided by
$1.00. The redemption of the original notes and the issuance of
the Dynamic Secured Notes in replacement thereof was effected in
full compliance with law. True and correct and fully executed
copies of all documents regarding the redemption and issuance of
the convertible notes by Dynamic have been provided to ACS2 and
Advanced. Except for the Dynamic Warrants, the Dynamic Options and
the Dynamic Secured Notes referenced in this clause (b), there are
not any existing options, warrants, calls, subscriptions, stock
appreciation rights, or other rights or agreements or commitments
obligating Dynamic to issue, transfer or sell any capital stock or
other security of it or any Dynamic Subsidiary or any other
security convertible into or evidencing the right to subscribe for
any such stock or security.
(c) Related Agreements. Other than the Operating
Agreement of the LLC as currently in effect, there are no voting
trusts, voting agreements, shareholders' agreements, registration
rights agreements or other comparable commitments or
understandings, oral or written, to which Dynamic is a party or by
which Dynamic is bound with respect to the voting of any Dynamic
Stock or the capital stock or securities of any Dynamic Subsidiary.
(d) Sufficient Shares. At the Effective Time of the
Merger, Dynamic will have a sufficient number of authorized but
unissued and/or treasury shares of Dynamic Stock available for
issuance to the ACS2 Stockholders in accordance with the provisions
of the Merger Agreement. Dynamic Stock to be issued pursuant to the
Agreement will, when so delivered, be duly and validly issued in
accordance with all applicable federal and state securities laws,
will be fully paid and nonassessable, and will be free and clear of
preemptive and similar rights.
5.3 Absence of Default. The execution, delivery and
consummation of this Agreement, and all other agreements and
documents executed in connection herewith by Dynamic, will not
constitute a violation of, be in conflict with, or, with or without
the giving of notice or the passage of time, or both, result in a
breach of, constitute a default under, or create (or cause the
acceleration of the maturity of) any debt, indenture, obligation or
liability or result in the creation or imposition of any security
interest, lien, charge or other encumbrance upon any of the assets
of Dynamic under: (a) any term or provision of the Charter or
Bylaws of Dynamic; (b) any material contract, lease, purchase
order, agreement, document or other commitment, oral or written, to
which Dynamic is a party or by which Dynamic is bound (collectively
the "Dynamic Contracts") (for purposes of categorizing contracts,
"material" being defined to exclude any contract, lease, purchase
order, agreement, document or commitment which both (y) in terms of
payments, costs, services or other measure does not exceed
$10,000.00 in the aggregate, and (z) is terminable without penalty,
upon ninety (90) days' written notice or less); (c) any judgment,
decree, order, writ, injunction or rule of any court or regulatory
authority; or (d), to the knowledge of Dynamic, any law, statute,
rule or regulation to which Dynamic is subject.
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15
5.4 Operations Since December 31, 1997. Except as set forth
on Exhibit 5.4 attached hereto, to the knowledge of Dynamic, since
December 31, 1997, there has been no:
(1) change in the assets, liabilities or financial
condition of Dynamic which has a material adverse effect on
Dynamic' assets or business;
(2) material loss, damage or destruction of or to any of
the assets of Dynamic, whether or not covered by insurance;
(3) sale, lease, transfer or other disposition by
Dynamic of, or mortgages or pledges of or the imposition of any
lien, charge or encumbrance on, any material portion of the assets
of Dynamic, other than those made in the ordinary course of
business;
(4) substantial increase in the compensation payable by
Dynamic to any of its employees, directors, independent contractors
or agents, or increase in, or institution of, any bonus, insurance,
pension, profit-sharing or other employee benefit plan or
arrangements made to, for or with the employees, directors,
independent contractors or agents of Dynamic;
(5) payment by Dynamic of any dividend or other
distribution to its stockholders other than compensation as an
employee of Dynamic;
(6) material change in the accounting methods or
practices employed by Dynamic or change in adopted depreciation or
amortization policies; or
(7) strike, work stoppage or other labor dispute by or
with Dynamic employees which adversely affects Dynamic operations.
5.5 Licenses. Dynamic has all Licenses necessary for it to
occupy, operate and conduct its business, and there do not exist
any waivers or exemptions relating thereto. To the knowledge of
Dynamic, there is no material default on the part of Dynamic under
any of the Licenses and there exist no grounds for revocation,
suspension or limitation of any of the Licenses. Neither the
execution and delivery of this Agreement nor the consummation of
any of the transactions contemplated hereunder will result in any
revocation or termination of any License.
5.6 Medicare, Medicaid and Other Third-Party Payors. Dynamic
is a party to contracts with parties who participate in and are
"providers" under the Programs. Dynamic has materially complied
with all rules and regulations of the Programs and with all
statutes and regulations governing the Programs in the conduct of
the business carried on by Dynamic, including conduct under any
Dynamic Contracts related to the Programs. Dynamic, without
inquiry, is not aware of any claims, actions or appeals pending
with respect to any such providers or of any disallowances against
any such providers, including which disallowances, in the
aggregate, exceed Ten Thousand and No/100 Dollars ($10,000.00), but
not limited to, material disallowances for any fees charged by
Dynamic to such providers; and Dynamic is not aware of any such
providers receiving notice of any
<PAGE 64>
16
pending, threatened or possible decertification or other loss
of participation in any of the Programs.
5.7 Contracts.
(a) ACS2 and Advanced have had an opportunity to review
copies of all written Dynamic Contracts, including the contracts
referenced in Section 5.6, and a list of all written Dynamic
Contracts is attached hereof as Exhibit 5.7(a). In addition,
included in Exhibit 5.7(a) is a written synopsis of key terms of
all oral Dynamic Contracts. No Dynamic Contract has been modified
or amended from the form which has been provided to ACS2 for
review. No event or condition has happened or presently exists
which constitutes a default or breach or, after notice or lapse of
time or both, would constitute a default or breach by any party
under any Dynamic Contract. Except as listed in Exhibit 5.7(a)
attached hereto, no Dynamic Contract has been entered into with any
affiliate of Dynamic. Consummation of the Contribution will not
default, alternate or terminate any Dynamic Contracts. Neither
Dynamic nor the Dynamic Subsidiaries have issued or granted any
outstanding powers of attorney.
(b) To its knowledge, Dynamic has no claims as of the
date hereof against Advanced, its affiliates or representatives
with regard to the Interim Management Contract.
5.8 Environmental Matters.
(a) Hazardous Substances. As used in this Section, the
term "Hazardous Substances" means any hazardous or toxic
substances, materials or wastes, including but not limited to those
substances, materials, and wastes defined in Paragraph 101 of the
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), listed in the United States
Department of Transportation Table (49 CFR 172.101) or by the
Environmental Protection Agency as hazardous substances pursuant to
40 CFR Part 302, or which are regulated under any other
Environmental Law (as such term is defined herein), and any of the
following: hydrocarbons, petroleum and petroleum products,
asbestos, polychlorinated biphenyls, formaldehyde, radioactive
substances (other than naturally occurring materials in place),
flammables and explosives.
(b) Compliance with Laws and Regulations. All
operations or activities of Dynamic on, and any use or occupancy by
Dynamic of, the real estate necessary to operate the business of
Dynamic are in material compliance with any and all laws,
regulations, orders, codes, judicial decisions, decrees, licenses,
permits and other applicable requirements of governmental
authorities with respect to Hazardous Substances, pollution or
protection of human health and safety (collectively, "Environmental
Law"), including but not limited to the release, emission,
discharge, storage and removal of Hazardous Substances. To the
knowledge of Dynamic, without inquiry, all prior owners, operators
and occupants of such real estate complied with Environmental Law.
Dynamic is not aware of any pending or threatened claim, lawsuit,
investigation or inquiry regarding non-compliance with
Environmental Law pertaining to the operations of, or real estate
leased by, Dynamic.
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17
5.9 Litigation. Except as set forth in Exhibit 5.9(a)
attached hereto, there are no lawsuits, proceedings, actions,
arbitrations, governmental investigations, claims, inquiries or
proceedings pending or, to the knowledge of Dynamic, threatened
involving Dynamic. Except as set forth in Exhibit 5.9(b), Dynamic
knows of no basis for any lawsuits, proceedings, actions,
arbitrations, governmental investigations, claims, inquiries or
proceedings involving Dynamic. Dynamic believes that none of the
matters listed in Exhibit 5.9(a) or Exhibit 5.9(b) would, singly or
in the aggregate, reasonably be expected to materially adversely
affect Dynamic or its operations. Except as set forth on Exhibit
5.9(c) attached hereto, neither Dynamic nor the Dynamic
Subsidiaries have any outstanding liabilities or obligations,
contingent or otherwise, that individually exceed $5,000 or exceed
$20,000 in the aggregate.
5.10 Employees.
(a) Exhibit 5.10 attached hereto sets forth: (i) a
complete list of all of Dynamic's employees, and rates of pay, (ii)
the employment dates and job titles of each such person, and (iii)
categorization of each such person as a full-time or part-time
employee of Dynamic. For purposes of this Section, "part-time
employee" means an employee who is employed for an average of fewer
than twenty (20) hours per week or who has been employed for fewer
than six (6) of the twelve (12) months preceding the date on which
notice is required pursuant to the WARN.
(b) Dynamic is not a party to any labor contract,
collective bargaining agreement, contract, letter of understanding,
or any other arrangement, formal or informal, with any labor union
or organization which obligates it to compensate its employees at
prevailing rates or union scale, nor are any of such employees
represented by any labor union or organization. There is no
pending or, to the knowledge of Dynamic, threatened labor dispute,
work stoppage, unfair labor practice complaint, strike,
administrative or court proceeding or order between Dynamic and any
of its employees. There is no pending or, to the knowledge of
Dynamic, threatened suit, action, investigation or claim between
Dynamic and any of its present or former employees. Dynamic knows
of no labor union organizing activity at any location of Dynamic
within the last three (3) years.
5.11 Insurance. Dynamic has in effect and has continuously
maintained since December 21, 1997 insurance coverage for all of
its operations, personnel and assets. Exhibit 5.11 attached hereto
sets forth a summary of Dynamic's current insurance coverage
(listing type, carrier and limits), and includes a list of any
pending insurance claims relating to Dynamic. Dynamic has complied
with all provisions of its insurance policies, including but not
limited to obligations to inform carriers of possible claims under
such insurance coverage.
5.12 Broker's or Finder's Fee. Dynamic has not employed, and
is not liable for the payment of any fee to, any finder, or similar
person in connection with the transactions contemplated under this
Agreement other than Genesis Merchant Group Securities LLC whose
fees and expenses shall be paid by Dynamic.
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18
5.13 Conflicts of Interest. Except as described in Exhibit
5.13, to the knowledge of Dynamic, none of the following is either
a supplier of goods or services to Dynamic, or directly or
indirectly controls or is a director or officer of any
corporation, firm, association, partnership or other business
entity that is a supplier of goods or services to Dynamic: (a) any
director, officer, consultant or shareholder (indirect or direct)
of Dynamic, or (b) any entity under common control with Dynamic.
5.14 Employee Benefit Plans. Other than health and
comparable insurance, Dynamic does not maintain or contribute to,
or is required to maintain or contribute to, any "employee welfare
benefit plan" or any "employee pension benefit plan" as each is
defined in the Employee Retirement Income Security Act of 1974 as
amended. Further, no such benefit plans covered employees of
Dynamic during the period of their employment with any predecessor
of Dynamic, including any multi-employer pension plan as defined
under the Code. Accordingly, there are no unfunded liabilities of
Dynamic under any benefit plans.
5.15 Compliance with Healthcare and Other Laws. The business
of Dynamic has been and is currently operated in material
compliance with all applicable laws, rules and regulations of each
jurisdiction in which the business of Dynamic is conducted.
Dynamic has not made any kickback, bribe or payment to any person
or entity, directly or indirectly, for referring, recommending or
arranging business or patients with, to or for Dynamic which action
could have a material adverse effect on the business of Dynamic.
No bulk sales or similar statute under the laws of the States of
Nevada or Delaware applies to the transactions contemplated under
this Agreement. The transactions contemplated under this Agreement
comply with any applicable antitrust or similar laws of the States
of Nevada and Delaware. To the knowledge of Dynamic, none of the
Dynamic Contracts and no activity of Dynamic violates Section 1877
of the Social Security Act or any similar provision of applicable
state law in any material respect. To the knowledge of Dynamic,
none of the Dynamic Contracts and no activity of Dynamic violates
provisions of applicable state law relating to kickbacks, self-
referrals, fee-splitting or the corporate practice of medicine in
any material respect.
5.16 WARN Act. Since ninety (90) days prior to Closing,
Dynamic has not temporarily or permanently closed or shut down any
single site of employment or any facility or any operating unit,
department or service within a single site of employment, as such
terms are used in WARN.
5.17 Tax Returns; Taxes.
(a) Dynamic has filed all federal, state and local tax
returns and tax reports required by such authorities to be filed as
of the date hereof. Dynamic has paid all taxes, assessments,
governmental charges, penalties, interest and fines due or claimed
to be due as of the time of Closing (including, without limitation,
taxes on properties, income, franchises, licenses, sales and
payrolls) by any federal, state, local or other authority.
Additionally, the reserves for taxes reflected in the "Dynamic
Financial Statements" (as defined in Section 5.20) are adequate to
cover all tax liabilities accrued as of the respective dates
thereof. There is no pending tax examination or audit of, nor
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19
any action, suit, investigation or claim asserted or, to the knowledge
of Dynamic, threatened against Dynamic by any federal, state, local
or other authority; and there is no basis therefor. Dynamic has
not requested or been granted any extension of the limitation
period applicable to any tax claims.
(b) Dynamic has complied with all applicable laws, rules
and regulations relating to the payment and withholding of taxes
and has timely withheld from employee wages and paid over to the
proper governmental authorities all amounts required to be so
withheld and paid over. No agreements have been made by Dynamic to
waive the statute of limitations for the assessment or payment of
any taxes. To the knowledge of Dynamic, Dynamic has not committed
any violation of any federal, state, local or other tax laws.
5.18 Tax Reorganization. Dynamic has neither taken nor
failed to take any action which would prevent the Contribution from
being treated as a tax-free contribution under Section 721 of the
Code, or the Merger from constituting a reorganization within the
meaning of Section 368(a)(1)(A) of the Code.
5.19 Title to and Conditions of Assets. Dynamic is the sole
legal and beneficial owners of the personal property used in
operating its business, including all personal property reflected
in the Dynamic Financial Statements, and all such personal property
is owned by Dynamic free and clear of all liens, security
interests, charges and encumbrances, except as noted in Exhibit
5.19(a) attached hereto. Dynamic owns no real property, but is in
lawful possession of the real estate it leases. Dynamic is in
material compliance with respect to all leases of real estate
entered into for the conduct of its business. All equipment owned
or leased Dynamic performs the respective functions they are
supposed to perform and are in good working order, ordinary wear
and tear accepted. The inventory of Dynamic is, in aggregate, of a
quality and quantity customarily used in the ordinary course of
business. All Intellectual Property owned or used by Dynamic is
listed and described in Exhibit 5.19(b) attached hereto. Dynamic
is the sole legal and beneficial owner of such Intellectual
Property. No proceedings have been instituted or pending or, to
the knowledge of Dynamic, threatened which challenge the validity
of the ownership or use by Dynamic of any such Intellectual
Property. Dynamic has not licensed a third party to use any such
Intellectual Property, and Dynamic has no knowledge of the unlawful
use or infringement of any such Intellectual Property by any other
person. Dynamic possesses adequate and enforceable licences to use
all Intellectual Property currently used but not owned by Dynamic.
5.20 SEC Information. Dynamic Stock is reported only on the
Nasdaq O.T.C. Bulletin Board, the Frankfurt, Munich and Berlin
Germany Exchanges. Dynamic has provided to ACS2 true and complete
copies, as filed with the Securities Exchange Commission ("SEC")
and applicable German authorities, of Dynamic's Annual Report on
Form 10-K (or other form) for the fiscal year end December 31,
1997, Quarterly Reports on Form 10-Q (or other form) for the fiscal
quarters ended March 31, 1998, June 30, 1998, September 30, 1998
and March 31, 1999, proxy materials for the 1998 and 1999 Annual
Meeting of Stockholders, all other reports and other documents
filed with either the SEC, the NASDAQ Stock Market, the Berlin,
Munich and Frankfurt exchanges and all other German and foreign
authorities, or distributed to Dynamic Stockholders since December
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20
31, 1997, and all press releases issued since December 31, 1997
(collectively, the "Dynamic Public Reports"). Each Dynamic Public
Report is listed on Exhibit 5.20 attached hereto. Dynamic has
received an extension for the filing of its most recently due Form
10-Q and will file such 10-Q in compliance with applicable law.
Each of the Dynamic Public Reports, at the time it was filed with
the appropriate authorities or otherwise issued or distributed, was
prepared, filed and distributed timely and in accordance in all
material respects with the applicable rules and regulations of such
authorities and applicable requirements of the Securities Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
and other law, foreign or domestic, as the case may be, and did
not, at the time they were so filed or mailed, contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading. As of their respective dates, the
financial statements of Dynamic contained in the Dynamic Public
Reports (the "Dynamic Financial Statements") were prepared in
accordance with, and complied as to form in all material respects
with, applicable accounting requirements and with the published
rules and regulations of the applicable authorities with respect
thereto, were prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the
periods indicated except to the extent required by changes in
generally accepted accounting principles and as may be indicated in
the notes thereto and fairly presented the consolidated balance
sheet and the consolidated assets, liabilities and financial
position of Dynamic as at the dates thereof and the consolidated
results of operations and cash flows of Dynamic for the periods
then ended. All intercompany charges or payments between Dynamic
and any current or past affiliate are either set forth in the
Dynamic Financial Statements or noted on Exhibit 5.20 attached
hereto.
5.21 Absence of Appraisal Rights. No stockholders of Dynamic
will have any rights of appraisal of their shares of Dynamic Stock,
dissenters' rights or any comparable rights, as a result of the
transactions contemplated under this Agreement or the Merger
Agreement.
5.22 No Omissions or Misstatements. There is no fact
material to the aggregate assets, business, stock, liabilities or
prospects of Dynamic which has not been set forth or described in
this Agreement or in the Exhibits hereto. None of the information
included in this Agreement and Exhibits hereto, or other documents
furnished or to be furnished by Dynamic contains any untrue
statement of a material fact or is misleading in any material
respect or omits to state any material fact necessary in order to
make any of the statements herein or therein not misleading in
light of the circumstances in which they were made. Copies of all
documents referred to in any Exhibit hereto have been delivered or
made available to ACS2 and constitute true, correct and complete
copies thereof and include all amendments, exhibits, schedules,
appendices, supplements or modifications thereto or waivers
thereunder.
ARTICLE VI. COVENANTS OF PARTIES
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21
6.1 Preservation of Business and Assets. From the date
hereof until the Closing, each party will use its best efforts and
will do or cause to be done all such acts and things as may be
necessary to preserve, protect and maintain intact the operation of
its respective business and assets as a going concern consistent
with prior practice and not other than in the ordinary course of
business, including preserving, protecting and maintaining the
goodwill of the suppliers, employees, clientele, patients and
others having business relations with such party. Each party will
use its best efforts to retain its employees in their current
positions up to Closing. Through Closing, no party will acquire or
sell or agree to acquire or sell, by merging or consolidating with,
or by purchasing or selling a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other
business organization or division thereof. The execution, delivery
and consummation of this Agreement and the transactions
contemplated hereunder will not give rise to any obligation of any
party hereto, or any right of any holder of any security of any
party hereto to require such party, to purchase, offer to purchase,
redeem or otherwise prepay or repay any capital stock or other
security, or deposit any funds to effect the same. All parties will
use their best efforts to facilitate the consummation of the
Contribution as contemplated hereunder and the Merger as
contemplated under the Merger Agreement, including obtaining
requisite approval of shareholders and other third parties.
Through Closing, with the exception of any shares of Advanced
Common Stock issued pursuant to the cancellation agreements
referenced in Section 1.7 and any shares of Dynamic Common Stock
issued upon exercise of outstanding Dynamic Warrants, Dynamic
Options or conversion of the Dynamic Secured Notes, no party will
issue, deliver or sell, or authorize or propose to issue, deliver
or sell, any shares of its capital stock of any class, any voting
securities or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, voting securities
or convertible securities. Through Closing, no party will split,
combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital
stock, or repurchase, redeem or otherwise acquire any shares of its
capital stock. From the date hereof until the Closing, no party
will pay any dividend or distribution to its shareholders as such,
and no party will, other than in the ordinary course of business,
sell, discard or dispose of any of its assets.
6.2 Retention of Assets of LLC. Neither Dynamic nor ACS2
intends or plan to dispose of, or to cause the LLC to dispose of,
a significant part of any assets of the LLC, the Dynamic
Subsidiaries or Advanced, now or hereafter owned or used, within
five (5) years after Closing of the Merger, other than dispositions
in the ordinary course of business.
6.3 Absence of Material Change. From the date hereof until
the Closing, no party will make any material change in its business
or in the utilization of its assets and will not enter into any
contract or commitment or any other transaction with respect to its
business or its assets which is contrary to its representations,
warranties and obligations as set forth in this Agreement.
6.4 Material Transactions. Except as contemplated under
this Agreement or the Merger, prior to the Effective Time of
Contribution, each of ACS2, Advanced and the other
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22
ACS2 Subsidiaries, on the one hand, and Dynamic, LLC and the Dynamic
Subsidiaries, on the other hand, will not, without first obtaining
the written consent of the other:
(a) dispose of or encumber any asset or enter into any
transaction or make any contract commitment relating to the
properties, assets and business of such entity, other than in the
ordinary course of business or as otherwise disclosed herein;
(b) enter into any employment contract which is not at
will or terminable upon notice of thirty (30) days or less without
penalty;
(c) enter into any contract or agreement (i) which
cannot be performed within three (3) months or less, or (ii) which
involves the expenditure of over $10,000.00;
(d) except as expressly stipulated in Section 6.1, issue
or sell, or agree to issue or sell, any shares of capital stock or
other securities of such entity;
(e) make any payment or distribution under any bonus,
pension, profit-sharing or retirement plan or incur any obligation
to make any such payment or contribution which is not in accordance
with such entities usual past practice, or make any payment or
contributions or incur any obligation pursuant to or in respect of
any other plan or contract or arrangement of providing for bonuses,
executive incentive compensation, pensions, deferred compensation,
retirement payments, profit-sharing or the like, establish or enter
into any such plan, contract or arrangement, or terminate any plan;
(f) extend credit to anyone except in the ordinary
course of business consistent with prior practice;
(g) guarantee the obligation of any person, firm or
corporation;
(h) amend its Operating Agreement, Charter or Bylaws, or
applicable organizational documents;
(i) set aside or pay any cash or stock dividend or any
other distribution on or in respect of its capital stock or other
securities or any redemption, retirement or purchase with respect
to its capital stock or other securities or issue any additional
shares of its capital stock or other securities; or engage in any
stock split, recapitalization, reorganization or comparable
transaction;
(j) discharge or satisfy any lien, charge, encumbrance
or indebtedness outside the ordinary course of business;
(k) institute, settle or agree to settle any litigation,
action or proceeding before any court or governmental body other
than against or by former officers, directors and related parties;
(l) authorize any compensation increase of any kind
whatsoever for any employee, consultant or other representative; or
<PAGE 71>
23
(m) engage in any extraordinary transaction.
6.5 [Omitted.]
6.6 Certain Tax Matters.
(a) During the period from the date hereof through the
Effective Time of Contribution, no party will knowingly or
negligently take or fail to take any action that would jeopardize
the treatment of the Contribution as a tax-free contribution or the
treatment of the Merger as a "reorganization" within the meaning of
Section 368(a)(1)(A) of the Code (and any comparable provisions of
applicable state law). All parties shall report the Merger as a
reorganization as in Section 368(a) of the Code, and shall not take
any position inconsistent with this characterization except in the
event of a contrary final determination of the Internal Revenue
Service. If any party receives notice of any contrary position by
the Internal Revenue Service any party hereto may, at its option
and sole expense, contest such position, in which event the other
parties hereto shall cooperate with such contest as reasonably
requested by the contesting party.
(b) Each party shall provide to any other party, at the
expense of the requesting party, with such assistance as may
reasonably be requested by either of them in connection with the
preparation of any tax return, any audit or other examination by
any regulatory authority, or any judicial or administrative
proceedings relating to liability for taxes, and each will retain
and provide the requesting party with any records or information
that may be relevant to any of the foregoing.
6.7 Preserve Accuracy of Representations and Warranties.
Each party will refrain from taking any action which would render
any of its representations and warranties contained in this
Agreement untrue, inaccurate or misleading as of Closing. Through
Closing, each party will promptly notify the other parties of any
lawsuit, claim, audit, investigation, administrative action or
other proceeding asserted or commenced against such party that may
involve or relate in any way to another party to this Agreement.
Each party will promptly notify the other parties of any facts or
circumstances that come to its attention and that cause, or through
the passage of time may cause, any of a party's representations,
warranties or covenants to be untrue or misleading at any time from
the date hereof through Closing.
6.8 Notice of Subsequent Events. Each party hereto shall
notify the other parties in writing of any changes, additions or
events of which it has knowledge which would cause any material
change in or material addition to this Agreement or the Merger
Agreement (including but not limited to the Exhibits attached
hereto and thereto) promptly after occurrence of the same. If the
effect of such change or addition would, individually or in the
aggregate with the effect of changes or additions previously
disclosed pursuant to this Section, constitute a material adverse
effect on the notifying party, the non-notifying party may, within
(ten) 10 days after receipt of such written notice, elect to
terminate this Agreement and the Merger Agreement. If the non-
notifying party does not give written notice of such termination
with such ten (10)-day period, the non-notifying party shall be
<PAGE 72>
24
deemed to have consented to such change or addition and shall not
be entitled to terminate this Agreement by reason thereof.
6.9 Medicare and Medicaid Reporting. Through Closing, the
parties will timely file or cause to be filed all reports and
claims of every kind, nature or description, required by law or by
written or oral contract to be filed with respect to the purchase
of services by third party payors, including, but not limited to,
Medicare, Medicaid and Blue Cross.
6.10 Current Return Filing. Each party will continue to be
responsible for the preparation and filing of all of such party's
own tax returns which were due before, on or after the Closing, and
the payment of all taxes due.
6.11 Maintain Books and Accounting Practices. From the date
hereof until the Closing, each party will maintain its books of
account in the usual, regular and ordinary manner on a basis
consistent with prior years and will make no change in its
accounting methods or practices.
6.12 Compliance with Laws and Regulatory Consents. From the
date hereof until the Closing, (a) each party will comply with all
applicable statutes, laws, ordinances and regulations, (b) each
party will keep, hold and maintain all of its Licenses, (c) each
party will use its reasonable efforts and will cooperate fully with
the other parties hereto to obtain all consents, stockholder and
other approvals, exemptions and authorizations of third parties,
whether governmental or private, necessary to consummate the
Contribution and Merger, and (d) each party will make and cause to
be made all filings and give and cause to be given all notices
which may be necessary or desirable on their part under all
applicable laws and under their respective contracts, agreements
and commitments in order to consummate the Contribution and Merger.
6.13 Maintain Insurance Coverage. From the date hereof
until the Closing, each party will maintain and cause to be
maintained in full force and effect all its currently existing
insurance on such party's assets and the operations of such party's
business and will provide at Closing written evidence satisfactory
to each other party that such insurance continues to be in effect
and that all premiums due have been paid.
6.14 Closing Deliveries. At Closing the parties will
deliver or cause to be delivered the following in form and
substance reasonably satisfactory to the other parties:
(a) ACS2 will deliver to the LLC stock certificates
evidencing all Advanced Stock, duly endorsed by ACS2 or with stock
powers attached; provided, however, that ACS2 will not be deemed in
breach of this Agreement if it fails to obtain the same from its
shareholders.
(b) Dynamic will deliver to the LLC stock certificates
evidencing the outstanding capital stock of the Dynamic
Subsidiaries duly endorsed by Dynamic or with stock powers
attached.
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25
(c) Advanced, Dynamic and the LLC will each execute and
deliver Acceptance and Contribution Contracts, the form of which is
attached hereto as Exhibit 6.14(c). The LLC will issue to Dynamic
and ACS2 Contribution Consideration as contemplated under Section
1.3.
(d) ACS2 and Dynamic will execute and deliver the
Operating Agreement regarding their ownership interests in the LLC,
(in the form attached hereto as Exhibit 6.14(d).)
(e) Advanced will deliver the cancellation agreements
referenced in Section 1.7; provided, however, that Advanced will
not be deemed in breach of this Agreement if it fails to obtain the
same from the individual holders of Advanced Warrants, Advanced
Options and Advanced SARs.
(f) Each party will deliver to the other parties a
certificate of an officer of delivering party, dated as of Closing,
certifying that (i) each covenant and obligation of such party
hereunder has been complied with, (ii) each representation,
warranty and covenant of such party hereunder is true and correct
at the Closing as if made on and as of the Closing, and (iii) each
representation, warranty and covenant of such party under the
Merger Agreement is true and correct at the Closing as if made on
and as of the Closing.
(g) Each party will deliver an opinion of its legal
counsel, in form and substance reasonably acceptable to the
receiving party(ies).
(h) Each party shall deliver such customary certificates
of its officers and such other customary closing documentation as
may be reasonably requested by the other parties, including without
limitation:
(i) Certificates of Existence and/or "Good
Standing" regarding the delivering party and its subsidiaries,
certified by the appropriate Secretary of State and dated
within ten (10) business days of Closing;
(ii) Incumbency Certificates certifying the
identity of the officers of the delivering party and its
subsidiaries; and
(iii) Charters or Operating Agreements, as
certified by the appropriate Secretary of State within ten (10)
business days of Closing, and Bylaws, as certified by an
appropriate officer as of Closing, of the delivering party and its
subsidiaries.
(iv) copies of all resolutions and/or unanimous
written consent actions adopted by or on behalf of the board of
directors and, if applicable, the stockholders of each party
authorizing the transactions contemplated hereunder, certified by
an officer as of the date of Closing in form reasonably acceptable
to the receiving party.
<PAGE 74>
26
ARTICLE VII. CONDITIONS TO CLOSING
7.1 Conditions to Each Party's Obligation to Effect the
Merger. The obligation of each party to effect the Contribution
shall be subject to the fulfillment at or prior to the Closing of
the following conditions:
(a) No action or proceeding before a court or other
governmental body by any governmental agency or public authority
shall have been instituted or threatened to restrain or prohibit
the transactions contemplated under this Agreement or the Merger
Agreement or to obtain an amount of damages or other material
relief in connection with the execution of this Agreement, the
Merger Agreement or any related agreements or the consummation of
the Contribution and/or Merger; and no governmental agency shall
have given notice to any party hereto to the effect that
consummation of the transactions contemplated under this Agreement
would constitute a violation of any law or that it intends to
commence proceedings to restrain consummation of the Contribution
or Merger.
(b) All consents, authorizations, orders and approvals
of (or filings or registrations with) any governmental commission,
board or other regulatory body or any other third party (including
lenders and lessors) required in connection with the execution,
delivery and performance of this Agreement shall have been obtained
or made.
(c) The parties shall have entered into a mutual release
regarding the Interim Management Agreement dated December 7, 1998.
7.2 Further Conditions to Obligation of Dynamic and LLC to
Effect the Contribution. The obligation of Dynamic and LLC to
effect the Contribution shall also be subject to the fulfillment at
or prior to the Closing of the following conditions:
(a) ACS2 and Advanced shall each have performed its
respective obligations contained in this Agreement, including but
not limited to the deliveries stipulated in Section 6.14, required
to be performed on or prior to the Closing and the representations
and warranties of ACS2 and Advanced contained in this Agreement and
in any document delivered in connection herewith shall be true and
correct as of the Closing.
(b) From the date of this Agreement until the Effective
Time of Contribution, there shall not have occurred any material
change in the financial condition, business, operations or
prospects of Advanced or the other ACS2 Subsidiaries that would
have or would be reasonably likely to have a material adverse
effect on the operation of Advanced or the other ACS2 Subsidiaries;
provided, however, that for purposes of determining whether there
shall have been any such material changes, any adverse change
resulting from or relating to general industry or economic
conditions shall be disregarded.
(c) Dynamic and Kevin D. Lee shall have agreed to enter
into an Employment Agreement and a Stock Option Agreement upon
consummation of the Merger, each in the respective form attached
hereto as Exhibit 7.2(c).
<PAGE 75>
27
(d) Dynamic and its representatives shall have had
reasonable access of inspection of the business of ACS2 and the
ACS2 Subsidiaries in connection with Dynamic's due diligence
review, and the results of Dynamic's inspection and due diligence
review shall be acceptable to it. Further, should any such due
diligence reveal a matter reasonably related to any representation,
warranty or covenants herein or any exhibit hereto, Dynamic may
require appropriate amendment(s) to address such matter.
7.3 Further Conditions to Obligation of ACS2 to Effect the
Contribution. The obligations of ACS2 to effect the Contribution
shall also be subject to the fulfillment at or prior to the Closing
of the following conditions:
(a) Each of Dynamic and LLC shall have performed its
respective obligations contained in this Agreement, including but
not limited to the deliveries stipulated in Section 6.14, required
to be performed on or prior to the Closing and the representations
and warranties of Dynamic and the LLC contained in this Agreement
and in any document delivered in connection herewith shall be true
and correct as of the Closing. In addition, the security holders
of Advanced and its affiliates shall have executed and/or delivered
the applicable documents noted in Section 6.14.
(b) From the date of this Agreement until the Effective
Time of Contribution, there shall not have occurred any material
change in the financial condition, business, operations or
prospects of Dynamic or Dynamic Subsidiaries that would have or
would be reasonably likely to have a material adverse effect on the
operations of Dynamic or Dynamic Subsidiaries; provided, however,
that for purposes of determining whether there shall have been any
such material changes, any adverse change resulting from or
relating to general industry or economic conditions shall be
disregarded.
(c) Dynamic and Kevin D. Lee shall have agreed to enter
into the employment and stock option agreements referenced in
Section 7.2(c).
(d) ACS2, Advanced and their representatives shall have
had reasonable access of inspection of the business of Dynamic and
the Dynamic Subsidiaries in connection with ACS2' and Advanced's
due diligence review, and the results of ACS2' and Advanced's
inspection and due diligence review shall be acceptable to it.
Further, should any such due diligence reveal a matter reasonably
related to any representation, warranty or covenant herein or any
exhibit hereto, ACS2 and/or Advanced may require appropriate
amendment(s) to address such matter.
