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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 26,
1996 (November 13, 1996)
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DIAGNOSTIC HEALTH SERVICES, INC.
Delaware 0-21758 22-2960048
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(State or other (Commission File (IRS Employer ID
jurisdiction of No.) No.)
incorporation)
2777 Stemmons Freeway, Suite 1525, Dallas, Texas 75207
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(Address of principal executive offices)
(214) 634-0403
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Registrant's telephone number, including area code
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(Former name or former address, if changed since last report)
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Item 2. Acquisition or Disposition of Assets.
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On November 13, 1996, Diagnostic Health Services, Inc. (the
"Company"), through its wholly-owned subsidiary, DHS Management Services, Inc.
("DHSMS"), purchased substantially all of the operating assets (exclusive of
cash, and exclusive of assets utilized primarily in mobile X-ray operations)
of Advanced Clinical Technology, Inc. and Horizon MDS Corporation
(collectively, the "Sellers," each of which is a wholly-owned subsidiary of
Horizon/CMS Healthcare Corporation ("Horizon")). The acquired business (the
"Business") consists primarily of providing hospital-based and mobile non-
invasive ultrasound and other diagnostic testing services to the acute and
post-acute care industry and primary care physicians in the southwestern and
southern United States, including operations in Arizona, Nevada, New Mexico,
Texas, Oklahoma, Tennessee, Kentucky, Georgia, and Virginia.
The purchase included approximately $17,348,000 of various assets
(including goodwill), including approximately $3,452,000 of accounts
receivable, approximately $8,866,000 of equipment, furniture and fixtures,
approximately $550,000 of deposits, prepaid expenses and other such assets,
and approximately $4,480,000 of goodwill. The purchase price paid to the
Sellers was approximately $12,620,000 in cash (subject to adjustment) and
642,857 shares of convertible redeemable Series A Preferred Stock of the
Company (having an aggregate liquidation preference of $4,500,000), and DHSMS
assumed approximately $618,000 of trade accounts payable, $3,584,000 of
capital lease obligations, and $525,000 of other liabilities. The amount of
consideration paid in the transaction was based upon management's estimates of
the future earning capacity of the Business under the Company's ownership and
management, anticipated reductions of overhead expenses in the Business
through elimination of duplicative administrative functions, and anticipated
efficiencies and economies to be achieved by further absorption of existing
overhead and fixed costs of the Company's operations.
The Company intends to continue the Business in substantially the
manner heretofore conducted, utilizing the assets (including furniture,
equipment and leasehold improvements) acquired in the transaction, as well as
additional equipment and
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working capital to be provided by the Company from time to time in its
discretion.
As part of the acquisition, the Company obtained from Horizon and
the Sellers a one-year right of first refusal with respect to the retained
mobile x-ray operations of the Sellers, and a five-year non-competition
agreement with respect to Horizon or the Sellers participating in any business
competitive with the Business in any counties in which the Business is
currently conducted (subject to early termination of such non-competition
covenant at such time as neither Horizon nor either of the Sellers nor any of
their respective affiliates owns any Series A Preferred Stock of the Company
or any common stock of the Company issued upon conversion of such Series A
Preferred Stock).
The funds utilized to pay the cash portion of the purchase price
were obtained (i) as to approximately $6,570,000, by means of borrowing such
amount under the Company's existing acquisition term loan facility with Texas
Commerce Bank National Association, and (ii) as to the balance thereof, from
the Company's cash on hand (including a portion of the net proceeds of the
Company's secondary public offering of common stock consummated in June 1996).
Item 7. Financial Statements, Pro Forma Financial Information and
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Exhibits.
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(a) Financial Statements: [to be filed by Amendment].
(b) Pro forma financial information: [to be filed by Amendment].
(c) The following Exhibits are filed as part of this Form 8-K:
1. Asset Purchase Agreement, dated September 27, 1996, by and among the
Company DHSMS, the Sellers and Horizon.
2. Certificate of Stock Designation of the Company, creating the Series
A Preferred Stock of the Company, as filed with the Secretary of
State of Delaware on November 13, 1996.
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3. Consent of Moore Stephens LLP [to be filed by Amendment].
It is impractical to provide the financial statements and pro forma
financial information referred to in subparagraphs (a) and (b) and the consent
referred to in item 3 of subparagraph (c) of this Item 7. It is anticipated
that such items and information will be filed by Amendment to this Form 8-K on
or before January 27, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
DIAGNOSTIC HEALTH SERVICES, INC.
(Registrant)
Dated: November 26, 1996 By: /S/ Max W. Batzer
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Max W. Batzer, Chairman and
Chief Executive Officer
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EXHIBIT 1
ASSET PURCHASE AGREEMENT
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ASSET PURCHASE AGREEMENT (this "Agreement"), entered into this 27th day of
September, 1996, by and among DIAGNOSTIC HEALTH SERVICES, INC., a Delaware
corporation ("DHS"), DHS MANAGEMENT SERVICES, INC., a Texas corporation and a
wholly-owned subsidiary of DHS (the "Buyer"), ADVANCED CLINICAL TECHNOLOGIES,
INC., an Arizona corporation ("ACTI"), HORIZON MDS CORPORATION, a Delaware
corporation ("MDSI"), and HORIZON/CMS HEALTHCARE CORPORATION, a Delaware
corporation ("Horizon");
W I T N E S S E T H:
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WHEREAS, ACTI and MDSI (each a "Seller", and collectively the "Sellers")
are engaged, among other businesses, in the provision of hospital-based and
mobile non-invasive ultrasound and other diagnostic testing services on a fee-
for-service basis to the acute and post-acute care industry and primary care
physicians in the southwestern and southern United States (the "Business", it
being understood and agreed that the "Business" shall not include any mobile x-
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ray operations of the Sellers (the "X-Ray Operations") or any assets utilized in
the X-Ray Operations); and
WHEREAS, the Buyer and its affiliates are, among other businesses, engaged
in a business similar to the Business, which business is conducted primarily in
the southwestern and central United States; and
WHEREAS, the Sellers, which are each wholly-owned subsidiaries of Horizon,
have determined to divest the Business; and in connection therewith, the Sellers
have agreed to sell all of the assets and properties of the Business, and the
Business as a going concern, to the Buyer, and the Buyer has agreed to purchase
such assets and properties, and the Business as a going concern, all upon the
terms and conditions set forth in this Agreement;
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NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein set forth, the parties hereby covenant and agree
as follows:
1 ASSETS.
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1 Acquired Assets. Subject to the terms and conditions of this
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Agreement, on the Closing Date (as such term is hereinafter defined), the
Sellers shall sell, transfer and deliver to the Buyer, and the Buyer shall
purchase and receive from the Sellers, all of the assets, properties,
improvements and business owned by the Sellers and utilized in and/or relating
to the Business (other than the Excluded Assets (as such term is hereinafter
defined), as same are constituted on the Closing Date (collectively, the
"Assets"), including, but not limited to, the following:
1 All notes receivable and accounts receivable of the Business,
other than those payable by Horizon or its affiliates;
2 All tangible fixed assets, furniture, fixtures, machinery,
equipment, computers, computer systems and vehicles utilized in and/or related
to the Business (the "Fixed Assets");
3 All inventory and supplies utilized in and/or relating to the
Business;
4 Any and all prepaid expenses (including, without limitation,
prepaid rentals under the Assumed Property Leases (as such term is hereinafter
defined) and any equipment leases or financing agreements being assumed by the
Buyer) of the Business;
5 All trade names, trademarks, patents, copyrights, customer
lists, supplier lists, trade secrets, technical information, and other such
knowledge and information constituting the "know-how" used or usable in the
Business and owned and transferable by either of the Sellers without
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requirement of payment of any material fee, and the good will of the Business;
6 All contract rights, commitments and claims of the Business
(exclusive of rights under any employment agreements, consulting agreements,
management agreements or other such agreements which are disclaimed by the Buyer
hereunder, and any real property leases to the extent not listed in Schedule 2.1
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annexed hereto), including rights under those real property leases listed on
Schedule 2.1 (the "Assumed Property Leases"), and all customer contracts,
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equipment leases, vehicle leases, manufacturer's warranties and any licenses or
license agreements relating to patents, trademarks or other intangibles (to the
extent transferable without requirement of payment of any material fee), and any
security deposits under any of the foregoing;
7 All licenses and permits (to the extent transferable without
requirement of payment of any material fee) utilized in the Business, and all
Medicare and Medicaid provider numbers of the Sellers utilized in the Business;
8 All books, records, software programs, printouts, drawings,
data, files, notes, notebooks, accounts, invoices, correspondence and memoranda
relating to the Assets and/or the Business; and
9 All other rights and assets of any kind, tangible or
intangible, utilized in and/or relating to the Business, whether or not
reflected in the Sellers' financial statements or on their books and records.
2 Excluded Assets. Notwithstanding anything in this Agreement to the
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contrary, the Assets shall not include, and the Sellers shall retain as their
respective properties, the following assets (the "Excluded Assets"):
1 All tangible fixed assets, furniture, fixtures, machinery,
equipment, computers, computer systems and vehicles exclusively utilized in
and/or related to the X-Ray Operations;
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2 All inventory and supplies exclusively utilized in and/or
related to the X-Ray Operations;
3 Any and all prepaid expenses (including, without limitation,
prepaid rentals under any equipment leases or financing agreements) of the X-Ray
Operations;
4 All trade names, trademarks, patents, copyrights, customer
lists, supplier lists, trade secrets, technical information, and other such
knowledge and information constituting the "know-how" used or usable in the X-
Ray Operations, and the goodwill of the X-Ray Operations;
5 All contract rights, commitments and claims of the Sellers in
respect of the X-Ray Operations and all customer contracts, equipment leases,
vehicle leases, manufacturers' warranties and any licenses or license agreements
relating to patents, software, trademarks, proprietary materials, programs,
manuals, promotional materials and other intangibles in respect of the X-Ray
Operations, and any security deposits under any of the foregoing;
6 All cash of the Sellers (regardless of the source) as of the
Closing Date, marketable securities exclusively held by or arising exclusively
out of the X-Ray Operations, and notes receivable or accounts receivable of the
Sellers arising out of and/or relating to the X-Ray Operations;
7 All licenses, permits and certifications (including, without
limitation, any and all Medicaid and Medicare certifications) of the Sellers in
respect of the X-Ray Operations, and all Medicare and Medicaid provider numbers
of the Sellers in respect of the X-Ray Operations (provided that such
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certifications and/or provider numbers are not also utilized in the Business);
8 All books, records, software programs, printouts, drawings,
data, files, notebooks, accounts, invoices, correspondence and memoranda
relating to the Excluded Assets and/or the X-Ray Operations;
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9 The Sellers' respective stock record books, tax returns and
minute books;
10 The capital stock of Mobile X-Ray Xpress, Inc., a Nevada
corporation, owned by ACTI;
11 The capital stock of Health Care Mobile X-Ray, Inc., an Arizona
corporation, owned by ACTI;
12 ACTI's and Horizon's respective rights under those certain
Employment Agreements by and among ACTI, Horizon, and Louis H. Sanders and Larry
M. Novak dated as of April 1, 1994;
13 ACTI's and Horizon's respective rights under that certain Stock
Exchange Agreement by and among Horizon, ACTI and former shareholders of ACTI
dated as of April 1, 1994;
14 All computer hardware and software relating to the wide area
network of Horizon, to the extent installed at the offices of the Sellers;
15 All of the Sellers' and Horizon's rights under this Agreement
including, without limitation, the rights of the Sellers to receive the
consideration (as such term is hereinafter defined);
16 All bank accounts of the Sellers;
17 All refunds, whenever paid, relating to payments by or on
behalf of the Sellers prior to Closing Date (other than security deposits in
respect of leases included in the Assets) including, without limitation, any
federal, state, local or foreign taxes paid by the Sellers prior to the Closing
Date; and
18 All other rights and assets of any kind, tangible or
intangible, exclusively utilized in and/or relating to the X-Ray Operations,
whether or not reflected in the Sellers' financial statements or on their books
and records.