(e) Documentation, in form and substance reasonably
acceptable to ACS2, will have been executed and delivered electing
the officers and directors of the LLC and the other Dynamic
Subsidiaries as contemplated under Section 1.6.
<PAGE 76>
28
ARTICLE VIII. TERMINATION; AMENDMENT; EXTENSION AND WAIVER
8.1 Termination by Mutual Consent. This Agreement may be
terminated and the Contribution and Merger may be abandoned at any
time prior to the Effective Time of Contribution, by the mutual
consent of the Boards of Directors of ACS2 and Dynamic.
8.2 Termination by Either ACS2 or Dynamic. This Agreement
may be terminated and the Contribution and Merger may be abandoned
by action of the Board of Directors of ACS2 or Dynamic if (a) the
Contribution shall not have been consummated by March 31, 1999, (b)
there has been a breach by the other party (or an affiliate of the
other party) of any representation or warranty contained in this
Agreement which would have or would be reasonably likely to have a
material adverse effect on the operations of the other party, or
(c) there has been a breach of any of the covenants or agreements
set forth in this Agreement on the part of the other party (or an
affiliate of the other party), which breach is not curable or, if
curable, is not cured within thirty (30) days after written notice
of such breach is given by the terminating party.
8.3 Effect of Termination and Abandonment. Upon
termination of this Agreement pursuant to Section 8.1 or 8.2, this
Agreement and the Merger Agreement, along with all agreements and
documents (including opinion of counsel) related thereto, shall be
void and of no force or effect, and there shall be no liability by
reason of this Agreement or the Merger Agreement, or the
termination thereof, on the part of any party hereto, or on the
part of the respective directors, officers, employees, agents,
representatives or shareholders of any of them; provided that this
Section 8.3 will not relieve any party from liability for damages
incurred as a result of any willful breach by such party of any of
its representations, warranties, covenants or agreements set forth
in this Agreement.
8.4 Failure to Consummate Merger. If the Merger is not
consummated as contemplated under the Merger Agreement, either
party may cause a liquidation and dissolution of the LLC to occur
pursuant to the terms of Article XII of the Operating Agreement of
the LLC and Section 8.5(2) of the Merger Agreement, the effect of
which will be to reverse the transactions consummated pursuant to
the terms of this Agreement. In such event, there shall be no
liability by reason of this Agreement, the Merger Agreement or the
termination hereof or thereof, on the part of any party hereto, or
on the part of the respective directors, officers, employees or
shareholders of any of them, except as stipulated in said Section
8.5(b) of the Merger Agreement.
8.5 Extension; Waiver. At any time prior to the Closing,
any party hereto, by action taken by its Board of Directors
evidenced in writing, may, to the extent legally allowed, (a)
extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies
in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, and (c) waive
compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a
party hereto to a waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
<PAGE 77>
29
ARTICLE IX. SURVIVAL OF PROVISIONS AND INDEMNIFICATION
9.1 Survival. The covenants, obligations, representations
and warranties of ACS2 and Advanced, Dynamic and the LLC contained
in this Agreement, or in any certificate or document delivered
pursuant to this Agreement, will be deemed to be material and to
have been relied upon by the parties hereto notwithstanding any
investigation prior to the Closing, will survive the Closing, will
not be merged into any documents delivered in connection with the
Closing and will terminate two (2) years after Closing; provided
however, that if a notice claiming indemnity is properly delivered
pursuant to Section 9.4, the indemnification obligations will not
expire with respect to such claim(s) until the same are resolved as
contemplated hereunder.
9.2 Indemnification by Dynamic. Subject to the provisions
of Section 8.3 and Section 9.5, Dynamic and the LLC shall jointly
and severally indemnify, defend and hold ACS2, Advanced and the
other ACS2 Subsidiaries, their officers, directors, employees and
representatives, and the ACS2 stockholders harmless against any and
all losses, costs and expenses (including reasonable cost of
investigation, court costs and legal fees actually incurred) and
other damages resulting from (a) any breach by Dynamic or LLC of
any of its covenants, obligations, representations or warranties or
breach or untruth of any representation, warranty, fact or
conclusion pertaining to Dynamic, the LLC and/or the Dynamic
Subsidiaries contained in this Agreement, the Merger Agreement or
any certificate or document of Dynamic or LLC delivered pursuant to
this Agreement, and (b) any claim that is brought or asserted by
any third party(ies) arising out of the ownership, licensing,
operation or conduct of Dynamic, LLC and the Dynamic Subsidiaries
through the Closing.
9.3 Indemnification by ACS2. Subject to the provisions of
Section 8.3 and Section 9.5, ACS2 shall indemnify, defend and hold
Dynamic, the Dynamic Subsidiaries, their officers, directors,
employees and representatives, and the Dynamic stockholders
harmless against any and all losses, costs and expenses (including
reasonable cost of investigation, court costs and legal fees
actually incurred) and other damages resulting from (a) any breach
by ACS2 of any of its covenants, obligations, representations or
warranties or breach or untruth of any representation, warranty,
fact or conclusion pertaining to ACS2 contained in this Agreement,
the Merger Agreement or any certificate or document of ACS2
delivered pursuant to this Agreement, and (b) any claim that is
brought or asserted by any third party(ies) arising out of the
ownership, licensing, operation or conduct of ACS2 and the ACS2
Subsidiaries through the Closing.
9.4 Indemnification by Advanced. Subject to the provisions
of Section 8.3 and Section 9.5, Advanced shall indemnify, defend
and hold Dynamic, the Dynamic Subsidiaries, their officers,
directors, employees and representatives, and the Dynamic
stockholders harmless against any and all losses, costs and
expenses (including reasonable costs of investigation, court costs
and legal fees actually incurred) and other damages resulting from
(a) any breach by Advanced of any of its covenants, obligations,
representations or warrants or breach or untruth of any
representation, warranty, affect or conclusion pertaining to
Advanced and/or the ACS2 Subsidiaries contained in this Agreement,
the Merger Agreement or any certificate or document of Advanced
delivered
<PAGE 78>
30
pursuant to this Agreement, and (b) any claim that is
brought or asserted by any third party(ies) arising out of the
ownership, licensing, operation or conduct of Advanced and the
other ACS2 Subsidiaries through the Closing.
9.5 Rules Regarding Indemnification. The obligations and
liabilities of each party hereto (the "indemnifying party") which
may be subject to indemnification liability hereunder to the other
party(ies) (the "indemnified party") will be subject to the
following terms and conditions:
(1) Claims by Non-Parties. The indemnified party will
give written notice to the indemnifying party, within such time as
not to prejudice unduly the indemnifying party's ability to defend
against the underlying claim, of any written claim by a third party
which is likely to give rise to a claim by the indemnified party
against the indemnifying party based on the indemnity agreements
contained in this Article, stating with reasonable specificity the
nature of said claim and the amount thereof, to the extent known.
The indemnified party will give notice to the indemnifying party
that pursuant to the indemnity, the indemnified party is asserting
against the indemnifying party a claim with respect to a potential
loss from the third party claim, and such notice will constitute
the assertion of a claim for indemnity by the indemnified party.
If, within ten (10) days after receiving such notice, the
indemnifying party advises the indemnified party that it will
provide indemnification and assume the defense at its expense, then
so long as such defense is being conducted, the indemnified party
will not settle or admit liability with respect to the claim
without the consent of the indemnifying party and will afford to
the indemnifying party and defending counsel reasonable assistance
in defending against the claim. If the indemnifying party assumes
the defense, counsel reasonably acceptable to the indemnified party
will be selected by such party and if the indemnified party then
retains its own counsel, it will do so at its own expense. If the
indemnified party does not receive a written objection to the
notice from the indemnifying party within ten (10) days after the
indemnifying party's receipt of such notice, the claim for
indemnity will be conclusively presumed to have been assented to
and approved, and in such case the indemnified party may control
the defense of the matter or case and, at its sole discretion,
settle or admit liability. If within the aforesaid ten (10) day
period the indemnified party will have received written objection
to a claim (which written objection will briefly describe the basis
of the objection to the claim or the amount thereof, all in good
faith), then for a period of thirty (30) days after receipt of such
objection the parties will attempt to settle the dispute as between
the indemnified party and indemnifying parties. If they are unable
to settle the dispute, the unresolved issue or issues will be
settled by a court of competent jurisdiction located in Nashville,
Tennessee. During the pendency of any such dispute, the
indemnified party may control all aspects of the defense of the
matter or case.
(2) Claims by a Party. The determination of a claim
asserted by a party hereunder (other than as set forth in
subsection (1) above) pursuant to this Article will be made as
follows: the indemnified party will give written notice to the
indemnifying party, within such time as not to prejudice unduly the
indemnifying party's ability to defend against the underlying
claim, of any claim by the indemnified party which has not been
made pursuant to subsection (1) above, stating with reasonable
specificity the nature of such claim and the amount thereof, to the
extent known. The claim will be deemed to have
<PAGE 79>
31
resulted in a determination in favor of the indemnified party and
to have resulted in a liability of the indemnifying party in an amount
equal to the amount of such claim estimated pursuant to this clause
(2) if within thirty (30) days after the indemnifying party's
receipt of the claim the indemnified party will not have received
written objection to the claim. In such event, the claim will be
conclusively presumed to have been assented to and approved. If
within the aforesaid thirty (30)-day period the indemnified party
will have received written objection to a claim (which written
objection will briefly describe the basis of the objection to the
claim or the amount thereof, all in good faith), then for a period
of sixty (60) days after receipt of such objection the parties will
attempt to settle the disputed claim as between the indemnified and
indemnifying parties. If they are unable to settle the dispute,
the unresolved issue or issues will be settled by a court of
competent jurisdiction located in Nashville, Tennessee.
9.6 Exclusive Remedy. The indemnification obligations under
this Article IX are the sole and exclusive remedies available to
ACS2, Advanced, Dynamic and the LLC with respect to this Agreement
and the transactions contemplated hereunder. The parties hereto
expressly acknowledge and agree that they may make no claim nor
institute any action against any security holder of ACS2 with
respect to this Agreement, any related agreement or the
transactions contemplated hereunder and thereunder.
ARTICLE X. MISCELLANEOUS
10.1 Expenses. Except as otherwise provided in this
Agreement, each party will pay all of its expenses in connection
with the negotiation, execution, and implementation of the
transactions contemplated under this Agreement.
10.2 Notices. All notices, requests, demands, waivers and
other communications required or permitted to be given under this
Agreement will be in writing and will be deemed to have been duly
given: (a) if delivered personally or sent by facsimile, on the
date received, (b) if delivered by overnight courier, on the day
after mailing, and (c) if mailed, five (5) days after mailing with
postage prepaid. Any such notice will be sent as follows:
To ACS2 or Advanced:
Advanced Clinical Systems, Inc.
49 Music City West, Suite 502
Nashville, TN 37203-3272
Attn: Kevin D. Lee
<PAGE 80>
32
with a courtesy copy to:
Lauren Anderson
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238
To Dynamic and LLC:
Dynamic Associates, Inc.
Suite B-169
7373 N. Scottsdale
Scottsdale, Arizona 85253
with courtesy copies to:
Michael H. Taylor Michael A. Cane
O'Neill & Company Cane & Company
Suite 1880, Royal Centre Suite 1200
1055 West Georgia Street, 101 Convention Center Dr
Box 11122 Las Vegas, Nevada
Vancouver, British Columbia 89109
V6E 3P3
10.3 Confidentiality; Prohibition on Trading. All parties
agree to maintain the confidentiality of the existence of this
Agreement and the Merger Agreement and the transactions
contemplated hereunder and thereunder, unless disclosure is
required by law and except for disclosures to be made in connection
with obtaining shareholder approval and other third party consents,
and actions required to consummate the contemplated transactions.
ACS2, Advanced and the other ACS2 Subsidiaries agree not to trade
in the securities of Dynamic based upon any nonpublic information.
10.4 Controlling Law. This Agreement will be construed,
interpreted and enforced in accordance with the substantive laws of
the State of Delaware, without giving effect to its conflicts of
laws provisions.
10.5 Headings. Any table of contents and Section headings in
this Agreement are for convenience of reference only and will not
be considered or referred to in resolving questions of
interpretation.
10.6 Benefit. This Agreement will be binding upon and will
inure to the benefit of the parties hereto and their successors and
assigns; however, no party may assign any rights or delegate any
duties hereunder without the prior written consent of the other
parties hereto. Any prohibited assignment or delegation will be
deemed null and void.
10.7 Partial Invalidity. The invalidity or unenforceability
of any particular provision of this Agreement will not affect the
other provisions hereof, and this Agreement will be
<PAGE 81>
33
construed in all respects as if such invalid or unenforceable
provisions were omitted. Further, there will be automatically
substituted for such invalid or unenforceable provision a
provision as similar as possible which is valid and enforceable.
10.8 Counterparts and Facsimiles. This Agreement may be
executed simultaneously in two (2) or more counterparts each of
which will be deemed an original and all of which together will
constitute but one and the same instrument. The signature page to
this Agreement and all other documents required to be executed at
Closing may be delivered by facsimile and the signatures thereon
will be deemed effective upon receipt by the intended receiving
party.
10.9 Interpretation. All pronouns and any variation thereof
will be deemed to refer to the masculine, feminine, neuter,
singular or plural as the identity of the person or entity, or the
context, may require. Further, it is acknowledged by the parties
that this Agreement has undergone several drafts with the
negotiated suggestions of both; and, therefore, no presumptions
will arise favoring either party by virtue of the authorship of any
of its provisions or the changes made through revisions.
10.10 Entire Agreement, Waivers. This Agreement, including
the Exhibits and Attachments hereto, constitutes the entire
Agreement between the parties hereto with regard to the matters
contained herein and it is understood and agreed that all previous
undertakings, negotiations, letter of intent and agreements between
the parties, other than the Merger Agreement and documents related
thereto, are merged herein. This Agreement may not be modified
orally, but only by an agreement in writing signed by the parties
hereto. The failure of any party to this agreement, or the failure
of any stockholder of ACS2, to assert any of its rights under this
Agreement or otherwise will not constitute a waiver of such rights.
Neither the failure nor any delay on the part of any party hereto
in exercising any rights, power or remedy hereunder will operate as
a waiver thereof, or of any other right, power or remedy; nor will
any single or partial exercise of any right, power or remedy
preclude any further or other exercise thereof, or the exercise of
any other right, power or remedy.
10.11 Legal Fees and Costs. In the event any party hereto
incurs legal expenses to enforce or interpret any provision of this
Agreement, the prevailing party will be entitled to recover such
legal expenses, including, without limitation, attorney's fees,
costs and disbursements, in addition to any other relief to which
such party will be entitled.
<PAGE 82>
34
IN WITNESS WHEREOF, the parties hereto have executed this
Capital Contribution Agreement as of the date first above written.
"ACS2":
ACS2, INC.
By: /s/ Kevin D. Lee
Title: President
"ADVANCED":
ADVANCED CLINICAL SYSTEMS, INC.
By: /s/ Kevin D. Lee
Title: President
"DYNAMIC":
DYNAMIC ASSOCIATES, INC.
By: /s/ Jan Wallace
Title: President, CEO
"LLC"
ADVANCED-DYNAMIC, LLC
By: Kevin D. Lee
Title: Chief Manager
<PAGE 83>
AGREEMENT AND PLAN OF MERGER
among
DYNAMIC ASSOCIATES, INC.
"Dynamic"
DYNAMIC ACQUISITION CORPORATION
"DAC"
ACS2, INC.
"ACS2"
and
ADVANCED CLINICAL SYSTEMS, INC.
"Advanced"
<Page 84>
2
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered
into as of March 30, 1999, by and among DYNAMIC ASSOCIATES, INC., a
Nevada corporation ("Dynamic"), DYNAMIC ACQUISITION CORPORATION, a
Nevada corporation ("DAC"), ACS2, INC., a Delaware corporation
("ACS2") and ADVANCED CLINICAL SYSTEMS, INC., a Delaware
corporation ("Advanced").
R E C I T A L S:
WHEREAS, the parties believe that a business combination
between ACS2 and the DAC is in the best interest of the parties to
this Agreement and their respective stockholders; and
WHEREAS, the parties hereto have entered into that certain
Capital Contribution Agreement of even date herewith (the
"Contribution Agreement") pursuant to which ACS2 and Dynamic
contributed on a tax-free basis under Section 721 of the Internal
Revenue Code of 1986, as amended (the "Code"), their respective
subsidiaries to Advanced-Dynamic, LLC (the "Contribution"); and
WHEREAS, the respective Boards of Directors and shareholders
of the parties have approved, or will meet to consider and approve,
the merger of ACS2 with and into DAC, upon the terms and conditions
set forth in this Agreement and Plan of Merger and in accordance
with the Delaware General Corporation Law and Chapter 78 "Private
Corporations" and Chapter 92A "Mergers and Exchanges of Interest"
of the Nevada Revised Statutes; and
WHEREAS, each party hereto wishes to adopt this Agreement and
Plan of Merger, together with the forms of Certificates of Merger
attached hereto as Exhibit A (the "Certificates of Merger") as a
"plan of reorganization" within the meaning of Section 368(a) of
the Code, and to cause the Merger to qualify as a reorganization
under the provision of Section 368(a)(1)(A) of the Code, whereby
each share of capital stock of ACS2 (the "ACS2 Common Stock") will
be canceled and whereby DAC will be the surviving entity of a
merger with ACS2.
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained in this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound hereby,
agree as follows:
ARTICLE I. THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section
1.3 hereof) and subject to and upon the terms and conditions of
this Agreement, ACS2 will be merged with and into DAC (the
"Merger"). Following the Merger, DAC will continue as the
surviving
<Page 85>
3
entity under the name "Dynamic Acquisition Corporation"
and the separate corporate existence of ACS2 will cease. (DAC and
ACS2 are sometimes referred to collectively herein as the
"Constituent Companies").
1.2 Effects of the Merger. At the Effective Time, DAC will
be a wholly owned subsidiary of Dynamic. At the Effective Time,
DAC will, without any other action, possess all the rights,
privileges, powers and franchises, of a public as well as of a
private nature, and be subject to all the restrictions,
disabilities and duties of each of the Constituent Companies; and
all rights, privileges, powers and franchises of each of the
Constituent Companies, and all property, real, personal and mixed,
and all debts due to either of the Constituent Companies on
whatever account, will be vested in DAC; and all property, rights,
privileges, powers and franchises, and all and every other interest
will be thereafter as effectually the property of DAC as they were
of the Constituent Companies, and the title to any real estate
vested by deed or otherwise in the Constituent Companies will not
revert or be in any way impaired by reason of the Merger; but all
rights of creditors and all liens upon any property of either of
the Constituent Companies will be preserved unimpaired, and all
debts, liabilities and duties of either of the Constituent
Companies will thenceforth attach to DAC, and may be enforced
against it to the same extent as if said debts, liabilities and
duties had been incurred or contracted by it.
1.3 Closing; Effective Time and Transaction Effective Date.
The closing of the Merger (the "Closing") will take place on a
date to be specified by the parties, but in no event more than ten
(10) business days following approval of the Merger by the
shareholders of Dynamic (the "Closing Date"), subject to
satisfaction or waiver of the conditions set forth in this
Agreement, at the offices of Harwell Howard Hyne Gabbert & Manner,
P.C., Nashville, Tennessee. The Merger will become effective at
the time of the filing of the Certificates of Merger with the
offices of the Secretaries of State of the States of Delaware and
Nevada in accordance with the provisions of applicable law, which
Certificates of Merger will be so filed as soon as practicable
after the Closing. The date and time when the Merger will become
effective shall be at such time as the Certificates of Merger are
duly filed with the Delaware and Nevada Secretaries of State or
such later date as mutually agreeable to the Constituent Companies
and specified in the Certificates of Merger (the "Effective Time").
1.4 Certificate of Incorporation. The Articles of
Organization and Bylaws of DAC in effect immediately prior to the
Effective Time will remain the Articles of Organization and Bylaws
of DAC until amended in accordance with the provisions of the
applicable corporate law.
1.5 Directors and Officers. The officers and directors of
DAC immediately prior to the Effective Time will, after the
Effective Time, continue to be the officers and directors of DAC
without change, until their successors have been duly elected and
qualified in accordance with the Articles of Incorporation and
Bylaws of DAC.
<Page 86>
4
ARTICLE II. STATUS AND CONVERSION OF SECURITIES;
MERGER CONSIDERATION
2.1 Conversion of Securities. At the Effective Time, each
share of ACS2 Common Stock issued and outstanding immediately prior
to the Effective Time will, by virtue of the Merger and without any
action on the part of the holders thereof, automatically be
canceled, retired and extinguished, and each outstanding share of
ACS2 Common Stock will be converted into the right to receive an
aliquot portion of the Merger Consideration (as defined in Section
2.2 hereof) as described below.
2.2 Merger Consideration.
(a) As of the Effective Time, each issued and outstanding
share of ACS2 Common Stock held by the Stockholders of ACS2
(collectively, the "Original ACS2 Stockholders"), comprising all
of the issued and outstanding shares of ACS2 Common Stock as of the
Effective Time, will be converted into a right to receive a pro-
rata portion of the "Merger Consideration", which is defined as 22,
473, 413 shares of the Common Stock of Dynamic plus a number of
shares of Dynamic Common Stock equal to 55% of the number of shares
of Dynamic Common Stock held by or issuable to Genesis (defined
below) pursuant to Section 2.2(b). Each Original ACS2 Stockholder
will be entitled to receive a percentage of the Merger
Consideration equal to the number of shares of ACS2 Common Stock
owned by such holder prior to Closing of the Merger divided by the
total number of shares of ACS2 Common Stock issued and outstanding
at such Closing. Since as of the Effective Time all shares of the
ACS2 Common Stock will no longer be outstanding, will automatically
be cancelled and retired, and will cease to exist, each holder of
shares of ACS2 Common Stock will cease to have any rights with
respect thereto, except the right to receive the Merger
Consideration and any cash in lieu of fractional shares of Dynamic
Common Stock to be issued or paid in consideration therefor upon
surrender of such certificate in accordance with Section 2.3. The
parties intend and agree that upon Closing, the Merger
Consideration due to the Original ACS2 Stockholders will
constitute, in the aggregate, a number of shares of Dynamic Common
Stock equal to fifty-five percent (55%) of the total Dynamic Common
Stock issued and outstanding immediately after the Effective Time
plus 55% of any Dynamic Stock issued to Genesis or to which Genesis
may be entitled pursuant to Section 2.2(b).
(b) Dynamic is a party to that certain May 19, 1998 letter
agreement with Genesis Merchant Group Securities LLC ("GMGS")
pursuant to which Dynamic may owe GMGS a fee upon consummation of
the transactions contemplated by the Contribution Agreement and
this Agreement. Dynamic has issued a Warrant for the Purchase of
Shares of Common Stock to GMGS covering 250,000 shares of Dynamic
Common Stock and subject to adjustment (the "Genesis Warrant").
Dynamic is party to that certain July 13, 1998 letter agreement
with JWGenesis Capital Markets ("JWG") pursuant to which Dynamic
may owe JWG a fee upon consummation of the transactions
contemplated by the Contribution Agreement and this Agreement.
GMGS, JWG and their affiliates are collectively referred to in this
Agreement as "Genesis". Dynamic shall, in consultation with ACS2,
attempt to settle its obligations to Genesis prior to Closing on
terms and conditions acceptable to Dynamic and ACS2. The parties
anticipate that such settlement will include the payment
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5
of a fee to Genesis and the cancellation of the Genesis Warrant and
any other obligation to issue securities of Dynamic to Genesis. Any
fee payable to Genesis shall be payable by Dynamic and shall not
affect the Merger Consideration. In the event the Genesis Warrant
is not canceled or Genesis is or becomes entitled to any Dynamic
Common Stock, the Merger Consideration shall be increased by that
number of shares of Dynamic Common Stock equal to 55% of the number
of shares of Dynamic Common Stock to which Genesis is or becomes
entitled.
2.3 Delivery of Merger Consideration. Dynamic shall deliver
the Merger Consideration to each holder of ACS2 Common Stock within
five (5) business days of Closing or within five (5) business days
after surrender of certificates (the "Certificates") representing
all shares of ACS2 Common Stock owned by such individual, whichever
is later. By accepting delivery of the Merger Consideration, each
such holder will be deemed to have represented to Dynamic that such
stockholder has no present intention of selling or otherwise
disposing of any of its interest in the Dynamic Common Stock
received as part of the Merger Consideration, except as
contemplated under that certain Registration Rights Agreement
referenced in Section 2.8.
(1) Certificates. The Certificates shall forthwith be
canceled upon surrender. Until surrendered as contemplated by this
Section 2.3, each such Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive
upon such surrender that pro rata portion of the Merger
Consideration applicable thereto. No interest will be paid or will
accrue on any portion of the Merger Consideration. In the event
any such Certificate is not duly surrendered within six (6) months
of Closing, the holder thereof will automatically forfeit all
rights therein, including the right to receive any Merger
Consideration, and any obligation of Dynamic or either Constituent
Company with respect to such Certificate will be rendered null and
void.
(2) No Further Ownership Rights in ACS2 Common Stock.
All shares of Dynamic Common Stock issued upon the surrender for
exchange of the Certificates in accordance with the terms of this
Article II shall be deemed to have been issued (and paid) in full
satisfaction of all rights pertaining to ACS2 Common Stock
theretofore represented by such Certificates, and there shall be no
further registration or transfer of the shares of ACS2 Common Stock
after the Effective Time.
(3) No Fractional Shares. No certificates or scrip
representing fractional shares of Dynamic Common Stock shall be
issued upon the surrender of certificates of ACS2 Common Stock for
exchange, and such fractional share interests will not entitle the
owner thereof to vote or to any rights as a stockholder of Dynamic.
Notwithstanding any other provision of this Agreement, each holder
of ACS2 Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of
Dynamic Common Stock (after taking into account all Certificates
delivered by such holder) will promptly receive, in lieu thereof,
cash (without interest) in an amount equal to such fractional part
of a share of Dynamic Common Stock multiplied by the per share
closing price of such Dynamic Common Stock as reported on the
Nasdaq Over-The-Counter Bulletin Board on the date of the Effective
Time.
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6
(4) Lost Certificates. In the event any Certificates
have been lost, stolen or destroyed, upon the making of an
affidavit of that fact, in form and substance reasonably
satisfactory to Dynamic, by the person claiming such certificate to
be lost, stolen or destroyed, Dynamic will issue in exchange for
such lost, stolen or destroyed Certificate the shares of Dynamic
Common Stock and cash in lieu of fractional shares, deliverable in
respect thereof pursuant to this Agreement.
2.4 Escrow. Notwithstanding anything to the contrary
contained in this Article II, 4,086,073 shares of Dynamic Common
Stock (the "Escrow Stock") will not be distributed to the Original
ACS2 Stockholders, but will, instead, be placed in escrow subject
to the terms of that certain escrow agreement to be entered into at
Closing among Dynamic, the Original ACS2 Stockholders, ACS2 and, as
escrow agent, Harwell Howard Hyne Gabbert & Manner, P.C., the form
of which is attached hereto as Exhibit 2.4 (the "Escrow
Agreement").
2.5 [Omitted]
2.6 Cancellation of Treasury Shares. Any authorized but
unissued shares of ACS2 Common Stock as of the Effective Time shall
automatically be canceled and retired and shall cease to exist, and
no Dynamic Common Stock, cash or other consideration will be
delivered in exchange therefor.
2.7 Securities Exemptions. Dynamic hereby represents,
warrants and covenants that all the shares of Dynamic Common Stock
comprising the Merger Consideration (including but not limited to
the Escrow Stock) will be issued pursuant to an exemption from
registration provided by Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"). Each share certificate
representing the Dynamic Common Stock so issued will be endorsed
with a legend stating that the shares have been issued pursuant to
an exemption from registration provided by the Securities Act and
may not be sold without an exemption from registration or an
effective registration statement.
2.8 Registration Rights. One-half (1/2) of the shares of
Dynamic Common Stock comprising the Merger Consideration will be
subject to a Registration Rights Agreement in favor of the Original
ACS2 Stockholders, the form of which is attached hereto as Exhibit
2.8.
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ADVANCED
As an inducement to the other parties hereto to enter into
this Agreement and to consummate the Merger, Advanced represents
and warrants to each such party, which representations will be true
and correct at Closing, as follows. Any representation, warranty
or covenant of or relating to Advanced is hereby deemed to also be
a representation, warranty or covenant of or relating to any and
all of the Advanced Subsidiaries (as defined in Section 3.1), as
applicable, but not of ACS2.
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7
3.1 Organization, Qualification and Authority. Advanced
is a corporation duly organized, validly existing and in good
standing in the State of Delaware, and is not required to be
qualified to do business as a foreign corporation in any other
jurisdiction. Advanced does not own stock or equity interests in
and does not control, directly or indirectly, any corporation,
partnership, joint venture, association or business organization
other than those entities listed on Exhibit 3.1 (collectively, the
"Advanced Subsidiaries"). Except as set forth on Exhibit 3.1, all
outstanding shares of capital stock of the entities listed on
Exhibit 3.1 are owned by Advanced, free and clear of all liens,
charges, encumbrances, claims and options of any nature. Each
Advanced Subsidiary is a corporation duly organized, validly
existing, in good standing and duly qualified as a foreign
corporation in the respective jurisdictions set forth in Exhibit
3.1 attached hereto. Since the date of its organization and
incorporation, Advanced has consistently observed and operated
within the corporate formalities of the jurisdiction in which it is
incorporated and/or conducts its business, and has consistently
observed and complied with the general corporation law of such
jurisdiction. Advanced has the full corporate power and authority
to own, lease and operate its properties and assets as presently
owned, leased and operated and to carry on its business as it is
now being conducted. Subject to obtaining certain third party
consents, Advanced has the full right, power and authority to
execute, deliver and carry out the terms of this Agreement and all
documents and agreements necessary to give effect to the provisions
of this Agreement. Subject to obtaining certain third party
consents, the execution, delivery and consummation of this
Agreement and all other agreements and documents executed in
connection herewith by Advanced have been duly authorized by all
necessary corporate action on the part of Advanced and no other
action on the part of Advanced or any other person or entity is
necessary to authorize the execution, delivery and consummation of
this Agreement and all other documents and agreements executed in
connection herewith. This Agreement and all other agreements and
documents executed in connection herewith by Advanced, upon due
execution and delivery thereof, will constitute the valid and
binding obligations of Advanced, enforceable in accordance with
their respective terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally and by general principles of equity.
3.2 Capitalization and Stock Ownership
(1) Common Stock. The authorized capital stock of
Advanced consists of ten million (10,000,000) shares, $0.01 par
value, of common stock. Assuming each former Advanced Stockholder
converts their shares into ACS2 Common Stock and assuming each
holder of an Advanced Option, Warrant or SAR converts such interest
as contemplated by the Contribution Agreement, ACS2 will hold
1,625,000 shares of Advanced Stock which based on such assumptions,
constitutes all issued and outstanding securities of Advanced, and
is duly authorized, validly issued, fully paid and nonassessable.
The Advanced Stock is not subject to preemptive or comparable
rights. The Advanced Stock has been issued in accordance with all
applicable federal and state securities laws.
(2) Related Agreements. There are no voting trusts,
voting agreements, shareholders' agreements or other comparable
commitments or understandings to which
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8
Advanced is a party or by which Advanced is bound with respect to
the voting of any Advanced Stock or capital stock of any other
ACS2 Subsidiary.
3.3 Absence of Default. Except as set forth on Exhibit
3.3, the execution, delivery and consummation of this Agreement,
and all other agreements and documents executed in connection
herewith, by Advanced will not constitute a violation of, be in
conflict with, or, with or without the giving of notice or the
passage of time, or both, result in a breach of, constitute a
default under, or create (or cause the acceleration of the maturity
of) any debt, indenture, obligation or liability or result in the
creation or imposition of any security interest, lien, charge or
other encumbrance upon any of the assets of Advanced under: (a)
any term or provision of the Certificate of Incorporation or Bylaws
of Advanced; (b) any material contract, lease, purchase order,
agreement, document or other commitment, oral or written, to which
Advanced is a party or by which Advanced is bound (collectively,
the "Advanced Contracts") (for purposes of categorizing contracts,
"material" being defined to exclude any contract, lease purchase
order, agreement, document or commitment which both (y) in terms of
payments, costs, services or other measure does not exceed
$10,000.00 in the aggregate, and (z) is terminable without penalty
upon ninety (90) days' written notice or less); (c) any judgment,
decree, order, writ, injunction or rule of any court or regulatory
authority; or (d) to the knowledge of Advanced, any law, statute,
rule or regulation to which Advanced is subject.
3.4 Other Representations. Except as modified by
consummation of the transactions contemplated under the
Contribution Agreement, those representations and warranties
contained in paragraphs 3.4 through 3.21 of the Contribution
Agreement, along with the corresponding exhibits thereto, are
incorporated herein by reference and deemed to be made again herein
by Advanced as if restated herein in their entirety.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF ACS2
As an inducement to the other parties hereto to enter into
this Agreement and to consummate the Merger, ACS2 hereby represents
and warrants to each such party, which representations and
warranties will be true and correct at Closing, as follows:
4.1 Organization and Authority. ACS2 is a corporation duly
organized, validly existing and in good standing in the State of
Delaware, and is not required to be duly qualified to do business
as foreign corporation in any other jurisdiction. Since the date
of its organization and incorporation, ACS2 has consistently
observed and operated within the corporate formalities of the
jurisdiction in which it is incorporated, and has consistently
observed and complied with the general corporation law of such
jurisdiction. Subject to obtaining certain third party consents,
ACS2 has the full right, power and authority to execute, deliver
and carry out the terms of this Agreement and all documents and
agreements necessary to give effect to the provisions of this
Agreement. This Agreement and all other such agreements and
documents executed in connection herewith by ACS2, upon due
execution and delivery thereof, will constitute the valid and
binding obligations of ACS2, enforceable in accordance with their
respective terms, except as enforcement
<Page 91>
9
may be limited by bankruptcy, insolvency, reorganization or
similar laws effecting creditors' rights generally and by general
principles of equity. ACS2 has taken all necessary actions as a
Member of the LLC to authorize the LLC to enter into and perform
the transactions contemplated by this Agreement. The authorized
capital stock of ACS2 consists of 10,000,000 shares of $0.01 par
value common stock. Assuming each former Advanced Stockholder
converts their shares into ACS2 common stock and assuming each
Holder of an Advanced Option, Warrant or SAR converts such
interest as contemplated by the Contribution Agreement, there
will be ___________ shares of issued and outstanding ACS2 Common
Stock which constitutes all issued and outstanding ACS2 securities
and is duly authorized, validly issued, fully paid and
non-assessable.