2 LIABILITIES.
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1 Assumed Liabilities. Subject to the terms and conditions of this
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Agreement, on the Closing Date, the Sellers shall assign to the Buyer, and the
Buyer shall assume and agree to pay and perform when due, the following
liabilities and obligations of the Business, as same are constituted on the
Closing Date (collectively, the "Assumed Liabilities"):
1 All accounts payable of the Business incurred in the normal
course of the Business (exclusive of amounts owed to Horizon or any of its
affiliates, except to the extent that same constitute trade payables);
2 All payroll and related federal and state withholding taxes for
employees of the Business for the Sellers' current payroll remittance period as
of the time of the Closing (to the extent not theretofore remitted by the
Sellers to the applicable taxing authority);
3 All accrued vacation pay (paid time off), wellness pay, sick
days and other such items (other than severance benefits or any severance
policies or commitments) relating to Hired Employees (as such term is defined
below) of the Business accrued and outstanding as of the Closing Date;
4 All liabilities of the Sellers from and after the Closing Date
under outstanding vehicle and equipment leases or financing agreements relating
to the Fixed Assets;
5 All of the Home Office Accrued Benefits (as such term is
hereinafter defined), to the extent that the Sellers provide funding therefor;
6 All liabilities of the Sellers from and after the Closing Date
under the Assumed Property Leases as and to the extent set forth on Schedule
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2.1; and
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7 All other executory contracts, service contracts, orders and
commitments which in any case are for the purchase of inventory and/or supplies
for the Business, or the
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rendition of services in the Business, which have been entered into by the
Sellers in the normal course of the Business.
2 Excluded Liabilities. Notwithstanding anything to the contrary
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contained in Section 2.1 above, the Buyer shall not assume, or become in any way
liable for, the payment or performance of any debts, liabilities or obligations
(absolute or contingent) of either Seller (a) owed to Horizon or any of its
affiliates, whether constituting intercompany debt or any other type of
obligations other than trade payables and obligations under operating
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agreements, (b) in respect of any indebtedness for money borrowed (provided that
this shall not include accounts payable constituting part of the Assumed
Liabilities, regardless of aging), (c) under any employment agreements,
consulting agreements, management agreements or other such agreements (other
than employment agreements with technicians and regional office employees of the
Business and with David Bondurant and Mickey King, as disclosed in Schedule 4.17
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annexed hereto, or in respect of employee severance benefits, (d) arising out of
or relating to any diagnostic tests or other services rendered by the Sellers
prior to the Closing Date, including any claims for professional liability
arising therefrom,(e) relating to any lease obligations of any kind relating to
real property other than the Assumed Property Leases as and to the extent set
forth in Schedule 2.1, (f) relating to any federal, state or local income taxes
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or sales, transfer or other taxes (other than those described in Section 2.1(b)
above) payable by or in respect of the Sellers, including but not limited to any
such taxes which may be assessable against the Sellers arising out of, in
connection with or as a result of the transactions contemplated by this
Agreement and/or the consummation thereof, (g) relating to or arising out of any
pending claims, actions, arbitrations and/or other proceedings against either of
the Sellers, (h) relating to recapture of any depreciation deduction or
investment tax credit of either of the Sellers, (i) in respect of any unfunded
pension or retirement benefits, or in respect of any funding obligations to, or
transactions in or relating to any trust funds under, any pension, employee
benefit or retirement plans now or heretofore maintained by or on behalf of
either Seller for the benefit of any past or present employees, (j) relating to
any claims, obligations or liabilities in respect of environmental remediation
or any
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violation of any environmental laws or regulations, or any other violation or
alleged violation of applicable law or regulations by either Seller, (k)
relating to any business operations other than the Business (including, without
limitation, the X-Ray Operations), or not incurred in the normal course of the
Business (unless specifically included in the Assumed Liabilities pursuant to
Section 2.1), or (l) not specifically assumed by the Buyer pursuant to Section
2.1 above (collectively, the "Excluded Liabilities").
3 PURCHASE PRICE.
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1 Consideration to the Sellers.
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1 The net purchase price for the Assets (the "Consideration")
shall, subject to adjustment in accordance with Section 3.1(b) below, be in the
aggregate amount of $17,500,000, which shall be payable (i) $13,000,000 by wire
transfer of immediately available funds to the Sellers' designated accounts on
the Closing Date, and (ii) $4,500,000 by means of the issuance to the Sellers,
on the Closing Date, of shares of Series A Preferred Stock of DHS (the
"Preferred Stock") having relative rights, preferences and limitations
substantially as provided in the certificate of stock designation (the
"Certificate of Stock Designation") annexed hereto as Exhibit A. The number of
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shares of Preferred Stock issuable on the Closing Date hereunder shall be
determined by dividing $4,500,000 by the mean average last reported sale price
of the common stock of DHS for the twenty (20) consecutive trading days ending
on the third trading day immediately prior to the Closing Date, provided that if
such mean average last reported sale price is greater than $6.50 per share and
less than $7.50 per share, then, for purposes hereof, the Preferred Stock shall
be deemed to be issued at $7.00 per share (which shall be deemed to be the mean
average last reported sale price for purposes hereof); and further provided,
that if the Preferred Stock is not issued or deemed issued at $7.00 per share,
then the Liquidation Value and optional redemption prices of the Preferred Stock
(as set forth in the form of Certificate of Stock Designation annexed hereto)
shall be correspondingly and proportionately adjusted.
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2 Adjustment of Consideration. Within thirty (30) days after the
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Closing Date, the Buyer and the Sellers shall jointly prepare a Closing Date
Balance Sheet of the Business, in a manner and utilizing accounting treatments
consistent with the methodology utilized in the preparation of the Business
Financial Statements (as such term is hereinafter defined) as of August 31,
1996. To the extent that the Net Working Capital (as such term is hereinafter
defined) reflected in such Closing Date Balance Sheet is greater or less than
$3,146,108 (being the agreed-upon amount of the Net Working Capital as reflected
in the Business Financial Statements as of August 31, 1996), then, within
fifteen (15) days after the parties reach agreement or resolution on the Closing
Date Balance Sheet, the Buyer will pay to the Sellers (in proportion to their
relative contributions to the Net Working Capital reflected in the Closing Date
Balance Sheet) the amount of any excess, or the Sellers (jointly and severally)
will pay to the Buyer the amount of any deficiency. As used herein, the term
"Net Working Capital", as of any date of determination, shall mean the
difference between the book value of the current assets of the Business as of
such date (after giving effect to an allowance for doubtful accounts determined
in a manner consistent with the manner of determination of such allowance as
contained in the Business Financial Statements as of August 31, 1996) that will
be acquired by the Buyer, minus the book value of the current liabilities of the
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Business as of such date that will be assumed by the Buyer. The parties shall
cooperate with one another to reach prompt agreement on the Closing Date Balance
Sheet, but if the parties are unable to reach agreement on the Closing Date
Balance Sheet within sixty (60) days after the Closing Date, then such dispute
shall be submitted for arbitration in accordance with Section 17.3 below.
2 Net Price. The foregoing purchase price for the Assets shall be
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in addition to the assumption of the Assumed Liabilities set forth in Section
2.1 above.
3 Allocation of Consideration. The Consideration specified in
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Section 3.1 above shall be allocated, as between the Sellers and as among the
Assets, in accordance with Schedule 3.3 annexed hereto.
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4 REPRESENTATIONS AND WARRANTIES OF SELLERS AND HORIZON.
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In connection with the sale of the Assets to the Buyer, the Sellers
and Horizon hereby jointly and severally represent and warrant to the Buyer as
follows:
1 Organization, Good Standing and Qualification. ACTI is a
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corporation duly organized, validly existing and in good standing under the laws
of the State of Arizona, MDSI is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, and Horizon is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, each with full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby, and to own its assets and conduct its business as owned and
conducted on the date hereof. Each Seller is duly qualified to do business as a
foreign corporation under the laws of each jurisdiction where the nature of its
business or the location of its properties makes such qualification necessary
and the failure to be so qualified would have a material adverse effect on the
subject Seller or its assets, properties, business or financial condition.
2 Authorization of Agreement. The execution, delivery and
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performance of this Agreement and the consummation of the transactions
contemplated hereby by the Sellers and Horizon has been duly and validly
authorized by the Board of Directors of each Seller, and by Horizon (as the sole
stockholder of each Seller). No further corporate authorization is required on
the part of either of the Sellers or Horizon to consummate the transactions
contemplated hereby.
3 Valid and Binding Agreements. This Agreement, and, when executed
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and delivered, the Bill of Sale, the Assumption Agreement, the Non-Competition
Agreement and the First Refusal Agreement (as such terms are hereinafter
defined), constitute and will constitute the legal, valid and binding
obligations of each Seller and Horizon (to the extent a party thereto),
enforceable against each Seller and Horizon in accordance with their respective
terms, except to the extent limited by bankruptcy, insolvency, reorganization
and other laws affecting creditors'
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rights generally, and except that the remedy of specific performance or similar
equitable relief is available only at the discretion of the court before which
enforcement is sought.
4 No Breach of Statute or Contract. Neither the execution and
--------------------------------
delivery of this Agreement, the Bill of Sale, the Assumption Agreement, the Non-
Competition Agreement, or the First Refusal Agreement by the Sellers and Horizon
(to the extent a party thereto), nor compliance with the terms and provisions of
this Agreement, the Bill of Sale, the Assumption Agreement, the Non-Competition
Agreement or the First Refusal Agreement on the part of the Sellers and Horizon
(to the extent a party thereto), will: (a) violate any statute or regulation of
any governmental authority, domestic or foreign, affecting either of the Sellers
or Horizon, (b) except as set forth in Schedule 4.4(b) annexed hereto, require
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the issuance of any authorization, license, consent or approval of any federal
or state governmental agency or any other person; or (c) except as set forth in
Schedule 4.4(c) annexed hereto, conflict with or result in a breach of any of
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the terms, conditions or provisions of the certificate of incorporation or by-
laws of either of the Sellers or Horizon or any judgment, order, injunction,
decree, agreement or instrument to which either of the Sellers or Horizon is a
party, or by which either of the Sellers or Horizon is bound, or constitute a
default thereunder.
5 Ownership of Business. No portion of the Business is owned or
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operated by any person or entity other than the Sellers.
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6 Financial Information.
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1 Annexed hereto as Schedule 4.6(a) are: (i) the financial
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statements of the Sellers as at March 31, 1993 and March 31, 1994, and for each
of the fiscal years then ended, including balance sheets, statements of
operations, statements of stockholders' equity, and consolidated statements of
cash flow, as reported on by KPMG Peat Marwick (the "Seller Audited Financial
Statements"), (ii) the unaudited financial statements of the Sellers as at
_________________, ___________________ and August 31, 1996, and for the fiscal
periods then ended, including balance sheets and statements of operations, as
prepared by management of the Sellers (the "Seller Unaudited Financial
Statements"), and (iii) the pro forma financial statements of the Business at
_________________, ____________________ and August 31, 1996, and for the fiscal
periods then ended, including balance sheets and statements of operations, as
prepared by management of the Sellers (the "Business Financial Statements"). The
Seller Audited Financial Statements and the Seller Unaudited Financial
Statements are herein collectively referred to as the "Seller Financial
Statements".
2 The Seller Financial Statements: (i) represent the Sellers'
management's best estimate of the financial position of the Sellers as of the
dates thereof and for the periods reflected therein; and (ii) were prepared from
the books and records of the Sellers, which, to the Sellers' knowledge,
accurately and consistently reflect all transactions to which the Sellers were
and are a party.
3 The Business Financial Statements represent the Sellers'
management's best estimate, on a pro forma basis, of the separate financial
position and results of operations of the Business as of the dates thereof and
for the periods reflected therein.
4 Except as expressly set forth in the Business Financial
Statements and/or in the Schedules to this Agreement, or arising in the normal
course of the Business since August 31, 1996, there are, as at the date hereof,
no liabilities or obligations (including, without limitation, any tax
liabilities
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or accruals) of the Business, including any contingent liabilities, that are, in
the aggregate, material.
5 Schedule 4.6(e) annexed hereto contains: (i) an aging schedule
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of accounts receivable and accounts payable of the Business as at August 31,
1996; (ii) a list of the outstanding principal balance of and approximate
accrued interest on all indebtedness (other than accounts payable), loans and/or
notes payable of the Sellers as of August 31, 1996; (iii) a list of any
leasehold or other contractual obligations of the Sellers to Horizon and/or any
of its Affiliates on the date hereof; (iv) a list of all obligations of the
Business guaranteed by Horizon and/or any of its Affiliates on the date hereof,
and the terms of such guarantees; (v) a list reflecting the nature and amount of
all obligations owed to the Sellers on the date hereof by Horizon and/or any of
its Affiliates; and (vi) a list reflecting the nature and amount of all
obligations owed by the Sellers on the date hereof to Horizon and/or any of its
Affiliates. Wherever used in this Agreement, the term "Affiliate" means, as
respects any person or entity, any other person or entity that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with the first person or entity.
7 No Material Changes. Except as and to the extent described in
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Schedule 4.7 annexed hereto (which Schedule may make reference to any other
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Schedule hereto or to any other document(s) referred to in this Agreement which
has heretofore been delivered to the Buyer), and/or in the Business Financial
Statements, since August 31, 1996, the Business has been operated only in the
ordinary course, and there has not been:
1 any material change in the financial condition, operations or
business of the Business from that shown in the Business Financial Statements as
at August 31, 1996 and for the period then ended, any material acquisition or
disposition of assets, or any other material transaction or commitment effected
or entered into outside of the normal course of the Business;
2 any damage, destruction or loss, whether covered by insurance
or not, materially and adversely affecting
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the business, operations, assets, properties, financial condition or prospects
of the Business taken as a whole;
3 any payment or distribution of any assets or property, other
than cash, to Horizon or any of its Affiliates (other than the Sellers);
4 any material increase in the rate of salary or compensation
paid or payable to any employee, consultant or other person performing services
in the Business; or
5 any other event or condition arising from or out of the
operation of the Sellers or Horizon which has or will materially and adversely
affect the business, financial condition, results of operations or prospects of
the Business.
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8 Tax Returns and Tax Audits.
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1 Except as and to the extent disclosed in Schedule 4.8(a)
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annexed hereto: (i) on the date hereof and on the Closing Date, all federal,
state and local tax returns and tax reports required to be filed by either of
the Sellers on or before the date of this Agreement or the Closing Date, as the
case may be, have been and will have been timely filed with the appropriate
governmental agencies in all jurisdictions in which such returns and reports are
required to be filed; (ii) all federal, state and local income, franchise,
sales, use, property, excise, unemployment, payroll withholding and other taxes
(including interest and penalties and including estimated tax installments where
required to be filed and paid) due from or with respect to either of the Sellers
as of the date hereof and as of the Closing Date have been and will have been
fully paid, and appropriate accruals shall have been made on the Sellers' books
for taxes not yet due and payable; (iii) as of the Closing Date, all taxes and
other assessments and levies which either of the Sellers is required by law to
withhold or to collect on or before the Closing Date will have been duly
withheld and collected, and will have been paid over to the proper governmental
authorities to the extent due and payable on or before the Closing Date; and
(iv) there are no outstanding or pending claims, deficiencies or assessments for
taxes, interest or penalties with respect to any taxable period of either of the
Sellers.
(b) Except as set forth in Schedule 4.8(b) annexed hereto, there
---------------
are no audits pending with respect to any federal, state or local tax returns of
either of the Sellers, and no waivers of statutes of limitations have been given
or requested with respect to any tax years or tax filings of either of the
Sellers.
1 Personal Property; Liens. The Sellers have and own good and
------------------------
indefeasible title to all of the personal property utilized in the Business,
free and clear of all liens, pledges, claims, security interests and
encumbrances whatsoever, except for: (a) rights of lessors in respect of any
Fixed Assets which are leased by either of the Sellers; (b) liens which solely
secure the deferred purchase price of machinery, equipment, vehicles
-15-
<PAGE>
and/or other Fixed Assets, as indicated on Schedule 4.9; (c) liens for current
------------
taxes not yet due and payable or which are being contested in good faith by
appropriate proceedings; and (d) liens, pledges, claims, security interests,
encumbrances, conditions or restrictions which are not, individually or in the
aggregate, material in character or amount and do not interfere with the use
made or presently proposed to be made of any such property (collectively,
"Permitted Liens"). All material items of machinery, equipment, vehicles and
other Fixed Assets owned or leased by the Sellers and utilized in the Business
are listed in Schedule 4.9 annexed hereto, and, except as and to the extent
------------
disclosed in Schedule 4.9, all of such fixed assets are in good operating
------------
condition and repair (reasonable wear and tear excepted) and are adequate for
their use in the Business as presently conducted.
2 Real Property.
-------------
1 Neither of the Sellers owns or has any interest of any kind
(whether ownership, lease or otherwise) in any real property except to the
extent of leasehold interests under leases for business premises occupied by the
Sellers.
2 The Sellers are presently in compliance with all of their
obligations under the Assumed Property Leases, and the premises leased
thereunder are in good condition (reasonable wear and tear excepted) and are
adequate for the operation of the Business as and to the extent presently
conducted therefrom.
3 Accounts Receivable. All accounts receivable shown on the balance
-------------------
sheet as of August 31, 1996 included in the Business Financial Statements (the
"Balance Sheet"), and all accounts receivable thereafter created or acquired in
the Business prior to the Closing Date, (a) have arisen or will arise in the
ordinary course of the Business, (b) except as set forth in Schedule 4.11(b)
----------------
annexed hereto, are and will be subject to no material counterclaims, set-offs,
allowances or discounts of any kind, except to the extent of the allowance (if
any) for doubtful accounts as of August 31, 1996 reflected in the Balance Sheet,
and (c) have been, are or will be valid and collectible in the
-16-
<PAGE>
ordinary course of business (subject to the aforesaid allowance for doubtful
accounts).
4 Inventories. All supplies and other inventories shown on the
-----------
Balance Sheet, and all inventories thereafter acquired in the Business prior to
the Closing Date, to the extent material, have been and will be valued at the
lower of cost or market, and, to the extent a material value was ascribed
thereto, consisted and will consist of items which are of a quality and quantity
which are usable in the ordinary course of the Business.
5 Insurance Policies. Schedule 4.13 annexed hereto contains a true
------------------
and correct schedule of all insurance coverages held by the Sellers concerning
the Business and the Sellers' assets and properties (including but not limited
to professional liability insurance).
6 Permits and Licenses. Each Seller possesses all required permits,
--------------------
licenses and/or franchises, from whatever governmental authorities or agencies
(domestic and/or foreign) requiring the same and having jurisdiction over such
Seller, necessary in order to operate the Business in the manner presently
conducted, all of which permits, licenses and/or franchises are valid, current
and in full force and effect, except where the failure to have or maintain any
such permit, license and/or franchise would not have or could not reasonably be
expected to have a material adverse effect on the Assets or the Business. Each
Seller has heretofore conducted the Business in compliance in all material
respects with the requirements of such permits, licenses and/or franchises, and
neither of the Sellers has received written notice of any default or violation
in respect of or under any of such permits, licenses and/or franchises except
where such default would not have or could not reasonably be expected to have a
material adverse effect on the Assets or the Business.
-17-
<PAGE>
7 Contracts and Commitments.
-------------------------
1 Schedule 4.15 annexed hereto lists all material contracts,
-------------
leases, commitments, indentures and other agreements relating to the Business to
which either Seller is a party (collectively, "Material Contracts"), except that
Schedule 4.15 need not list any such agreement that is listed on any other
- -------------
Schedule hereto, or was entered into in the ordinary course of the business of
the subject Seller and that, in any case: (i) is for the purchase of supplies
or other inventory items in the ordinary course of the Business; (ii) is related
to the purchase or lease of any capital asset involving aggregate payments of
less than $25,000 per annum; or (iii) may be terminated without penalty, premium
or liability by the subject Seller on not more than thirty-one (31) days' prior
written notice; provided, however, that Schedule 4.15 shall list any agreement
-------- ------- -------------
or arrangement (written or verbal) between either Seller (on the one hand) and
any physicians or persons known to either Seller or Horizon to be Affiliates of
any physicians (on the other hand), regardless of the amount of payments called
for, required or made thereunder.
2 To the best of the Sellers' and Horizon's knowledge, except as
set forth in Schedule 4.15: (i) all Material Contracts are in full force and
-------------
effect; (ii) the subject Seller is in compliance in all material respects with
all of its obligations under the Material Contracts, and has not received any
written notice that any party to any Material Contract is in material breach or
default of such Material Contract or is now subject to any condition or event
which has occurred and which, after notice or lapse of time or both, would
constitute a material default by any party under any such contract, lease,
agreement or commitment; and (iii) none of the Material Contracts will be
voided, revoked or terminated, or voidable, revocable or terminable, upon and by
reason of the assignment thereof to the Buyer pursuant to this Agreement.
3 To the best of the Sellers' and Horizon's knowledge, no
purchase commitment by the Sellers relating to the Business is materially in
excess of the normal, ordinary and usual requirements of the Business.
-18-
<PAGE>
4 Except as set forth in Schedule 4.15, neither Seller has any
-------------
outstanding contracts with or commitments to officers, employees, physicians,
technicians, agents, consultants or advisors relating to the Business that are
not cancelable by such Seller without penalty, premium or liability (for
severance or otherwise) on less than thirty-two (32) days' prior written notice.
8 Customers and Suppliers. Neither of the Sellers has received any
-----------------------
written notice of any existing, announced or anticipated changes in the policies
of any material clients, customers, referral sources or suppliers of the
Sellers which will materially adversely affect the Business as presently
conducted.
9 Labor, Benefit and Employment Agreements.
----------------------------------------
1 Except as set forth in Schedule 4.17 annexed hereto, neither of
-------------
the Sellers is a party to or has any commitment or obligation in respect of (i)
any collective bargaining agreement or other labor agreement relating to any
employees of the Business, or (ii) any agreement with respect to the employment
or compensation of any non-hourly and/or non-union employee(s) of the Business.
Schedule 4.17 sets forth the amount of all compensation or remuneration
- -------------
(including any discretionary bonuses) paid by the Sellers during the 1995
calendar year to employees or consultants of the Business who presently receive
aggregate compensation or remuneration at an annual rate in excess of $35,000.
2 No union is now certified or, to the best of the Sellers' and
Horizon's knowledge, claims to be certified as a collective bargaining agent to
represent any employees of the Business, and there are no labor disputes
existing or, to the best of the Sellers' and Horizon's knowledge, threatened,
involving strikes, slowdowns, work stoppages, job actions or lockouts of any
employees of the Business.
3 There are no unfair labor practice charges or petitions for
election pending or being litigated before the National Labor Relations Board or
any other federal or state labor
-19-
<PAGE>
commission relating to any employees of the Business. Neither of the Sellers nor
Horizon has received any written notice of any actual or alleged violation by
either Seller of any law, regulation, order or contract term affecting the
collective bargaining rights of employees, equal opportunity in employment, or
employee health, safety, welfare, or wages and hours.