4.2 Absence of Default. Subject to obtaining certain third
party consents, the execution, delivery and consummation of this
Agreement, and all other agreements and documents executed in
connection herewith by ACS2 will not constitute a violation of, be
in conflict with, or, with or without the giving of notice or the
passage of time, or both, result in a breach of, constitute a
default under, or create (or cause the acceleration of the maturity
of) any debt, indenture, obligation or liability or result in the
creation or imposition of any security interest, lien, charge or
other encumbrance upon any of the assets of ACS2 under: (a) any
term or provision of the Certificate of Incorporation or Bylaws of
ACS2; (b) any contract, lease, purchase order, agreement, document
or other commitment, oral or written, to which ACS2 is a party or
by which ACS2 is bound; (c) any judgment, decree, order, writ,
injunction or rule of any court or regulatory authority; or (d), to
the knowledge of ACS2, any law, statute, rule or regulation to
which ACS2 is subject.
4.3 Broker's or Finder's Fee. ACS2 has not employed, and is
not liable for the payment of any fee to, any finder, broker or
similar person in connection with the transactions contemplated
under this Agreement.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF DYNAMIC
AND LLC
As an inducement to the other parties hereto to enter into
this Agreement and to consummate the Merger, and as an inducement
to the Original ACS2 Stockholders to approve of and consummate the
Contribution and Merger, Dynamic hereby represents and warrants to
each such party, which representations and warranties will be true
and correct at Closing, as follows. Any representation, warranty
or covenant of or relating to Dynamic is hereby deemed to also be
a representation, warranty or covenant of or relating to any and
all of the Dynamic Subsidiaries (as defined in Section 5.1).
5.1 Organization, Qualification and Authority. Dynamic is a
corporation duly organized, validly existing and in good standing
in the State of Nevada, and is not required to be qualified to do
business as a foreign corporation in any other jurisdiction.
Dynamic does not own stock or equity interest in and does not
control, directly or indirectly, any corporation, partnership,
joint venture, association or business organization other than the
LLC and the entities set forth on Exhibit 5.1 attached hereto
(collectively, the "Dynamic Subsidiaries"). Since the date of its
organization and incorporation or formation, Dynamic
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10
has consistently observed and operated within the corporate
formalities of the jurisdictions in which it is organized and/or
conducts its business, has consistently observed and complied with
the general corporation law of such jurisdictions and has been duly
qualified to do business as a foreign corporation in all relevant
jurisdictions. All outstanding shares of capital stock of the
Dynamic Subsidiaries consist solely of common stock and have been
validly issued in accordance with all applicable federal and state
securities laws and are owned by Dynamic free and clear of all
liens, charges, encumbrances, claims and options of any nature.
Dynamic has the full right, power and authority to own, lease and
operate its properties and assets as presently owned, leased and
operated and to carry on its business as it is now being conducted.
Subject to obtaining requisite approval of the shareholders of
Dynamic, Dynamic has the full right, power and authority to
execute, deliver and carry out the terms of this Agreement and all
documents and agreements necessary to give effect to the provisions
of this Agreement, to consummate the transactions contemplated on
the part of Dynamic hereby, and to take all actions necessary to
permit or approve the actions Dynamic take in connection with this
Agreement. Subject to obtaining requisite approval of the
shareholders of Dynamic, the execution, delivery and consummation
of this Agreement and all other agreements and documents executed
in connection herewith by Dynamic have been duly authorized by all
necessary corporate action on the part of Dynamic. No other action
on the part of Dynamic, or any other person or entity is necessary
to authorize the execution, delivery and consummation of this
Agreement and all other agreements and documents executed in
connection herewith, other than such shareholder approval. This
Agreement and all other agreements and documents executed in
connection herewith by Dynamic, upon due execution and delivery
thereof, will constitute the valid and binding obligations of
Dynamic as the case may be, enforceable in accordance with their
respective terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally and by general principles of equity.
Dynamic has taken all necessary actions as a member of the LLC to
authorize the LLC to enter into and perform the transactions
contemplated by this Agreement.
5.2 Capitalization and Stock Ownership.
(1) Common Stock. The authorized capital stock of
Dynamic (the "Dynamic Common Stock") consists of 100,000,000
shares, $0.001 par value, of common stock, of which 18,386,929
shares are issued and outstanding as of the date hereof. The
Dynamic Common Stock, along with the securities referenced in
clause (2) below and the replacement convertible notes referenced
in the Contribution Agreement, constitutes all current issued and
outstanding securities of Dynamic, and are duly authorized, validly
issued, fully paid and nonassessable. The original convertible
notes issued by Dynamic constitute all past securities of Dynamic
not currently outstanding, were duly authorized and validly issued,
and no party has any rights or claims with respect thereto. The
Dynamic Common Stock is not subject to preemptive or comparable
rights. The Dynamic Common Stock and all other currently or
previously outstanding securities of Dynamic have been issued in
accordance with all applicable federal, state and foreign
securities laws.
(2) Other Securities. As of the date hereof, 8,575,000
shares of Dynamic Common Stock are reserved for issuance upon the
exercise of outstanding warrants (the
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11
"Dynamic Warrants"), 117,500 shares of Dynamic Common Stock are
reserved for issuance upon exercise of outstanding options (the
"Dynamic Options"), all of which have been granted under the 1997
Stock Option Plan, 8,325,000 shares of Dynamic Common Stock are
reserved for issuance upon conversion of those certain replacement
7.5% convertible subordinated notes referenced in the Contribution
Agreement (the "Dynamic Secured Notes"), and no other shares of
Dynamic Common Stock are or needed to be reserved for any other
Purpose other than as Merger Consideration. Dynamic has issued the
Dynamic Secured Notes in the aggregate principal amount of
$8,325,000 which Notes are convertible into that number of shares
of Dynamic Common Stock equal to the principal amount of such notes
divided by $1.00. The redemption of the original Notes and the
issuance of the Dynamic Secured Notes in replacement thereof was
effected in full compliance with law. True and correct fully
executed copies of all documents regarding the redemption and
issuance of the convertible Notes by Dynamic have been provided
to ACS2 and Advanced. Except for the Dynamic Warrants, the Dynamic
Options and the Dynamic Secured Notes referenced in this clause (2)
there are not any existing options, warrants, calls, subscriptions,
stock appreciation rights or other rights or agreements or
commitments obligating Dynamic to issue, transfer or sell any
capital stock or other security of it or any Dynamic Subsidiary, or
any other security convertible into or evidencing the right to
subscribe for any such security.
(3) Related Agreements. Other than the Operating
Agreement of the LLC as currently in effect, there are no voting
trusts, voting agreements, shareholders' or other comparable
commitments or understandings, oral or written, to which Dynamic or
any holder of Dynamic securities is a party or by which Dynamic or
any such holder is bound with respect to the voting of any Dynamic
Common Stock or the capital stock or securities of any Dynamic
Subsidiary, either before or after Closing of the Merger.
(4) Dynamic Common Stock. On the Closing Date, Dynamic
will have a sufficient number of authorized but unissued and/or
treasury shares of Dynamic Common Stock available for issuance to
the Original ACS2 Stockholders in accordance with the provisions
of this Agreement. The Dynamic Common Stock to be issued as Merger
Consideration pursuant to the Agreement will, when so delivered, be
duly and validly issued in accordance with all applicable federal
and state securities laws, will be exempt from registration
requirements of the 1933 Act and state "blue sky" laws, will be
fully paid and nonassessable, and will be free and clear of
preemptive or comparable rights.
5.3 Convertible Unsecured Debt; Refinancing. The Dynamic
Secured Notes and the convertible notes they replaced were offered,
sold and issued in compliance with law, including but not limited
to applicable federal, state and foreign securities laws. The
Trust Indenture Act of 1939, as amended, did not apply to the
offer, sale, issuance or ownership of either the Dynamic Secured
Notes or the convertible notes they replaced.
5.4 Absence of Default. The execution, delivery and
consummation of this Agreement, and all other agreements and
documents executed in connection herewith by Dynamic will not
constitute a violation of, be in conflict with, or, with or without
the giving of notice or the passage of time, or both, result in a
breach of, constitute a default under, or create (or cause the
acceleration of the maturity of) any debt, indenture, obligation or
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12
liability or result in the creation or imposition of any security
interest, lien, charge or other encumbrance upon any of the assets
of Dynamic under: (a) any term or provision of the Charter or
Bylaws of Dynamic; (b) any material contract, lease, purchase
order, agreement, document or other commitment, oral or written, to
which Dynamic is a party or by which Dynamic is bound (collectively
the "Dynamic Contracts") (for purposes of categorizing contracts,
"material" being defined to exclude any contract, lease, purchase
order, agreement, document or commitment which both (y) in terms of
payments, costs, services or other measure does not exceed
$10,000.00 in the aggregate and (z) is terminable without penalty
upon ninety (90) days' written notice or less); (c) any judgment,
decree, order, writ, injunction or rule of any court or regulatory
authority; or (d), to the knowledge of Dynamic, any law, statute,
rule or regulation to which Dynamic is subject.
5.5 Other Representations. Except as modified by
consummation of the transactions contemplated under the
Contribution Agreement, those representations and warranties
contained in paragraphs 5.4 through 5.22 of the Contribution
Agreement, along with the corresponding exhibits thereto, are
incorporated herein by reference and deemed to be made again herein
by each of Dynamic and the Dynamic Subsidiaries as if restated
herein in their entirety.
ARTICLE VI. COVENANTS OF PARTIES
6.1 Preservation of Business and Assets. From the date
hereof until the Closing, except as contemplated under the
Contribution Agreement, each party will use its best efforts and
will do or cause to be done all such acts and things as may be
necessary to preserve, protect and maintain intact the operation of
its respective business and assets as a going concern consistent
with prior practice and not other than in the ordinary course of
business, including preserving, protecting and maintaining the
goodwill of the suppliers, employees, clientele, patients and
others having business relations with such party. Each party will
use its best efforts to retain its employees in their current
positions up to Closing. Through Closing, other than pursuant to
the Contribution Agreement, no party will acquire or sell or agree
to acquire or sell by merging or consolidating with, or by
purchasing or selling a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other
business organization or division thereof. Except as expressly set
forth in this Agreement or any related Agreement, the execution,
delivery and consummation of this Agreement and the transactions
contemplated hereunder will not give rise to any obligation of any
party hereto, or any right of any holder of any security of any
party hereto to require such party, to purchase, offer to purchase,
redeem or otherwise prepay or repay any capital stock or other
security, or deposit any funds to affect the same. All parties
will use their best efforts to facilitate the consummation of the
Merger as contemplated hereunder, including obtaining requisite
approval of stockholders and third parties. Through Closing,
except as expressly set forth in this Agreement or related
Agreements (such as the cancellation agreements referenced in
Section 1.7 of the Contribution Agreement) and except for exercise
of any outstanding Dynamic Warrants, Dynamic Options of conversion
of Dynamic Secured Notes, no party will issue, deliver or sell, or
authorize or propose to issue, deliver or sell, any shares of its
capital stock of any class, any voting securities or any securities
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13
convertible into, or any rights, warrants or options to acquire,
any such shares, voting securities or convertible securities.
Through Closing, no party will split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance of
any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or repurchase, redeem or otherwise
acquire any shares of its capital stock. From the date hereof
until the Closing, no party will pay any dividend or distribution
to its stockholders as such, and no party will sell, discard or
dispose of any of its assets.
6.2 Retention of Assets of LLC. Dynamic does not intend
or plan to dispose of, or to cause the LLC to dispose of, a
significant part of any assets of the LLC or its subsidiaries, now
or hereafter owned or used, within five (5) years after the
Effective Time, other than dispositions in the ordinary course of
business.
6.3 Absence of Material Change. From the date hereof until
the Closing, no party will make any change in its business or in
the utilization of its assets and will not enter into any contract
or commitment or any other transaction with respect to its business
or its assets which is contrary to its representations, warranties
and obligations as set forth in this Agreement.
6.4 Material Transactions. Except as contemplated by this
Agreement, prior to the Effective Time, each party hereto,
including its respective subsidiaries, if any, will not, without
first obtaining the written consent of the other parties hereto:
(1) dispose of or encumber any asset or enter into any
transaction or make any contract commitment relating to the
properties, assets and business of such entity, other than in the
ordinary course of business or as otherwise disclosed herein;
(2) enter into any employment contract which is not at
will or terminable upon notice of thirty (30) days or less, without
penalty;
(3) enter into any contract or agreement (i) which
cannot be performed within three months or less, or (ii) which
involves the expenditure of over $10,000.00;
(4) except as stipulated in Section 6.1, issue or sell,
or agree to issue or sell, any shares of capital stock or other
securities of such entity;
(5) make any payment or distribution under any bonus,
pension, profit-sharing or retirement plan or incur any obligation
to make any such payment or contribution which is not in accordance
with such entities usual past practice, or make any payment or
contributions or incur any obligation pursuant to or in respect of
any other plan or contract or arrangement of providing for bonuses,
executive incentive compensation, pensions, deferred compensation,
retirement payments, profit-sharing or the like, establish or enter
into any such plan, contract or arrangement, or terminate any plan;
(6) extend credit to anyone except in the ordinary course of
business consistent with prior practice;
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14
(7) guarantee the obligation of any person, firm or
corporation;
(8) amend its operating agreement, charter or bylaws, or
applicable organizational documents;
(9) set aside or pay any cash dividend or any other
distribution on or in respect of its capital stock or any
redemption, retirement or purchase with respect to its capital
stock or issue any additional shares of its capital stock; or
engage in any stock split, recapitalization, reorganization or
comparable transaction;
(10) discharge or satisfy any lien, charge, encumbrance
or indebtedness outside the ordinary course of business;
(11) institute, settle or agree to settle any litigation,
action or proceeding before any court or governmental body;
(12) authorize any compensation increase of any kind
whatsoever for any employee, consultant or other representative; or
(13) engage in any extraordinary transaction.
6.5 Preparation of the Proxy Statement; Stockholders
Meetings.
(1) As soon as practicable, but in no event more than
ten (10) business days following the consummation of the
Contribution Agreement, Dynamic shall prepare and file with the SEC
and any appropriate foreign governmental authorities a proxy
statement relating to the meeting of Dynamic's shareholders to be
held in connection with obtaining the approval of Dynamic's
shareholders (as the same may be amended or supplemented from time
to time, the "Proxy Statement"). Dynamic will cause the Proxy
Statement to be mailed to the holders of Dynamic Common Stock as
promptly as practicable thereafter. Dynamic shall also take any
action (other than qualifying to do business in any jurisdiction in
which it is not now so qualified or to file a general consent to
service of process) required to be taken under any applicable state
or foreign securities laws in connection with the issuance of the
Dynamic Common Stock in the Merger, and ACS2 shall furnish all
information concerning ACS2 and the Original ACS2 Stockholders as
may be reasonably requested in connection with any such action. No
filing of, or amendment or supplement to, the Proxy Statement will
be made by Dynamic without providing ACS2 and its counsel ample
opportunity to review and comment thereon. Dynamic will advise ACS2
of the time when the Proxy Statement is filed, the Proxy Statement
is mailed to shareholders, any supplement or amendment has been
filed or mailed, or comments thereon and responses thereto or
requests by governmental authorities for additional information. If
at any time prior to the Effective Time any information relating to
Dynamic or ACS2, or any of their respective affiliates, officers or
directors, should be discovered by Dynamic or ACS2 which should be
set forth in an amendment or supplement to the Proxy Statement so
that such document would not include any misstatement of a material
fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they
were made,
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15
not misleading, the party which discovers such
information shall promptly notify the other parties hereto and an
appropriate amendment or supplement describing such information
shall be promptly filed and, to the extent required by law,
disseminated to the stockholders of Dynamic.
(2) Dynamic shall, as promptly as reasonably practicable
after the date hereof give notice of, convene and hold a meeting of
its shareholders (the "Dynamic Shareholders Meeting") in accordance
with Chapter 78 "Private Corporations" and Chapter 92A "Mergers and
Exchanges of Interest" of the Nevada Revised Statutes
(collectively, the "Nevada Acts") and the requirements of the
Nasdaq Over-The-Counter Bulletin Board and any applicable foreign
authorities for the purpose of obtaining Dynamic's shareholder
approval of the Merger and shall, through its Board of Directors,
recommend to its shareholders that they approve of the Contribution
and Merger in all respects.
(3) As an integral part of its obligations under the
Registration Rights Agreement, Dynamic will comply with the
provisions of Rule 144(c) under the Securities Act in order that
affiliates of ACS2 may resell the Dynamic Common Stock they receive
pursuant to the Merger pursuant to Rule 145(d) under the Securities
Act, and agrees that the registration statements to be filed
pursuant to the Registration Rights Agreement will include such
information as may be requested by ACS2 to permit resales of such
Dynamic Common Stock by persons who may be deemed to be
underwriters of Dynamic Common Stock pursuant to Rule 145 under the
Securities Act.
6.6 Certain Tax Matters.
(1) During the period from the date hereof through the
Effective Time, no party will knowingly or negligently take or fail
to take any action that would jeopardize the treatment of the
Contribution as a tax-free contribution or the treatment of the
Merger as a "reorganization" within the meaning of Section
368(a)(1)(A) of the Code (and any comparable provisions of
applicable state law). Each party hereto shall report the Merger,
and the Exchange, as a reorganization under Section 368(a) of the
Code, and shall not take any position inconsistent with this
characterization except in the event of a contrary final
determination of the Internal Revenue Service. If any party
receives notice of any contrary position by the Internal Revenue
Service any party hereto may, at its option and sole expense,
contest such position, in which event the other parties hereto
shall cooperate with such contest as reasonably requested by the
contesting party.
(2) Each party hereto shall provide to the other
parties, at the expense of the requesting party, with such
assistance as may reasonably be requested by any of them in
connection with the preparation of any tax return, any audit or
other examination by any regulatory authority, or any judicial or
administrative proceedings relating to liability for taxes, and
each party will retain and provide the requesting party(ies) with
any records or information that may be relevant to any of the
foregoing.
6.7 Legal Conditions to Merger. Each party hereto will take
all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on it with respect to the Merger
and will promptly cooperate with and furnish information
<Page 98>
16
to each other party in connection with any such requirements
imposed upon either any of them in connection with the Merger.
6.8 Preserve Accuracy of Representations and Warranties.
Each party hereto will refrain from taking any action which would
render any of its representations and warranties contained in this
Agreement untrue, inaccurate or misleading as of Closing and the
Effective Time. Through Closing, each party will promptly notify
the other parties of any lawsuit, claim, audit, investigation,
administrative action or other proceeding asserted or commenced
against such party that may involve or relate in any way to
another party to this Agreement. Each party hereto will promptly
notify the other parties of any facts or circumstances that come to
its attention and that cause, or through the passage of time may
cause, any of a party's representations, warranties or covenants
to be untrue or misleading at any time from the date hereof through
Closing.
6.9 Notice of Subsequent Events. Each party hereto shall
notify the other parties of any changes, additions or events of
which it has knowledge which would cause any material change in or
material addition to the Contribution Agreement or this Agreement
(including but not limited to the Exhibits attached hereto and
thereto) promptly after occurrence of the same. If the effect of
such change or addition would, individually or in the aggregate
with the effect of changes or additions previously disclosed
pursuant to this Section, constitute a material adverse effect on
the notifying party, any non-notifying party may, within ten (10)
days after receipt of such notice, elect to terminate this
Agreement. If no non-notifying party gives written notice of such
termination with such 10-day period, the non-notifying parties
shall be deemed to have consented to such change or addition and
shall not be entitled to terminate this Agreement by reason
thereof.
6.10 Medicare and Medicaid Reporting. Through Closing,
the parties will timely file or cause to be filed all reports and
claims of every kind, nature or description, required by law or by
written or oral contract to be filed with respect to the purchase
of services by third party payors, including, but not limited to,
Medicare, Medicaid and Blue Cross.
6.11 Current Return Filing. Each party will be
responsible for the preparation and filing of all of such party's
own tax returns which were due on or before the Closing, and the
payment of all taxes due.
6.12 Maintain Books and Accounting Practices. From the
date hereof until the Closing, each party will maintain its books
of account in the usual, regular and ordinary manner on a basis
consistent with prior years and will make no change in its
accounting methods or practices.
6.13 Compliance with Laws and Regulatory Consents. From
the date hereof until the Closing, (a) each party will comply with
all applicable statutes, laws, ordinances and regulations, (b) each
party will keep, hold and maintain all Licenses, (c) each party will
use its reasonable efforts and will cooperate fully with the
other parties hereto to obtain all consents, stockholder and other
approvals, exemptions and authorizations of third parties, whether
governmental or private, necessary to consummate the Contribution
and Merger, and (d) each party will make and cause to be made all
filings and give and cause to be
<Page 99>
17
given all notices which may be necessary or desirable on their part
under all applicable laws and under their respective contracts,
agreements and commitments in order to consummate the Contribution
and Merger.
6.14 Maintain Insurance Coverage. From the date hereof
until the Closing, each party will maintain and cause to be
maintained in full force and effect all its currently existing
insurance on such party's assets and the operations of such party's
business and will provide at Closing written evidence satisfactory
to each other parties that such insurance continues to be in
effect, that all premiums due have been paid.
6.15 Closing Deliveries. At Closing, the parties hereto
will deliver or cause to be delivered the following, fully executed
and in form and substance reasonably satisfactory to the receiving
party(ies):
(1) ACS2 will deliver to Dynamic stock certificates of
ACS2, duly endorsed by the original ACS2 Stockholders or with stock
powers attached, representing all of the issued and outstanding
shares of ACS2 Common Stock; provided, however, that a failure by
ACS2 to deliver the same will not be deemed a breach of this
Agreement.
(2) Dynamic will deliver to the Original ACS2
Stockholders' certificates representing the shares of Dynamic
Common Stock comprising the Merger Consideration set forth in
Article II, less the stock to be held subject to the Escrow
Agreement. Certificates evidencing stock to be held in escrow will
instead be delivered to the escrow agent pursuant to such Escrow
Agreement.
(3) Each will deliver to the other parties and the
Original ACS2 Stockholders a certificate of an officer, dated as of
Closing, certifying that (a) each covenant and obligation of the
delivering party has been complied with, and (b) each
representation, warranty and covenant of the delivering party is
true and correct at the Closing as if made on and as of the
Closing.
(4) Each party will deliver an opinion of its legal
counsel, in form and substance reasonably acceptable to the
receiving party(ies).
(5) Each party will deliver the Certificates of Merger
in form acceptable for filing with the applicable Secretaries of
State.
(6) Each party thereto will deliver to the other parties
thereto the Escrow Agreement and Registrations Rights Agreement.
(7) Dynamic will deliver to Kevin D. Lee, the Employment
Agreement and Stock Option Agreement referenced in the Contribution
Agreement.
(8) Each party shall deliver such customary certificates
of its officers and such other customary closing documentation as
may be reasonably requested by the other parties, including without
limitation:
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18
(i) Certificates of Existence and/or "Good
Standing" regarding the delivering party and its subsidiaries,
certified by the appropriate Secretary of State and dated
within (10) business days of Closing;
(ii) Incumbency Certificates certifying the
identity of the officers of the delivering party and its
subsidiaries; and
(iii) Charters, Operating Agreement or
Certificates of Incorporation, as certified by the appropriate
Secretary of State within ten (10) business days of Closing,
and Bylaws, as certified by an appropriate officer as of
Closing, of the delivering party and its subsidiaries.
ARTICLE VII. CONDITIONS TO CLOSING
7.1 Conditions to Each Party's Obligation to Effect the
Merger. The obligation of each party hereto to effect the Merger
shall be subject to the fulfillment at or prior to the Closing of
the following conditions:
(1) The Contribution will have been previously
consummated and all deliveries to be made and obligations to be
performed at closing of the Contribution shall, to the extent not
completed at such closing, have been subsequently completed.
(2) This Agreement and the transactions contemplated
hereunder shall have been approved by shareholders of Dynamic in
the manner required by the applicable laws of the State of Nevada
and the Charter and Bylaws of Dynamic. Further, the Original ACS2
Stockholders will have executed and delivered such documents and
performed such acts as reasonably required to effectuate the
Merger.
(3) Each party hereto shall have received from the other
parties copies of all resolutions and/or consent actions adopted by
or on behalf of the boards of directors and shareholders of such
other parties hereto, certified as of the date of Closing and
evidencing approval of this Agreement and the transactions
contemplated hereunder.
(4) No action or proceeding before a court or other
governmental body by any governmental agency or public authority
shall have been instituted or threatened to restrain or prohibit
the transactions contemplated under this Agreement or to obtain an
amount of damages or other material relief in connection with the
execution of this Agreement or any related agreements or the
consummation of the Merger; and no governmental agency shall have
given notice to any party hereto to the effect that consummation of
the transactions contemplated under this Agreement would constitute
a violation of any law or that it intends to commence proceedings
to restrain consummation of the Merger.
(5) All consents, authorizations, orders and approvals
of (or filings or registrations with) any governmental commission,
board or other regulatory body or any
<Page 101>
19
other third party (including lenders and lessors) required in
connection with the execution, delivery and performance of this
Agreement shall have been obtained or made.
(6) NationsCredit shall have consented to the Merger or
have been paid and all obligations of Advanced to NationsCredit
satisfied in full.
(7) Dynamic shall have settled any outstanding claims,
liabilities, actions or lawsuits against or by former officers,
directors, stockholders or related parties of Dynamic or its
subsidiaries to the satisfaction of ACS2.
(8) Dynamic and each of Jan Wallace and Grace Sims shall
have entered into separation and release agreements in the form
attached hereto as Exhibit 7.1.
(9) The settlement described in Section 2.2(b) shall
have been completed to the satisfaction of Dynamic and ACS2.
(10) At the Effective Time the Board of Directors of
Dynamic shall be composed of persons acceptable to Dynamic and
ACS2.
(11) The capitalization of ACS2 and Advanced shall be as
reflected in Section 3.2((1) and Section 4.1 or arrangements
satisfactory to Dynamic, ACS2 and Advanced shall have been made
regarding such capitalization.
7.2 Further Conditions to Obligation of Dynamic and LLC
to Effect the Merger. The obligation of Dynamic and LLC to effect
the Merger shall also be subject to the fulfillment at or prior to
the Closing of the following conditions:
(1) ACS2 shall have performed its obligations contained
in this Agreement, including but not limited to the deliveries
stipulated in Section 6.15, required to be performed on or prior to
the Closing, and the representations and warranties of ACS2,
Advanced and the Advanced Subsidiaries contained in this Agreement
and in any document delivered in connection herewith shall be true
and correct as of the Closing.
(2) Dynamic and its representatives shall have had
reasonable access of inspection of the business of Advanced in
connection with Dynamic's due diligence review, and the results of
Dynamic's inspection and due diligence review shall be acceptable
to it. Further, should any such due diligence reveal a matter
reasonably related to any representation, warranty or covenant
herein or any exhibit hereto, Dynamic may require appropriate
amendment(s) to address such matter.
7.3 Further Conditions to Obligation of ACS2 to Effect
the Merger. The obligations of ACS2 to effect the Merger shall
also be subject to the fulfillment at or prior to the Closing of
the following conditions:
(1) Each of Dynamic and the LLC shall have performed its
obligations contained in this Agreement, including but not limited
to the deliveries stipulated in Section 6.15, required to be
performed on or prior to the Closing, and the representations and
<Page 102>
20
warranties of Dynamic, the LLC and the Dynamic Subsidiaries
contained in this Agreement and in any document delivered in
connection herewith shall be true and correct as of the Closing.
(2) The Dynamic shareholders shall have properly
approved of the Contribution and Merger by December 1, 1999.
(3) The Dynamic shareholders shall have approved, and
Dynamic shall have implemented, an amendment to its 1997 Incentive
Stock Option Plan and 1997 Non-Statutory Stock Option Plan to
increase the pool of shares of Dynamic Common Stock available for
issuance upon exercise of plan options from 2,500,000 to 6,000,000.
(4) From the date of this Agreement until the Effective
Time, there shall not have occurred any material change in the
financial condition, business, operations or prospects of Dynamic
or the Constituent Companies, that would have or would be
reasonably likely to have a material adverse effect on the
operations of Dynamic or the LLC; provided, however, that for
purposes of determining whether there shall have been any such
material changes, any adverse change resulting from or relating to
general business or economic conditions shall be disregarded.
(5) Documentation, in form and substance reasonably
acceptable to ACS2 will have been executed and delivered electing
the directors and officers of Dynamic as stipulated in Exhibit
7.3(4) attached hereto.
(6) ACS2 and its representatives shall have had
reasonable access of inspection of the business of Dynamic in
connection with ACS2's due diligence review, and the results of
ACS2's inspection and due diligence review shall be acceptable to
it. Further, should any such due diligence reveal a matter
reasonably related to any representation, warranty or covenant
herein or any exhibit hereto, ACS2 may require appropriate
amendment(s) to address such matter.
ARTICLE VIII. TERMINATION; AMENDMENT; EXTENSION AND WAIVER
8.1 Termination by Mutual Consent. This Agreement may
be terminated and the Merger may be abandoned at any time prior to
the Effective Time, before or after the approval of this Agreement
by the shareholders of ACS2 and/or Dynamic, by the mutual consent
of the Boards of Directors of ACS2 and Dynamic.
8.2 Termination by Certain Parties. Any party hereto
may terminate this Agreement at any time pursuant to Section 6.9.
This Agreement may be terminated and the Merger may be abandoned
by action of the Board of Directors of ACS2 or Dynamic if (a) the
Merger shall not have been consummated by December 15, 1999, (b)
the Contribution shall not have been consummated by March 31, 1999,
(c) the approval of the Contribution and Merger by Dynamic's
shareholders shall not have been obtained by December 1, 1999 at a
meeting duly convened therefor or at any adjournment thereof, or
<Page 103>
21
(d) a United States federal or state court of competent
jurisdiction or United States federal or state governmental,
regulatory or administrative agency or commission shall have issued
an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and non-appealable; provided,
that the party seeking to terminate this Agreement pursuant to this
clause (d) shall have used all reasonable efforts to remove such
injunction, order or decree.
8.3 Termination by Dynamic. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the
Effective Time, before or after the adoption and approval by the
shareholders of Dynamic, by action by the Board of Directors of
Dynamic, if (a) there has been a breach by ACS2, Advanced or the
Advanced Subsidiaries of any representation or warranty contained
in this Agreement which would have or would be reasonably likely to
have a material adverse effect on the operations of Advanced; or
(b) there has been a breach of any of the covenants or agreements
set forth in this Agreement on the part of ACS2 or Advanced, which
breach is not curable or, if curable, is not cured within thirty
(30) days after written notice of such breach is given by Dynamic
to ACS2.
8.4 Termination by ACS2. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the
Effective Time, before or after adoption and approval of the
Original ACS2 Stockholders, by action of the Board of Directors of
ACS2, if (a) there has been a breach by Dynamic, the LLC or the
Dynamic Subsidiaries of any representation or warranty contained in
this Agreement which would have or would be reasonably likely to
have a material adverse effect on the operations of Dynamic or the
LLC, or (b) there has been a breach of any of the covenants or
agreements set forth in this Agreement on the part of Dynamic, the
LLC or the Dynamic Subsidiaries, which breach is not curable or, if
curable, is not cured within thirty (30) days after written notice
of such breach is given by ACS2 or Advanced to Dynamic.
8.5 Effect of Termination and Abandonment.
(1) With Respect to this Agreement. Upon termination of
this Agreement pursuant to Section 6.9 or this Article VIII, this
Agreement and all agreements and documents (including legal
opinions) related hereto shall be void and of no force or effect,
and there shall be no liability by reason of this Agreement or the
termination thereof on the part of any party hereto, or on the part
of the respective directors, officers, managers, employees, agents,
representatives or shareholders of any of them; provided that this
Section 8.5 will not relieve any party from liability for damages
incurred as a result of any willful breach by such party or by an
affiliate of such party of any of its respective representations,
warranties, covenants or obligations set forth in this Agreement.
(2) With Respect to the Contribution. The parties
acknowledge that if this Agreement is terminated pursuant to
Section 6.9 or this Article VIII, the Merger will not be
consummated. Consequently, either Dynamic or ACS2 may cause a
liquidation of the LLC to occur, as contemplated under Section 8.4
of the Contribution Agreement and Article XII of the LLC's
Operating Agreement, in order to reverse the transactions
consummated
<Page 104>
22
pursuant to the terms of the Contribution Agreement and
to dissolve the LLC. To effectuate such liquidation and
dissolution, the LLC will immediately deliver to ACS2 certificates
evidencing all shares of common stock of Advanced pursuant to the
terms of the Contribution Agreement. ACS2 acknowledges that it
will forfeit 99 of its 100 Units in the LLC upon delivery of such
stock certificates. To further effectuate such liquidation and
dissolution, the LLC will immediately deliver to Dynamic
certificates evidencing all shares of common stock of the Dynamic
Subsidiaries contributed pursuant to the terms of the Contribution
Agreement. Dynamic acknowledges that it will forfeit 99 of its 100
Units in the LLC upon delivery of such stock certificates. All
certificates delivered by the LLC pursuant to this clause (2) shall
be duly endorsed or have stock powers attached. ACS2 and Dynamic
will then immediately undertake all necessary and appropriate
action to dissolve the LLC in accordance with the terms of the
Operating Agreement. Further, all agreement and documents relating
to the Contribution shall be void and of no force or effect,
including but not limited to any legal opinions. Further,
Advanced, on the one hand, and Dynamic, on the other hand, will
enter into an Indemnification Agreement, in form comparable to
Article IX hereof, pursuant to which each will indemnify the other
with regard to the operations of each and their respective
subsidiaries and actions or omissions taken on behalf of each and
their respective subsidiaries for any period prior to or following
termination and abandonment of the Merger. Notwithstanding
anything contained in clause (2) to the contrary, this Section 8.5
will not relieve any party from liability for damages incurred as
a result of any willful breach by such party or by any affiliate of
such party of its respective representations, warranties, covenants
or obligations set forth in this Agreement.
8.6 Amendment. This Agreement may be amended by the
parties at any time before or after any required approval of
matters presented in connection with the Merger by the Dynamic
shareholders or the Original ACS2 Stockholders; provided, that any
amendments requiring the approval of the Dynamic shareholders or
the Original ACS2 Stockholders will not become effective until the
amendment is approved by said holders. This Agreement may not be
amended except by an instrument in writing signed on behalf of all
the parties hereto.