4 With respect to any "multiemployer plan" (as defined in Section
3(37) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) to which either Seller or any of its Affiliates has at any time been
required to make contributions, neither of the Sellers nor any of its Affiliates
has, at any time on or after April 29, 1980, suffered or caused any "complete
withdrawal" or "partial withdrawal" (as such terms are respectively defined in
Sections 4203 and 4205 of ERISA) therefrom on its part.
a) Except as disclosed in Schedule 4.17, neither of the Sellers
-------------
maintains, or has any liabilities or obligations of any kind with respect to,
any bonus, deferred compensation, pension, profit sharing, retirement or other
such benefit plan, and does not have any potential or contingent liability in
respect of any actions or transactions relating to any such plan other than to
make contributions thereto if, as and when due in respect of periods subsequent
to the date hereof. Without limitation of the foregoing, (i) each Seller has
made all required contributions to or in respect of any and all such benefit
plans, (ii) no "accumulated funding deficiency" (as defined in Section 412 of
the Internal Revenue Code of 1986, as amended (the "Code")) has been incurred in
respect of any of such benefit plans, and the present value of all vested
accrued benefits thereunder does not, on the date hereof, exceed the assets of
any such plan allocable to the vested accrued benefits thereunder, (iii) there
has been no "prohibited transaction" (as defined in Section 4975 of the Code)
with respect to any such plan, and no transaction which could give rise to any
tax or penalty under Section 4975 of the Code or Section 502 of ERISA, and (iv)
there has been no "reportable event" (within the meaning of Section 4043(b) of
ERISA) with respect to any such plan. All of such plans which constitute, are
intended to constitute, or have been treated by the Sellers as
-20-
<PAGE>
"employee pension benefit plans" or other plans within Section 3 of ERISA have
been determined by the Internal Revenue Service to be "qualified" under Section
401(a) of the Code, and have been administered and are in compliance with ERISA
and the Code; and neither of the Sellers nor Horizon has any knowledge of any
state of facts, conditions or occurrences such as would impair the "qualified"
status of any of such plans.
(a) Except for the group insurance programs listed in Schedule
--------
4.17, neither of the Sellers maintains any medical, health, life or other
- ----
employee benefit insurance programs or any welfare plans (within the meaning of
Section 3(1) of ERISA) for the benefit of any current of former employees, and,
except as required by law, neither of the Sellers has any liability, fixed or
contingent, for health or medical benefits to any former employee.
2 [Intentionally Omitted].
-21-
<PAGE>
3 Compliance with Laws.
--------------------
(a) Each of the Sellers is in compliance in all material respects
with all laws, statutes, regulations, rules and ordinances applicable to the
conduct of its business as presently constituted; and neither of the Sellers nor
Horizon has received written notice of any default or violation under or in
respect of any of the foregoing. Neither of the Sellers is presently in material
violation of any requirements of any its insurance carriers.
(b) Without limitation of Section 4.19(a) above, neither of the
Sellers has, at any time during the three (3) year period prior to the date
hereof, (i) handled, stored, generated, processed or disposed of any hazardous
substances in violation of any federal, state or local environmental laws or
regulations, or (ii) otherwise committed any material violation of any federal,
state or local environmental laws or regulations (including, without limitation,
the provisions of the Environmental Protection Act, the Comprehensive
Environmental Responsibility and Cleanup Act, and other applicable environmental
statutes and regulations) or any material violation of the Occupational Safety
and Health Act.
(c) Neither of the Sellers nor, to the best of the Sellers'
knowledge, any of the Sellers' respective directors, officers or employees has
received any written notice of default or violation, nor, to the best of the
Sellers' knowledge, is either of the Sellers or any of their respective
directors, officers or employees in default or violation, with respect to any
judgment, order, writ, injunction, decree, demand or assessment issued by any
court or any federal, state, local, municipal or other governmental agency,
board, commission, bureau, instrumentality or department, domestic or foreign,
relating to any aspect of such Seller's business, affairs, properties or assets.
Neither of the Sellers nor, to the best of the Sellers' knowledge, either of the
Sellers or any of their respective directors, officers or employees, has
received written notice of, been charged with, or is under investigation with
respect to, any violation of any provision of any federal, state, local,
municipal or other law or administrative rule or regulation, domestic or
-22-
<PAGE>
foreign, relating to any aspect of either Seller's business, affairs, properties
or assets, which violation would have a material adverse effect on the Business
or any material portion of the Assets.
(d) Schedule 4.19 sets forth the date(s) of the last known audits
-------------
or inspections (if any) of either of the Sellers conducted by or on behalf of
the Environmental Protection Agency, the Occupational Safety and Health
Administration, the federal Department of Health and Human Services and/or any
agency thereof (including, without limitation, the Healthcare Financing
Administration) or intermediary acting on its behalf, any corresponding or
comparable state or local governmental department, agency or authority, and any
other governmental and/or quasi-governmental agency (federal, state and/or
local).
4 Litigation. Except as disclosed in Schedule 4.20 annexed hereto,
---------- -------------
there is no suit, action, arbitration, or legal, administrative or other
proceeding, or governmental investigation (including, without limitation, any
claim alleging the invalidity, infringement or interference of any patent,
patent application, or rights thereunder owned or licensed by either of the
Sellers) pending, or to the best knowledge of the Sellers, threatened, by or
against either of the Sellers that relates in any way to the Business or any of
the Assets. Neither of the Sellers nor Horizon is aware of any state of facts,
events, conditions or occurrences which might properly constitute grounds for or
the basis of any suit, action, arbitration, proceeding or investigation against
or with respect to either of the Sellers or that relate to the Business or any
of the Assets, which, if adversely determined, would have a material adverse
effect on the Business or any material portion of the Assets.
5 Patents, Licenses and Trademarks. Schedule 4.21 annexed hereto
-------------------------------- -------------
correctly sets forth a list and brief description of the nature and ownership
of: (a) all patents, patent applications, copyright registrations and
applications, registered trade names, and trademark registrations and
applications, both domestic and foreign, which are presently owned, filed or
held by either of the Sellers or Horizon and/or any of their respective
directors, officers or employees and which in any way relate to or
-23-
<PAGE>
are used in the Business; (b) all licenses, both domestic and foreign, which are
owned or controlled by either of the Sellers or Horizon and/or any of their
respective directors, officers or employees and which in any way relate to or
are used in the Business; and (c) all franchises, licenses and/or similar
arrangements granted to either Seller by others and/or to others by either
Seller. None of the patents, patent applications, copyright registrations or
applications, registered trade names, trademark registrations or applications,
franchises, licenses or other arrangements set forth or required to be set forth
in Schedule 4.21 is subject to any pending challenge known to either of the
-------------
Sellers or Horizon. Each of the Sellers has the valid right to utilize all trade
names and other intellectual property utilized in the Business, and neither of
the Sellers has received any written notice of any claimed infringement of any
such intellectual property with the right or property of any other person.
6 Transactions with Affiliates. No material asset utilized in the
----------------------------
Business is owned by, leased from or leased to Horizon or any of its Affiliates
(other than the Sellers).
7 Sensitive Payments. Neither of the Sellers has any reason to
------------------
believe that either of them has (a) made any contributions, payments or gifts to
or for the private use of any governmental official, employee or agent where
either the payment or the purpose of such contribution, payment or gift is
illegal under the laws of the United States or the jurisdiction in which made,
(b) established or maintained any unrecorded fund or asset for any purpose or
made any false or artificial entries on its or their books, (c) given or
received any payments or other forms of remuneration in connection with the
referral of patients which would violate the Medicare/Medicaid Anti-Kickback
Law, Section 1128(b) of the Social Security Act, 42 U.S.C. (S) 1320a-7b(b) or
any analogous state statute, or (d) made any payments to any person with the
intention that any part of such payment was to be used for any purpose other
than that described in the documents supporting the payment.
8 Going Concern. Neither of the Sellers nor Horizon has any
-------------
knowledge of any fact, event, circumstance or condition
-24-
<PAGE>
(including, without limitation, any announced or anticipated changes in the
policies of any material client or customer) that would materially impair the
ability of the Buyer to continue the Business in substantially the manner
heretofore conducted, other than general, industry-wide conditions.
9 Disclosure Materials; Restricted Securities. Each of the Sellers
-------------------------------------------
and Horizon has reviewed the reports of DHS described in Section 5.5 below, and
each of the Sellers is an "accredited investor" within the meaning thereof under
Rule 506 promulgated under the Securities Act of 1933, as amended. Each of the
Sellers and Horizon hereby further acknowledges that (a) the Preferred Stock to
be issued pursuant to Section 3.1 above, any and all additional shares of
Preferred Stock issued as dividends on the Preferred Stock from time to time,
and any shares of common stock of DHS issued upon any conversion(s) of the
Preferred Stock, will constitute "restricted securities" within the meaning of
federal and state securities laws, which the Sellers will acquire for their own
account for investment (and not with a view to the resale or distribution
thereof in violation of any applicable securities laws), and which the Sellers
may be required to hold indefinitely or until an exemption from registration
requirements is available for the resale or disposition thereof, and (b) DHS has
made no representation, warranty or assurance as to whether or when any of such
securities may be registered or any exemption from registration requirements
will be available with respect thereto.
4.26 Disclosure and Duty of Inquiry. Neither DHS nor the Buyer is or
------------------------------
will be required to undertake any independent investigation to determine the
truth, accuracy and completeness of the representations and warranties made by
the Sellers and Horizon in this Agreement.
1. REPRESENTATIONS AND WARRANTIES OF THE BUYER AND DHS.
---------------------------------------------------
In connection with the purchase of the Assets from the Sellers
hereunder, the Buyer and DHS hereby jointly and severally represent and warrant
to the Sellers and Horizon as follows:
-25-
<PAGE>
1 Organization, Good Standing and Qualification. The Buyer is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas, and DHS is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, each with all
necessary power and authority to execute and deliver this Agreement, to perform
its obligations hereunder, and to consummate the transactions contemplated
hereby.
2 Authorization of Agreement. The execution, delivery and
--------------------------
performance of this Agreement and the consummation of the transactions
contemplated hereby by the Buyer and DHS have been duly and validly authorized
by the Board of Directors and sole stockholder of the Buyer, and by the Board of
Directors of DHS; and the Buyer and DHS have the full legal right, power and
authority to execute and deliver this Agreement, to perform their respective
obligations hereunder, and to consummate the transactions contemplated hereby.
No further corporate authorization is necessary on the part of the Buyer or DHS
to consummate the transactions contemplated hereby.
3 Valid and Binding Agreement. This Agreement and, when executed and
---------------------------
delivered, the Assumption Agreement, the Non-Competition Agreement, the First
Refusal Agreement and the Registration Rights Agreement (as such terms are
hereinafter defined), constitute and will constitute the legal, valid and
binding obligations of the Buyer and DHS (to the extent a party thereto),
enforceable against the Buyer and DHS in accordance with their respective terms,
except, in each case, to the extent limited by bankruptcy, insolvency,
reorganization and other laws affecting creditors' rights generally, and except
that the remedy of specific performance or similar equitable relief is available
only at the discretion of the court before which enforcement is sought.
4 No Breach of Statute or Contract. Neither the execution and
--------------------------------
delivery of this Agreement, the Assumption Agreement, the Non-Competition
Agreement, the First Refusal Agreement and the Registration Rights Agreement by
the Buyer or DHS or the filing of the Certificate of Stock Designation, nor
-26-
<PAGE>
compliance with the terms and provisions of this Agreement, such other
agreements or the Certificate of Stock Designation on the part of the Buyer or
DHS, will: (a) violate any statute or regulation of any governmental authority,
domestic or foreign, affecting the Buyer or DHS; (b) require the issuance of any
authorization, license, consent or approval of any federal or state governmental
agency (except to the extent that the Buyer may be required to be qualified as a
foreign corporation in certain jurisdictions in which it is not currently so
qualified, and to the extent that the Buyer may be required to reapply for any
permits, licenses and/or franchises which are not assignable as part of the
Assets); or (c) conflict with or result in a breach of any of the terms,
conditions or provisions of any judgment, order, injunction, decree, note,
indenture, loan agreement or other agreement or instrument to which the Buyer or
DHS is a party, or by which the Buyer or DHS is bound, or constitute a default
thereunder.
5 Disclosure. DHS has previously delivered to the Sellers and
----------
Horizon DHS' Annual Report on Form 10-KSB for the year ended December 31, 1995
and quarterly report on Form 10-QSB for the quarter ended June 30, 1996; and the
financial and other information contained therein is true, complete and correct
in all material respects as of the dates thereof, in accordance with the
disclosure requirements applicable thereto. Since June 30, 1996, (a) except for
the issuance and sale of 400,000 shares of common stock of DHS pursuant to the
exercise of the underwriters' overallotment option in DHS' secondary public
offering, there has been no material change in the capitalization of DHS, (b)
the businesses of DHS and its subsidiaries have been operated in the normal
course, and (c) there has been no material adverse change in the financial
condition, operations or business of DHS and its subsidiaries (taken as a
consolidated whole) from that reflected in such reports.
6 Commission Filings. DHS has heretofore filed all registration
------------------
statements, reports, documents and schedules with the Securities and Exchange
Commission required to be filed by it pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or the Securities Act of 1933, as amended
(the "Securities Act"), since June 1, 1993 (the "SEC Reports"). As of
-27-
<PAGE>
their respective filing or effective dates, as the case may be, the SEC reports
complied in all material respects with all applicable requirements of the
Exchange Act and the Securities Act and the rules and regulations promulgated
thereunder. None of the SEC Reports (as of their respective filing or effective
dates, as the case may be) contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. The audited and unaudited consolidated
financial Statements of DHS and its consolidated subsidiaries included in the
SEC Reports present fairly, in all material respects, the financial position of
DHS and its consolidated subsidiaries as of the dates of such financial
statements and the results of their operations and their cash flows for the
periods indicated therein, in each case in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis, subject, in the
case of the unaudited financial statements, to normal year-end audit adjustments
and the absence of full footnote disclosures.
7 Litigation. There is no suit, action, arbitration, or legal,
----------
administrative or other proceeding, or governmental investigation pending, or to
the knowledge of the Buyer and DHS, threatened, against the Buyer and/or DHS (i)
which challenges the Buyer's and/or DHS' ability to consummate the transactions
provided for herein, or (ii) materially restricts or affects the business
operations of the Buyer and/or DHS either before or after the Closing. Neither
the Buyer nor DHS is a party to or bound by any orders, judgments, injunctions,
decrees or settlement agreements under which it may have continuing obligations
as of the date hereof or as of the Closing Date and which are likely to
materially restrict or affect the business operations of the Buyer and/or DHS
either before or after the Closing Date. Neither the Buyer nor DHS is aware of
any state of facts, events, conditions or occurrences which might properly
constitute grounds for or the basis of any suit, action, arbitration, proceeding
or investigation against or with respect to the Buyer and/or DHS.
8 Sensitive Payments. The Buyer and DHS have no reason to believe
------------------
that either of them has (a) made any
-28-
<PAGE>
contributions, payments or gifts to or for the private use of any governmental
official, employee or agent where either the payment or the purpose of such
contribution, payment or gift is illegal under the laws of the United States or
the jurisdiction in which made, (b) established or maintained any unrecorded
fund or asset for any purpose or made any false or artificial entries on its or
their books, (c) given or received any payments or other forms of remuneration
in connection with the referral of patients which would violate the
Medicare/Medicaid Anti-Kickback Law, Section 1128(b) of the Social Security Act,
42 U.S.C. (S) 1320a-7b(b) or any analogous state statute, or (d) made any
payments to any person with the intention that any part of such payment was to
be used for any purpose other than that described in the documents supporting
the payment.
9 Taxes and Tax Returns. All tax and other related returns, reports
---------------------
and filings of any kind or nature, required to be filed by the Buyer or DHS
prior to the date of this Agreement with respect to its operations have been
properly completed and timely filed, or extensions for the filing thereof have
been timely secured, with all such filings being in material compliance with all
applicable requirements; and all taxes due with respect to the Buyer's and/or
DHS' operations have been timely paid, except to the extent that the same are
being duly contested in good faith in accordance with applicable law and
adequate reserves therefor are reflected on DHS' financial statements or will be
reflected in any subsequent financials prepared by the Buyer and/or DHS.
10 Preferred Stock. When issued and delivered pursuant to Section 3.1
---------------
above, all of the Preferred Stock shall have been duly authorized and validly
issued, and shall be fully paid and non-assessable.
11 Disclosure and Duty of Inquiry. The Sellers and Horizon are not
------------------------------
and will not be required to undertake any independent investigation to determine
the truth, accuracy and completeness of the representations and warranties made
by the Buyer and DHS in this Agreement.
2. THE SELLERS' AND HORIZON'S OBLIGATIONS BEFORE THE CLOSING DATE.
---------------------------------------------------------- ----
-29-
<PAGE>
Each of the Sellers and Horizon covenants and agrees that, from the
date hereof until the Closing Date:
1 Access to Information.
---------------------
(a) The Sellers shall permit DHS, the Buyer and their counsel,
accountants and other representatives, upon reasonable advance notice to the
Sellers, during normal business hours and without undue disruption of the
business of the Sellers, to have reasonable access to all properties, books,
accounts, records, contracts, documents and information relating to the Business
and, to the extent reasonably required by the Buyer for its due diligence, the
Sellers. DHS, the Buyer and their representatives shall also be permitted to
freely consult with the Sellers' counsel concerning the Business.
(b) Each of the Sellers and Horizon will make available to the
Buyer and its accountants all financial records relating to the Sellers and the
Business, and shall cause the Sellers' accountants to cooperate with the Buyer's
accountants and make available to the Buyer's accountants all work papers and
other materials developed by or in the possession of the Seller's accountants,
for the purpose of assisting the Buyer's accountants in the performance of an
audit of the Business for all periods subsequent to January 1, 1993.
2 Conduct of Business in Normal Course. The Sellers shall carry on
------------------------------------
their business activities in substantially the same manner as heretofore
conducted, and shall not make or institute any unusual or novel methods of
service, sale, purchase, lease, management, accounting or operation that will
vary materially from those methods used by the Sellers as of the date hereof,
without in each instance obtaining the prior written consent of DHS.
3 Preservation of Business and Relationships. The Sellers shall,
------------------------------------------
without making or incurring any unusual commitments or expenditures, use all
reasonable efforts to preserve their business organization intact, and preserve
their present relationships with referral sources, clients, customers, suppliers
and others having business relationships with the Sellers.
-30-
<PAGE>
4 Maintenance of Insurance. Each Seller shall continue to carry its
------------------------
existing insurance, to the extent obtainable upon reasonable terms.
5 Corporate Matters. Neither Seller shall, without the prior written
-----------------
consent of DHS :
(a) amend, cancel or modify any Material Contract or enter into
any material new agreement, commitment or transaction except, in each instance,
in the ordinary course of business;
(b) pay, grant or authorize any material salary increases or
bonuses except in the ordinary course of business and consistent with past
practice, or enter into any employment, consulting or management agreements;
(c) modify in any material respect any material agreement
relating to the Business to which such Seller is a party or by which it may be
bound, except in the ordinary course of business;
(d) make any change in management personnel (other than Louis H.
Sanders and Larry Novak);
(e) except pursuant to commitments in effect on the date hereof
(to the extent disclosed in this Agreement or in any Schedule hereto), make any
capital expenditure(s) or commitment(s), whether by means of purchase, lease or
otherwise, or any operating lease commitment(s), in excess of $100,000 in the
aggregate;
(f) dispose of or transfer any asset outside of the ordinary
course of business, or sell, assign or dispose of any capital asset(s) with a
net book value in excess of $25,000 as to any one item;
(g) materially change its method of collection of accounts or
notes receivable, accelerate or slow in any material respect its payment of
accounts payable, or prepay any of its
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obligations or liabilities, other than prepayments to take advantage of trade
discounts not otherwise inconsistent with or in excess of historical prepayment
practices;
(h) make any payment or distribution of any assets or property
other than cash to Horizon or any of its Affiliates (other than the Sellers);
(i) incur any material liability or indebtedness except, in each
instance, in the ordinary course of business;
(j) subject any of the assets or properties of the Business to
any further material liens or encumbrances, other than Permitted Liens; or
(k) agree to do, or take any action in furtherance of, any of the
foregoing.
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2. ADDITIONAL AGREEMENTS OF THE PARTIES.
------------------------------------
1 Confidentiality. Notwithstanding anything to the contrary
---------------
contained in this Agreement, and subject only to any disclosure requirements
which may be imposed upon any party under applicable state or federal securities
or antitrust laws, it is expressly understood and agreed by the parties that,
except with respect to matters or information which are publicly available other
than by reason of a breach of this Section 7.1, (i) this Agreement, the
Schedules hereto, and the conversations, negotiations and transactions relating
hereto and/or contemplated hereby, and (ii) all financial information, business
records and other non-public information concerning either party which the other
party or its representatives has received or may hereafter receive, shall be
maintained in the strictest confidence by the recipient and its representatives,
and shall not be disclosed to any person that is not associated or affiliated
with the recipient and involved in the transactions contemplated hereby, without
the prior written approval of the party which provided the information. The
parties hereto shall use their best efforts to avoid disclosure of any of the
foregoing or undue disruption of any of the business operations or personnel of
the parties, and no party shall issue any press release or other public
announcement regarding the transactions contemplated hereby without the prior
approval of each other party (such approval not to be unreasonably withheld or
delayed) unless compelled to do so upon advice of counsel and there is
insufficient time to practicably obtain approval hereunder. In the event that
the transactions contemplated hereby shall not be consummated for any reason,
each party covenants and agrees that neither it nor any of its representatives
shall retain (other than information which is publicly available other than by
reason of a breach of this Section 7.1) any documents, lists or other writings
of any other party which it may have received or obtained in connection herewith
or any documents incorporating any of the information contained in any of the
same (all of which, and all copies thereof in the possession or control of the
recipient or its representatives, shall be returned to the party which provided
the information).
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2 Exclusivity. From the date hereof through any termination of this
-----------
Agreement in accordance with Section 11 below, the Sellers and Horizon shall not
(and shall not permit any of their stockholders, directors, officers or
affiliates to) negotiate with or enter into any other commitments, agreements or
understandings with any person, firm or corporation (other than DHS and its
Affiliates) in respect of any sale of capital stock or assets of the Sellers,
any merger, consolidation or corporate reorganization, or any other such
transaction relating to the Sellers or the Business.
3 Bill of Sale; Transfer Documents; Assumption Agreement.
------------------------------------------------------
(a) On the Closing Date, the Sellers shall execute and deliver to
the Buyer a bill of sale in respect of the Assets in substantially the form of
Exhibit B annexed hereto (the "Bill of Sale"). In addition, to the extent that
- ---------
specific assignments may be necessary or appropriate in respect of any of the
Assets, and/or to the extent that any of the Assets are represented by
certificates of title or other documents, then the Sellers shall execute and
deliver to the Buyer any and or additional transfer documents, and shall endorse
to and in the name of the Buyer all certificates of title and other such
documents, as may be necessary or appropriate in order to effect the full
transfer to the Buyer or its designee(s) of all of the Assets.