8.7 Extension; Waiver. At any time prior to the
Effective Time, any party hereto, by action taken by its Board of
Directors evidenced in writing, may, to the extent legally allowed,
(a) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant
hereto, and (c) waive compliance with any of the agreements or
conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE IX. SURVIVAL OF PROVISIONS AND INDEMNIFICATION
9.1 Survival. The covenants, obligations, representations
and warranties of each party contained in this Agreement, or in any
certificate or document delivered pursuant to
<Page 105>
23
this Agreement, will be deemed to be material and to have been
relied upon by the other parties notwithstanding any investigation
prior to the Closing, will not be merged into any documents
delivered in connection with the Closing, and will terminate two
(2) years after Closing; provided however, that if a notice
claiming indemnity is properly delivered pursuant to Section 9.5,
the indemnification obligations will not expire with respect to
such claim(s) until the same are resolved as contemplated
hereunder.
9.2 Indemnification by Dynamic. Subject to the provisions of
Section 8.5 and Section 9.5, Dynamic shall indemnify, defend and
hold ACS2, Advanced and the Advanced Subsidiaries, their officers,
directors, employees, agents and representatives, and the Original
ACS2 Stockholders harmless against any and all losses, costs and
expenses (including reasonable cost of investigation, court costs
and legal fees actually incurred) and other damages resulting from
(a) any breach by Dynamic, the LLC or any Dynamic Subsidiary of any
of their covenants, obligations, representations or warranties or
breach or untruth of any representation, warranty, fact or
conclusion contained in this Agreement or any certificate or
document of Dynamic, the LLC or any Dynamic Subsidiary delivered
pursuant to this Agreement, and (b) any claim that is brought or
asserted by any third party(ies) against the Original ACS2
Stockholders arising out of the ownership, licensing, operation or
conduct of Dynamic, the LLC and the Dynamic Subsidiaries through
the Closing.
9.3 Indemnification by ACS2. Subject to the provisions of
Section 8.5 and Section 9.5, ACS2 shall indemnify, defend and hold
Dynamic and the Dynamic Subsidiaries, their respective officers,
directors, employees and representatives harmless against any and
all losses, costs and expenses (including reasonable cost of
investigation, court costs and legal fees actually incurred) and
other damages resulting from (a) any breach by ACS2 of any of its
covenants, obligations, representations or warranties or breach or
untruth of any representation, warranty, fact or conclusion
contained in this Agreement or any certificate or document of ACS2
delivered pursuant to this Agreement, and (b) any claim that is
brought or asserted by any third party(ies) arising out of the
ownership, licensing, operation or conduct of ACS2 through Closing.
9.4 Indemnification by Advanced. Subject to the provisions
of Section 8.5 and Section 9.5, Advanced shall indemnify, defend
and hold Dynamic, its officers, directors, employees and
representatives, and the Dynamic stockholders, harmless against any
and all losses, costs and expenses (including reasonable costs of
investigation, court costs and legal fees actually incurred) and
other damages resulting from (a) any breach by Advanced or an
Advanced Subsidiary of any of its covenants, obligations,
representations or warranties or breach or untruth of any
representation, warranty, a fact or conclusion pertaining to
Advanced and/or the Advanced Subsidiaries contained in this
Agreement or any certificate or document of Advanced delivered
pursuant to this Agreement, and (b) any claim that is brought or
asserted by any third party(ies) arising out of the ownership,
licensing, operation or conduct of Advanced and the Advanced
Subsidiaries through the Closing.
9.5 Rules Regarding Indemnification. The obligations and
liabilities of each party hereto (the "indemnifying party") which
may be subject to indemnification liability hereunder
<Page 106>
24
to the other party(ies) (the "indemnified party") will be subject
to the following terms and conditions:
(1) Claims by Non-Parties. The indemnified party will
give written notice to the indemnifying party, within such time as
not to prejudice unduly the indemnifying party's ability to defend
against the underlying claim, of any written claim by a third party
which is likely to give rise to a claim by the indemnified party
against the indemnifying party based on the indemnity agreements
contained in this Article, stating with reasonable specificity the
nature of said claim and the amount thereof, to the extent known.
The indemnified party will give notice to the indemnifying party
that pursuant to the indemnity, the indemnified party is asserting
against the indemnifying party a claim with respect to a potential
loss from the third party claim, and such notice will constitute
the assertion of a claim for indemnity by the indemnified party.
If, within ten (10) days after receiving such notice, the
indemnifying party advises the indemnified party that it will
provide indemnification and assume the defense at its expense, then
so long as such defense is being conducted, the indemnified party
will not settle or admit liability with respect to the claim
without the consent of the indemnifying party and will afford to
the indemnifying party and defending counsel reasonable assistance
in defending against the claim. If the indemnifying party assumes
the defense, counsel reasonably acceptable to the indemnified party
will be selected by such party and if the indemnified party then
retains its own counsel, it will do so at its own expense. If the
indemnified party does not receive a written objection to the
notice from the indemnifying party within ten (10) days after the
indemnifying party's receipt of such notice, the claim for
indemnity will be conclusively presumed to have been assented to
and approved, and in such case the indemnified party may control
the defense of the matter or case and, at its sole discretion,
settle or admit liability. If within the aforesaid ten (10) day
period the indemnified party will have received written objection
to a claim (which written objection will briefly describe the basis
of the objection to the claim or the amount thereof, all in good
faith), then for a period of thirty (30) days after receipt of such
objection the parties will attempt to settle the dispute as between
the indemnified party and indemnifying parties. If they are unable
to settle the dispute, the unresolved issue or issues will be
settled by a court of competent jurisdiction located in Nashville,
Tennessee. During the pendency of any such dispute, the
indemnified party may control all aspects of the defense of the
matter or case.
(2) Claims by a Party. The determination of a claim
asserted by a party hereunder (other than as set forth in
subsection (1) above) pursuant to this Article will be made as
follows: the indemnified party will give written notice to the
indemnifying party, within such time as not to prejudice unduly the
indemnifying party's ability to defend against the underlying
claim, of any claim by the indemnified party which has not been
made pursuant to subsection (1) above, stating with reasonable
specificity the nature of such claim and the amount thereof, to the
extent known. The claim will be deemed to have resulted in a
determination in favor of the indemnified party and to have
resulted in a liability of the indemnifying party in an amount
equal to the amount of such claim estimated pursuant to this clause
(2) if within thirty (30) days after the indemnifying party's
receipt of the claim the indemnified party will not have received
written objection to the claim. In such event, the claim will be
conclusively presumed to have been assented to and approved. If
within the aforesaid thirty (30) day period the indemnified party
will have received written
<Page 107>
25
objection to a claim (which written objection will briefly describe
the basis of the objection to the claim or the amount thereof, all
in good faith), then for a period of sixty (60) days after receipt
of such objection the parties will attempt to settle the disputed
claim as between the indemnified and indemnifying parties. If they
are unable to settle the dispute, the unresolved issue or issues
will be settled by a court of competent jurisdiction located
in Nashville, Tennessee.
9.6 Exclusive Remedy. The indemnification obligations under
this Article IX are the sole and exclusive remedies available to
ACS2, Advanced, Dynamic and the LLC with respect to this Agreement
and the transactions contemplated hereunder. The parties hereto
expressly acknowledge and agree that they may make no claim nor
institute any action against any Original ACS2 Stockholder with
respect to this Agreement, any related agreement or the
transactions contemplated hereunder and thereunder.
ARTICLE X. MISCELLANEOUS
10.1 Other Expenses. Except as otherwise provided in this
Agreement, each party will pay all of its expenses in connection
with the negotiation, execution, and implementation of the
transactions contemplated under this Agreement.
10.2 Notices. All notices, requests, demands, waivers and
other communications required or permitted to be given under this
Agreement will be in writing and will be deemed to have been duly
given: (a) if delivered personally or sent by facsimile, on the
date received, (b) if delivered by overnight courier, on the day
after mailing, and (c) if mailed, five days after mailing with
postage prepaid. Any such notice will be sent as follows:
To ACS2 or Advanced:
Advanced Clinical Systems, Inc.
49 Music City West, Suite 502
Nashville, TN 37203-3272
Attn: Kevin D. Lee
with a courtesy copy to:
Lauren Anderson
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238
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26
To Dynamic or the LLC:
Dynamic Associates, Inc.
Suite B-169
7373 N. Scottsdale
Scottsdale, Arizona 85253
with courtesy copies to:
Michael H. Taylor Michael A. Cane
O'Neill & Company Cane & Company
Suite 1880, Royal Centre Suite 1200
1055 West Georgia Street, Box 11122 101 Convention Centre Boulevard
Vancouver, British Columbia Las Vegas, Nevada
V6E 3P3 89109
10.3 Confidentiality; Prohibition on Trading. All parties
agree to maintain the confidentiality of the existence of the
Contribution Agreement, this Agreement and the transactions
contemplated hereunder and thereunder, unless disclosure is
required by law and except for disclosures to be made in connection
with obtaining shareholder approval and third party consents, and
actions required to consummate the contemplated transactions.
ACS2, Advanced and the Advanced Subsidiaries agree not to trade in
the securities of Dynamic based upon any nonpublic information.
10.4 Controlling Law. This Agreement will be construed,
interpreted and enforced in accordance with the substantive laws of
the State of Delaware, without giving effect to its conflicts of
laws provisions.
10.5 Headings. Any table of contents and Section headings in
this Agreement are for convenience of reference only and will not
be considered or referred to in resolving questions of
interpretation.
10.6 Benefit. This Agreement will be binding upon and will
inure to the exclusive benefit of the parties hereto and their
respective heirs, legal representatives, successors and assigns.
No party hereto may assign any rights or delegate any duties
hereunder without the prior written consent of the other parties
hereto and any prohibited assignment or delegation will be deemed
null and void. This Agreement also inures to the benefit of the
Original ACS2 Stockholders, individually and as a group, and the
parties hereto acknowledge and agree that each ACS2 Stockholder is
a third party beneficiary of this Agreement and the
representations, warranties and obligations set forth herein of
each party hereto.
10.7 Partial Invalidity. The invalidity or unenforceability
of any particular provision of this Agreement will not affect the
other provisions hereof, and this Agreement will be construed in
all respects as if such invalid or unenforceable provisions were
omitted. Further, there will be automatically substituted for such
invalid or unenforceable provision a provision as similar as
possible which is valid and enforceable.
<Page 109>
27
10.8 Counterparts and Facsimiles This Agreement may be
executed simultaneously in two (2) or more counterparts each of
which will be deemed an original and all of which together will
constitute but one and the same instrument. The signature page to
this Agreement and all other documents required to be executed at
Closing may be delivered by facsimile and the signatures thereon
will be deemed effective upon receipt by the intended receiving
party.
10.9 Interpretation. All pronouns and any variation thereof
will be deemed to refer to the masculine, feminine, neuter,
singular or plural as the identity of the person or entity, or the
context, may require. Further, it is acknowledged by the parties
that this Agreement has undergone several drafts with the
negotiated suggestions of both; and, therefore, no presumptions
will arise favoring either party by virtue of the authorship of any
of its provisions or the changes made through revisions.
10.10 Entire Agreement; Waivers. This Agreement, including the
Exhibits and Attachments hereto and those portions incorporated
herein by reference, constitutes the entire agreement between the
parties hereto with regard to the matters contained herein and it
is understood and agreed that all previous undertakings,
negotiations, letter of intent and agreements between the parties,
other than the Contribution Agreement and documents related
thereto, are merged herein. This Agreement may not be modified
orally, but only by an agreement in writing signed by the parties
hereto. The failure of any party to this Agreement or the failure
of any Original ACS2 Stockholder to assert any of its rights under
this Agreement or otherwise will not constitute a waiver of such
rights. Neither the failure nor any delay on the part of any party
hereto in exercising any rights, power or remedy hereunder will
operate as a waiver thereof or of any right, power or remedy; nor
will any single or partial exercise of any right, power or remedy
preclude any further or other exercise thereof, or the exercise of
any other right, power or remedy.
10.11 Legal Fees and Costs. In the event any party hereto
incurs legal expenses to enforce or interpret any provision of this
Agreement, the prevailing party will be entitled to recover such
legal expenses, including, without limitation, attorney's fees,
costs and disbursements, in addition to any other relief to which
such party will be entitled.
<Page 110>
28
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement and Plan of Merger as of the date first above written.
"ADVANCED":
ADVANCED CLINICAL SYSTEMS, INC.
By: /s/ Kevin D. Lee
Title: President
"ACS2":
ACS2, INC.
By: /s/Kevin D. Lee
Title: President
"DYNAMIC":
DYNAMIC ASSOCIATES, INC.
By: /s/ Jan Wallace
Title: President, CEO
"DAC":
DYNAMIC ACQUISITION CORPORATION
By: /s/ Kevin D. Lee
Title: Chief Manager
<Page 111>
EXHIBIT 3
OPERATING AGREEMENT
OF
ADVANCED - DYNAMIC, LLC
<PAGE 112>
i
TABLE OF CONTENTS
TO
OPERATING AGREEMENT
OF
ADVANCED-DYNAMIC, LLC
ARTICLE I DEFINITIONS 1
1.1 Definitions of Certain Terms 1
1.2 Other Definitions 7
ARTICLE II FORMATION 7
2.1 Formation 7
2.2 Name 7
2.3 Articles of Organization 8
2.4 Principal Executive & Registered Office 8
2.5 Perpetual Existence 8
2.6 Nature of Member's Interest 8
2.7 No Certificates Evidencing Interests in Company 8
2.8 Registered Agent 8
2.9 Filings 8
2.10 Status of Company for Tax Purposes 8
ARTICLE III PURPOSE & POWERS 9
3.1 Purpose 9
3.2 Powers 9
ARTICLE IV CAPITAL 9
4.1 Units 9
4.2 Capital Contributions 9
4.3 Membership Interests 10
4.4 No Interest On or Right to Withdraw Capital 10
4.5 Capital Accounts 10
ARTICLE V PROFITS, LOSSES & CASH FLOW 10
5.1 Allocation of Profits 10
5.2 Allocation of Losses 10
5.3 Special Allocations 11
5.4 Curative Allocations 13
5.5 Other Allocation Rules 14
5.6 Tax Allocations: Code Section 704(c) 14
5.7 Allocations with Respect to Transferred Interests14
5.9 Distributions 16
5.10 Assignment 17
ARTICLE VI MANAGEMENT 18
6.1 Management of Company 18
6.2 Administration of the Company by the Managers 18
6.3 Duties and Powers of the Chief Manager 18
6.4 Day to Day Management 18
6.4.1 Standard of Management Services 18
6.4.2 Consideration 19
<PAGE 113>
ii
6.4.3 Key Management Decisions 19
6.4.4 Coordination of Management and
Operational Activities 19
6.4.5 Agency 19
6.4.6 Indemnification 19
6.4.7 Advanced Subsidiaries Operations 20
6.5 Duties and Powers of the Vice Manager 20
6.6 Duties and Powers of the Secretary 20
6.7 Duties and Powers of the Treasurer 20
6.8 Direction and Approval by Members 20
6.9 Election, Withdrawal and Removal of Managers 20
6.10 Compensation of Managers 21
6.11 Standard of Conduct 21
6.12 Action of Members 21
6.13 Liability of Managers and Employees 22
6.14 Consent of Members to Certain Actions 22
6.15 Additional Duties and Obligations of the Managers23
6.16 Limitations on Distributions 23
ARTICLE VII MEMBER MEETINGS, VOTING RIGHTS & OTHER ACTIVITIES24
7.1 Annual Meeting 24
7.2 Calling Meetings and Notice 24
7.3 Quorum Requirements for Meetings 25
7.4 Voting 25
7.5 Action Without a Meeting 25
ARTICLE VIII INDEMNIFICATION AND ELIMINATION OF LIABILITY 26
8.1 Indemnification of Managers, Employees and Agents26
8.2 Elimination of Liability 27
ARTICLE IX FISCAL MATTERS 27
9.1 Books and Records 27
9.2 Fiscal Year 27
9.3 Financial Statements 27
9.4 Income Tax Reports 27
9.5 Bank Accounts 27
9.6 Tax Matters Partner 27
9.7 Tax Election Under Code Section 754 28
ARTICLE X TERMINATION & ADMISSION OF MEMBERS 28
10.1 No Right to Withdraw 28
10.2 Expulsion 28
10.3 Termination of Membership Interest 28
10.4 Admission of New Members Upon Issuance
of Additional Units 29
10.5 No Preemptive Rights 29
ARTICLE XI TRANSFERS OF INTERESTS IN THE COMPANY 29
11.1 Required Consent to Transfer 29
11.2 Certain Permitted Transfers of Financial Rights 30
11.3 Right of First Refusal 30
11.4 No Termination of Company for Tax Purposes 30
ARTICLE XII DISSOLUTION, TERMINATION & WINDING UP 31
<PAGE 114>
iii
12.1 Dissolution of Company 31
12.2 Winding Up Affairs on Dissolution 31
12.3 Distribution Upon Pre-Merger Dissolution 31
12.4 Distribution Upon Post-Merger Dissolution 32
12.5 Waiver of Right to Partition and Decree
of Dissolution 32
ARTICLE XIII GENERAL PROVISIONS 33
13.1 Notices 33
13.2 Integration 33
13.3 Governing Law 33
13.4 Severability 33
13.5 Binding Effect 33
13.6 Terminology 33
13.7 Amendment 34
13.8 Waivers 34
13.9 Confidentiality 34
13.10 No Third Party Beneficiaries 34
<PAGE 115>
1
OPERATING AGREEMENT
OF
ADVANCED - DYNAMIC, LLC
_______________________________________________________________
BY THIS OPERATING AGREEMENT made and entered into as of this
30th day of March, 1999 by and between Dynamic Associates, Inc.
("Dynamic") and ACS2, Inc. ("ACS2") (together, the "Members"),
being all of the current members of Advanced-Dynamic, LLC (the
"Company"), the Members represent and agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions of Certain Terms. As used in this Agreement,
the following terms shall have the indicated meanings.
1.1.1 "Act" shall mean Chapter 86 of the Nevada
Revised Statutes in effect on the date hereof and as it may be
amended hereafter.
1.1.2 [Omitted].
1.1.3 "Advanced Subsidiaries" means Pain Care, Inc.,
Pain Care of Florida, Inc., Pain Care of Kentucky, Inc., Pain Care
of Georgia, Inc., Pain Care of Tennessee, Pain Care of Texas,
Inc., New Day, Inc., NDA of Alabama, Inc., NDA of Texas, Inc., and
ACS/Managed Care Systems, Inc.
1.1.4 "Agreement" means this Operating Agreement of
Advanced-Dynamic, LLC, as it may be hereafter amended, modified or
restated.
1.1.5 "Articles" means the Articles of Organization
of Advanced-Dynamic, LLC, filed with the Nevada Secretary of State
on March 22, 1999.
1.1.6 "Capital Account" means, with respect to each
holder of Financial Rights, the Capital Account maintained for
such person in accordance with the following provisions:
1.1.6.1 To the Capital Account of each holder of
Financial Rights there shall be credited such person's Capital
Contributions and distributive share of Profits and any items in
the nature of income or gain that are specially allocated to such
person pursuant to section 5.3 or
<PAGE 116>
2
5.4 hereof, and the amount of any Company liabilities assumed by
such person or that are secured by any Company property
distributed to such person.
1.1.6.2 To the Capital Account of each holder of
Financial Rights there shall be debited the amount of cash and the
Gross Asset Value of any Company property distributed to such
person pursuant to any provision of this Agreement, such person's
distributive share of Losses and any items in the nature of
deductions or losses that are specially allocated to such person
pursuant to section 5.3 or 5.4 hereof, and the amount of any
liabilities of such person assumed by the Company or that are
secured by any property contributed by such person to the Company.
1.1.6.3 In the event of an assignment of a
Membership Interest or Financial Rights that is permitted by this
Agreement, the assignee shall succeed to the Capital Account of
The transferor in accordance with Regulations section 1.704-
1(b)(2)(iv) to the extent such Capital Account relates to the transferred
Membership Interest or Financial Rights; provided, however, no
such assignment shall, in and of itself, relieve the transferor of any
obligation to the Company, including, but not limited to, any
obligation of such transferor to contribute to the capital of the
Company.
1.1.6.4 In determining the amount of any
liability for purposes of sections 1.1.6.1 and 1.1.6.2 hereof,
there shall be taken into account Code section 752(c) and any
other applicable provisions of the Code and Regulations.
The foregoing provisions of section 1.1.6 and the other
provisions of this Agreement relating to the maintenance of
Capital Accounts are intended to comply with Regulations section 1.704-
1(b) and shall be interpreted and applied in a manner consistent with
such Regulations. In the event the Members determine that it is
prudent to modify the manner in which Capital Accounts, or any
debits or credits thereto (including, without limitation, debits
or credits relating to liabilities that are secured by contributed or
distributed property, or that are assumed by the Company or
holders of Financial Rights), are computed in order to comply with such
Regulations, the Members may make such modification, provided it
is not likely to have a material effect on the amounts distributable
to any holder of Financial Rights pursuant to section 5.9, upon
the dissolution of the Company, or upon the termination of such
person's interest in the Company. The Members also shall make any
adjustments that are necessary or appropriate to maintain equality
between the Capital Accounts of the holders of Financial Rights
and the amount of Company capital reflected on the Company's balance
sheet, as computed for book purposes, in accordance with
Regulations
<PAGE 117>
3
section 1.704-1(b)(2)(iv)(q), and any appropriate modifications
in the event unanticipated events might otherwise cause this
Agreement not to comply with Regulations section 1.704-1(b).
1.1.7 "Capital Contribution" means, with respect to
any holder of Financial Rights, the amount of money and the
initial Gross Asset Value of any property (other than money) contributed
at any time to the Company with respect to such person's interest in
the Company.
1.1.8 "Cash Flow" means the Company's taxable
income for Federal income tax purposes, increased by (i)
amortization, depreciation and other non-cash charges taken into
account in computing taxable income, (ii) any nontaxable income or
proceeds from any refinancing of the Company's indebtedness (other
than Capital Contributions), and (iii) the net proceeds from the
sale of any of the Company's assets, and decreased by (iv)
principal payments on Company debts, (v) any other cash
expenditures that have not been deducted in determining the
Company's taxable income, and (vi) any amount the Members
determine to be reasonably required to maintain sufficient working capital
and reasonable reserves for operating expenses and capital
expenditures. Cash Flow shall be determined separately for each
fiscal year and not cumulatively.
1.1.9 "Code" means the Internal Revenue Code of
1986, as hereafter amended from time to time. All references
herein to sections of the Code shall include references to any
corresponding successor provision or provisions.
1.1.10 "Company" means Advanced-Dynamic, LLC, the
Nevada limited liability company to which this Agreement relates.
1.1.11 "Contribution Agreement" means that certain
Capital Contribution Agreement dated as of March 30, 1999 among
Dynamic, ACS2, Advanced Clinical Systems, Inc. and the Company.
1.1.12 "Depreciation" means, for each fiscal year or
other shorter period of the Company, an amount equal to the
depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such year or other period,
except that if the Gross Asset Value of an asset differs from its
adjusted basis for Federal income tax purposes at the beginning of
such year or other period, Depreciation shall be an amount that
bears the same ratio to such beginning Gross Asset Value as the
Federal income tax depreciation, amortization or other cost
recovery deduction for such fiscal year or other period bears to
such beginning adjusted tax basis; provided, however, if the
Federal income tax deduction, amortization, or other cost recovery
deduction for such year is zero, Depreciation shall be determined
with reference to such beginning Gross Asset Value using any
reasonable method selected by the Members.
<PAGE 118>
4
1.1.13 "Dynamic Subsidiaries" means Genesis Health
Care Management Corporation and Geriatric Care Centers of
American, Inc.
1.1.14 "Financial Rights" means the rights of each
Member (or assignee thereof) to share in profits, losses and
distributions of the Company, to receive interim and liquidating
distributions of the Company, and to assign such rights in
accordance with the terms of this Agreement.
1.1.15 "Governance Rights" means the rights of each
Member to vote on one or more matters as herein specified or
otherwise required under the Act and all of each Member's rights
as a member in the Company other than Financial Rights and the right
to assign Financial Rights.
1.1.16 "Gross Asset Value" means, with respect to
any asset of the Company, the asset's adjusted basis for Federal
income tax purposes, except as follows:
1.1.16.1 The initial Gross Asset Value of any
asset contributed to the Company by a Member or holder of
Financial Rights shall be the gross fair market value of such asset,
as agreed upon by the person making such contribution and the
Company;
1.1.16.2 The Gross Asset Values of all Company
assets shall be adjusted to equal their respective gross fair
market values, as determined by the Members, as of the following
times:
1.1.16.2.1 The acquisition of an
additional interest in the Company by any person in exchange
for more than a de minimis Capital Contribution to the Company
if the Members reasonably determine that such an adjustment is
necessary or appropriate to reflect the relative economic
interests of the holders of Financial Rights;
1.1.16.2.2 The distribution by the Company
to a holder of Financial Rights of more than a de minimis
amount of property as consideration for an interest in the
Company if the Members reasonably determine that such an
adjustment is necessary or appropriate to reflect the relative
economic interests of the holders of Financial Rights; and
1.1.16.2.3 The liquidation of the Company
within the meaning of Regulations section 1.704-1(b) (2) (ii)
(g).
1.1.16.3 The Gross Asset Value of any Company
asset distributed to any holder of Financial Rights shall be the
gross fair market value of such asset on the date of distribution,
as agreed upon by the person to whom the asset is distributed and
the Company; and
<PAGE 119>
5
1.1.16.4 The Gross Asset Values of Company assets
shall be increased (or decreased) to reflect any adjustments to
the adjusted basis of such assets pursuant to Code section 734(b) or
743(b), but only to the extent that such adjustments are taken
into account in determining Capital Accounts pursuant to Regulations
section 1.704-1(b) (2) (iv) (m) and section 5.3.7 hereof;
provided, however, that Gross Asset Values shall not be adjusted pursuant to
this section 1.1.16.4 to the extent the Members determine that an
adjustment pursuant to section 1.1.16.2 above is necessary or
appropriate in connection with a transaction that would otherwise
result in an adjustment pursuant to this section 1.1.16.4.
If the Gross Asset Value of an asset has been determined
or adjusted pursuant to sections 1.1.16.1, 1.1.16.2 or 1.1.16.4
above, such Gross Asset Value shall thereafter be adjusted by the
Depreciation taken into account with respect to such asset for
purposes of computing Profits or Losses.
1.1.17 "Managers" means, collectively, and "Manager"
means, individually, Kevin Lee, Andrew Miller, Jan Wallace, and
Clay Deardorf, and those additional and substitute persons who may
be elected from time to time by the Members to manager the
administrative affairs of the Company pursuant to the provisions
of this Agreement.
1.1.18 "Members" means those persons identified on
Exhibit A attached hereto, together with any additional persons
admitted as Members pursuant to the provisions of this Agreement.
No person shall be a Member unless he or she possesses some
Governance Rights. The term "Member" means any one of such
persons.
1.1.19 "Membership Interest" means each Member's
interest in the Company, consisting of (i) Financial Rights, (ii)
Governance Rights, and (iii) rights to assign either Financial
Rights and Governance Rights or both. If a Member has assigned
some or all of such Member's Financial Rights, then "Membership
Interest" means, with respect to such Member, (i) such Member's
Governance Rights, (ii) such Member's right to assign such
Governance Rights, (iii) any remaining Financial Rights of such
Member, and (iv) such Member's right to assign any such remaining
Financial Rights.
1.1.20 "Merger Agreement" means that certain
Agreement and Plan of Merger entered into among Dynamic, ACS2,
Advanced Clinical Systems, Inc., Dynamic Acquisition Corporation
("DAC"), and the Company contemporaneously with the Contribution
Agreement.
1.1.21 "Percentage Financial Interest" means the
interest of each Member or holder of Financial Rights obtained by
converting to a percentage the fraction having as its numerator
<PAGE 120>
6
the number of Units, for Financial Rights purposes, held by such
Member or holder of Financial Rights and having as its denominator
the aggregate number of Units, for Financial Rights purposes, held
by all Members and holders of Financial Rights at the time. The
initial Percentage Financial Interest of each Member is set forth
opposite such Member's name on Exhibit A attached hereto.
1.1.22 [Omitted].
1.1.23 "Profits or Losses" shall mean, for each
fiscal year or other shorter period of the Company, an amount
equal to the Company's Federal taxable income or loss for such year or
period, determined in accordance with Code section 703(a) (for
this purpose, all items of income, gain, loss or deduction required to
be stated separately pursuant to Code section 703(a)(1) shall be
included in taxable income or loss), with the following
adjustments:
1.1.23.1 Any income of the Company that is exempt
from Federal income taxation and not otherwise taken into account
in computing Profits or Losses pursuant to this section 1.1.23
shall be added to such taxable income or loss;
1.1.23.2 Any expenditures of the Company described
in Code section 705(a)(2)(B) or treated as Code section
705(a)(2)(B) expenditures pursuant to Regulations section
1.704-1(b)(2)(iv)(i) and not otherwise taken into account in
computing Profits or Losses pursuant to this section 1.1.23 shall
be subtracted from such taxable income or loss;
1.1.23.3 In the event the Gross Asset Value of any
Company asset is adjusted pursuant to section 1.1.16.3 or 1.1.16.4
hereof, the amount of such adjustment shall be taken into account
as gain or loss from the disposition of such asset for purposes of
computing Profits or Losses;
1.1.23.4 Gain or loss resulting from any
disposition of Company property with respect to which gain or loss
is recognized for Federal income tax purposes shall be computed by
reference to the Gross Asset Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property
differs from its Gross Asset Value;
1.1.23.5 In lieu of the depreciation,
amortization, and other cost recovery deductions taken into
account in computing such taxable income or loss, there shall be taken
into account Depreciation for such fiscal year or other shorter period,
computed in accordance with section 1.1.12 hereof; and
1.1.23.6 To the extent an adjustment to the
adjusted tax basis of any Company asset pursuant to Code section
734(b) or 743(b) is required pursuant to Regulations section
1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital
Accounts as a result of a
<PAGE 121>
7
distribution other than in liquidation
of a holder of Financial Rights' interest, the amount of such
adjustment shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment
decreases the basis of the asset) from the disposition of the
asset and shall be taken into account for purposes of computing Profits
or Losses; and
1.1.23.7 Notwithstanding any other provision of
this section 1.1.23, any items that are specially allocated
pursuant to section 5.3 or 5.4 hereof shall not be taken into
account in computing Profits or Losses.
1.1.24 "Regulations" means the regulations
promulgated by the United States Department of the Treasury
pursuant to and in respect of the Code. All references herein to
sections of the Regulations shall include any corresponding
provision or provisions of succeeding, substitute, proposed or
final Regulations.
1.2 Other Definitions. Capitalized terms used in this
Agreement not otherwise defined in this Article I shall have the
meanings given to them elsewhere herein. Certain definitions
relating to the allocation of Profits or Losses are found in
section 5.8.
ARTICLE II
FORMATION
2.1 Formation. The Members hereby acknowledge the formation
of Advanced-Dynamic, LLC, as a Nevada limited liability company
effective upon the filing of the Company's Articles with the
Secretary of State of Nevada on March 22, 1999. The Members shall
immediately, and from time to time hereafter, execute all
documents and do all filing, recording, and other acts as may be
required to comply with the operation of the Company under the Act.
2.2 Name. The name of the Company is Advanced-Dynamic LLC.
The Company shall conduct its business under said name or may
adopt and conduct its business under such other name or assumed or
trade name permitted under the Act as the Members may designate
from time to time. The Company shall execute and cause to be
filed any and all documents, including assumed or fictitious name
certificates, as may be required to conduct business in Nevada and
other states or jurisdictions in which the Company does business
to enable the Company to lawfully transact business in such
jurisdiction under such name.
<PAGE 122>
8
2.3 Articles of Organization. The Articles, as in effect on
the date of this Agreement, are hereby adopted and ratified by the
Members. In the event of a conflict between the terms of this
Agreement and those of the Articles, the terms of the Articles
shall prevail.
2.4 Principal Executive & Registered Office. The principal
executive office of the Company shall be located at 49 Music
Square, West, Suite 502, Nashville, Tennessee 37203-3272 or at
such other place as the Members shall mutually determine in their sole
discretion.
2.5 Perpetual Existence. The Company shall be deemed to have
commenced upon the filing of the Articles and shall continue in
perpetuity until the Company's existence is terminated in
accordance with this Agreement or the Act.
2.6 Nature of Member's Interest. The interest in the
Company of each Member (and all assignees thereof) shall be personal
property. All real and personal property owned by the Company
shall be owned by the Company as an entity in the Company's name.
No Member or holder of Financial Rights, as such, shall own any
interest in specific Company property.
2.7 No Certificates Evidencing Interests in Company. The
Company shall have no authority to issue certificates evidencing
Membership Interests, Governance Rights or Financial Rights in the
Company. The Company shall, at the request of any Member, provide
the written statement describing the interest of such Member to
which such Member is entitled.
2.8 Registered Agent. The name and business address of the
agent for service of process for the Company is Michael A. Cane,
101 Convention Center Drive., Las Vegas, Nevada 89109, or such
other person as the Members shall mutually appoint from time to
time.
2.9 Filings. The Company shall execute and cause to be filed
such certificates and documents required by Nevada and any state
or other jurisdiction in which the Company engages in business. The
Company shall take any and all other actions reasonably necessary
to perfect and maintain the status of the Company as a limited
liability company under the laws of Nevada and in any state or
other jurisdiction in which the Company engages in business, and
the Company shall execute and file for public record the Articles,
and any and all amendments thereto, and other filings in all
places and at such times as required by the Act or other applicable law
necessary for the continuation of, or the transaction of any,
business by the Company.
2.10 Status of Company for Tax Purposes. The Members
intend that the Company be classified as a partnership for Federal
income tax purposes. The Members shall be under a continuing
obligation to perform their duties and responsibilities under this
Agreement in light of such intention, and the Company shall do any
and all things and acts necessary or appropriate to
<PAGE 123>
9
maintain such classification. The Members also intend that the Company
not be classified as a partnership for purposes of Section 3030 of the
Federal Bankruptcy Code. No Member shall take any action
inconsistent with this express intent of the Members.