(b) On the Closing Date, the Sellers and the Buyer shall execute
and deliver to one another an assignment and assumption agreement in
substantially the form of Exhibit C annexed hereto (the "Assumption Agreement").
---------
In addition, to the extent that specific assignments may be required in order to
effect the assignment to and assumption by the Buyer of any particular Assumed
Liabilities, the Sellers and the Buyer shall execute and deliver to one another
such additional assignment and assumption documents.
4 Non-Competition Agreement. On the Closing Date, the Sellers,
-------------------------
Horizon, the Buyer and DHS shall execute and deliver to one another a non-
competition and non-disclosure agreement in
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substantially the form of Exhibit D annexed hereto (the "Non-Competition
---------
Agreement").
5 First Refusal Agreement. On the Closing Date, Horizon, the
-----------------------
Sellers, the Buyer and DHS shall execute and deliver to one another a right of
first refusal agreement in respect of the Sellers' retained mobile x-ray
business, in substantially the form of Exhibit E annexed hereto (the "First
---------
Refusal Agreement").
6 Registration Rights Agreement. On the Closing Date, DHS shall
-----------------------------
execute and deliver to the Sellers a registration rights agreement in respect of
the shares of common stock of DHS which may be issued from time to time upon
conversion of the Preferred Stock, in substantially the form of Exhibit F
---------
annexed hereto (the "Registration Rights Agreement").
7 Additional Agreements and Instruments. On or before the Closing
-------------------------------------
Date, the Sellers, Horizon, the Buyer and DHS shall execute, deliver and file
all exhibits, agreements, certificates, instruments and other documents, not
inconsistent with the provisions of this Agreement, which, in the opinion of
counsel to the parties hereto, shall reasonably be required to be executed,
delivered and filed in order to consummate the transactions contemplated by this
Agreement.
8 Non-Interference. Neither the Buyer, DHS, the Sellers nor Horizon
----------------
shall cause to occur any act, event or condition which would cause any of their
respective representations and warranties made in this Agreement to be or become
untrue or incorrect in any material respect as of the Closing Date, or would
interfere with, frustrate or render unreasonably expensive the satisfaction by
the other party or parties of any of the conditions precedent set forth in
Sections 8 and 9 below.
9 Due Diligence; Schedules. The parties hereby acknowledge and
------------------------
confirm that this Agreement has been executed and delivered prior to any of the
parties having performed any material amount of due diligence with respect to
the other parties, and in particular, the absence to date of any material due
diligence by the Buyer and DHS with respect to the Business.
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Accordingly, the Sellers and Horizon have agreed that they will, at all times
from the date hereof until October 22, 1996 (the "Due Diligence Period"),
provide the Buyer and DHS with full and unfettered access to the Business and
all information relating thereto in accordance with Section 6.1 above, and will
permit the Buyer and DHS, based on the results of such due diligence, to (i)
request that the Sellers and Horizon undertake to rectify any due diligence
concerns raised by the Buyer or DHS with respect to the Business or the Assets
(and the Sellers and Horizon hereby agree to use all reasonable efforts to
comply with any reasonable requests by the Buyer and DHS hereunder, provided
that the Sellers and Horizon shall not be required to expend more than $100,000
or incur any substantial commitments or expenditures of time in connection
therewith), and/or (ii) terminate this Agreement in the event that the Buyer and
DHS shall discover that any of the representations and warranties of the Sellers
and Horizon made in this Agreement (as originally executed and delivered) are
materially incorrect or false or misleading; and the Sellers and Horizon hereby
agree to accommodate any and all such reasonable requests which may be made by
the Buyer and DHS within the Due Diligence Period, and/or to permit the Buyer
and DHS to terminate this Agreement within the Due Diligence Period under such
circumstances. Furthermore, the parties hereby acknowledge that this Agreement
has been executed and delivered without simultaneous delivery of the various
Schedules required hereunder; and the Sellers and Horizon hereby agree to
deliver all of such Schedules (exclusive of the list of the Assumed Property
Leases for Schedule 2.1, which shall be prepared by the Buyer based upon its due
------------
diligence pursuant to this Section 7.9, but shall be subject to the reasonable
approval of Horizon) to the Buyer, DHS and their counsel within fifteen (15)
days hereafter (with the Due Diligence Period hereunder to be extended by the
amount of time, if any, by which any of the Schedules, exclusive of Schedule
--------
2.1, is not timely delivered), and the Buyer and DHS shall have the right,
- ---
consistent with the foregoing, to request reasonable modifications of such
Schedules and/or to terminate this Agreement if (A) the Buyer and DHS are
reasonably dissatisfied with any of such Schedules, and (B) the Sellers and
Horizon are unable to reasonably resolve the Buyer's and DHS' dissatisfaction
within ten (10) days after the delivery of all of the Schedules (exclusive of
Schedule 2.1). Subject to the foregoing provisions, the parties
- ------------
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<PAGE>
hereby agree to cooperate with one another so as to finalize and resolve, as
promptly as practicable, any and all due diligence and disclosure issues which
may be raised within the Due Diligence Period. Nothing herein contained,
however, shall be deemed to impair the Buyer's and DHS' rights to continue to
perform due diligence in accordance with Section 6.1 above at all times through
the Closing Date or the termination of this Agreement pursuant to Section 11
below.
3. CONDITIONS PRECEDENT TO THE BUYER'S AND DHS' PERFORMANCE.
--------------------------------------------------------
In addition to the fulfillment of the parties' agreements in Section
7 above, the obligations of the Buyer and DHS to consummate the transactions
contemplated by this Agreement are further subject to the satisfaction, at or
before the Closing Date, of all the following conditions, any one or more of
which may be waived in writing by the Buyer and DHS:
1 Accuracy of Representations and Warranties. All representations
------------------------------------------
and warranties made by the Sellers and/or Horizon in this Agreement shall be
true and correct in all material respects on and as of the Closing Date as
though such representations and warranties were made on and as of that date.
2 Performance. The Sellers and Horizon shall have performed,
-----------
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by them on or before the Closing Date.
3 Certification. The Buyer and DHS shall have received a
-------------
certificate, dated the Closing Date, signed by the Sellers and Horizon,
certifying, in such detail as the Buyer and DHS and their counsel may reasonably
request, that the conditions specified in Sections 8.1 and 8.2 above have been
fulfilled.
4 Resolutions. The Buyer and DHS shall have received certified
-----------
resolutions of the Board of Directors and the sole stockholder of each of the
Sellers, in form reasonably satisfactory to counsel for the Buyer and DHS,
authorizing the
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Sellers' execution, delivery and performance of this Agreement and all actions
to be taken by the Sellers hereunder.
5 Absence of Litigation. No action, suit or proceeding by or before
---------------------
any court or any governmental body or authority, against either of the Sellers
or Horizon or pertaining to the transactions contemplated by this Agreement or
their consummation, shall have been instituted on or before the Closing Date,
which action, suit or proceeding would, if determined adversely, have a material
adverse effect on the Business or any material portion of the Assets.
6 Consents.
--------
(a) All necessary disclosures to and agreements and consents of
(i) any parties to any Material Contracts, the landlords under the Assumed
Property Leases, and/or any licensing authorities which are material to the
Business, and (ii) any governmental authorities or agencies to the extent
required to be obtained prior to the Closing in connection with the transactions
contemplated by this Agreement, shall have been obtained and true and complete
copies thereof delivered to the Buyer. Any such consents must be obtained
without composing any unreasonable burden or obligation on the Business from and
after the Closing Date.
(b) DHS and the Buyer shall have obtained, and there shall be in
full force and effect, the consent of DHS' existing lender (i) for the use of up
to $8,000,000 in principal amount of loans under DHS' loan agreement with such
lender in respect of the cash portion of the Consideration, and (ii) with
respect to the consummation of the transactions contemplated hereby.
7 Completion of Audit. DHS' accountants shall have completed their
-------------------
audit of the Business as contemplated by Section 6.1(b) above.
8 Execution and Delivery of Exhibits. On or before the Closing Date,
----------------------------------
(a) the Sellers shall have executed and delivered to the Buyer, the Bill of the
Sale and the Assumption
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<PAGE>
Agreement, and (b) the Sellers and Horizon shall have executed and delivered to
the Buyer and DHS the Non-Competition Agreement and the First Refusal Agreement.
In addition, the parties hereto, and DHS' existing lender, shall have reached
agreement with respect to the terms, conditions and subordination provisions to
be applicable to any "Redemption Notes" for purposes of Section 4.1 of the
Certificate of Stock Designation (and such agreed terms shall have been included
in the Certificate of Stock Designation, as filed with the Delaware Secretary of
State).
2. CONDITIONS PRECEDENT TO THE SELLERS' AND HORIZON'S
--------------------------------------------------
PERFORMANCE.
-----------
In addition to the fulfillment of the parties' agreements in Section
7 above, the obligations of the Sellers and Horizon to consummate the
transactions contemplated by this Agreement are further subject to the
satisfaction, at or before the Closing Date, of all of the following conditions,
any one or more of which may be waived in writing by the Sellers and Horizon:
1 Accuracy of Representations and Warranties. All representations
------------------------------------------
and warranties made by the Buyer and DHS in this Agreement shall be true and
correct in all material respects on and as of the Closing Date as though such
representations and warranties were made on and as of that date.
2 Performance. The Buyer and DHS shall have performed, satisfied and
-----------
complied in all material respects with all covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer and DHS on or before the Closing Date.
3 Certification. The Sellers and Horizon shall have received a
-------------
certificate, dated the Closing Date, signed by the Buyer and DHS, certifying, in
such detail as the Sellers and Horizon and their counsel may reasonably request,
that the conditions specified in Sections 9.1 and 9.2 above have been fulfilled.
4 Resolutions. The Sellers and Horizon shall have received certified
-----------
resolutions of the Board of Directors and sole
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<PAGE>
stockholder of the Buyer and of the Board of Directors of DHS, in form
reasonably satisfactory to counsel for the Sellers and Horizon, authorizing the
Buyer's and DHS' execution, delivery and performance of this Agreement and all
actions to be taken by the Buyer and DHS hereunder.
5 Consents. Horizon shall have obtained or received a release from
--------
Bank of America Leasing from and in respect of any and all guaranty obligations
and liabilities arising for periods or from events occurring after the Closing
Date under those lease agreements by and between Bank of America Leasing (as
lessor) and ACTI (as lessee). In addition, the Sellers and Horizon shall have
received any and all agreements and consents of any governmental authorities and
agencies, and any parties to any material contracts or agreements of either of
the Sellers, to the extent required in connection with the transactions
contemplated by this Agreement.
6 Execution and Delivery of Exhibits. On or before the Closing Date,
----------------------------------
(a) the Buyer shall have executed and delivered to the Sellers the Assumption
Agreement, (b) the Buyer and DHS shall have executed and delivered to the
Sellers and Horizon the Non-Competition Agreement and the First Refusal
Agreement, and (c) DHS shall have filed the Certificate of Stock Designation and
shall have executed and delivered to the Sellers the Registration Rights
Agreement. In addition, the parties hereto, and DHS' existing lender, shall have
reached agreement with respect to the terms, conditions and subordination
provisions to be applicable to any "Redemption Notes" for purposes of Section
4.1 of the Certificate of Stock Designation (and such agreed terms shall have
been included in the Certificate of Stock Designation, as filed with the
Delaware Secretary of State).
2. CLOSING.
-------
1 Place and Date of Closing. Unless this Agreement shall be
-------------------------
terminated pursuant to Section 11 below, the consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of the Sellers' counsel, Vinson & Elkins L.L.P., located at 3700 Trammell Crow
Center, 2001 Ross Avenue, Dallas, Texas 75201-2975, or such other location as is
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<PAGE>
agreed to between the parties, at 10:00 A.M. local time on November 15, 1996, or
such later date (not later than December 15, 1996) as may be reasonably
agreeable to all parties (the date of the Closing being referred to in this
Agreement as the "Closing Date").
2 Actions at Closing. At the Closing, there shall be made, by all
------------------
necessary and appropriate persons, all payments and deliveries stated in this
Agreement to be made at the Closing and/or on or prior to the Closing Date.
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<PAGE>
3. TERMINATION OF AGREEMENT.
------------------------
1 General. This Agreement may be terminated and the transactions
-------
contemplated hereby may be abandoned at any time prior to the Closing: (a)
pursuant to Section 7.9 above; (b) by the mutual written consent of the Sellers,
Horizon, the Buyer and DHS; (c) by the Buyer and DHS, or by the Sellers and
Horizon, if: (i) a material breach shall exist with respect to the written
representations and warranties made by the other party or parties, as the case
may be, (ii) the other party or parties, as the case may be, shall take any
action prohibited by this Agreement, if such actions shall or may have a
material adverse effect on the Business and/or the transactions contemplated
hereby, (iii) the other party or parties, as the case may be, shall not have
furnished, upon reasonable notice therefor, such certificates and documents
required in connection with the transactions contemplated hereby and matters
incidental thereto as it or they shall have agreed to furnish, and it is
reasonably unlikely that the other party or parties will be able to furnish such
item(s) prior to the Outside Closing Date specified below, or (iv) any consent
of any third party to the transactions contemplated hereby (whether or not the
necessity of which is disclosed herein or in any Schedule hereto) is reasonably
necessary to prevent a default under any outstanding material obligation of the
Buyer, DHS, Horizon or the Sellers, and such consent is not obtainable without
material cost or penalty (unless the party or parties not seeking to terminate
this Agreement agrees or agree to pay such cost or penalty); or (d) by the Buyer
and DHS, or by the Sellers and Horizon, at any time on or after December 15,
1996 (the "Outside Closing Date"), if the transactions contemplated hereby shall
not have been consummated prior thereto, and the party directing termination
shall not then be in breach or default of any obligations imposed upon such
party by this Agreement.
2 Effect of Termination. In the event of termination by either party
---------------------
as above provided in this Section 11, prompt written notice shall be given to
the other party. Termination of this Agreement shall not relieve any party of
any of its obligations pursuant to Section 7.1 above, and shall not relieve any
breaching party from liability for any breach of this
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Agreement (including, without limitation, obligations under Section 11.3 below,
if applicable under the circumstances).
3 Expense Reimbursement. Regardless of whether this Agreement is
---------------------
terminated, DHS and the Buyer (on the one hand) and Horizon and the Sellers (on
the other hand) shall each have the right, in the event that (a) the
transactions contemplated hereby shall not be consummated on or prior to the
Outside Closing Date, (b) such party is not then in default of any material
obligation hereunder, and (c) the other party is then in default of any material
obligation hereunder, to obtain reimbursement from the other party for its costs
and expenses incurred in connection with the transactions contemplated hereby,
and the parties hereby agree that $150,000 represents a fair and reasonable
estimate of the actual costs and expenses which each party may expect to incur
in connection herewith. Such liquidated expenses shall be a non-exclusive
remedy (except in respect of expenses) for an aggrieved party hereunder, and
demand for and acceptance of any such liquidated expenses, or any other
reimbursement, shall not preclude the non-defaulting party from pursuing any
other remedies, including but not limited to seeking and obtaining specific
performance of this Agreement.
4. INDEMNIFICATION.
---------------
1 General.
-------
(a) Without prejudice to any rights of contribution as between
the Sellers and Horizon, from and after the Closing Date, the Sellers and
Horizon shall jointly and severally defend, indemnify and hold harmless the
Buyer and DHS from, against and in respect of any and all claims, losses, costs,
expenses, obligations, liabilities, damages, recoveries and deficiencies,
including interest, penalties and reasonable attorneys' fees, that the Buyer
and/or DHS may incur, sustain or suffer ("Losses") as a result of (i) any breach
of, or failure by the Sellers or Horizon to perform, any of the representations,
warranties, covenants or agreements of the Sellers or Horizon contained in this
Agreement, or (ii) any failure by either of the Sellers to pay or perform when
due any of their retained liabilities.
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<PAGE>
(b) From and after the Closing Date, the Buyer and DHS shall
jointly and severally defend, indemnify and hold harmless the Sellers and
Horizon from, against and in respect of any and all claims, losses, costs,
expenses, obligations, liabilities, damages, recoveries and deficiencies,
including interest, penalties and reasonable attorneys' fees, that the Sellers
or Horizon may incur, sustain or suffer as a result of (i) any breach of, or
failure by the Buyer or DHS to perform, any of the representations, warranties,
covenants or agreements of the Buyer or DHS contained in this Agreement, or (ii)
any failure by the Buyer to pay or perform when due any of the Assumed
Liabilities.
2 Limitations on Certain Indemnity.
--------------------------------
(a) Notwithstanding any other provision of this Agreement to the
contrary, except for Losses arising out of claims for breach of any of the
warranties made under Sections 4.1, 4.2, 4.3, 4.8 and/or 4.22 above, the Sellers
and Horizon shall not be liable to the Buyer or DHS with respect to Losses
unless and until, and then only to the extent that, the aggregate amount of all
Losses incurred by the Buyer or DHS shall exceed the sum of $100,000 (the
"Basket"); provided, however, that the Basket shall not be available with
-------- -------
respect to any Losses under Section 12.1(a)(ii). The Sellers and Horizon shall
thereafter be liable for all Losses in excess of the Basket, provided that the
Sellers' and Horizon's maximum aggregate liability in respect of all Losses
shall not, in the absence of proven fraud by either of the Sellers or Horizon in
respect of any particular Losses, in any event exceed the limitations set forth
in Section 12.2(b) below.
(b) Except with respect to any Losses involving proven fraud by
either of the Sellers or Horizon, the Sellers and Horizon shall only be
required, in the aggregate, to pay indemnification hereunder, after application
of the Basket, up to a maximum amount equal to the Consideration.
(c) The Buyer and DHS shall be entitled to indemnification by the
Sellers and Horizon for Losses only in respect of claims for which notice of
claim shall have been given
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<PAGE>
to the Sellers and Horizon on or before March 31, 1998, or, with respect to
Losses relating to a breach of any warranties under Section 4.8 above, the
expiration of the final statute of limitations for those tax returns covered by
the warranties under Section 4.8 above; provided, however, that neither the
-------- -------
Buyer nor DHS shall be entitled to indemnification from the Sellers or Horizon
in the event that the subject claim for indemnification relates to a third-party
claim and the Buyer or DHS (as the case may be) delayed giving notice thereof to
the Sellers and Horizon to such an extent as to cause material prejudice to the
defense of such third-party claim. This Section 12.2(c) shall not apply to any
failure by either of the Sellers to pay when due any of its retained
liabilities.
3 Claims for Indemnity. Whenever a claim shall arise for which any
--------------------
party shall be entitled to indemnification hereunder, the indemnified party
shall notify the indemnifying party in writing within ten (10) business days of
the indemnified party's first receipt of notice of, or the indemnified party's
obtaining actual knowledge of, such claim, and in any event within such shorter
period as may be necessary for the indemnifying party or parties to take
appropriate action to resist such claim. Such notice shall specify all facts
known to the indemnified party giving rise to such indemnity rights and shall
estimate (to the extent reasonably possible) the amount of potential liability
arising therefrom. If the indemnifying party shall be duly notified of such
dispute, the parties shall attempt to settle and compromise the same or may
agree to submit the same to arbitration or, if unable or unwilling to do any of
the foregoing, such dispute shall be settled by appropriate litigation, and any
rights of indemnification established by reason of such settlement, compromise,
arbitration or litigation shall promptly thereafter be paid and satisfied by
those indemnifying parties obligated to make indemnification hereunder.
4 Right to Defend. If the facts giving rise to any claim for
---------------
indemnification shall involve any actual or threatened action or demand by any
third party against the indemnified party or any of its Affiliates, the
indemnifying party or parties shall be entitled (without prejudice to the
indemnified party's right to participate at its own expense through counsel of
its own
-45-
<PAGE>
choosing), at their expense and through counsel of their own choosing, to defend
or prosecute such claim in the name of the indemnifying party or parties, or any
of them, or if necessary, in the name of the indemnified party. In any event,
the indemnified party shall give the indemnifying party advance written notice
of any proposed compromise or settlement of any such claim. If the remedy sought
in any such action or demand is solely money damages, the indemnifying party
shall have fifteen (15) days after receipt of such notice of settlement to
object to the proposed compromise or settlement, and if it does so object, the
indemnifying party shall be required to undertake, conduct and control, though
counsel of its own choosing and at its sole expense, the settlement or defense
thereof, and the indemnified party shall cooperate with the indemnifying party
in connection therewith.
5 POST-CLOSING EVENTS.
-------------------
The parties hereby further agree that, from and after the Closing:
1 Books and Records. At any time and from time to time from and
-----------------
after the Closing Date, the Buyer shall permit the Sellers and/or Horizon to
have access, during normal business hours and without undue disruption of the
Buyer's business, to those books and records transferred to the Buyer as part of
the Assets, for purposes of preparing any tax filings or any other legitimate
purpose of the Sellers and/or Horizon. Such books and records may be made
available at any location where the Buyer maintains same, and all costs and
expenses relating to such access and inspection shall be the responsibility of
the Sellers and/or Horizon. In the event that, at any time and from time to time
after the Closing Date, the Buyer shall determine to destroy or dispose of any
such books and records, the Buyer shall give notice thereof to the Sellers
and/or Horizon not less than thirty (30) days prior to such disposition, and the
Sellers and/or Horizon shall have the right, at their own cost and expense, to
take possession of such books and records prior to their disposition.
2 Employee Benefits.
-----------------
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<PAGE>
(a) Retained Employees. With the exception of the employees of
------------------
ACTI in its home office in Albuquerque, New Mexico (the "Home Office
Employees"), the Buyer and/or DHS (either itself or through any of its
subsidiaries) shall offer to hire at Closing not less than 136 employees of the
Sellers (who, as of the Closing, work for the Business and have been employed on
average for 20 or more hours per week). Such employees who are offered
employment by the Buyer, DHS and/or its subsidiaries shall hereinafter be
referred to as the "Retained Employees". Any such offer of employment to a
Retained Employee by the Buyer, DHS and/or its subsidiaries shall be to perform
comparable services, in a comparable position and at substantially the same base
salary as such Retained Employee held with the Sellers as of the Closing. The
Sellers, or their affiliates, shall have the right to employ or offer to employ
any Retained Employee who declines the Buyer's, DHS' and/or its subsidiary's
offer of employment.
(b) Home Office Employees.
---------------------
(1) On or before twenty (20) days preceding the Closing Date,
ACTI shall deliver to the Buyer and DHS a schedule (the "Home Office Employee
Schedule") which reflects, among other things, the following: (i) the names of
the Home Office Employees, (ii) their positions and rates of pay, (iii) all
earned and accrued vacation, holiday and sick pay and any other benefits to
and/or coming due to the Home Office Employees as of the Closing Date and during
the period ending 120 days after the Closing Date, and (iv) any severance
payment that may be due to such Home Office Employee in the event of termination
as of the end of the 120-day period following the Closing Date (the "Home Office
Accrued Benefits"). Within five (5) business days after receipt of the Home
Office Employee Schedule, the Buyer and/or DHS shall advise the Sellers as to
which of the Home Office Employees the Buyer and/or DHS (either itself or
through any subsidiary) desires to retain (the "Retained Home Office Employees")
for the 120-day transition period following the Closing Date (the "Transition
Period"). Any such offer of employment to a Retained Home Office Employee by the
Buyer, DHS and/or its subsidiary shall be to perform comparable services, in a
comparable position and at substantially the same base salary as such Retained
Home Office Employee held with the Sellers as of the Closing. The Sellers, or
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their affiliates, shall have the right to employ or offer to employ any Retained
Home Office Employee who declines the Buyer's, DHS' or its subsidiary's offer of
employment.