ARTICLE III
PURPOSE & POWERS
3.1 Purpose. The Company has been formed to engage in
the business of health care management and any other lawful
activity incident to such purpose, and, upon the unanimous
affirmative vote of the Members, to engage in any other lawful
business, act or activity in which a limited liability company may
engage under the Act.
3.2 Powers. In furtherance of its purpose, the Company
shall have full power and authority to do all things necessary or
desirable to accomplish its purpose and carry on its business as
permitted by applicable law and shall have all powers and
authority granted to limited liability companies under the Act.
ARTICLE IV
CAPITAL
4.1 Units. Membership Interests in the Company shall be
denominated in "Units," or fractions thereof. For Governance
Rights purposes, each full Unit entitles the Member holding such
Unit to one (1) vote on all matters to which such Member is
entitled to vote and each fractional Unit entitles the Member
holding such fractional Unit to an equivalent fractional vote.
For purposes of assigning Financial Rights and/or Governance Rights,
each Unit may be severed and/or divided into fractional portions
as applicable.
4.2 Capital Contributions. At the closing of the
Contribution Agreement and as contemplated therein, the Members
shall contribute the Advanced Subsidiaries and Dynamic
Subsidiaries, respectively, to the capital of the Company in
consideration of the Units set forth in section 4.3. Additional
Units may be issued at such time, for such Capital Contributions,
and upon such other terms and conditions as the Members shall, in
their discretion, determine by the unanimous vote of the members.
Additional Capital Contributions will not be required of the
Members.
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10
Each Member will execute all assignments and documents of
transfer as required to give effect to the Capital Contributions
required by this Agreement.
4.3 Membership Interests. There shall be Two Hundred (200)
Units authorized for distribution from the Company. As of the
date of this Agreement, each of Dynamic and ACS2 have been issued one
(1) Unit. Upon completion of the Capital Contributions of each of
ACS2 and Dynamic as set forth in Section 4.2 of this Agreement,
each of Dynamic and ACS2 will be issued an additional ninety-nine
(99) Units, such that the aggregate outstanding Units for both
governance and financial rights purposes will be owned as follows:
Dynamic 100 Units
ACS2 100 Units
4.4 No Interest On or Right to Withdraw Capital. No holder
of Financial Rights shall have the right to demand the return of,
or otherwise withdraw, the Capital Contribution associated with
such person's Financial Rights, or to receive any specific
property of the Company, except as specifically provided in this Agreement.
Except as expressly provided for in Section 12.3 of this
Agreement, no holder of Financial Rights shall have the right to demand and
receive property other than cash in return for the Capital
Contributions associated with such Financial Rights. No holder of
Financial Rights shall have the right to any interest on Capital
Contributions.
4.5 Capital Accounts. The Company shall maintain for each
holder of Financial Rights a Capital Account in accordance with
section 1.1.5 of this Agreement.
ARTICLE V
PROFITS, LOSSES & CASH FLOW
5.1 Allocation of Profits. After giving effect to the
special allocations set forth in sections 5.3 and 5.4 hereof,
Profits for any fiscal year or other shorter period shall be
allocated among holders of Financial Rights in accordance with
their respective Percentage Financial Interests.
5.2 Allocation of Losses. After giving effect to the special
allocations set forth in sections 5.3 and 5.4 hereof, Losses for
any fiscal year or other shorter period shall be allocated among
holders of Financial Rights in accordance with their respective
Percentage Financial Interests.
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11
5.2.1 Losses allocated pursuant to section 5.2
hereof shall not exceed the maximum amount of Losses that can be
so allocated without causing any person to have an Adjusted Capital
Account Deficit at the end of any fiscal year. In the event some
but not all of the holders of Financial Rights would have Adjusted
Capital Account Deficits as a consequence of an allocation of
Losses pursuant to section 5.2, the limitation set forth in this
subsection 5.2.1 shall be applied on a person by person basis so
as to allocate the maximum permissible Loss to each holder of
Financial Rights under section 1.704-1(b)(2)(ii)(d) of the
Regulations.
5.3 Special Allocations. The following special allocations
shall be made in the following order:
5.3.1 Minimum Gain Chargeback. Except as otherwise
provided in section 1.704-2(f) of the Regulations, notwithstanding
any other provision of this Article V, if there is a net decrease
in Company Minimum Gain during any Company fiscal year or other
shorter period, each holder of Financial Rights shall be specially
allocated items of Company income and gain for such year or other
shorter period (and, if necessary, subsequent years) in an amount
equal to such person's share of the net decrease in Company
Minimum Gain, determined in accordance with Regulations section 1.704-
2(g). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to
each holder of Financial Rights pursuant thereto. The items to be
so allocated shall be determined in accordance with sections
1.704-(f)(6) and 1.704-2(j)(2) of the Regulations. This section 5.3.1
is intended to comply with the minimum gain chargeback requirement in
section 1.704-2(f) of the Regulations and shall be interpreted
consistently therewith.
5.3.2 Partner Minimum Gain Chargeback. Except as
otherwise provided in section 1.704-2(i)(4) of the Regulations,
notwithstanding any other provision of this Article V except
section 5.3.1, if there is a net decrease in Partner Nonrecourse
Debt Minimum Gain attributable to a Partner Nonrecourse Debt
during any Company fiscal year or other shorter period, each holder of
Financial Rights who has a share of the Partner Nonrecourse Debt
Minimum Gain attributable to such Partner Nonrecourse Debt,
determined in accordance with section 1.704-2(i)(5) of the
Regulations, shall be specially allocated items of Company income
and gain for such year or other shorter period (and, if necessary,
subsequent years) in an amount equal to such person's share of the
net decrease in Partner Nonrecourse Debt Minimum Gain attributable
to such Partner Nonrecourse Debt, determined in accordance with
Regulations section 1.704-2(i)(4). Allocations pursuant to the
previous sentence shall be made in proportion to the respective
amounts required to be allocated to each holder of
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12
Financial Rights pursuant thereto. The items to be so allocated shall be
determined in accordance with sections 1.704-2(i)(4) and 1.704-2(j)(2) of the
Regulations. This section 5.3.2 is intended to comply with the
minimum gain chargeback requirement in section 1.704-2(i)(4) of
the Regulations and shall be interpreted consistently therewith.
5.3.3 Qualified Income Offset. In the event any
holder of Financial Rights unexpectedly receives any adjustments,
allocations, or distributions described in Regulations section
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-
1(b)(2)(ii)(d)(6), items of income and gain shall be specially
allocated to each such person in an amount and manner sufficient
to eliminate, to the extent required by the Regulations, the Adjusted
Capital Account Deficit of such person as quickly as possible,
provided that an allocation pursuant to this section 5.3.3 shall
be made if and only to the extent that such person would have an
Adjusted Capital Account Deficit after all other allocations
provided for in this Article V have been tentatively made as if
this section 5.3.3 were not in the Agreement.
5.3.4 Gross Income Allocation. In the event any
holder of Financial Rights has a deficit Capital Account at the
end of any Company fiscal year or other shorter period that is in
excess of the sum of (i) the amount, if any, such person is
obligated to restore, and (ii) the amount such person is deemed to
be obligated to restore pursuant to the penultimate sentences of
Regulations sections 1.704-2(g)(1) and 1.704-2(i)(5), each such
person shall be specially allocated items of Company income and
gain in the amount of such excess as quickly as possible, provided
that an allocation pursuant to this section 5.3.4 shall be made if
and only to the extent that such person would have a deficit
Capital Account in excess of such sum after all other allocations
provided for in this Article V have been tentatively made as if
section 5.3.3 hereof and this section 5.3.4 were not in the
Agreement.
5.3.5 Nonrecourse Deductions. Nonrecourse
Deductions for any fiscal year or other shorter period shall be
specially allocated among the holders of Financial Rights in
accordance with their respective Percentage Financial Interests.
5.3.6 Partner Nonrecourse Deductions. Any Partner
Nonrecourse Deductions for any fiscal year or other shorter period
shall be specially allocated to the holder of Financial Rights who
bears the economic risk of loss with respect to the Partner
Nonrecourse Debt to which such Partner Nonrecourse Deductions are
attributable in accordance with Regulations section 1.704-2(i)(1).
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13
5.3.7 Code Section 754 Adjustments. To the extent
an adjustment to the adjusted tax basis of any Company asset
pursuant to Code section 734(b) or 743(b) is required, pursuant to
Regulations section 1.704-1(b)(2)(iv)(m)(2) or 1.704-
1(b)(2)(iv)(m)(4), to be taken into account in determining Capital
Accounts as the result of a distribution to a holder of Financial
Rights in complete liquidation of such Financial Rights, the
amount of such adjustment to the Capital Accounts shall be treated as an
item of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis), and such gain or
loss shall be specially allocated to the holders of Financial
Rights in accordance with their interests in the Company in the
event that Regulations section 1.704-1(b)(2)(iv)(m)(2) applies, or
to the persons to whom such distribution was made in the event
that Regulations section 1.704-1(b)(2)(iv)(m)(4) applies.
5.3.8 Imputed Interest. To the extent the Company
has Federal taxable interest income with respect to any promissory
note pursuant to section 483 or sections 1271 through 1288 of the
Code:
5.3.8.1 Such interest income shall be specially
allocated to the holder of Financial Rights to whom such
promissory note relates; and
5.3.8.2 The amount of such interest income shall
be excluded from the Capital Contributions credited to the Capital
Account of such holder of Financial Rights in connection with
payments of principal with respect to such promissory note.
5.4 Curative Allocations. The allocations set forth in
sections 5.2.1, 5.3.1, 5.3.2, 5.3.3, 5.3.4, 5.3.5, 5.3.6 and 5.3.7
hereof (the "Regulatory Allocations") are intended to comply with
certain requirements of the Regulations. It is the intent of the
Members that, to the extent possible, all Regulatory Allocations
shall be offset either with other Regulatory Allocations or with
special allocations of other items of Company income, gain, loss,
or deduction pursuant to this section 5.4. Therefore,
notwithstanding any other provision of this Article V (other than
the Regulatory Allocations), the Members shall make such
offsetting special allocations of Company income, gain, loss, or deduction in
whatever manner it determines appropriate so that, after such
offsetting allocations are made, the Capital Account balance of
each holder of Financial Rights is, to the extent possible, equal
to the Capital Account balance such person would have had if the
Regulatory Allocations were not part of this Agreement and all
Company items were allocated pursuant to sections 5.1, 5.2, 5.3.8,
and 5.5. In exercising its discretion under this section 5.4, the
Members shall take into account future Regulatory Allocations
under sections 5.3.1 and 5.3.2 that, although not yet
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14
made, are likely to offset other Regulatory Allocations previously made under
sections 5.3.5 and 5.3.6.
5.5 Other Allocation Rules.
5.5.1 Basis for Determining Profits or Losses. For
purposes of determining the Profits, Losses, or any other items
allocable to any period, Profits, Losses, and any such other items
shall be determined on a daily, monthly, or other basis, as
determined by the Members on a consistent basis using any
permissible method under Code section 706 and the Regulations
thereunder.
5.5.2 Distributions of Cash Treated as Proceeds
from Nonrecourse Liability or Partner Nonrecourse Debt. To the
extent permitted by section 1.704-2(h)(3) of the Regulations, the
Members shall endeavor to treat distributions of cash as having
been made from the proceeds of a Nonrecourse Liability or a
Partner Nonrecourse Debt only to the extent that such distributions would
cause or increase an Adjusted Capital Account Deficit for any
holder of Financial Rights.
5.5.3 Allocations of Items Not Otherwise Allocated.
Except as otherwise provided in this Agreement, all items of
Company income, gain, credit, loss, deduction, and any other
allocations not otherwise provided for shall be divided among the
holders of Financial Rights in the same proportions as they share
Profits or Losses, as the case may be, for such fiscal year or
other shorter period.
5.5.4 Allocations Binding. The Members and holders
of Financial Rights are aware of the income tax consequences of
the allocations made by this Article V and hereby agree to be bound by
the provisions of this Article V in reporting their respective
shares of Company income and loss for income tax purposes. The
Members and holders of Financial Rights further intend that,
pursuant to Regulations section 1.704-1(b)(3), the respective
interests in the Company of the holders of Financial Rights are
equal to the respective Percentage Financial Interests of such
person for purposes of complying with section 704(b) of the Code.
5.6 Tax Allocations: Code Section 704(c). In accordance with
Code section 704(c) and the Regulations thereunder, income, gain,
loss, and deduction with respect to any property contributed to
the capital of the Company shall, solely for tax purposes, be
allocated among the holders of Financial Rights so as to take account
of any variation between the adjusted basis of such property to the
Company for Federal income tax purposes and its initial Gross
Asset Value.
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15
5.7 Allocations with Respect to Transferred Interests.
5.7.1 General Rule. If a Membership Interest or
Financial Rights are transferred or increased or decreased by
reason of the admission of a new Member or otherwise, during any
fiscal year or other shorter period of the Company, Profits or
Losses and any other item of income, gain, loss, deduction or
credit of the Company for such fiscal year or other shorter period
shall be allocated among the holders of Financial Rights in
accordance with their varying respective Percentage Financial
Interests that they had from time to time during such fiscal year
or other shorter period in accordance with Code section 706(d).
5.7.2 Accounting Convention. For convenience in
accounting, the Company may, to the extent permitted by law, treat
a transfer of a Membership Interest or Financial Rights, or an
increase or decrease of a holder of Financial Rights' Percentage
Financial Interest, that occurs at any time during a month
(commencing with the month including the date of this Agreement)
as having been consummated on the first day of that month, regardless
of when during that month the transfer, increase or decrease
actually occurs, or adopt such other convention as the Members may
lawfully select.
5.7.3 Sale or Other Disposition of All Assets.
Notwithstanding anything in section 5.7 to the contrary, gain or
loss of the Company realized in connection with the sale or other
disposition of all or substantially all the Company's assets
(other than in the usual or regular course of the Company's business)
and/or the liquidation of the Company shall be allocated only to
holders of Financial Rights who own interests on the date such
transaction occurs.
5.8 Allocation Definitions. As used in this Agreement, the
following terms shall have the indicated meanings.
5.8.1 "Adjusted Capital Account Deficit" means,
with respect to any holder of Financial Rights, the deficit
balance, if any, in such person's Capital Account as of the end of
the relevant fiscal year or other shorter period, after giving
effect to the following adjustments:
5V.8.1.1 Credit to such Capital Account any
amounts that such holder of Financial Rights is obligated to
restore or is deemed to be obligated to restore pursuant to the
penultimate sentences of Regulations sections 1.704-2(g)(1) and
1.704-2(i)(5); and
5.8.1.2 Debit to such Capital Account the items
described in Regulations sections 1.704-1(b)(2)(ii)(d)(4), (5) and
(6).
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16
The foregoing definition of Adjusted Capital Account
Deficit is intended to comply with the provisions of section
1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted
consistently therewith.
5.8.2 "Company Minimum Gain" has the meaning set
forth in Regulations sections 1.704-2(b)(2) and 1.704-2(d) for
"Partnership Minimum Gain" after substituting therein the word
"Company" in place of the word "Partnership."
5.8.3 "Nonrecourse Deductions" has the meaning set
forth in section 1.704-2(b)(1) of the Regulations.
5.8.4 "Nonrecourse Liability" has the meaning set
forth in section 1.704-2(b)(3) of the Regulations.
5.8.5 "Partner Nonrecourse Debt" has the meaning
set forth in section 1.704-2(b)(4) of the Regulations.
5.8.6 "Partner Nonrecourse Debt Minimum Gain" means
an amount, with respect to each Partner Nonrecourse Debt, equal to
the Company Minimum Gain that would result if such Partner
Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with section 1.704-2(i)(3) of the
Regulations.
5.8.7 "Partner Nonrecourse Deductions" has the
meaning set forth in sections 1.704-2(i)(1) and 1.704-2(i)(2) of
the Regulations.
5.9 Distributions.
5.9.1 Distributions. Subject to Section 5.9.4, the
Members are authorized to make distributions of cash or other
property, in such amounts and at such times as the Members shall
determine in its discretion, to holders of Financial Rights,
allocated among them in accordance with their respective
Percentage Financial Interests; provided, however, the Company shall, to
the extent of Cash Flow, distribute to each holder of Financial Rights
an amount estimated by the Members to be sufficient to allow such
holder of Financial Rights to pay income taxes resulting from all
of the various allocations (whether regular or special) of the
Company's income, gain, loss and deduction among the holders of
Financial Rights pursuant to this Article V for such fiscal year
or other shorter period utilizing for this purpose the then highest
marginal individual Federal income tax rate in effect during such
fiscal year or shorter period. Such annual minimum distributions
shall be made by the fifth (5th) day preceding the earliest date
(without regard to extensions) by which any holder of Financial
Rights must file his or her Federal income tax return reporting
such person's distributive share of the Company's taxable income
and may be made, at the Members' discretion, in installments
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17
over the twelve (12) months preceding such due date to coincide with
Federal income tax estimated payments. Notwithstanding anything
in this Agreement to the contrary, the Company shall not make any
distributions that would render it insolvent.
5.9.2 Amounts Withheld. All amounts withheld
pursuant to the Code or any provision of state or local tax law
with respect to any payment of taxes of holders of Financial
Rights or distribution to the holders of Financial Rights shall be
treated as amounts distributed to them pursuant to this section 5.9 for
all purposes under this Agreement.
5.9.3 Distributions in Kind. Except as expressly
provided for in Section 12.3 of this Agreement, no holder of
Financial Rights shall have the right to demand or receive
distributions of property other than cash. Distributions in kind
of Company property, in liquidation or otherwise, shall be made
only with the consent of the Members and only at a value agreed to
by the Members. Prior to any such distribution in kind, the
difference between such agreed value and the book value of such
property shall be credited or charged, as the case may be, to the
holders of Financial Rights' Capital Accounts in proportion to
their Percentage Financial Interests, except as may otherwise be
required under Code section 704(c). Upon the distribution of such
property, such agreed value shall be charged to the Capital
Accounts of the holders of Financial Rights receiving such
distribution.
5.9.4 Distributions Pending Merger. During the
period from the date of this Agreement to the date of consummation
of the Merger, the Members will not make any distributions of
cash, assets, or other properties of the company except as provided for
in this Agreement.
5.10 Assignment. In the event of an assignment of a
Membership Interest or Financial Rights in the Company that is
permitted under this Agreement, Profits or Losses and other tax
attributes shall be allocated and Cash Flow distributions shall be
made to the assignee rather than to the assignor to the extent of
the Financial Rights assigned. Except as otherwise provided in
section 5.7.3, Profits or Losses and other tax attributes
allocable to any Member or holder of Financial Rights whose Membership
Interest or Financial Rights has been assigned, in whole or in
part, during a fiscal year shall be allocated among the persons
who were the holders of such Membership Interest or Financial Rights
during such fiscal year in proportion to their respective holding
periods, without separate determination of the results of Company
operations during such periods in accordance with Code section
706. The Secretary of the Company shall revise Exhibit A attached
hereto to reflect any such assignment and the revised Membership
Interests, Governance Rights and/or Financial Rights as a result
thereof.
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18
ARTICLE VI
MANAGEMENT
6.1 Management of Company. The management of the business
and affairs of the Company shall be vested in the Members. Except
where expressly provided herein to the contrary, all decisions
with respect to the management of the Company shall be made by the
Members and will be binding upon the Company and all Members.
6.2 Administration of the Company by the Managers. The
administration of the day-to-day business and affairs of the
Company is hereby delegated by the Members to at least four (4)
Managers: a Chief Manager, a Vice Manager, an Advanced Operations
Manager, and a Dynamic Operations Manager,. The Members may also
appoint such other managers, including secretaries, vice managers
and treasurers, as they may deem appropriate. Except where
expressly provided herein to the contrary, such decisions with
respect to the administration of the Company shall be made by the
Managers and shall be binding upon the Company. The Managers may
delegate any or all of their responsibilities and appoint agents
or attorneys in fact to act in their behalf.
6.3 Duties and Powers of the Chief Manager. Except as
provided in Section 6.4, the Chief Manager shall carry out the
day-to-day management and operations of the Company in accordance with
the directions, and subject to the review, of the Members and
shall have such other duties and responsibilities as prescribed by the
Act. Notwithstanding the foregoing and except as provided in
Section 6.4, the Chief Manager shall have the authority, power and
discretion to make decisions and to take actions in the ordinary
course of business of the Company that the Chief Manager deems
reasonably necessary in light of the Company's business and
objectives, consistent with the Articles, this Agreement and the
actions and/or resolutions of the Members.
6.4 Day to Day Management. The day to day management and
operation of the geriatric psychiatric health care businesses
carried on by the Dynamic Subsidiaries will be carried out by
Advanced pursuant to this Section 6.4.
6.4.1 Standard of Management Services. Advanced
will supervise all day to day management and operations
activities, with the assistance of the staff of the Dynamic Subsidiaries, to
ensure that the geriatric psychiatric health care businesses are
carried on by the Dynamic Subsidiaries in the ordinary course of
the businesses of the Dynamic Subsidiaries in a manner consistent
with prior practices.
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19
6.4.2 Consideration. In consideration of Advanced
providing the management and operation services as contemplated in
this Section 6.4, the Dynamic Subsidiaries will pay to Advanced a
fee equal to $7,000 per month, payable in advance, provided that
the fee will be pro-rated for any portion of a month in which the
services are provided. In addition, the Dynamic Subsidiaries will
reimburse Advanced for the reasonable expenses incurred by
Advanced and paid to arms-length parties in providing the management and
operations services, provided that the reimbursable expenses will
be limited to a maximum of $6,000 per month and provided further
Advanced shall not be obligated to incur such expense, it being
agreed that the Advanced Subsidiaries shall bear their own
operating expenses. The Dynamic Subsidiaries may, in their sole
discretion, defer such monthly payments until June 30, 1999, upon
which date all accrued sums shall be immediately payable and all
subsequent monthly payments shall be made in advance; provided,
however, that such obligation shall be forgiven if the Merger is
completed on or before June 30, 1999. Notwithstanding anything
else contained herein, the $30,000 in management fees and up to
$24,000 of reimbursable expenses due to Advanced under that
certain Interim Management Contract dated December 7, 1998 shall be paid
in full on or before April 1, 1999.
6.4.3 Key Management Decisions. Dynamic, through
the Dynamic Operations Manager, will retain control over and will
continue to assume all responsibility for all key management
decisions of the Dynamic Subsidiaries. Advanced will make
recommendations to Dynamic and the Dynamic Operations Manager for
all key management decisions, provided that Dynamic and the
Dynamic Operations Manager will not be bound to carry out any
recommendation of Advanced. Advanced will carry out all
management directions made by Dynamic, provided they are within the scope of
this Section 6.4.
6.4.4 Coordination of Management and Operational
Activities. Advanced will coordinate all management and
operational activities through the Dynamic Operations Manager.
Advanced will keep Dynamic and the Dynamic Operations Manager
fully apprised of all management and operation activities conducted by
Advanced.
6.4.5 Agency. Advanced will not be the agent of
Dynamic or the Dynamic Subsidiaries and will have no authority to
bind or to enter into agreements on behalf of Dynamic or the
Dynamic Subsidiaries without prior written approval of the Dynamic
Operations Manager. Advanced will at all times be an independent,
arms-length contractor of Dynamic.
6.4.6 Indemnification. Dynamic will indemnify
Advanced and its subsidiaries, employees, officers, directors and
representatives for any loss, claim or expense incurred by
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20
Advanced or any of its subsidiaries, employees, officers, directors and
representatives as a result of a claim against Advanced or its
subsidiaries, employees, officers, directors and representatives
as a result of providing the management and operational services,
provided that Advanced has acted in good faith and in accordance
with its obligations pursuant to this Section 6.4.
6.4.7 Advanced Subsidiaries Operations. The
Advanced Operations Manager will retain control over the business
of the Advanced Subsidiaries and will carry out the day to day
management and operations of the Advanced Subsidiaries subject to
the terms and conditions of this Agreement.
6.5 Duties and Powers of the Vice Manager. If appointed, the
Vice Manager shall perform those duties requested by the Chief
Manager. In the case of the death or absence of the Chief
Manager, or of his inability for whatever reason to perform his duties as
Chief Manager, the Vice Manager shall assume such duties on a
temporary basis.
6.6 Duties and Powers of the Secretary. If appointed, the
Secretary shall have the following duties and powers: (a)
maintain accurate membership records for the Company including all records
required by the Act; (b) maintain records and minutes of all
meetings of the Members; (c) receive and maintain all notices sent
to the Company; and (d) execute all contracts, documents,
certificates and other instruments on behalf of the Company where
two signatures are required, or by himself where the Chief Manager
or Vice Manager is unavailable. Except as otherwise expressly
directed by the Members or the Act, the Secretary shall have no
other duties or powers.
6.7 Duties and Powers of the Treasurer. If appointed, the
Treasurer shall keep an account of all monies received and
expended by the Company, shall make distributions to Members pursuant to
the terms hereof, shall oversee audits of the Company's financial
records and perform those duties requested by the Chief Manager
and Members.
6.8 Direction and Approval by Members. Notwithstanding the
provisions of Sections 6.1 through 6.7, the Members may, at any
time, direct the Managers to undertake and perform any lawful act
that is consistent with the terms of this Agreement and the
provisions of the Act; provided, however, that prior to the
consummation of the Merger of ACS2 as completed by the execution
of the Merger Agreement, the Members can only exercise such powers
upon unanimous consent. The Members shall have no right or
authority to cancel, set aside, reduce or diminish any lawful
contract, agreement or obligation previously made or undertaken by
the Managers on behalf of the Company.
6.9 Election, Withdrawal and Removal of Managers. Prior to
the consummation of the merger of ACS2 into DAC as contemplated
under the Merger Agreement (the "Merger"), ACS2
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21
shall have the sole responsibility of appointing, removing or
replacing the Advanced Operations Manager, Dynamic shall have
the sole responsibility of appointing, removing or replacing
the Dynamic Operations Manager and the Members shall mutually
appoint, remove or replace the Chief Manager, Vice Manager and
any other secretary, treasurer or other Manager. ACS2 initially
appoints Andrew Miller as Advanced Operations Manager, Dynamic
initially appoints Clay Deardorf as Dynamic Operations Manager,
and the Members initially appoint Kevin Lee as Chief Manager and
Jan Wallace as Vice Manager. After the consummation of the
Merger, the Members may, by unanimous consent, at any time
appoint additional or substitute Managers. The Members may,
at any time and without cause, remove and replace any one or
more of the Managers; provided; however, that a Manager may be
removed only upon the affirmative vote of the Members holding a
majority of the Governance Rights at the time such removal is
proposed. The Members may eliminate any Manager position other
than that of the Chief Manager, Advanced Operations Manager, and
Dynamic Operations Manager. Any Manager may, at any time and upon
thirty (30) days prior written notice to the Members, resign as a
Manager, but such resignation shall not affect his status, if any,
as a Member.
6.10 Compensation of Managers. Except as may be
expressly provided for herein or hereafter approved by the
Members, no payment will be made by the Company to any Manager for the
services of such Manager or any affiliate, partner or employee of
the Manager.
6.11 Standard of Conduct. Each Manager shall discharge
and perform his duties and responsibilities under this Agreement
in accordance with the general standards of conduct prescribed by the
Act. No Manager shall be required to perform in accordance with
or adhere to any standard other than that prescribed by the Act.
6.12 Action of Members. Except as expressly provided in
this Agreement, any vote, determination, consent, approval or action by the
Members required or allowed under the terms of this
Agreement shall be undertaken only upon the affirmative unanimous
vote of Members holding a majority of the Governance Rights of the
Members. Any such vote, determination, consent, approval or
action may be taken and evidenced by written consent. Each Member that
is not a natural person shall, from time to time, appoint in writing
one representative who shall have the full power and authority to
act on behalf of such Member with respect to the making or giving
of any vote, determination, consent, approval or other action by
such Member required or allowed under the terms of this Agreement.
Each such written appointment shall be delivered to the Chief
Manager
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22
and shall not be effective until the time of actual
delivery. Any Member may at any time change any such appointment
by delivering a new written instrument to the Chief Manager.
Notwithstanding anything contained herein to the contrary, any
vote, determination, consent, approval or action by the Members
required or allowed under the terms of this Agreement, other than
the appointment of Managers pursuant to Section 6.8, prior to the
consummation of the Merger, shall be undertaken only upon the
unanimous approval of all of the Members.
6.13 Liability of Managers and Employees. No Manager,
employee or agent of the Company shall have any personal liability
or obligation for the acts, debts, liabilities or obligations of
the Company, whether such arise in contract, tort or otherwise, by
virtue of his status as a Manager, employee or agent of the
Company.
6.14 Consent of Members to Certain Actions.
Notwithstanding anything in this Agreement to the contrary,
following consummation of the Merger, the Company shall not take
any of the following actions without the affirmative vote of
Members holding at least two-thirds (2/3) of the total Governance
Rights in the Company:
6.14.1 Sell all or substantially all of the property
owned by the Company in a single transaction or in a series of
related transactions not in the ordinary and usual course of the
Company's business;
6.14.2 Merge with or into one or more entities not
wholly-owned by the Company, excluding the Merger;
6.14.3 Dissolve the Company, except as anticipated
under the Contribution Agreement or Merger Agreement if the Merger
is not timely consummated;
6.14.4 Acquire or dispose of property, including
real property, securities, instruments, notes and other
investments, from or to any person outside of the ordinary course
of business in an amount greater than $50,000;
6.14.5 Borrow any money in an amount greater than
$50,000 for the Company or its subsidiaries from banks or other
lending institutions outside of the ordinary course of business as
presently conducted or the granting of any security interests in
the assets of the Company to secure repayment of any borrowed
sums;
6.14.6 Enter into of any contract in an amount
payable greater than $50,000 on behalf of the Company or its
subsidiaries which is outside of the ordinary course of the
business as carried on as of the date of this Agreement;
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23
6.14.7 Make any assignment for the benefit of
creditors of the Company, file a voluntary petition in bankruptcy,
or appoint a receiver for the Company;
6.14.8 Commence, settle, dismiss or defend any
lawsuit or other judicial or administrative proceeding brought by
or on behalf of or against the Company or its subsidiaries; or
6.14.9 Terminate, amend, or enter into any contract
on behalf of the Company or its subsidiaries where the term of the
contract is greater than three months or where the amount payable
to the Company pursuant to the contract is greater than $50,000.
As noted in Section 6.11, prior to consummation of the
Merger, the Company shall only take any of the foregoing actions
with the unanimous consent of all Members.
6.15 Additional Duties and Obligations of the Managers.
The Managers shall cause the Company to conduct its business and
operations such that the Dynamic Subsidiaries and the Advanced
Subsidiaries will be kept separate and apart from each other,
unless and until all shares have been released from escrow
pursuant to that certain Escrow Agreement referenced in the Merger
Agreement including, without limitation, (i) segregating the funds,
business operations, and assets of each of the Dynamic Subsidiaries
and the Advanced Subsidiaries and not allowing business operations,
funds, or other assets of the Dynamic Subsidiaries and the Advanced
Subsidiaries to be commingled with the business operations, funds,
or other assets of, held by, or registered in the name of, the
other, (ii) maintaining books and financial records of the Dynamic
Subsidiaries and the Advanced Subsidiaries separate from the books
and financial records of the other and, in each case, in a manner
consistent with past practice for such operations and in
accordance with generally accepted accounting principles as established
in the United States, and observing all corporate procedures and
formalities for each of the Dynamic Subsidiaries and the Advanced
Subsidiaries, including, without limitation, maintaining company
minutes and acting only pursuant to due authorization of the
respective shareholders, (iii) causing the Dynamic Subsidiaries
and the Advanced Subsidiaries to segregate their respective
liabilities and to pay such liabilities from their respective assets, (iv)
causing the Dynamic Subsidiaries and the Advanced Subsidiaries to
conduct their dealings with third parties in their own names and
as separate and independent entities, and (v) causing the Dynamic
Subsidiaries and the Advanced Subsidiaries to maintain their
separate corporate existences without amendment to the Articles,
Bylaws, or other charter documents of any subsidiaries.
6.16 Limitations on Distributions. The Members will
ensure that neither of the Dynamic Subsidiaries nor any of the
Advanced Subsidiaries will make any distribution of the funds,
assets,
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24
or property of the Dynamic Subsidiaries or the Advanced
Subsidiaries by way of dividend or other distribution during the
period from the date of this Agreement to the date of consummation
of the Merger unless authorized by unanimous consent of the
Members; provided, however, that if the Merger has not been
consummated on or before June 30, 1999, The Dynamic Subsidiaries
shall be authorized to pay from their funds directly to Dynamic
the amount necessary to make the minimum payment currently due under
the Dynamic 7.5% Convertible Notes. Dynamic hereby indemnifies
and will hold ACS2, Inc. harmless from any tax liabilities or
obligations arising from such payments. Any funds required by the
Company for its operations will be advanced equally by the Dynamic
Subsidiaries and the Advanced Subsidiaries to the Company as a
loan during the period from the date of this Agreement to the date of
consummation of the Merger. Any such loans shall be adequately
documented. In the event of dissolution of the Company as a
result of the failure of consummation of the Merger, the loans by each of
the Dynamic Subsidiaries and the Advanced Subsidiaries to the
Company to fund the operational expenses of the Company will be
forgiven.
ARTICLE VII
MEMBER MEETINGS, VOTING RIGHTS & OTHER ACTIVITIES
7.1 Annual Meeting. An annual meeting of the Members
shall be held at such time and place, either within or without the
State of Nevada, as designated by the Members. At such annual
meeting, the Managers shall be elected and any other proper
business may be conducted. Members do not have the right to
cumulate their votes for Managers.
7.2 Calling Meetings and Notice. A meeting of the
Members of the Company may be called by any two (2) Managers, the
Chief Manager, or Members holding Governance Rights having at
least fifteen percent (15%) of the total Governance Rights voting power
of all Members. The person or persons having authority to call a
meeting of the Members may call the meeting by giving written
notice of demand for such meeting to every Member entitled to vote
on the matters to be considered at such meeting or by giving
written notice of demand to the Secretary, who shall in turn give
such notice to every Member entitled to vote on the matters to be
considered, with such notice being at the expense of the Company
and the same being given within seven (7) days after receipt of
the notice of demand. Regardless of who calls the meeting, the notice
must be given no fewer than ten (10) days nor more than sixty (60)
days before the meeting date. The notice must contain the date,
time and place of the meeting, and it must contain a statement of
the purposes of the
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25
meeting (unless it is a notice of an annual
meeting, in which event the notice need not contain a statement of
the purposes of the meeting). Unless all Members entitled to vote
on the matters to be considered and all Members entitled to
receive notice of a particular meeting agree to the holding of a meeting
at another place, all meetings of the Members shall be held in the
county in which the principal executive office is located or, if
there is no such principal executive office, in the county in
which the registered office is located. Notwithstanding the foregoing,
all Members, parties to contribution agreements and parties to
contribution allowance agreements shall be entitled to receive
notices of the annual meetings of the Members and notices of all
meetings of the Company called for the purpose of considering any
of the actions enumerated in section 6.13 hereof. A conference
among Members by any means of communication through which the
participants may simultaneously hear each other during the
conference constitutes attendance at the meeting in person or by
proxy if all the other requirements for a meeting are met.
7.3 Quorum Requirements for Meetings. Except as
otherwise provided in the Act, Members holding, for Governance
Rights purposes, a majority of the Units entitled to vote at a
meeting shall constitute a quorum for the transaction of business.
Once a Membership Interest is represented at a meeting for any
purpose, it is deemed to be present for quorum purposes for the
remainder of that meeting and for any adjournment thereof unless a
new record date is or must be set for that adjourned meeting. A
meeting may be adjourned, and notice of any adjourned meeting is
not necessary if the time and place to which the meeting is
adjourned are announced at the meeting at which the adjournment is
taken.
7.4 Voting. For Governance Rights purposes, each full
Unit shall entitle the Member holding such Unit to one (1) vote
and each fractional Unit shall entitle the Member holding such
fractional Unit to an equivalent fractional vote. Except where
this Agreement, the Act, or the Articles require a larger
proportion, the Members entitled to vote shall take action on an
item of business by the affirmative vote of the Members holding a
majority of the voting power present and entitled to vote on that
item of business at a meeting at which a quorum is present.
7.5 Action Without a Meeting. Action required or
permitted to be taken at a meeting of the Members may be taken on
written consent without a meeting. To do so, a written waiver of
acting at a meeting entered into following consummation of the
Merger must be signed by Members holding at least three-fourths
(3/4) of the voting power, for Governance Rights purposes, of all
Members entitled to vote on the particular matter that is the
subject of the action, and a written consent must be signed by
Members with voting power at least equal to the percentage that
Would
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26
be required to take the same action at a meeting of the
Members at which all Members are present. Prior to consummation
of the Merger, all Members must sign the above-described waiver.
The written waivers and written consents may be evidenced by one
(1) or more instruments evidencing the same, which may be executed
in counterparts, all of which shall be delivered to the Secretary
for inclusion in the records of the Company.
ARTICLE VIII
INDEMNIFICATION AND ELIMINATION OF LIABILITY
8.1 Indemnification of Managers, Employees and Agents.
8.1.1 The Company agrees to indemnify each Manager
and each Manager's members, partners, employees and affiliates
(each, an "Indemnitee") to the fullest extent permitted by law and
to save and hold them harmless from and in respect of all (a)
reasonable fees, costs, and expenses paid in connection with or
resulting from any claim, action, or demand against an Indemnitee
that arises out of or in any way relates to the Company, its
properties, business, or affairs and (b) such claims, actions, and
demands and any losses or damages resulting form such claims,
actions, and demands, including amounts paid in settlement or
compromise (if recommended by attorneys for the Company) of any
such claim, action or demand; provided, however, that this
indemnity shall not extend to (i) conduct not undertaken in good
faith to promote the interests of the Company or (ii) conduct
which is reckless, intentionally wrongful or grossly negligent. In
addition to the indemnification conferred in this section 8.1, the
Indemnitee shall also be entitled to have paid directly by the
Company the expenses reasonably incurred in defending any such
proceeding against such Indemnitee in advance of its final
disposition, to the fullest extent not prohibited by the Act, as
the same exists or may hereafter be amended. The right to
indemnification conferred in this section 8.1 shall be a contract
right.
8.1.2 The Company may, by action of the Managers,
provide indemnification to such of the officers, employees and
agents of the Company to such extent and to such effect as the
Managers shall determine to be appropriate and authorized under
the Act, as the same exists or may hereafter be amended.
8.1.3 The rights and authority conferred in this
section 8.1 shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, agreement,
or otherwise.
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27
8.1.4 The Company may purchase and maintain
insurance on behalf of one or more Indemnitees and other persons
against any liability which may be asserted against, or expense
which may be incurred by, any such person in connection with the
Company's activities, whether or not the Company would have the
power to indemnify such person against such liability under the
provisions of this Agreement.
8.2 Elimination of Liability. A Manager's personal
liability to the Company and its Members for breach of fiduciary
duty is hereby eliminated to the fullest extent permitted by the
Act, as the same exists or may hereafter be amended.
ARTICLE IX
FISCAL MATTERS
9.1 Books and Records. Full and accurate books and records
of the Company (including, without limitation, all information
and records required by the Act) shall be maintained at its
principal executive office or at such other place or places
within the United States designated by the Members.
9.2 Fiscal Year. The fiscal year of the Company shall end on
June 30 of each year or as otherwise required by the Code.
9.3 Financial Statements. The Company shall annually prepare
or have prepared financial statements, which shall include a
balance sheet and an income statement
9.4 Income Tax Reports. Within seventy-five (75) days after
the end of each fiscal year, the Company shall prepare and deliver
to each holder of Financial Rights all information necessary for
the preparation of the such person's Federal, state and local
income tax returns.
9.5 Bank Accounts. All funds of the Company shall be
deposited in its name at banks or other financial institutions
approved by the Members, in such checking and savings accounts or
time deposits or certificates of deposit as shall be approved by
the Members.
9.6 Tax Matters Partner. The Members shall designate one
Member to serve as the Tax Matters Partner ("TMP") as such is
defined in Code section 6231(a)(7). The Members initially appoint
ACS2. Upon the failure of the Members to so designate the TMP,
the Chief Manager, provided he or she is then a Member, shall serve as
the TMP. The TMP shall perform all duties and responsibilities
imposed upon him or her, and shall have all powers granted, by the
Code and Regulations.
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28
9.7 Tax Election Under Code Section 754. Upon the transfer
of a Membership Interest or Financial Rights in the Company or the
distribution of property to a holder of Financial Rights, the
Members, at their discretion, may, but are not required to, file
an election pursuant to section 754 of the Code to adjust the basis
of Company property under Code section 734(b) and 743(b).
ARTICLE X
TERMINATION & ADMISSION OF MEMBERS
10.1 No Right to Withdraw. No Member or holder of Financial
Rights shall have the right to withdraw as a Member of the Company
or otherwise have his or her Membership Interest or Financial
Rights in the Company redeemed by the Company except upon the
affirmative vote of Members holding two-thirds (_) of the
Governance Rights; provided, however, that prior to consummation
of the Merger, no Member or holder of Financial Rights may withdraw
as a Member or assign or otherwise transfer (by operation of law or
otherwise) any Governance or Financial Rights except pursuant to
the Merger or with the unanimous consent of Members. Upon the
approval by the Members of the withdrawal of a Member or holder of
Financial Rights and the redemption of his or her Membership
Interest or Financial Rights, the interest of such person in the
Company shall terminate and the Company shall pay to said Member
or holder of Financial Rights in exchange for said person's entire
interest in the Company an amount equal to said person's Capital
Account after all Capital Accounts have been adjusted to reflect a
revaluation of the Company's property then on the financial books
of the Company in accordance with Regulation section 1.704-
1(b)(2)(iv) or such other amount as may be agreed upon by the
Members and said person, which amount shall be paid upon such
terms and conditions as agreed upon by the Members and the withdrawing
Member or holder of Financial Rights; provided, however, if no
such agreement can be reached, said amount shall be paid in equal
annual installments over a period of ten (10) years with interest,
compounded annually, accruing on the unpaid balance at an annual
rate equal to the prime rate published in the Wall Street Journal
on the date the unsecured promissory note evidencing such
indebtedness is executed, which interest shall be due and payable
annually.
10.2 Expulsion. The Company shall not have the power to expel
a Member.
10.3 Termination of Membership Interest. A Member's continued
membership in the Company shall terminate upon (i) the Member's
death, (ii) the Member's withdrawal from the Company, (iii) the
assignment or other disposition of all of the Member's Governance
Rights, (iv)
<PAGE 143>
29
the Member's filing of a voluntary petition in
bankruptcy, (v) the Member's adjudication of bankruptcy, (vi) the
Member's dissolution, liquidation, termination or other cessation
of existence, (vii) the transfer, encumbrance or other
disposition, or the attempted transfer, encumbrance or other disposition, of
any part of his or her Membership Interest or Financial Rights in
breach of this Agreement, or (viii) the occurrence of any other
event that terminates the continued membership of the Member in
the Company under this Agreement or at law. Upon the termination of a
Member's membership in the Company, such Member shall cease to
have any Governance Rights in the Company and shall be treated as an
assignee of the Financial Rights, if any, owned by such Member
immediately prior to the termination of such membership.
Notwithstanding anything in the Act to the contrary, no Member
whose membership interest is terminated shall be entitled to
receive any amount in exchange for his or her interest in the
Company except as otherwise provided in this Agreement.
10.4 Admission of New Members Upon Issuance of Additional
Units. After the admission of the initial Members, additional
Units may be issued at such time, for such Capital Contributions,
and upon such other terms and conditions as the Members shall, in
their discretion, determine. The Secretary of the Company shall
revise Exhibit B attached hereto to reflect the issuance of
additional Units, the admission of new Members and the revised
Membership Interests, Governance Rights and/or Financial Rights as
a result thereof.
10.5 No Preemptive Rights. Notwithstanding anything in this
Agreement or the Articles to the contrary, the Members shall have
no preemptive rights.
ARTICLE XI
TRANSFERS OF INTERESTS IN THE COMPANY
11.1 Required Consent to Transfer. Except as otherwise
provided in section 10.1, 11.2 or 11.3, no Member or holder of
Financial Rights shall have the right to voluntarily sell, assign,
transfer, alienate, mortgage, pledge or otherwise dispose of or
encumber all or any part of his or her Membership Interest,
Governance Rights, or Financial Rights to any person or entity
without the affirmative vote of Members holding at least two-
thirds (2/3) of the Governance Rights; provided, however, that prior
to the consummation of the Merger no Member or holder of Financial
Rights may assign or otherwise transfer, deposit or encumber (by
operation of law or otherwise) any of its Membership Interest,
Governance Rights or Financial Rights except pursuant to the Merger
or with
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30
the unanimous consent of Members. Following any transfer permitted
by this Article XI, the Secretary of the Company shall revise
Exhibit A attached hereto to reflect the admission of new Members
and/or the revised Membership Interests, Governance Rights and/or
Financial Rights as a result thereof.
11.2 Certain Permitted Transfers of Financial Rights. Without
the necessity of the consent of any Member, but subject to the
provisions of section 11.4, a Member or holder of Financial Rights
may transfer all or any portion of his or her Financial Rights to
any person, upon written notice to the Company specifying the
Financial Rights transferred and the name and address of the
transferee.
11.3 Right of First Refusal. No Member shall have the right
to voluntarily sell, assign, transfer, alienate, mortgage, pledge
or otherwise dispose of or encumber all or any part of his or her
Membership Interest or Governance Rights (other than Financial
Rights pursuant to Section 11.2) to any person or entity (other
than to the Company pursuant to Section 10.1) without said Member
(the "Transferor") first offering to sell such interest (the
"Offered Interest") to the Company as follows:
11.3.1 The Transferor shall deliver written notice
("Notice of Proffered Sale") to the Company, which notice shall
include the name of the prospective transferee and the price and
terms upon which such assignment or other disposition is to be
made.
11.3.2 The Company shall have an option to purchase
the Offered Interest at the price and on the terms set forth in
the Notice of Proferred Sale, which option shall be exercisable within
thirty (30) days following the receipt of said Notice by giving
written notice of acceptance of such offer ("Notice of
Acceptance") to the Transferor.
11.3.3 The Members shall determine whether or not
the Company shall decline to exercise its option or accept
exercise its option and provide the Notice of Acceptance.
11.3.4 If the Company declines to accept the Notice
of Proffered Sale within said thirty (30) day period, the
Transferor may consummate the proposed assignment or other
disposition of the Offered Interest to the prospective transferee
upon the terms and conditions stated in the Notice of Proffered
Sale; provided, however, if the proposed assignment or other
disposition is not consummated within ninety (90) days after the
close of the thirty (30) day period referenced in section 11.3.2,
the Transferor shall have no right to transfer the Offered
Interest without again offering to the Company the option to purchase said
Offered Interest as provided in this section 11.3.
11.4 No Termination of Company for Tax Purposes.
Notwithstanding anything in this Article XI to the contrary, in
no event may a Member or holder of Financial Rights transfer or
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31
assign all or any part of such person's Membership Interest or Financial
Rights in the Company, be admitted to the Company, or withdraw
from the Company if such action would result in a sale or exchange of
fifty percent (50%) or more of the total interest in the capital
and profits of the Company within a twelve (12) month period such
that the Company would be considered as terminated under section
Code 708 without the prior affirmative vote of Members holding
three-fourths (3/4) of the Governance Rights.
ARTICLE XII
DISSOLUTION, TERMINATION & WINDING UP
12.1 Dissolution of Company. The Company shall be
dissolved and its affairs wound up upon the unanimous vote of the
Members, or as may be otherwise required by law. Notwithstanding
any provision to the contrary, the Company shall be dissolved
without notice to or action by any member in the event that the
closing of the Contribution Agreement is not consummated by March
31, 1999 or the Merger is not consummated by December 15, 1999
provided that such dates may be extended by the unanimous written
consent of the members. The Company shall be terminated when the
winding up of Company affairs has been completed following
dissolution.
12.2 Winding Up Affairs on Dissolution. Upon
dissolution of the Company, the Members or the other persons
required or permitted by law to carry out the winding up of the
affairs of the Company shall promptly notify all Members of such
dissolution; shall wind up the affairs of the Company; shall
prepare and file all instruments or documents required by law to
be filed to reflect the dissolution of the Company; and, after paying
or providing for the payment of all liabilities and obligations of
the Company, shall distribute the assets of the Company as
provided by the terms of this Agreement.
12.3 Distribution Upon Pre-Merger Dissolution. Upon
dissolution of the Company prior to consummation of the Merger,
the Company shall:
12.3.1 First, pay all outstanding liabilities and
expenses of the Company;
12.3.2 Transfer the legal and beneficial ownership
of the Dynamic Subsidiaries to Dynamic and the Advanced
Subsidiaries to ACS2; and
12.3.3 Distribute any remaining assets of the
Company to the Members in accordance with their proportional
financial rights.
<PAGE 146>
32
12.4 Distribution Upon Post-Merger Dissolution. Upon
dissolution of the Company and the sale of its assets at any time
after consummation of the Merger, the proceeds of such sale of the
assets of the Company shall be allocated as set forth below:
12.4.1 First, to pay all outstanding liabilities and
expenses of the Company;
12.4.2 Second, to establish such reserves for
unknown or contingent liabilities as the Members may determine;
and
12.4.3 The balance, if any, to the holders of
Financial Rights, in accordance with their Capital Accounts, after
giving effect to all contributions, distributions and allocations
for all periods.
12.5 Waiver of Right to Partition and Decree of
Dissolution. As a material inducement to each Member to execute
this Agreement and except as expressly provided in this Agreement,
each Member covenants and represents to each other Member that
during the existence of the Company, no Member, nor such Member's
heirs, personal representatives, administrators, successors,
transferees or assigns, will attempt to make any partition of any
Company assets whether now owned or hereafter acquired, and each
Member waives all rights of partition provided by statute or
principles of law or equity, including partition in kind or
partition by sale. The Members agree that irreparable damage
would be done to the goodwill and reputation of the Company if any
Member should bring an action in a court to dissolve the Company. The
Members agree that there are fair and just provisions for payment
and liquidation of the interest of any Member, and fair and just
provisions to prevent a Member from selling or otherwise
alienating such Member's Membership Interest in the Company. Accordingly,
each Member hereby waives and renounces such Member's right to such a
court decree of dissolution or to seek the appointment by court of
a liquidator or receiver for the Company.
12.6 Non-Competition. In the event of the dissolution of the
Company pursuant to 12.1 as a result of the failure of the parties
to consummate the Merger by December 15, 1999, unless such date is
extended by mutual agreement of the parties, each of Dynamic and
ACS2 will not directly or indirectly alone or in conjunction with
any other individual, firm or corporation, association or other
entity, whether they are acting as principal agent, director,
officer, employee , shareholder or in any other capacity
whatsoever, for a period of one (1) year from the date of
dissolution of the Company, solicit any customer, client, or other
individual or entity with whom the other party serves or
contracts on the date of dissolution of the Company in a manner which could
adversely affect the other party.
<PAGE 147>
33
ARTICLE XIII
GENERAL PROVISIONS
13.1 Notices. All notices or other communications
provided for under this Agreement or the Act shall be in writing,
signed by the party giving the same, and shall be deemed properly
given when personally delivered or on the earlier of actual
receipt or the fifth (5th) business day after mailing if mailed by
registered or certified United States mail, postage prepaid, or
deposited with any other generally recognized delivery service
with receipt returned and charges prepaid or billed to sender,
addressed:
13.1.1 In the case of the Company, to its principal
executive office; or
13.1.2 In the case of any Member or holder of
Financial Rights, to the address set forth on Exhibit A or to such
other address as such person may specify by notice to the Company.
13.2 Integration. This Agreement embodies the entire
agreement and understanding among the Members with respect to the
subject matter hereof, and supersedes all prior agreements and
understandings, if any, among and between the Members relating to
the subject matter of this Agreement.
13.3 Governing Law. This Agreement and the rights of
Members and holders of Financial Rights shall be governed by and
construed and enforced in accordance with the laws of the State of
Nevada. The parties hereto consent to the exclusive jurisdiction
and venue of the federal and state courts in Davidson County,
Tennessee, with respect to any controversy arising out of this
Agreement or the transaction contemplated hereby.
13.4 Severability. In case any one or more of the
provisions contained in this Agreement or any application thereof
shall be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions
herein contained and any other application thereof shall not in
any way be affected or impaired.
13.5 Binding Effect. Except as otherwise provided herein
to the contrary, this Agreement shall be binding upon, and inure
to the benefit of, the Members and their respective heirs, personal
representatives, administrators, successors, transferees and
assigns.
13.6 Terminology. All personal pronouns used in this
Agreement, whether used in the masculine, feminine, or neuter
gender, shall include all other genders; and the singular shall
include the plural, and vice versa. Titles of Articles and
sections are for convenience only and shall not
<PAGE 148>
34
control or affect the meaning or construction of any terms or
provisions of this Agreement. All references herein to Articles
and sections are references to Articles and sections hereof
except where such references are made to the Act, the Code or
to some other specified law, regulation or instrument.
13.7 Amendment. This Agreement may be amended, modified,
or supplemented only by a writing executed by each of the Members;
provided, however, that the Secretary is hereby authorized and
directed to amend Exhibit A to reflect changes thereto when
applicable.
13.8 Waivers. The failure of any party to seek redress
for violation of or to insist upon the strict performance of any
covenant or condition of this Agreement shall not prevent a
subsequent act, which would have originally constituted a
violation, from having the effect of an original violation. No
waiver of any provision of this Agreement will be valid unless it
is in writing and signed by the party against which it is sought
to be enforced.
13.9 Confidentiality. All Members acknowledge that from
time to time, any Member and its employees and agents may come
into possession of certain information relating to the any other
Member's business operations or otherwise, which information the
latter deems to be confidential and proprietary. Accordingly, the
Members, for themselves and their employees and agents, hereby
agree to maintain the confidentiality of all such information and
to not use any such information for any purpose unless such
information becomes a part of the public domain through no fault
or breach by the Members, its agents or employees. In addition, each
Member hereby agrees, except as required in the conduct of the
business or in the discharge of the respective Member's duties and
responsibilities hereunder, neither to publish or disclose, nor to
authorize the publication or disclosure of, nor to permit any
other person, firm, corporation or other entity within its control to
public or to disclose, during or after the term of this Agreement,
any private or proprietary knowledge or information concerning the
Company.
13.10 No Third Party Beneficiaries. None of the
provisions of this Agreement is intended by the parties, nor shall
they be deemed, to confer any benefit on any person not a party to
this Agreement.
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35
IN WITNESS WHEREOF, the parties hereto have executed this
Operating Agreement as of the date first set forth above.
DYNAMIC ASSOCIATES, INC.
By: /s/Jan Wallace
Title: President CEO
ACS2, INC.
By: /s/ Kevin D. Lee
Title: President
<PAGE 150>
EXHIBIT 4
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is entered into on
________, 1999 between DYNAMIC ASSOCIATES, INC., a Nevada
corporation ("Dynamic"), and the parties named on Schedule 1
attached hereto (each a "Holder" and, collectively, the "Holders").
WHEREAS, each Holder previously owned stock in ACS2, Inc., a
Delaware corporation ("ACS2"); and
WHEREAS, ACS2, its wholly owned subsidiary Advanced Clinical
Systems, Inc., a Delaware corporation ("Advanced"), Dynamic, and
Dynamic Acquisition Corporation have entered into that certain
Agreement and Plan of Merger dated March __, 1999 (the "Merger
Agreement") pursuant to which ACS2 merged with and into Dynamic
Acquisition Corporation (the "Merger"); and
WHEREAS, as a result of the Merger, the Holders were issued
upon closing of the Merger and now own, in the aggregate,
22,473,413 shares of Dynamic common stock (the "Merger
Consideration").
WHEREAS, Dynamic has agreed to grant the Holders certain
demand registration rights and to file registration statements
pursuant to the 1933 Securities Act (as defined below) in order to
register for sale shares of Dynamic common stock issued to the
Holders pursuant to the Merger.
NOW THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties, intending to be legally
bound hereby, agree as follows:
AGREEMENT
1. Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"1934 Exchange Act" means the Securities Exchange Act of
1934, as amended, or any similar federal statute, and the
rules and regulations of the SEC thereunder, all as the
same shall be in effect from time to time.
"1933 Securities Act" means the Securities Act of 1933,
as amended, or any similar federal statute, and the rules
and regulations of the SEC thereunder, all as the same
shall be in effect from time to time.
"Register," including "Registered" and "Registration,"
refer to a registration effected by preparing and filing
with the SEC a registration statement in
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2
compliance with the 1933 Securities Act, and the declaration
or ordering of the effectiveness of such registration
statement. "SEC" means the Securities and Exchange
Commission or any other federal agency at the time
administering the 1933 Securities Act.
"Shares" means all shares of Dynamic common stock owned
by Holders immediately following the consummation of the
Merger, including any shares subject to escrow and any of
securities of Dynamic which may be converted into shares
of common stock of Dynamic, all as may be adjusted from
time to time in the event of a split, reorganization,
merger, consolidation or comparable recapitalization
involving Dynamic securities.
2. Demand Registration.
(a) Dynamic shall, within ninety (90) days after the
consummation of the Merger, cause (a) registration
statement in prescribed form under the 1933 Securities
Act with respect to a number of Shares equal to twenty-
five percent (25%) of the total Merger Consideration,
rounded up to the next higher round lot, to be prepared
and filed with the SEC and any applicable state
authority, to become and remain effective as provided
herein to permit the valid pubic sale of the Shares by
those Holders listed in Schedule 2 attached hereto in
compliance with all such applicable securities laws
pursuant to a public offering, which offering shall be
managed by one or more underwriters of recognized
national standing in the United States on a firm
underwriting basis mutually acceptable to Dynamic and a
majority of participating Holders.
(b) Subject to Section 2(f), Dynamic shall, within thirty
(30) days after the first anniversary of the consummation
of the Merger, cause another registration statement in
prescribed form under the 1933 Securities Act and the
1934 Exchange Act, with respect to a number of Shares
equal to twenty-five percent (25%) of the total Merger
Consideration, rounded up to the next higher round lot,
to be prepared and filed with the SEC and any applicable
state authority, to become and remain effective as
provided herein to permit the valid pubic sale of the
Shares by any and all Holders in compliance with all such
applicable securities laws pursuant to a public offering,
which offering shall be managed by one or more
underwriters of recognized national standing in the
United States on a firm underwriting basis mutually
acceptable to Dynamic and a majority of participating
Holders.
(c) Subject to Section 2(f), Dynamic will give written notice
of the filing of the registration statement referenced in
clause (b) (which notice will include a list of
jurisdictions in which Dynamic intends to attempt to
qualify the offer and sale of Shares under applicable
state securities laws) to each Holder at least forty-five
(45) days before the anticipated filing date of the
registration statement, and such notice will offer
Holders the opportunity to include in
<Page 152>
3
such registration the number of Shares as held by each
Holder as each Holder may request, and allow any Holder
to participate in such offer and sale of Shares so long
as such Holder notifies Dynamic of its intentions within
thirty (30) days after receipt of such written notice. If
the total number of Shares which Holders elect to make
available for sale exceed twenty-five percent (25%) of the
total Merger Consideration, each participating Holder will
instead be permitted to offer for sale a reduced number
of Shares determined on a proportionate basis based upon
the aggregate number of Shares which the participating
Holders desire to sell, which aggregate number will not
exceed twenty-five percent (25%) of the total Merger
Consideration.
(d) Dynamic may delay the filing of the registration
statement referenced in clause (b) for up to 120 days, if
in the good faith judgment of Dynamic's board of
directors, the financing would be detrimental to a
material transaction which has been approved by Dynamic's
board of directors prior to filing of the applicable
registration statement, or for up to ninety (90) days if
the underwriters determine that it is not possible to
sell the Shares subject to the proposed registration at
a price equal to or greater than ninety percent (90%) of
the average market price of such Shares during the last
twenty (20) trading days prior to such determination. If
Dynamic delays filing of such registration statement, it
must provide each Holder an opportunity to consider
participating in the delayed offering by delivering new
written notices pursuant to the first sentence of clause
(c).
(e) A registration will not be considered to be one of the
demand registrations required under this Agreement unless
it has been kept continuously effective for a period of
at least six (6) months following the date on which such
registration was declared effective, or such shorter
period that will terminate when all of the Shares covered
by the registration have been sold pursuant to the terms
of such registration. In the event that either the
registration anticipated under clauses (a) or (b) above
does not satisfy this criteria, Dynamic shall begin the
registration process again in accordance with the
provisions of this Agreement within ninety (90) days
thereof; provided, that the number of Shares to be then
registered will be reduced by the number of shares sold,
if any, in the previously effective registration
statements filed pursuant to this Agreement.
(f) In the event either a portion of the Merger Consideration
held in escrow pursuant to the Escrow Agreement executed
at Closing of the Merger is returned to Dynamic or, in
the alternative, if additional shares of Dynamic Common
Stock other than those held in escrow are distributed to
the Holders as contemplated under Section 2(c)(ii) of the
Escrow Agreement, then the number of shares subject to
registration pursuant to Section 2(b) of this
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4
Registration Rights Agreement will be adjusted so that
the total number of shares of Dynamic Common Stock
registered pursuant to Section 2(a) and 2(b) hereof will
equal a total of fifty percent (50%) of the total Merger
Consideration actually delivered to all Holders following
completion of distributions from escrow.
3. Registration Procedures. In connection with the
registration and sale of Shares, and as contemplated hereunder,
Dynamic will as expeditiously as possible:
(a) prepare and file with the SEC a registration
statement with respect to such Shares and use its
best efforts to cause such registration statement
to become effective (provided that before filing a
registration statement or prospectus or any
amendments or supplements thereto, Dynamic will
furnish to a single law firm selected by a majority
of the participating Holders copies of all such
documents proposed to be filed, which documents
would be subject to the reasonable review of such
counsel);
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the
prospectus used in connection therewith as may be
necessary to keep such registration statement effective
for a period of not less than six (6) months and comply
with the provisions of the 1933 Securities Act with
respect to the disposition of all Shares covered by such
registration statement during such period in accordance
with the intended methods of disposition by the Holders
thereof as set forth in such registration statement;
(c) furnish to each Holder such number of copies of such
registration statement, each amendment and supplement
thereto, the prospectus included in such registration
statement (including each preliminary prospectus) and
such other documents as such Holder may reasonably
request in order to facilitate the disposition of the
Shares owned by such Holder;
(d) use its best efforts to register or qualify such Shares
under such other securities or blue sky laws of such
jurisdiction as any Holder reasonably requests and do any
and all other acts and things which may be reasonably
necessary or advisable to enable such Holder to
consummate the disposition in such jurisdictions of the
Shares owned by such Holder (provided that Dynamic will
not be required to (i) qualify generally to do business
in any jurisdiction where it would not otherwise be
required to qualify but for this subparagraph, (ii)
subject itself to taxation in any such jurisdiction, or
(iii) consent to general service of process in any such
jurisdiction);
(e) notify each Holder, at any time when a prospectus
relating thereto is required to be delivered under the
1933 Securities Act, of the happening of any event as a
result of which the prospectus included in such
registration statement
<Page 154>
5
contains an untrue statement of a material fact or omits
any fact necessary to make the statements therein not
misleading, and, at the request of any such Holder, Dynamic
will prepare a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of such
Shares, such prospectus will not contain an untrue statement
of a material fact or omit to state any fact necessary to make
the statements therein not misleading;
(f) cause all such Shares to be listed on each securities
exchange on which similar securities issued by Dynamic
are then listed;
(g) provide a transfer agent and registrar for all such
Shares not later than the effective date of such
registration statement;
(h) enter into such customary agreements and take all such
other customary actions as a majority of the Holders or
the underwriters reasonably request in order to expedite
or facilitate the disposition of such Shares (but
exclusive of effecting a stock split or a combination of
shares);
(i) make available for inspection by any Holder, any
underwriter participating in any disposition pursuant to
such registration statement, and any attorney, accountant
or other agent retained by any such Holder or
underwriter, all financial and other records, pertinent
corporate documents and properties of Dynamic, and cause
Dynamic's officers, directors, employees and independent
accountants to supply all information reasonably
requested by any such Holder, underwriter, attorney,
accountant or agent in connection with such registration
statement subject to the execution of a confidentiality
agreement in a form reasonably acceptable to Dynamic and
in favor of Dynamic by any party receiving such
information; and
(j) obtain a comfort letter from Dynamic's independent public
accountants in customary form and covering such matters
of the type customarily covered by comfort letters as the
holders of a majority of the Shares being sold reasonably
request.
4. Registration Expenses. All expenses incident to
Dynamic's performance under this Agreement, including without
limitation all registration and filing fees, fees and expenses of
compliance with securities or blue sky laws, transfer and similar
taxes, printing expenses, messenger and delivery expenses, and fees
and disbursements of counsel for Dynamic and all independent
certified public accountants, underwriters and other persons
retained by Dynamic (all such expenses being herein called
"Registration Expenses"), will be borne by Dynamic. Further,
Dynamic will pay its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual
audit or quarterly review, the expense of any
<Page 155>
6
liability insurance and the expenses and fees for listing the
securities to be registered on each securities exchange on which
similar securities issued by Dynamic are then listed.
5. Indemnification.
(a) Dynamic will, and hereby does, indemnify and hold
harmless each participating Holder in any and all
registrations contemplated hereunder, any and all
directors, officers or representatives of a participating
Holder, and each person, if any, who controls a
participating Holder (within the meaning of the 1933
Securities Act), against any losses, claims, damages or
liabilities which a participating Holder or any such
representative or controlling person may become subject
under the 1933 Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in any
registration statement under which Shares were
registered under the 1933 Securities Act, any preliminary
prospectus, final prospectus, or summary prospectus
contained therein or filed with the SEC pursuant to Rule
424 under the 1933 Securities Act, or any amendment or
supplement thereto, or (ii) any omission or alleged
omission to state in any document referred to in clause
(i) a material fact required to be stated therein or
necessary to make the statements therein not misleading;
and Dynamic shall reimburse each indemnified party for
and legal or any other expenses incurred by them in
connection with investigating or defending any such loss,
claim, liability, action or proceeding as such expenses
are incurred; provided, however, that Dynamic shall not
be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is
based upon an untrue or alleged untrue statement in or
omission or alleged omission from any of such documents
in reliance upon and in conformity with written
information furnished to Dynamic through an instrument
duly executed by a Holder specifically stating that it is
expressly for use therein. Such indemnity shall remain
in full force and effect regardless of any investigation
made by or on behalf of a participating Holder or such
representative or controlling person, and shall survive
the transfer of such securities by a Holder.
(b) Dynamic may and intends to require, as a condition to
including the Shares of any Holder in any registration
statement pursuant to this Agreement, that Dynamic shall
have received a written undertaking reasonably
satisfactory to it from such Holder to indemnify and hold
harmless, severally but not jointly with any other
Holder, Dynamic, its directors, officers and
representatives against any losses, claims damages or
liabilities which Dynamic, its directors, officers or
representatives may become subject under the 1993
Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of
<Page 156>
7
any material fact contained in registration statement under
which such Shares were registered under the 1933
Securities Act, any preliminary prospectus, final
prospectus or summary prospectus contained therein or
filed with the SEC pursuant to Rule 424 under the 1933
Securities Act, or any amendment or supplement hereto, or
(ii) any omission or alleged omission to state in any
document referred to in clause (i) a material fact
required to be stated therein or necessary to make the
statement therein not misleading, but only if and to the
extent in the case of clause (i) or (ii) such untrue
statement or alleged untrue statement in or omission or
alleged omission from any such document was made in
reliance upon and in conformity with written information
furnished to Dynamic through an instrument duly executed
by such Holder specifically stating that it is expressly
for use therein; provided, that the liability of each
participating Holder shall be limited to the net proceeds
received by such Holder with respect to the Shares sold
by such Holder thereunder unless such untrue statement or
alleged untrue statement in or omission or alleged
omission from any such document was made as a result of
the intentional withholding of information or intentional
provision of information known to be false by such
participating Holder.
(c) A party from whom indemnity may be sought pursuant to the
provisions of Section 5 (a) or (b) shall not be liable
for such indemnity with respect to any claims as to which
indemnity is sought unless the party seeking such
indemnity shall have notified such indemnifying party in
writing of the nature of such claim promptly after such
indemnified party becomes aware of the assertion thereof;
provided, however, that the failure so to notify such
indemnifying party shall not relieve such party from any
liability which it may have to such indemnified party
otherwise than on account of the provisions of Section 5
(a) or (b) or if the failure to give such notice promptly
shall not have been materially prejudicial to such
indemnifying party. No indemnifying party shall be
liable for any compromises or settlement of any such
action effected without its consent. No indemnifying
party, in the defense of any such claim or suit, shall,
except with the consent of each indemnified party,
consent to any compromise or settlement that does not
include as an unconditional term thereof the giving by
the claimant to such indemnified party of a release from
all liability in respect of such claim or suit. An
indemnifying party may participate with counsel
reasonably satisfactory to the indemnified party in, and
to the extent that it shall wish (except to the extent
set forth below), may direct and assume at its own
expense, either individually or jointly with any other
indemnifying party, the defense of any suit brought to
enforce such claim. Such indemnified party shall have
the right to participate in such suit (but not to control
such suit except to the extent set forth below) unless no
indemnifying party shall have assumed the defense thereof
in accordance with the preceding sentence) and to retain
its own counsel, but the fees and expenses of such
counsel (other than
<Page 157>
8
reasonable costs of investigation) shall be at the expense
of such indemnified party unless no indemnifying party shall
have assumed the defense thereof in accordance with the
preceding sentence or unless the named parties to any such
suit include one or more indemnifying party and representation
of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them (in
which case such indemnified party shall have the right to
control all aspects of such suit relating to such actual
or potential differing interests). It is understood that
no indemnifying party shall, in connection with any such
suit, be liable under this subsection for the fees and
expense of more than one separate firm (in addition to
any local counsel in each jurisdiction) for all
indemnified parties and that all such fees and expenses
shall be reimbursed as they are incurred.
(d) Indemnification similar to that specified in Sections 5
(a), (b), and (c) (with appropriate modifications) shall
be given by Dynamic and each Holder participating in the
registration with respect to any required registration
or other qualification of Shares under any federal or
state law or regulation of governmental authority other
than the 1933 Securities Act
(e) In order to provide for just and equitable contribution
in circumstances in which the indemnification provided
for above is for any reason held to be unenforceable
although applicable in accordance with its terms, Dynamic
and each participating Holder shall contribute to the
losses, claims, damages, liabilities and expenses
described herein, in such proportions so that the portion
thereof for which any particular participating Holder
shall be responsible shall be limited to the portion
determined by a court (or the parties to any settlement)
to be directly attributable to an untrue statement of a
material fact or an omission to state a material fact in
a registration statement, preliminary prospectus,
prospectus or amendment or supplement thereto in specific
reliance upon and in conformity with written information
furnished to Dynamic through an instrument duly executed
by such participating Holder specifically stating that it
is expressly for use therein, and Dynamic shall be
responsible for the balance; provided, that the liability
of each participating Holder shall be limited to the net
proceeds received by such Holder with respect to the
Shares sold by such Holder thereunder unless such untrue
statement or alleged untrue statement in or omission or
alleged omission from any such document was made as a
result of the intentional withholding of information or
intentional provision of information known to be false by
such participating Holder. Dynamic and each
participating Holder agree that it would not be just and
equitable if their respective obligations to contribute
were to be determined by pro rata allocation, by
reference to the proceeds realized by them or in any
manner which does not take into account the equitable
considerations set forth in this Section 5 (e).
<Page 158>
9
6. Participation in Underwritten Registrations. No person
may participate in any registration hereunder which includes an
underwritten offering unless such person (i) agrees to sell such
person's securities on the basis provided in any reasonable
underwriting arrangements approved by the person entitled hereunder
to approve such arrangements, and (ii) completes and executes all
questionnaires, power of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms
of such underwriting arrangements.
7. Absence of Other Registration Rights. Dynamic has not
granted any other party any demand registration, piggyback
registration or similar rights regarding any securities of Dynamic
other than pursuant to that certain Warrant for the Purchase Of
Shares Of Common Stock from Dynamic to Genesis Merchant Group
Securities LLC covering 250,000 shares of Dynamic common stock.
8. Rule 144 Reporting.
(a) Dynamic shall make and keep public information available,
as those terms are understood and defined in Rule
144(c)(1) or (c)(2), whichever is applicable, under the
1933 Securities Act, at all times from and after the date
it is first required to do so.
(b) Dynamic shall file with the SEC in a timely manner all
reports and other documents as the SEC may prescribe
under Sections 13(a) or 15(d) of the 1934 Exchange Act at
all times during which Dynamic is subject to such
reporting requirements of the 1934 Exchange Act.
(c) Dynamic shall furnish to each and every Holder, upon
request (i) a written statement by Dynamic as to its
compliance with the reporting requirements of Rule 144
and of the 1933 Securities Act and the 1934 Exchange Act,
(ii) a copy of the most recent annual or quarterly report
of Dynamic, and (iii) such other reports and documents
filed with the SEC as the Holder may reasonably request
to avail itself of any rule or regulation of the SEC
allowing a Holder of restricted securities to sell any
such securities without registration.
9. Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may be amended and Dynamic
may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if Dynamic has obtained
the written consent of at least two-thirds of the Holders.
10. Successors and Assigns. All covenants and agreements in
this Agreement by or on behalf of any of the parties hereto will
bind and inure to the benefit of the respective, permitted
successors and assigns of the parties hereto whether or not any
express assignment has been made, the provisions of this Agreement
which are for the
<Page 159>
10
benefit of Holders are also for the benefit of, and enforceable by,
any subsequent holder of Shares, provided that Dynamic is given
written notice at the time of or within a reasonable time after said
assignment, stating the name and address of the assignee or holder and
identifying the securities with respect to which such registration
rights are being assigned, and provided further, that the assignee
or subsequent holder of such rights assumes the obligations of such
Holder under this Agreement (other than obligations pursuant to
Section 5(b) with respect to written instruments prepared by such
prior Holder). Dynamic may not assign its rights or delegate its
duties hereunder, by transfer, operation of law or otherwise, without
the prior written consent of all of the Holders, and any prohibited
assignment or delegation will be deemed rule and void.
11. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement
is held to be prohibited by or invalid under applicable law, such
provision will be effective only to the extent of such prohibition
or invalidity, without invalidating the remainder of this
Agreement. Further, there shall be automatically added to this
Agreement a provision as similar as possible to the provision (or
that portion thereof), which new provision will be valid and
enforceable under applicable laws.
12. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need
not contain the signature of more than one party, but all such
counterparts taken together will constitute one and the same
Agreement.
13. Descriptive Headings. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute
a part of this Agreement.
14. Governing Law. The construction, validity and
interpretation of this Agreement and the exhibits and schedules
hereto will be governed by the internal law, and not the law of
conflicts, of the State of Nevada.
15. Notices. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this
Agreement will be in writing and will be deemed to have been given
when delivered personally or mailed by certified or registered
mail, return receipt requested and postage prepaid, to the
recipient. Such notices, demands and other communications will be
sent to each Holder at the address provided by such Holder and
listed on Schedule 1 hereto and to Company at the address indicated
below:
To Company: Dynamic Associates, Inc.
Suite B-169
7373 North Scottsdale
Scottsdale, AZ 85253
or to such other address or to the attention of such other person
as the recipient party has specified by prior written notice to the
sending party.
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11
IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of March 30, 1999.
COMPANY:
DYNAMIC ASSOCIATES, INC.
By:
Title:
HOLDERS:
Healthmark Partners, LLC
By:
Title:
M. Bruce Sanderson, M.D.
Kimberly Tipton, R.N.
T.C. Thomas, III, M.D.
Reginald J. Rutherford, M.D.
Thomas P. Toomey, M.D.
Walter M. Jones
Lisa A. Manning
Carol Ann Kelley, R.N.
Scott N. Mohler, Ph.D.
Elizabeth Dan
F. Karl VanDevender, M.D.
Betty Brumley
NationsCredit
By:
Its:
<Page 161>
12
Schedule 1
Name of Holder Address of Holder Number of Shares Held
Healthmark Partners, LLC 1,236,105
*James T. Harper 30,603
*Kevin D. Lee 40,985
David Alfery, J.D. 674
T.C. Thomas, III, M.D. 674
Thomas P. Toomey, M.D. 674
*Lisa A. Manning 1,750
*Scott N. Mohler, Ph.D.
*F. Karl VanDevender, M.D.
*H. Brooks Morgan, M.D.
*M. Bruce Sanderson, M.D.
*NationsCredit
*Kimberly Tipton, R.N.
*Reginald J. Rutherford, M.D.
*Walter M. Jones
*Carol Ann Kelley, R.N.
*Maureen T. (Stearns) Browning, R.N.
*Elizabeth Dan
*Betty Brumley
(* = option, warrant or SAR holder - need to adjust # shares held
accordingly.)
[Subject to Change]
<Page 162>
13
Schedule 2
Participating Holders in First Registration
Name: Number of Shares to
be Offered for Sale:
Total:________________
<Page 163>
EXHIBIT 5
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is entered into on _____________, 1999,
by and among DYNAMIC ASSOCIATES, INC., a Nevada corporation
("Dynamic"), ACS2, Inc., a Delaware corporation ("ACS2"), ADVANCED
CLINICAL SYSTEMS, INC., a Delaware corporation ("Advanced"), the
parties named on Exhibit 1 attached hereto (collectively the
"Original ACS2 Stockholders") and Harwell Howard Hyne Gabbert &
Manner, P.C. ("Escrow Agent").
W I T N E S S E T H:
A. Dynamic, ACS2, Advanced and Dynamic Acquisition
Corporation, have entered into an Agreement and Plan of Merger
dated March 30, 1999, (the "Merger Agreement"), pursuant to which
ACS2 is being merged into the (the "Merger") and the Original ACS2
Stockholders are being issued shares of common stock of Dynamic
(the "Dynamic Common Stock").
B. The parties hereto have agreed, pursuant to the Merger
Agreement, to the establishment of an escrow account to hold a
portion of the shares of Dynamic Common Stock issued pursuant to
the Merger, in an amount and for the purposes specified herein.
NOW, THEREFORE, in consideration of the premises set forth in
the Merger Agreement, the mutual covenants herein contained, 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. Deposit. Concurrently with the execution and delivery of
this Agreement, Dynamic has deposited with Escrow Agent four
million eighty six thousand seventy three (4,086,073) shares of
Dynamic Common Stock, with duly executed stock powers
(collectively, the "Escrow Stock"), which constitutes a portion of
the Merger Consideration (as such term is defined in the Merger
Agreement) to be issued under the Merger Agreement. Escrow Agent
hereby acknowledges receipt of the Escrow Stock. The number of
shares of Escrow Stock earmarked for each Original ACS2 Stockholder
is set forth on Exhibit 1 attached hereto. Escrow Agent will hold
the Escrow Stock in accordance with the terms and provisions of
this Agreement.
2. Disbursement of Escrow Stock.
(a) Dynamic, with respect to the operations of Genesis
Health Care Management Corporation ("Genesis") and Geriatric Care
Centers of America, Inc. ("GCCA") (Genesis and GCCA are referred
collectively herein as the "Dynamic Group"), and ACS2, with respect
to the operations of Advanced, Pain Care, Inc., Pain Care of
Florida, Inc., Pain Care of Kentucky, Inc., Pain Care of Georgia,
Inc., Pain Care of Tennessee, Inc. and Pain Care of Texas, Inc.
(collectively the "ACS2 Group"), have projected consolidated
earnings before interest, taxes, depreciation and amortization
("EBITDA") of $2,400,000 for each of the Dynamic Group and ACS2
Group, respectively, for the twelve (12) month period ending
December 31, 1999 (the "Projections").
<PAGE 164>
2
(b) On or before April 1, 2000, Dynamic shall prepare
and deliver to the Original ACS2 Stockholders and the Escrow Agent
a written statement of the consolidated EBITDA for the Dynamic
Group for the twelve (12) month period ending December 31, 1999
(the "Dynamic Group EBITDA") and a comparable written statement of
the consolidated EBITDA for the ACS2 Group for the twelve (12)
month period ending December 31, 1999 (the "ACS2 Group EBITDA").
The Dynamic Group EBITDA and ACS2 Group EBITDA shall be based on
audited financial statements, prepared in a manner consistent with
past practice for the applicable group's operations and in
accordance with generally accepted accounting principles. Dynamic
will make the work papers related to such written statements
available to any Original ACS2 Stockholder promptly upon written
request.
(c) If any Original ACS2 Stockholder disputes the
calculation of either Dynamic Group EBITDA or ACS2 Group EBITDA,
such stockholder will provide written notice to Dynamic and the
Escrow Agent setting forth in detail the nature and basis for the
dispute. The dispute shall be settled pursuant to paragraph 3 of
this Agreement. If no such notice of dispute is received within
forty-five (45) days of delivery of the written statements
referenced in Section 2(b), the Escrow Agent will disburse the
Escrow Stock on or about June 1, 2000 as follows:
(i) If both the Dynamic Group EBITDA and the ACS2
Group EBITDA exceed seventy percent (70%) of their respective
Projections, or neither the Dynamic Group EBITDA nor the ACS2 Group
EBITDA exceeds seventy percent (70%) of their respective
Projections, Escrow Agent will promptly release all of the Escrow
Stock to the Original ACS2 Stockholders in accordance with the
amounts set forth in Exhibit 1.
(ii) If the ACS2 Group EBITDA exceeds seventy
percent (70%) of its Projections and the Dynamic Group EBITDA fails
to exceed seventy percent (70%) of its Projections, the Escrow
Agent will release all of the Escrow Stock to the Original ACS2
Stockholders. In addition, Dynamic will issue pro rata to the
Original ACS2 Stockholders an additional 4,180,000 shares of
Dynamic Common Stock.
(iii) If the Dynamic Group EBITDA exceeds
seventy percent (70%) of its Projections and the ACS2 Group EBITDA
fails to exceed seventy percent (70%) of its Projections, the
Escrow Agent will release the Escrow Stock to Dynamic and such
shares shall be returned to treasury.
3. Settlement of Disputes.
(a) If one or more Original ACS2 Stockholders provide
written notice in accordance with Section 2(c) of this Agreement of
a dispute, the question of whether the claim is valid shall be
conclusively determined by a single arbitrator which Dynamic and
the disputing stockholder(s) shall jointly and in good faith
attempt to select. If such parties are unable to agree on a single
arbitrator, then such determination shall be made by three
arbitrators, one arbitrator being selected by Dynamic, one
arbitrator being selected by the disputing stockholder(s) and the
third being selected by the two arbitrators so selected. If the
first two (2) arbitrators are unable to agree on the selection of
the third arbitrator, the third arbitrator shall be designated by
the American
<PAGE 165>
3
Arbitration Association. The rules of such Association shall
govern the conduct of any such arbitration proceeding, except as
may otherwise be specifically provided in this Agreement. If either
party, thirty (30) days after written notification of any demand for
arbitration hereunder, shall not have so selected its arbitrator and
given written notice thereof to the other party, such arbitrator
shall be selected by the American Arbitration Association at the
request of any party to this Agreement.
(b) The meetings of the arbitrators shall be held in
Nashville, Tennessee, or at such other place or places as may be
agreed upon by the arbitrators. All determinations made by the
arbitrator(s) shall be by majority vote and shall be final,
conclusive, and binding on the parties hereto and the parties agree
to the entry of judgment in any court of competent jurisdiction
based on the award of the arbitrator(s). Notice of any such
determination shall forthwith be given to the disputing party(ies)
and Escrow Agent. Escrow Agent shall, upon receipt of such notice,
release the Escrow Stock to the appropriate party(ies). Dynamic,
on the one hand, and the disputing stockholder(s), on the other
hand, shall each pay one-half of the fees and expenses of such
arbitration, unless the arbitrator(s) shall expressly determine to
the contrary.
(c) Any award of the arbitrator(s) will be limited to a
direction as to the release of the Escrow Stock and the issuance by
Dynamic of the additional shares of Dynamic Common Stock pursuant
to Section 2(c)(ii), along with any order as to costs which the
arbitrator(s) deem appropriate.
4. Other Payments. Notwithstanding anything in this Escrow
Agreement to the contrary, Escrow Agent shall make payments of any
or all Escrow Stock in accordance with the terms of any written
instructions which it may receive which have been executed by each
of the Dynamic and all of the Original ACS2 Stockholders.
5. Rights as Stockholders. So long as Escrow Stock remains
in escrow the Original ACS2 Stockholders may vote those shares of
Dynamic Common Stock held in escrow pursuant to the allocation set
forth in Exhibit 1, but shall have no other rights as stockholders
of Dynamic with respect to such shares.
6. Resignation or Substitution of Escrow Agent. Escrow
Agent may resign and be discharged of its duties hereunder at any
time by giving notice of such resignation to the LLC, Dynamic and
all of the Original ACS2 Stockholders, which notice will specify a
date not less than thirty (30) days after the giving of such notice
when the resignation will take effect. Promptly after such notice,
a successor escrow agent will be appointed by Dynamic. The
successor escrow agent will become Escrow Agent upon the
resignation date specified in the notice. Escrow Agent will
continue to serve until its successor accepts the escrow and
receives the Escrow Stock or until Escrow Agent interpleads the
same into the registry of the District Court of Davidson County,
Tennessee.
<PAGE 166>
4
7. Liability of Escrow Agent.
(a) Upon disbursement of all Escrow Stock held in escrow
in accordance with the terms of this Agreement, Escrow Agent will
be released and discharged without further obligation under this
Agreement. Escrow Agent has no duties other than to hold and
release the Escrow Stock as contemplated hereunder. This Agreement
sets forth exclusively the duties of Escrow Agent in its capacity
as such and no implied duties or obligations will be read into this
Agreement against it. Escrow Agent will have no liability
hereunder except for acts of gross negligence, willful misconduct
or fraud. Escrow Agent shall not be responsible or liable in any
manner whatsoever with respect to any liability or obligation of
Dynamic, ACS2, Advanced, Advanced-Dynamic, LLC or any Original ACS2
Stockholder.
(b) Escrow Agent will be under no obligation to
institute or defend any action, suit or legal proceeding in
connection with this Agreement or to take any other action likely
to involve it in expense unless first indemnified to its
satisfaction. In the event that a dispute arises, Escrow Agent may
bring an interpleader action in the District Court of Davidson
County, Tennessee naming the LLC, Dynamic and the Original ACS2
Stockholder(s) as parties.
(c) Escrow Agent shall be protected in acting in
reliance upon any instrument or signature or telephonic
communication believed to be genuine and may assume that any person
purporting to give any notice, advice or instruction in connection
with the provisions hereof has been duly authorized to do so.
Escrow Agent shall be protected in acting upon advice of counsel in
reference to any matter connected herewith.
(d) Escrow Agent shall not be liable for any error of
judgement, or for any act done or steps taken or omitted by it in
good faith or for any mistake of fact or law, or for anything which
it may do or refrain from doing in connection herewith, except its
own gross negligence, willful misconduct or fraud.
8. Representation. Dynamic, ACS2, Advanced and each of the
Original ACS2 Stockholders hereby acknowledge and agree that Escrow
Agent has also acted as legal counsel to ACS2 and Advanced in
connection with the negotiations of this Agreement, the Merger
Agreement and other agreements and matters related thereto.
Dynamic, for itself and on behalf of its affiliates, and each of
the Original ACS2 Stockholders hereby agree that Escrow Agent may
represent ACS2 and/or Advanced as its legal counsel in connection
with any dispute arising between or among the parties, including
disputes that may involve the rights or obligations of ACS2 and/or
Advanced under this Agreement, the Merger Agreement or any related
agreement or matters.
9. Indemnification of Escrow Agent.
(a) The Escrow Agent shall have no duties or
responsibilities whatsoever with respect to the Escrow Stock except
as are specifically set forth herein. The Escrow Agent shall
neither be responsible for or under, nor chargeable with knowledge
of the terms and conditions of, any other agreement, instrument or
document in connection herewith. The Escrow Agent may conclusively
rely upon, and shall be fully protected from all liability, loss,
cost, damage or expense
<PAGE 167>
5
in acting or omitting to act pursuant to any written notice,
instrument, request, consent, certificate, document, letter,
telegram, opinion, order, resolution or other writing hereunder
without being required to determine the authenticity of such
document, the correctness of any fact stated therein, the propriety
of the service thereof or the capacity, identity or authority of
any party purporting to sign or deliver such document. The Escrow
Agent shall have no responsibility for the contents of any such
writing contemplated herein and may rely without any liability upon
the contents thereof.
(b) The Escrow Agent shall not be liable for any action
taken or omitted by it in good faith and reasonably believed by it
to be authorized hereby or with the rights or powers conferred upon
it hereunder, nor for action taken or omitted by it in good faith,
and in accordance with advice of counsel (which counsel may be of
the Escrow Agent's own choosing), and shall not be liable for any
mistake of fact or error of judgment or for any acts or omissions
of any kind except for its own willful misconduct, gross negligence
or fraud.
(c) All other parties hereto agree to jointly and
severally indemnify the Escrow Agent and its employees, directors,
agents and advisors and hold each harmless against any and all
liabilities incurred by it hereunder as a consequence of such
party's action, and all other parties hereto agree jointly and
severally to indemnify the Escrow Agent and hold it harmless
against any claims, costs, payments, and expenses (including the
fees and expenses of counsel) and all liabilities incurred by it in
connection with the performance of its duties hereunder and them
hereunder, except in either case for claims, costs, payments and
expenses (including the fees and expenses of counsel) and
liabilities incurred by the Escrow Agent resulting from its own
willful misconduct, gross negligence or fraud.
10. Notices. All notices and other communications required
or permitted to be given under this Agreement shall be in writing
and shall be deemed to be duly given: (a) if delivered personally
or sent by facsimile, on the date received; (b) if delivered by
overnight courier on the day after mailing so long as the sending
party retains a receipt thereof; and (c) if mailed, then three (3)
days after mailing with the United States mail service, postage
pre-paid. Any such notices or communications shall be sent to the
parties at the addresses listed below or at such other addresses as
a party may specify by notice to the other parties to this
Agreement, which notice will be accomplished in accordance with the
terms of this paragraph 10.
11. Miscellaneous. All capitalized terms not otherwise
defined in this Agreement will have the respective meanings set
forth in the Merger Agreement. This Agreement will inure to the
benefit of, and will be binding upon, the parties hereto and may
not be assigned by any party without the prior written consent of
all other parties, and any prohibited assignment shall be null and
void. The headings used in this Agreement have been inserted for
convenience only and will not control or affect the meaning of any
provision of this Agreement. The provisions of this Agreement have
been subject to negotiation, and will not be construed against its
drafter. This Agreement, together with the Merger Agreement and
the exhibits hereto, constitutes the entire agreement among the
parties with respect to the subject matter hereof. No change in,
addition to or waiver or amendment of the terms or conditions of
this Agreement will be binding upon any of the parties unless
approved in writing by such parties. This Agreement may be
executed in any number of counterparts, each of which will be
deemed an original and all of which together will be deemed one and
the same instrument. This Agreement will be governed by and
construed in accordance with the substantive laws of the State of
Tennessee, without giving effect to its conflicts of laws
provisions.
<PAGE 168>
6
IN WITNESS WHEREOF, the parties have executed this Escrow
Agreement as of the date set forth above.
ACS2:
ACS2, Inc.
By:
Title:
49 Music Square West, Suite 502
Nashville, Tennessee 37203-3272
DYNAMIC:
DYNAMIC ASSOCIATES, INC.
By:
Title:
7373 N. Scottsdale,
Suite B-169
Scottsdale, AZ 85253
ADVANCED:
ADVANCED CLINICAL SYSTEMS, INC.
By:
Title:
49 Music Square West, Suite 502
Nashville, Tennessee 37203-3272
ORIGINAL ACS2 STOCKHOLDERS:
Healthmark Partners, LLC
By:
Title:
Kevin D. Lee
James T. Harper
Lisa A. Manning
David Alfery
T.C. Thomas, III, M.D.
Thomas P. Tooney, M.D.
<Page 169>
7
ESCROW AGENT:
HARWELL HOWARD HYNE GABBERT &
MANNER, P.C.
By:
Title:
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238
Kimberly Tipton
Scott N. Mohler
Reginal J. Rutherford
Walter M. Jones
Carol Ann Kelley
Maureen T. (Stearns) Browning
Elizabeth Dan
Betty Brumley
F. Karl VanDevender
H. Brooks Morgan
M. Bruce Sanderson
NationsCredit
By:
Title:
<Page 170>
8
EXHIBIT 1
Number of Shares
Original ACS2 Stockholders of Escrow Stock
Andrew W. Miller
James T. Harper
Kevin D. Lee
David Alfery
T.C. Thomas, III, M.D.
Thomas P. Tooney, M.D.
Lisa A. Manning
Kimberly Tipton
Scott N. Mohler, Ph.D
Reginal J. Rutherford, M.D.
Walter M. Jones
Carol Ann Kelley, R.N.
M. Bruce Sanderson, M.D.
H. Brooks Morgan, M.D.
Maureen T. (Stearns) Browning, R.N.
F. Karl VanDevender, M.D.
Elizabeth Dan
Betty Brumley
<PAGE 171>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, effective ______________, 1999, is
between DYNAMIC ASSOCIATES, INC., a Nevada corporation
("Employer"), and KEVIN D. LEE ("Employee").
W I T N E S S E T H:
WHEREAS, Employer and Employee want to enter into an agreement
providing for the continued employment of Employee as an executive
of Employer;
NOW, THEREFORE, in consideration of the premises and the
covenants contained herein, Employer and Employee agree as follows:
1. Employment of Employee.
(a) Subject to the terms and conditions hereof, Employer
hereby employs Employee as President of Employer, to
perform the services set forth in Section l(b) below for
a term of approximately three (3) years, commencing with
the date hereof and ending on June 30, 2002. Employee
hereby accepts such employment an agrees to serve
Employers as President for such period.
(b) Employee will perform the general duties of managing the
day-to-day operations of Employer, including leading the
development and implementation of its operating systems,
coordinating and leading its new business development
activities, leading its business planning and budgeting
activities, and other duties and responsibilities
reasonably and customarily required of a president of a
business enterprise. Employee shall report to and be
under the supervision of the board of directors of
Employer.
2. Salary. Employer shall pay to Employee as compensation
for the services to be performed hereunder a salary at a rate of
One Hundred Fifty Thousand and No/100 Dollars ($150,000.00) per
annum, payable in installments in accordance with the prevailing
payroll practices of Employer.
3. Bonus Payments and Stock Option Grant.
(a) For the period that Employee is employed by Employer
hereunder, Employer shall pay or cause to be paid to
Employee as incentive compensation a potential cash bonus
payable within seventy-five (75) days after each fiscal
year ending June 30. Such potential cash bonus shall be
determined in accordance with the following description
and shall not exceed a total amount of One Hundred
Thousand and No/100 Dollars ($100,000.00) per year.
<Page 172>
(b) If Employer's consolidated earnings before interest
expense, taxes, depreciation and amortization ("EBITDA"),
based on independent audit results, equals or exceeds the
threshold EBITDA amount for each year, as stipulated
below, then a bonus of $100,000.00 shall be paid. If less
than the EBITDA threshold but a minimum of 80% of the
EBITDA threshold amount is earned, then the $100,000.00
potential bonus shall be multiplied by the actual
percentage of threshold EBITDA achieved. Also, the
potential bonus amounts for Employee shall not be
considered when calculating Employer's annual EBITDA.
(c) The EBITDA threshold amounts for each fiscal year of
Employer for purposes of this Agreement shall be as
follows:
Year 1 (ending June 30, 2000) $4,000,000
Year 2 (ending June 30, 2001) $4,600,000
Year 3 (ending June 30, 2002) $5,290,000
4. Employee Benefits. Employee shall be entitled during the
period that he is employed hereunder to participate in all regular
employee benefit plans maintained by Employer, including without
limitation, any group life insurance, group medical insurance and
long term disability insurance programs.
5. Stock Option. Employer will grant Employee as of the
date hereof an option to purchase 1,000,000 shares of Dynamic
Common Stock pursuant to Employer's 1997 Non-Statutory Stock Option
Plan. The per-share exercise price of the option shall equal the
average, per-share closing bid and asked price of Dynamic Common
Stock for the eleven (11)-day period beginning five (5) days prior
to the grant date and ending five (5) days after the grant date.
The option will vest with respect to one-third (1/3) of the shares
upon execution of this Agreement, with respect to one-third (1/3)
of the shares upon the first (1st) anniversary of the execution of
this Agreement, and with respect to the remaining one-third (1/3)
of the shares upon the second (2nd) anniversary of the execution of
this Agreement.
6. Confidentiality. Employee acknowledges that all
information possessed by him relating to those activities of
Employer which are of a secret or confidential nature is the
property of Employer, and Employee shall not, during the period
that he is employed by Employer and for one year thereafter, use
any such information for the benefit of others than Employer, or
any corporation directly or indirectly controlled by it, or
disclose any such information to others except in the course of the
business of Employer, or any corporation directly or indirectly
controlled by it. Such restricted information includes all of
Employer's documented operating systems, software and written
material.
7. Noncompete and Hiring Restrictions.
(a) Upon termination of this Agreement for any reason,
provided that, if required by the terms of this
Agreement, the Employer has made the payment to Employee
as specified in Section 11 below, then for one year after
termination of this Agreement,
2
<Page 173>
Employee shall not compete with Employer within twenty (20)
miles of any of Employer's operating units by directly or
indirectly managing, consulting with, being an owner or any
form of partner with any entity that provided mental health
services or pain management services similar to those
services with which Employer is affiliated or associated
and will not solicit the business of or contact for the
purposes of soliciting the business of any of the
Employer's operating units, customers or clients.
Employer's operating units shall include those in
operation, in development or already solicited by
Employer without a negative response at the date of
Employee's termination.
(b) Upon termination of this Agreement for any reason,
provided that, if required by the terms of this
Agreement, the Employer has made the payment to Employee
as specified in Section 11 below, then for one year after
termination of this Agreement for any reason, Employee
shall not directly or indirectly solicit the employment
of, or contractual services of, or employ or contract
with in any matter any individual who has been employed
or contracted in anyway by or with Employer at any time
during the term of this Agreement with Employer.
8. Reimbursement of Expenses. During the period that
Employee is employed hereunder, Employer shall provide for payment
of or reimbursement of Employee for all travel and other out-of-
pocket expenses reasonably incurred by Employee in the performance
of his duties hereunder. Employee will provide a written record of
his expenses.
9. Obligation to Perform Duties. The obligations of
Employer hereunder, including its obligation as to the payment of
the compensation provided for herein, shall be contingent upon the
performance by Employee of his obligations hereunder.
10. Termination of Employment.
Employee's employment hereunder:
(a) Shall terminate forthwith upon the death of Employee.
(b) May be terminated immediately by Employer for cause which
shall include any of the following reasons:
(1) if Employee shall engage in any material misconduct
or neglect of duties or otherwise fails to act in a
way which materially and adversely affects the
business or affairs of Employer; or
(2) if Employee shall (i) be convicted of a felony or
(ii) commit an act of dishonestly, fraud or
embezzlement against Employer.
(c) May be terminated by Employer at any time if Employee
shall become ill or be injured or otherwise incapacitated
and such illness, injury, or incapacity shall be of
3
<Page 174>
such nature as to prevent him from performing the duties to be
performed by him hereunder and shall continue for a
period of six (6) consecutive months.
(d) May be terminated by Employer without cause without
written notice, subject to the payments being made to
Employee on the effective termination date as described
in Section 11 below and the option described in Section
5 shall remain exercisable for its full five (5) year
term.
(e) May be terminated by Employee upon thirty (30) days'
advance written notice.
11. Payments After Termination. In the event Employee's
employment hereunder terminates pursuant to Section 10(a), 10(c) or
10(e), Employee (or his heirs, executors, or administrators in the
event of termination by reason of death of Employee) shall be
entitled to receive (a) the salary payable to Employee under
Section 2 prorated to the close of the month in which such
termination occurs, plus (b) any unreimbursed expenses, plus (c) a
cash payment equal to the cash bonus paid to Employee for
performance during the most recently completed fiscal year of
Employer multiplied by a fraction, the numeration of which is the
number of months in the current fiscal year during which Employee
was employed hereunder (including the month in which termination of
employment occurs) and the denominator of which is twelve (12). In
the event Employee's employment hereunder terminates pursuant to
Section 10(b), Employee (or his heirs, executors, or administrators
in the event of termination by reason of death of Employee) shall
be entitled to receive (a) the salary payable to Employee under
Section 2 prorated to the close of the month in which such
termination occurs, plus (b) any unreimbursed expenses. In the
event Employee's employment hereunder is terminated pursuant to
Section 10(d), Employer shall pay Employee $150,000.00 plus the
total potential cash bonus amount of $100,000.00 as provided for in
Section 3 so long as Employee has complied with the restrictions
set forth in Sections 6 and 7. In addition, the option mentioned
in Section 5 shall remain exercisable for its full five (5) year
term.
12. Severability. If any one or more of the covenants or
agreements provided in this Agreement should be determined by a
court or competent jurisdiction to be contrary to law, such
covenant or agreement shall be deemed and construed to be severable
from the remaining covenants and agreement herein contained and
shall in no way affect the validity of the remaining provisions of
this Agreement.
13. Notices. Any notice or communication provided for herein
and contemplated hereby shall be sufficiently given if given in
writing and delivered by certified mail, return receipt requested,
and addressed to Employer at Suite B-169, 7373 N. Scottsdale,
Scottsdale, Arizona 85253, and to Employee at 9102 Heritage Drive,
Brentwood, Tennessee 37027, or in either case to a new address
specified by notice given as provided in this Section 13.
14. Binding Agreement. This Agreement shall be governed by
and construed in accordance with the laws of the State of
Tennessee, without giving effect to its conflicts of laws
provisions.
4
<Page 175>
IN WITNESS WHEREOF, Employer and Employee have executed this
Employment Agreement as of the date first above written.
DYNAMIC ASSOCIATES, INC.
By: Date: March 25, 1999
Title:______________________________
____________________________________ Date: March 25, 1999
KEVIN D. LEE
5
<Page 176>
THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE
OF THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH THE SALE OR
DISTRIBUTION THEREOF. NO SALE, TRANSFER OR DISTRIBUTION MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING
THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED.
NON-STATUTORY OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT made as of the ___ day
of ________________, 1999, by and between DYNAMIC ASSOCIATES, INC.,
a Nevada corporation (hereinafter called "Company"), and KEVIN D.
LEE (hereinafter called "Optionee").
R E C I T A L S
A. The Board of Directors of the Company has adopted the
Company's 1997 Incentive Stock Option Plan (the "Plan") for the
purpose of attracting and retaining the services of selected key
employees (including officers and employee directors) who
contribute to the financial success of the Company or its parent or
subsidiary corporations.
B. Optionee is an eligible person, and this Agreement is
executed pursuant to, and is intended to carry out the purposes of,
the Plan in connection with the Company's grant of a stock option
to the Optionee.
C. The granted option is not intended to be an incentive
stock option ("Incentive Option") within the meaning of Section 422
of the Internal Revenue Code.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. Subject to and upon the terms and
conditions set forth in this Agreement, there is hereby granted to
Optionee, as of the date of this Agreement (the "Grant Date"), a
stock option to purchase up to 1,000,000 shares of the Company's
Common Stock (the "Optioned Shares") from time to time during the
option term at the option price of $_______ per share.
2. Plan. The options granted hereunder are in all instances
subject to the terms and conditions of the Plan. In the event of
any conflict between this Agreement and the Plan, the provisions of
the Plan shall control, except as expressly noted herein to the
contrary. Optionee acknowledges receipt of a copy of the Plan and
hereby accepts this option subject to all of the terms and
conditions of the Plan. Optionee agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board
upon any questions arising under the Plan.
<PAGE 177>
3. Option Term. This option shall have a maximum term of
five (5) years measured from the Grant Date and shall accordingly
expire at the close of business on ________, 2004 (the "Expiration
Date"), unless sooner terminated in accordance with Paragraph 6 or
Paragraph 8(a).
4. Option Nontransferable; Exception. This option shall be
neither transferable nor assignable by Optionee, either voluntarily
or involuntarily, other than by will or by the laws of descent and
distribution and may be exercised, during Optionee's lifetime, only
by Optionee.
5. Dates of Exercise. The option will vest and become
exercisable with respect to one-third (1/3) of the Optioned Shares
upon the execution of that certain Employment Agreement between
Dynamic Associates, Inc. and Kevin D. Lee (the "Employment
Agreement"); with respect to one-third (1/3) of the Optioned Shares
upon the first (1st) anniversary of execution of the Employment
Agreement; and with respect to the remaining one-third (1/3) of the
Optioned Shares upon the second (2nd) anniversary of execution of
the Employment Agreement. Once exercisable, options shall remain
so exercisable until the expiration or sooner termination of the
option term under Paragraphs 6 or 8(a) of this Agreement. In no
event, however, shall this option be exercisable for any fractional
shares.
6. Accelerated Termination of Option Term. The option term
specified in Paragraph 3 shall terminate (and this option shall
cease to be exercisable) prior to the Expiration Date should one of
the following provisions become applicable:
(a) Except as otherwise provided in subparagraphs (b),
(c) or (d) below, should Optionee cease to be an Employee of the
Company at any time during the option term, then the period for
exercising this option shall be reduced to a three (3) month period
commencing with the date of such cessation of Employee status, but
in no event shall this option be exercisable at any time after the
Expiration Date. Upon the expiration of such three (3) month period
or (if earlier) upon the Expiration Date, this option shall
terminate and cease to be outstanding.
(b) Should Optionee die while this option is
outstanding, then the executors or administrators of Optionee's
estate or Optionee's heirs or legatees (as the case may be) shall
have the right to exercise this option for the number of shares (if
any) for which the option is exercisable on the date of the
optionee's death. Such right shall lapse and this option shall
cease to be exercisable upon the earlier of (i) six (6) months from
the date of the optionee's death or (ii) the Expiration Date.
(c) Should Optionee become permanently disabled and
cease by reason thereof to be an Employee of the Company at any
time during the option term, then Optionee shall have a period of
six (6) months (commencing with the date of such cessation of
Employee status) during which to exercise this option; provided,
however, that in no event shall this option be exercisable at any
time after the Expiration Date. Optionee shall be deemed to be
permanently disabled if Optionee is, by reason of any medically
determinable physical or mental impairment expected to result in
death or to be of continuous duration of not less than twelve (12)
months, unable to perform his usual duties for the Company or its
Parent or Subsidiary corporations. Upon the expiration of the
limited period of exercisability or (if earlier) upon the
Expiration Date, this option shall terminate and cease to be
outstanding.
2
<PAGE 178>
(d) Should Optionee's status as an Employee be
terminated for cause (as defined in his Employment Agreement of
even date herewith, as such agreement may be amended or superceded
from time to time) or should Optionee make or attempt to make any
unauthorized use or disclosure of the confidential information or
trade secrets of the Company or any parent or subsidiary
corporations, then in any such event this option shall terminate
and cease to be exercisable immediately upon such termination of
Employee status or such unauthorized disclosure or use of
confidential or secret information or attempt thereat.
(e) For purposes of this Paragraph 6 and for all other
purposes under this Agreement, Optionee shall be deemed to be an
Employee of the Company and to continue in the Company's employ for
so long as Optionee remains an Employee of the Company or one or
more of its parent or subsidiary corporations as such terms are
defined in the Plan.
7. Adjustment in Option Shares.
(a) In the event any change is made to the Common Stock
issuable under the Plan by reason of any stock split, stock
dividend, combination of shares, or other change affecting the
outstanding Common Stock as a class without receipt of
consideration (as set forth in the Plan), then appropriate
adjustments will be made to (i) the total number of Optioned Shares
subject to this option and (ii) the option price payable per share
in order to reflect such change and thereby preclude a dilution or
enlargement of benefits hereunder.
(b) If the Company is the surviving entity in any merger
or other business combination, then this option, if outstanding
under the Plan immediately after such merger or other business
combination shall be appropriately adjusted to apply and pertain to
the number and class of securities to which Optionee immediately
prior to such merger of other business combination would have been
entitled to receive in the consummation of such merger or other
business combination.
8. Special Termination of Option.
(a) In the event of one or more of the following
transactions (a "Corporate Transaction"):
(i) a merger or acquisition in which the Company
is not the surviving entity, except for a transaction the principal
purpose of which is to change the State of the Company's
incorporation;
(ii) the sale, transfer or other disposition of all
or substantially all of the assets of the Company; or
(iii) any other corporate reorganization or
business combination in which fifty percent (50%) or more of the
Company's outstanding voting stock is transferred, or exchanged
through merger, to different holders in a single transaction or a
series of related transactions; then this option shall terminate
upon the consummation of such Corporate Transaction and cease to be
exercisable, unless it is expressly assumed by the successor
corporation or parent thereof. The Company can give no assurance
that the options shall be assumed and shall provide Optionee with
3
<PAGE 179>
at least thirty (30) days prior written notice of the specified
date for the triggering event, and it may occur that some options
outstanding under the Plan will be assumed while these options are
terminated.
(b) In the event of a Corporate Transaction, the Company
may, at its option, accelerate the vesting schedule contained in
Section 5 hereof, but shall have no obligation to do so. The
Company shall have the right to accelerate other options
outstanding under the Plan or any other plan, even if it does not
accelerate the options of Optionee hereunder.
(c) This Agreement shall not in any way affect the right
of the Company to make changes in its capital or business structure
or to merge, consolidate, dissolve, liquidate or sell or transfer
all or any part of its business or assets.
9. Privilege of Stock Ownership. The holder of this option
shall not have any of the rights of a shareholder with respect to
the Optioned Shares until such individual shall have exercised the
option and paid the option price in accordance with this Agreement.
10. Manner of Exercising Option.
(a) In order to exercise this option with respect to all
or any part of the Optioned Shares for which this option is at the
time exercisable, Optionee (or in the case of exercise after
Optionee's death, Optionee's executor, administrator, heir or
legatee, as the case may be) must pay the aggregate option price
for the purchased shares in cash or such other form of
consideration as permitted under the Plan.
(b) This option shall be deemed to have been exercised
with respect to the number of Optioned Shares specified by Optionee
at such time as the Optionee shall have been delivered appropriate
consideration to the Company therefor. As soon thereafter as
practical, the Company shall mail or deliver to Optionee or to the
other person or persons exercising this option a certificate or
certificates representing the shares so purchased and paid for.
11. Compliance with Laws and Regulations.
(a) The exercise of this option and the issuance of
Optioned Shares upon such exercise shall be subject to compliance
by the Company and Optionee with all applicable requirements of law
relating thereto and with all applicable regulations of any stock
exchange on which shares of the Company's Common Stock may be
listed at the time of such exercise and issuance.
(b) In connection with the exercise of this option,
Optionee shall execute and deliver to the Company such
representations in writing as may be requested by the Company in
order for it to comply with the applicable requirements of federal
and state securities laws.
12. Successors and Assigns. Except to the extent otherwise
provided herein, the provisions of this Agreement shall insure to
the benefit of; and be binding upon, the successors,
administrators, heirs, legal representatives and assigns of
Optionee and the successors and assigns of the Company.
4
<PAGE 180>
13. Liability of Company.
(a) If the Optioned Shares covered by this Agreement
exceed, as of the Grant Date, the number of shares of Common Stock
which may without shareholder approval be issued under the Plan,
then this option shall be void with respect to such excess shares
unless shareholder approval of an amendment sufficiently increasing
the number of shares of Common Stock issuable under the Plan is
obtained in accordance with the provisions of Section 18 of the
Plan.
(b) The inability of the Company to obtain approval from
any regulatory body having authority deemed by the Company to be
necessary to the lawful issuance and sale of any Common Stock
pursuant to this option without the imposition of requirements
unacceptable to the Company in its reasonable discretion shall
relieve the Company of any liability with respect to the non-
issuance or sale of the Common Stock as to which such approval
shall not have been obtained. The Company, however, shall use its
best efforts to obtain all such approvals.
14. No Employment Contract. Except to the extent the terms
of any written employment contract between the Company and Optionee
may expressly provide otherwise, the Company (or any parent or
subsidiary corporation of the Company employing Optionee) shall be
under no obligation to continue the employment of Optionee for any
period of specific duration and may terminate Optionee's status as
an Employee at any time, with or without cause.
15. Notices. Any notice required to be given or delivered to
the Company under the terms of this Agreement shall be in writing
and addressed to the Company in care of its Secretary at its
corporate offices. Any notice required to be given or delivered to
Optionee shall be in writing and addressed to Optionee at the
address indicated below Optionee's signature line on this
Agreement. All notices shall be deemed to have been given or
delivered upon personal delivery or upon deposit in the U.S. mail,
postage prepaid and properly addressed to the party to be notified.
16. Loans or Guarantees. The Company may, in its absolute
discretion and without any obligation to do so, assist Optionee in
the exercise of this option by (i) authorizing the extension of a
loan to Optionee from the Company, (ii) permitting Optionee to pay
the option price for the purchased Common Stock in installments
over a period of years, or (iii) authorizing a guarantee by the
Company of a third party loan to Optionee. The terms of any loan,
installment method of payment or guarantee (including the interest
rate, the collateral requirements and terms of repayment) shall be
established by the Company in its sole discretion.
17. Construction. This Agreement and the option evidenced
hereby are made and granted pursuant to the Plan and are in all
respects limited by and subject to the Plan. All decisions of the
Company with respect to any question or issue arising under the
Plan or this Agreement shall be conclusive and binding on all
persons having an interest in this option.
18. Governing Law. The interpretation, performance, and
enforcement of this Agreement shall be governed by the laws of the
State of Nevada.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed in duplicate on its behalf by its duly authorized
officer and Optionee has also executed this Agreement in duplicate,
all as of the day and year indicated above.
5
<PAGE 181>
DYNAMIC ASSOCIATES, INC.,
a Nevada corporation
By: ________________________________
Title: ________________________________
_________________________________________
KEVIN D. LEE, Optionee
Address: _______________________________
_______________________________
6
<Page 182>
ADVANCED CLINICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE 183>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Advanced Clinical Systems, Inc.:
We have audited the accompanying consolidated balance sheets
of ADVANCED CLINICAL SYSTEMS, INC. (a Delaware corporation)
and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of income, shareholders'
equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements are free
of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall consolidated 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 Advanced Clinical Systems, Inc.
and subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for the
years then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Nashville, Tennessee
August 12, 1998
<PAGE 184>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
ASSETS 1998 1997
- ------------------------------- ---------- ----------
CURRENT ASSETS:
Cash $ 567,683 $ 412,986
Trade receivables, net of
allowance for doubtful
accounts of $499,745 and
$509,708, respectively 2,316,724 2,128,141
Other receivables, net 19,889 74,387
Income taxes receivable 250,000 -
Prepaid expenses and other
current assets 43,574 31,273
Deferred tax asset 303,286 345,889
---------- ----------
Total current assets 3,501,156 2,992,676
---------- ----------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation 317,639 487,573
OTHER ASSETS:
Excess of cost over fair value
of net assets acquired, net
of accumulated amortization 386,105 443,515
Start-up costs, net of
accumulated amortization 39,455 166,159
Loan costs, net of accumulated
Amortization 125,095 -
Deferred tax asset 334,905 193,638
Other assets 29,836 29,102
---------- ----------
Total assets $4,734,191 $4,312,663
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Line of credit $ 500,000 $ -
Current portion of notes
Payable 246,105 -
Current portion of capital
lease obligations 24,266 53,048
Accounts payable 351,859 369,785
Accrued salaries and benefits 439,768 512,233
Other accrued expenses 39,668 105,744
Income taxes payable - 245,484
---------- ----------
Total current liabilities 1,601,666 1,286,294
---------- ----------
NON-CURRENT LIABILITIES:
Notes payable, net of current
portion 5,218,735 -
Notes payable to shareholders - 610,000
Interest payable to shareholders - 389,805
Capital lease obligations, net of
current portion 18,707 42,505
Other long-term obligations 80,000 -
---------- ----------
Total noncurrent
Liabilities 5,317,442 1,042,310
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock - $.01 par
value; 10,000,000 shares
authorized; 4,202,370
and 2,869,666 shares
issued, respectively 42,024 28,697
Additional paid-in capital,
net of deferred compensation
of $0 and $21,972,
respectively 2,330,189 1,261,223
Retained earnings 1,392,365 694,139
Treasury stock, at cost (5,949,495) -
---------- ----------
Total shareholders'
equity (2,184,917) 1,984,059
---------- ----------
Total liabilities and
shareholders' equity $ 4,734,191 $ 4,312,663
---------- ----------
The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.
<PAGE 185>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997
---------- ----------
NET REVENUES $ 12,925,752 $ 11,928,867
OPERATING EXPENSES:
Salaries and benefits 7,241,373 7,411,124
Other operating expenses 3,588,232 3,245,681
Depreciation and amortization 410,819 534,695
Litigation settlement 283,325 -
---------- ----------
Total operating expenses 11,523,749 11,191,500
---------- ----------
OTHER REVENUES (EXPENSES):
Interest expense (209,911) (145,819)
Investment income 18,297 57,329
Other 9,662 1,278
---------- ----------
Total other expense (181,952) (87,212)
---------- ----------
INCOME BEFORE TAXES 1,220,051 650,155
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 620,489 441,317
Deferred (98,664) (428,355)
---------- ----------
521,825 12,962
---------- ----------
NET INCOME $ 698,226 $ 637,193
---------- ----------
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
<PAGE 186>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Common Stock Treasury Stock Paid-in Retained
<S><C> <C>Shares <C>Amount <C>Shares <C>Amount<C>Capital<C>Earnings<C>Total
---------- --------- --------- --------- --------- ---------- --------
BALANCE
AT JUNE 30,
1996 2,868,666 $28,687 - - $1,237,640 $56,946 1,323,273
Exercise of
options 1,000 10 - - 1,490 - 1,500
Amortization
of deferred
compensation - - - - 22,093 - 22,093
Net income - - - - - 637,193 637,193
BALANCE
AT JUNE 30,
1997 2,869,666 28,697 - - 1,261,223 694,139 1,984,059
Conversion of
convertible notes
payable 1,332,030 13,320 - - 1,045,990 - 1,059,310
Purchase of
treasury
shares - - 2,902,253 (5,949,495) - - (5,949,495)
Exercise of
options 674 7 - - 1,004 - 1,011
Amortization
of deferred
compensation - - - - 21,972 - 21,972
Net income - - - - - 698,226 698,226
BALANCE
AT JUNE 30,
--------- ------ --------- ----------- --------- --------- -----------
1998 4,202,370 42,024 2,902,253 (5,949,495) 2,330,189 1,392,365(2,184,917)
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
<PAGE 187>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
(Increase (Decrease) in Cash)
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 698,226 $ 637,193
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 410,819 534,695
Deferred income taxes (98,664) (428,355)
Amortization of deferred
Compensation 21,972 22,093
Changes in assets and
liabilities, net of effect
of acquisition:
Trade receivables, net (188,583) (91,637)
Other receivables, net 54,498 125,895
Prepaid expenses and other
current assets (262,301) 171,344
Accounts payable (17,926) (130,037)
Accrued expenses (244,520) 392,572
---------- ----------
Net cash provided by
operating activities 373,521 1,233,763
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment,
Net (50,194) (143,469)
Other (734) (85,534)
---------- ----------
Net cash used in investing
Activities (50,928) (229,003)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of
Payments 5,464,840 -
Proceeds from line of credit 500,000 -
Payment of loan costs (131,672) -
Payment on line of credit - (765,000)
Purchase of treasury stock (5,949,495) -
Payments on capital lease
Obligations (52,580) (28,817)
Other 1,011 1,500
---------- ----------
Net cash used in financing
Activities (167,896) (792,317)
---------- ----------
NET INCREASE IN CASH 154,697 212,443
CASH, at beginning of year 412,986 200,543
---------- ----------
CASH, at end of year $ 567,683 $ 412,986
---------- ----------
(Continued)
<PAGE 188>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
(Increase (Decrease) in Cash)
(Continued)
1998 1997
---------- ----------
SUPPLEMENTAL INFORMATION:
Cash payments of interest
expense $ 150,400 $ 76,358
Cash payments of income taxes $1,129,973 $ 68,040
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of notes payable to
shareholders into common stock $1,059,310 $ -
Liabilities assumed in
Acquisition $ - $ 59,605
Capital lease of equipment $ - $ 58,660
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE 189>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Advanced Clinical Systems, Inc. (the "Company") provides
management services to hospitals and community mental health
centers under long-term contracts for the operation of inpatient
and outpatient clinics dedicated either to the diagnosis and
treatment of individuals suffering with mental health conditions
or chronic pain. The Company also provides practice management
services to physicians and other clinicians in connection with
the Company's programs at those hospitals. At June 30, 1998,
the Company provides mental health management services to
fourteen hospitals and two community mental health centers
through its wholly-owned subsidiary, New Day, Inc., and provides
chronic pain management services to eight hospitals through its
wholly-owned subsidiary, Pain Care, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. As of June 30,
1998, the Company's investment in an unconsolidated partnership
was accounted for using the equity method and the investment is
included in other assets. All intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Approximately 90% and 85% of the Company's net operating
revenues for 1998 and 1997, respectively, consist of management
fees earned from contracts with hospitals and community mental
health centers. Remaining net operating revenues consist
primarily of patient service revenues and management fees earned
from contracts with physician practices.
Provision for Doubtful Accounts
Provision for estimated uncollectible accounts receivable is
included in operating expenses.
<PAGE 190>
-2-
Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the property and equipment. The general range
of estimated useful lives is 3-10 years. Maintenance and
repairs are charged to operations while significant renewals and
replacements are capitalized. When assets are sold or retired,
the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the
consolidated statement of income. The Company uses accelerated
depreciation methods for tax reporting purposes.
Other Assets
The excess of cost over fair value of net assets acquired
("goodwill") is being amortized over 15 years using the
straight-line method. Start-up costs generally include
development fees, salaries and wages, travel and other related
costs incurred with the development of new clinics. These costs
are amortized over 36 months using the straight-line method
beginning when patients are initially served.
Effective April 1, 1997, the Company changed its method of
accounting for start-up costs from capitalizing start-up costs
and amortizing those costs over 36 months to expensing the new
start-up costs as incurred. The change in the method of
accounting for start-up costs resulted in a charge to operations
of $50,625 for the year ended June 30, 1997. Capitalized costs
through March 31, 1997, are being amortized over their remaining
life under the Company's original policy.
In April 1998, the Company incurred $131,672 in loan costs
associated with the financing arrangements described in Note 5.
These costs are being amortized over the life of the related
debt.
The Company evaluates, on a continual basis, the realizability
of intangible assets using measurements of earnings before
amortization, as well as operating cash flows for the respective
operations. The Company considers the effects of external
changes to the Company's business environment, including
competitive pressures, market erosion and technological and
regulatory changes.
Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Certain elements of income and
expense are recognized in different periods for income tax
reporting than for financial reporting. Such differences are
primarily attributable to the Company's use of accelerated
depreciation methods for equipment and timing differences
related to the deduction of bad debt expense and accrued
expenses. See Note 4 for further information related to income
taxes.
<PAGE 191>
-3-
Concentration of Credit Risks
The Company's credit risks relate primarily to cash and trade
receivables. Cash is primarily held in bank accounts with
financial institutions in the southeastern region of the United
States. Trade receivables consist primarily of amounts due from
hospitals, community mental health centers and physician
practices in the southeastern region of the United States. The
Company continually monitors the financial condition and
operations of its clients to determine adequacy of allowances
for doubtful accounts on these receivables. The Company has
risk of accounting losses should uncollectible amounts exceed
current allowances.
Litigation Settlement
In fiscal 1995, the Company was named as a defendant in a
lawsuit in which the plaintiff alleged breach of contract. In
fiscal 1998, the Company settled the suit with the plaintiff for
$283,325, including legal fees of $43,325.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those estimates.
Accounting Developments
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 129, "Disclosure of Information about Capital
Structure." SFAS No. 129 establishes standards for disclosing
information about an entity's capital structure. The statement
was adopted during fiscal year 1998, and the adoption did not
have a material impact on the Company's results of operations,
financial condition or cash flows.
In April 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities." The SOP is effective for fiscal years
beginning after December 15, 1998, and requires entities to
expense costs of start-up activities as incurred. As discussed
in "Other Assets" above, the Company changed its method of
accounting for start-up costs in April 1997. Accordingly,
management does not expect the adoption to have a material
impact on the Company's results of operations, financial
condition or cash flows.
Reclassifications
Certain reclassifications have been made to the 1997
consolidated financial statements in order to conform with the
1998 presentation.
<PAGE 192> -4-
2. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at
June 30, 1998 and 1997:
1998 1997
---------- ----------
Clinic leasehold improvements $ 197,512 $ 197,512
Equipment, furniture and
Fixtures 587,901 738,124
Automobiles 171,301 171,301
---------- ----------
956,714 1,106,937
Less accumulated depreciation (639,075) (619,364)
---------- ----------
$ 317,639 $ 487,573
---------- ----------
3. EMPLOYEE BENEFIT PLAN
The Company has a defined-contribution employee benefit plan
that was established under provisions of section 401(k) of the
Internal Revenue Code. Substantially all full-time regular
employees of the Company and its subsidiaries are eligible to
participate in the plan. Under the plan's provisions, an
employee may contribute, on a tax-deferred basis, up to 15% of
total cash compensation, not to exceed, within a calendar year,
the amount allowable by the Commissioner of Internal Revenue.
Matching contributions and discretionary contributions can be
made by the Company in an amount determined by the Board of
Directors each year. The Company did not make matching or
discretionary contributions for the years ended June 30, 1998 or
1997.
4. INCOME TAXES
The provision (benefit) for income taxes includes the following
components for the years ended June 30, 1998 and 1997:
1998 1997
---------- ----------
Current income taxes
Federal $ 527,415 $ 375,119
State 93,074 66,198
---------- ----------
Total current tax provision 620,489 441,317
---------- ----------
Deferred income taxes
Federal (83,864) (364,102)
State (14,800) (64,253)
---------- ----------
Total deferred tax benefit (98,664) (428,355)
---------- ----------
Total income tax provision $ 521,825 $ 12,962
---------- ----------
<PAGE 193>
-5-
Deferred income taxes reflect the tax effects of differences
between the carrying amounts of assets and liabilities for
financial reporting and income tax purposes. The significant
components of the Company's net deferred tax assets and
liabilities, at the respective tax rates, as of June 30, 1998
and 1997 are as follows:
1998 1997
Non- Non-
Current Current Current Current
--------- --------- --------- -------
Deferred tax assets:
Allowance for
accounts receivable $ 199,898 $ - $ 203,883 $ -
Accrued liabilities 103,388 - 142,006 -
Accelerated
Depreciation - 303,594 - 153,538
Other - 31,311 - 40,100
--------- --------- --------- -------
Total deferred
tax assets $ 303,286 $334,905 $ 345,889 $193,638
--------- --------- --------- --------
In fiscal 1997, the Company eliminated valuation allowances in
the amount of $269,332 applied against deferred tax assets based
upon its tax planning strategies and future income projections.
5. FINANCING ARRANGEMENTS
Effective November 29, 1994, the Company negotiated a revolving
line of credit with a bank which provided for borrowings up to
$1,400,000. Borrowings accrue interest at an adjustable market
rate payable monthly and are secured by a first lien on the
accounts receivable, financial instruments and intangible assets
of the Company. As of June 30, 1997, there were no outstanding
borrowings under this line of credit. The line of credit
expired November 15, 1997. As of that date, there were no
outstanding borrowings under the line of credit.
Effective April 3, 1998, the Company negotiated a new revolving
line of credit with a bank which provides for borrowings up to
$1,200,000. Borrowings accrue interest at an adjustable market
rate (8.78% at June 30, 1998) and are payable monthly. Line of
credit borrowings are secured by liens on certain assets of the
Company. The line of credit expires on March 31, 2004. As of
June 30, 1998, the Company had outstanding borrowings related to
the line of credit of $500,000.
<PAGE 194>
-6-
Effective April 3, 1998, the Company issued notes payable to a
bank to fund the repurchase of a portion of the Company's
outstanding common shares (see Note 7). Notes payable consist
of following:
June 30,
1998 1997
---------- ----------
Note payable to bank, issued
April 3, 1998, interest at
a variable rate (9.53% at
June 30, 1998), maturing
March 31, 2003 $3,714,840 $ -
Note payable to bank, issued
April 3, 1998, interest at
a variable rate (10.03% at
June 30, 1998), maturing
March 31, 2004 1,750,000 -
---------- ----------
5,464,840 -
Less current portion (246,105) -
---------- ----------
$ 5,218,735 $ -
---------- ----------
Principal payments required on long-term debt are as follows:
1999 $ 246,105
2000 609,375
2001 796,875
2002 1,042,500
2003 1,019,985
Thereafter 1,750,000
-----------
$ 5,464,840
-----------
The Company's revolving line of credit and notes payable contain
certain financial covenants which, among other restrictions,
restrict total debt, impose minimum coverage ratios, limit
capital expenditures and require a minimum net worth. As of
June 30, 1998, the Company was in compliance with all financial
covenants.
<PAGE 195> -7-
6. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders at June 30, 1997, consists of
subordinated convertible debt agreements. The total outstanding
principal and compounded accrued interest payable is payable
upon maturity or may be converted into shares of the Company's
common stock at the option of the shareholders as follows:
June 30, 1997
Accrued
Principal Interest
---------- ----------
Notes payable to shareholders,
issued September 1, 1991,
interest at 9%, maturing
September 1, 1998,
convertible at $0.75 per
share $ 460,000 $ 311,058
Notes payable to shareholders,
issued February 25, 1992,
interest at 8%, maturing
February 25, 1999,
convertible at $1.00 per
share 150,000 78,747
---------- ----------
$ 610,000 $ 389,805
---------- ----------
During fiscal 1998, the notes payable were converted into common
stock according to the terms of the convertible debt agreements.
See Note 7 for additional discussion of equity transactions.
7. SHAREHOLDERS' EQUITY
Convertible Notes Payable
As discussed in Note 6, during fiscal 1998, convertible notes
payable to shareholders were converted into 1,332,030 shares of
common stock pursuant to the subordinated convertible debt
agreements.
Treasury Stock
In fiscal 1998, the Board of Directors authorized the repurchase
of a portion of the Company's outstanding common stock.
Accordingly, the Company acquired 2,902,253 shares of the
Company's common stock for $5,949,495. The treasury shares are
stated at cost in the accompanying consolidated balance sheets.
<PAGE 196>
-8-
Stock Options
Pursuant to the Company's 1991 Incentive Stock Option Plan (the
"Plan"), the Company provides for the grant of stock options to
certain employees to purchase in the aggregate up to 1,350,000
shares of common stock. Awarded options typically vest and
become exercisable in incremental installments within two to
five years from the date of grant and expire no later than ten
years from the date of grant. All options are deemed to have
been granted for prices at or above fair market value of the
stock at the date of the grant as determined by the Board of
Directors and management. The following table summarizes stock
option transactions for the years ending June 30, 1998 and 1997:
Weighted-
Average
Exercise
Shares Under Price Per
Option Share
---------- ----------
Outstanding at
June 30, 1996 452,000 $1.28
Granted 83,000 $2.00
Canceled (63,500) $1.94
Exercised (1,000) $1.50
---------- ----------
Outstanding at
June 30, 1997 470,500 $1.32
Granted 3,000 $2.50
Canceled (40,000) $1.56
Exercised (674) $1.50
---------- ----------
Outstanding at
June 30, 1998 432,826 $1.30
---------- ----------
There were 347,659 and 353,333 options exercisable at June 30,
1998 and 1997, respectively, with a weighted average exercise
price of $1.17. At June 30, 1998, there are 160,000 options
outstanding with exercise prices between $.50 and $1.49, with a
weighted average exercise price of $.75 and a weighted average
remaining contractual life of 6 months. All of these options
are exercisable at June 30, 1998. 272,826 options outstanding
at June 30, 1998, have exercise prices between $1.50 and $2.50,
with a weighted average exercise price of $1.63 and a weighted
average remaining contractual life of 1.5 years. Of these,
187,659 are exercisable at June 30, 1998 and have a weighted
average exercise price of $1.52.
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company continues to account for options
issued to employees under Accounting Principles Board Opinion
No. 25. All options have been granted with exercise prices
equal to or greater than market value of the Company's common
stock on the date of grant. As a result, no compensation cost
has been recognized in the accompanying consolidated financial
statements.
<PAGE 197>
-9-
SFAS No. 123 established new financial and reporting standards
for stock-based compensation plans. As the Company has adopted
the disclosure-only provision of SFAS No. 123, no compensation
cost has been recognized related to the Plan. If the Company
had recognized compensation cost for the Plan based on the fair
value method prescribed by SFAS No. 123, the Company's net
income would have been reduced by $5,727 and $8,910 for the
years ended June 30, 1998 and 1997, respectively.
The fair value of each option on its grant date has been
estimated for pro forma purposes using the Black Scholes option-
pricing model using the following weighted average assumptions:
1998 1997
---------- ----------
Risk free interest rate 5.70% 5.74%
Expected life of options 5 years 2.68 years
Expected dividends $ - $ -
Weighted average fair value $ .62 $ .20
Deferred Compensation
During fiscal 1995, the Company issued non-qualified stock
options to employees at exercise prices below fair market value,
as estimated by the Company's management. Deferred compensation
of $120,000 has been provided for these stock options as
determined by the differences between the option prices and fair
market value as of the grant date. Of this amount, $21,972 and
$22,093 were charged to operations during fiscal 1998 and fiscal
1997, respectively. The deferred compensation is being
amortized using the straight-line method over the five-year
vesting period of the options.
Warrants
The Company issued stock warrants in fiscal year 1995 for 30,000
shares of common stock at $1.50 per share to an employee. The
Company issued stock warrants in fiscal year 1997 for 20,000
shares of common stock at $2.00 per share in relation to
consulting services received by the Company. The Company issued
stock warrants in fiscal year 1998 for 28,000 shares of common
stock at $2.05 per share in relation to the execution of a
financing arrangement (see Note 5).
In November 1996, the Company issued a stock warrant for 5,000
shares of common stock at $.01 per share related to an
acquisition. This warrant was canceled during fiscal 1998.
Stock Appreciation Rights
In fiscal 1998, the Company adopted a Stock Appreciation Right
plan ("SAR Plan"). The SAR Plan provides for payments to key
employees in the event certain contingent events occur. The
payments to the key employees would be based on appreciation in
the Company's common stock value from a per share base value, as
determined by the employees' respective SAR Plan agreement. The
SAR Plan expires June 30, 1999.
<PAGE 198>
-10-
8. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is a defendant in various legal proceedings arising
in the ordinary course of business. Although the results of
litigation cannot be predicted with certainty, management
believes that the outcome of pending litigation will not have a
material adverse effect on the Company's results of operations,
financial position or cash flows.
Malpractice Liability Insurance
The Company carries malpractice liability insurance of
$1,000,000 per incident and $3,000,000 in the aggregate on a
claims-made basis for possible liability claims and losses.
Lease Agreements
The Company leases certain facilities under noncancellable
operating lease agreements expiring through 2005. Certain
leases contain renewal options for an additional two to four
years. Additionally, the Company has entered into various
capital lease agreements for certain equipment.
Future minimum lease commitments as of June 30, 1998 are as
follows for these lease agreements:
Operating Capital
Leases Leases
---------- ----------
1999 $ 258,393 $ 24,266
2000 209,463 18,707
2001 173,964 -
2002 115,905 -
2003 99,517 -
Thereafter 123,147 -
---------- ----------
$ 980,389 $ 42,973
---------- ----------
Rental expense for the years ended June 30, 1998 and 1997 was
$249,264 and $237,883, respectively.
<PAGE 199>
-11-
Regulatory Compliance
The Company is required to comply with certain federal and state
regulations related to physician self-referral and anti-kickback
rules, the corporate practice of medicine and fee splitting.
The Company continually monitors its contracts and business
practices to make changes as necessary in order to be in
compliance with these regulations. The Company could be subject
to certain fines and penalties if it was determined that its
contracts or business practices violated these regulations;
however, management believes that there would be no material
adverse affect to the Company's results of operations, financial
position or cash flows if such determination was made.
9. LEGISLATION, REGULATIONS AND MARKET CONDITIONS
The health care industry is subject to numerous laws and
regulations of Federal, state, and local governments. These
laws and regulations include, but are not necessarily limited
to, matters such as licensure, accreditation, government health
care program participation requirements, reimbursement for
patient services, and Medicare and Medicaid fraud and abuse. In
addition, the Federal government is reviewing certain payment
mechanisms, including Medicare Prospective Payment System rates
for services as those provided by the Company, which could have
an effect on the Company's operations. Recently, government
activity has increased with respect to investigations and
allegations concerning possible violations of fraud and abuse
statutes and regulations by health care providers. Violations of
these laws and regulations could result in expulsion from
government health care programs together with the imposition of
significant fines and penalties, as well as significant
repayments for patient services previously billed. Management
believes that the Company is in compliance with fraud and abuse
statutes as well as other applicable governmental laws and
regulations. Compliance with such laws and regulations can be
subject to future government review and interpretation as well
as regulatory actions unknown or unasserted at this time.
<Page 200>