(2) On the Closing Date, the Sellers shall deliver to the
Buyer and/or DHS an amount equal to the Home Accrued Benefits reflected on the
Home Office Employee Schedule which funds shall be held in trust for the benefit
of the Sellers for distribution to the Retained Home Office Employees as and
when they are earned by the Retained Home Office Employees (the "Home Office
Accrued Benefit Fund"). The Buyer shall, from and after the Closing Date, pay
the Home Office Accrued Benefits to the Retained Home Office Employees at the
end of the Transition Period; provided, however, that in the event that any
-------- -------
Retained Home Office Employee does not become a Hired Employee (as such term is
hereinafter defined) or resigns his/her position with the Buyer, DHS or its
subsidiary prior to the expiration of the Transition Period, the Home Office
Accrued Benefits in the Home Office Accrued Benefit Fund attributable to such
Retained Home Office Employee shall immediately be paid to the Sellers;
provided, further, however, that in the event that any such Retained Home Office
- -------- ------- -------
Employee accepts employment with the Buyer, DHS or its subsidiary beyond the
Transition Period, the Home Office Accrued Benefits in the Home Office Accrued
Benefit Fund attributable to such Retained Home Office Employee shall
immediately be paid to the Sellers.
(a) Hiring of Retained Employees and Retained Home Office Employees.
---------------------------------------------------------------
The Buyer and/or DHS (either itself or through any of its subsidiaries) shall
hire at the Closing each Retained Employee and each Retained Home Employee who
elects to accept employment with Buyer, DHS or its subsidiary (the "Hired
Employees") and shall continue to employ each such Hired Employee for a period
of no less than ninety (90) days following the Closing Date, and the Buyer, DHS
and/or its subsidiary shall recognize each such Hired Employee's original hire
date, unless the employment of such Hired Employee is terminated for cause or as
a result of the Hired Employee's resignation. In the event that the Buyer, DHS
or any of its subsidiaries violates this provision, then the Buyer and/or DHS
shall indemnify and hold the Sellers and Horizon harmless from and against any
liability that
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<PAGE>
the subject Seller may have under the Worker Adjustment and Retraining
Notification Act (the "Warn Act") which is caused by such violation. All Hired
Employees shall be considered probationary, and no promise of permanent
employment is made by the Buyer and/or DHS. The Sellers shall offer and provide,
as appropriate, group health plan continuation coverage (pursuant to the
requirements of Section 601 et. seq. of ERISA and Section 4980B of the I.R.C.
-------
("COBRA")) to all of its employees as required under COBRA. Neither the Buyer
nor DHS is assuming any other of the Sellers' obligations to its employees
except as stated in Section 2.1 above, in this Section 13.2, and on Schedule
--------
13.2 annexed hereto.
- ----
(b) Health Benefits. The Buyer and/or DHS shall provide the Hired
---------------
Employees and their dependents the same program of health care benefits which is
currently provided by the Buyer and/or DHS to its employees (and their
dependents ). The Buyer and DHS agree that there shall be no waiting period for
DHS' health care benefits to commence coverage and there shall be no exclusion
for pre-existing conditions. The Buyer and/or DHS shall provide any COBRA
notices or coverages required to be given or made available to any Hired
Employees by reason of the Buyer's and/or DHS' termination of, or the
resignation by, any Hired Employees after the Closing Date.
Notwithstanding the foregoing, nothing in this Section 13.2 shall, or
shall be deemed to, create any rights in favor of any person not a party hereto
or to constitute an employment agreement or condition of employment for any
employee of the Sellers or affiliates of the Sellers or any Retained Employee.
1 Assistance with Auditors. From time to time as and when requested
------------------------
by the Buyer or DHS from and after the Closing Date, the Sellers and Horizon
shall provide reasonable assistance in order to obtain the consent of the
Sellers' and Horizon's independent public accountants for the use of their
reports with respect to the audited financial statements of the Sellers and the
use of such accountants' name, in public securities filings which DHS may make
from and after the Closing Date.
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<PAGE>
2 Further Assurances. From time to time from and after the Closing
------------------
Date hereof, the parties will take any and all such action and execute and
deliver to one another any and all further agreements, instruments, certificates
and other documents, as may reasonably be requested by any other party in order
more fully to consummate the transactions contemplated hereby, and to effect an
orderly transition of the ownership and operations of the Business.
2. COSTS.
-----
1 Finder's or Broker's Fees. Each of the Buyer and DHS (on the one
-------------------------
hand) and the Sellers and Horizon (on the other hand) represents and warrants
that neither they nor any of their respective Affiliates have dealt with any
broker or finder in connection with any of the transactions contemplated by this
Agreement, and no broker or other person is entitled to any commission or
finder's fee in connection with any of these transactions, except that DHS shall
be responsible for any fees or commissions payable to Evergreen Capital
Advisors, Inc. in connection herewith.
2 Expenses. The Buyer, DHS, the Sellers and Horizon shall each pay
--------
all of their own respective costs and expenses incurred or to be incurred by
them, respectively, in negotiating and preparing this Agreement and in closing
and carrying out the transactions contemplated by this Agreement.
3. FORM OF AGREEMENT.
-----------------
1 Effect of Headings. The Section headings used in this Agreement
------------------
and the titles of the Schedules hereto are included for purposes of convenience
only, and shall not affect the construction or interpretation of any of the
provisions hereof or of the information set forth in such Schedules.
2 Entire Agreement; Waivers. This Agreement (including the Schedules
-------------------------
and Exhibits hereto) constitutes the entire agreement between the parties
pertaining to the subject matter hereof, and supersedes all prior agreements or
understandings as to such subject matter. No party hereto has
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<PAGE>
made any representation or warranty or given any covenant to the other except as
set forth in this Agreement and the Schedules and Exhibits hereto. No waiver of
any of the provisions of this Agreement shall be deemed, or shall constitute, a
waiver of any other provisions, whether or not similar, nor shall any waiver
constitute a continuing waiver. No waiver shall be binding unless executed in
writing by the party making the waiver.
3 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4. PARTIES.
-------
1 Parties in Interest. Nothing in this Agreement, whether expressed
-------------------
or implied, is intended to confer any rights or remedies under or by reason of
this Agreement on any persons other than the parties to it and their respective
successors and permitted assigns, nor is anything in this Agreement intended to
relieve or discharge the obligations or liability of any third persons to any
party to this Agreement, nor shall any provision give any third persons any
right of subrogation or action over or against any party to this Agreement.
2 Notices. All notices, requests, demands and other communications
-------
under this Agreement shall be in writing and shall be deemed to have been duly
given on the date of service if served personally on or telecopied to the party
to whom notice is to be given, one day after being deposited for overnight
delivery with a recognized overnight courier service in a properly addressed
package with all charges prepaid or billed to the account of the sender, or on
the third day after mailing if mailed to the party to whom notice is to be
given, by first class mail, registered or certified, postage prepaid, and
properly addressed as follows:
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<PAGE>
(a) If to the Sellers or Horizon:
Horizon/CMS Healthcare Corporation
6001 Indian School Road, NE
Albuquerque, New Mexico 87110
Attn: Mr. Charles Gonzales, Senior V.P.
Fax No. (505) 881-5097
with a copy sent concurrently to:
Vinson & Elkins, L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Attn: James H. Wilson, Esq.
Fax No. (713) 615-5926
(a) If to the Buyer or DHS:
Diagnostic Health Services, Inc.
2777 Stemmons Freeway, Suite 1525
Dallas Texas 75207
Attn: Mr. Max W. Batzer, Chairman and CEO
Fax No. (214) 689-6459
with a copy sent concurrently to:
Greenberg Traurig Hoffman et al.
153 East 53rd Street, 35th Floor
New York, New York 10022
Attn: Shahe Sinanian, Esq.
Fax No. (212) 223-7161
or to such other address or telecopier number as any party shall have specified
by notice in writing given to all other parties.
1. MISCELLANEOUS.
-------------
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<PAGE>
1 Amendments and Modifications. No amendment or modification of this
----------------------------
Agreement or any Exhibit or Schedule hereto shall be valid unless made in
writing and signed by the party to be charged therewith.
2 Non-Assignability; Binding Effect. Neither this Agreement, nor any
---------------------------------
of the rights or obligations of the parties hereunder, shall be assignable by
any party hereto without the prior written consent of all other parties hereto,
except that DHS and the Buyer may, without requirement of any consent of Horizon
or the Sellers, assign DHS' and the Buyer's rights to indemnification hereunder
to any secured lender to DHS and/or the Buyer from time to time. Otherwise, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
3 Governing Law; Jurisdiction. This Agreement shall be construed and
---------------------------
interpreted and the rights granted herein governed in accordance with the laws
of the State of Texas applicable to contracts made and to be performed wholly
within such State. Except as otherwise provided in Section 12.3 above, any
claim, dispute or controversy arising under or in connection with this Agreement
or any actual or alleged breach hereof shall be settled exclusively by
arbitration in accordance with the commercial arbitration rules of the American
Arbitration Association then obtaining. As part of his or her award, the
arbitrator shall make a fair allocation of the fee of the American Arbitration
Association, the cost of any transcript, and the parties' reasonable attorneys'
fees, taking into account the merits and good faith of the parties' claims and
defenses. Judgment may be entered on the award so rendered in any court having
jurisdiction. Any process or other papers hereunder may be served by registered
or certified mail, return receipt requested, or by personal service, provided
that a reasonable time for appearance or response is allowed.
[The remainder of this page is intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on and as of
the date first set forth above.
DIAGNOSTIC HEALTH SERVICES, INC
By: /s/ Brad A. Hummel
----------------------------
DHS MANAGEMENT SERVICES, INC.
By: /s/ Brad A. Hummel
----------------------------
ADVANCED CLINICAL TECHNOLOGIES, INC.
By: /s/ Charles H. Gonzales
---------------------------
HORIZON MDS CORPORATION
By: /s/ Charles H. Gonzales
---------------------------
HORIZON/CMS HEALTHCARE
CORPORATION
By: /s/ Charles H. Gonzales
---------------------------
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<PAGE>
Exhibits
--------
A - Certificate of Stock Designation
B - Bill of Sale
C - Assumption Agreement
D - Non-Competition Agreement
E - First Refusal Agreement
F - Registration Rights Agreement
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<PAGE>
EXHIBIT 2
CERTIFICATE OF STOCK DESIGNATION
OF
DIAGNOSTIC HEALTH SERVICES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is DIAGNOSTIC HEALTH SERVICES, INC.
2. The certificate of incorporation of the Corporation authorizes
the issuance of 3,000,000 shares of preferred stock of the Corporation having a
par value of $.001 per share, and expressly vests in the Board of Directors of
the Corporation the authority provided therein to fix by resolution or
resolutions the designation, number, preferences and relative, participating,
optional and other special rights and the qualifications, limitations,
restrictions and other distinguishing characteristics of each series of
Preferred Stock to be issued.
3. The Board of Directors of the Corporation, pursuant to the
authority expressly vested in it as aforesaid, has adopted the following
resolutions creating a Series A issue of the Preferred Stock of the Corporation
as follows:
RESOLVED: That there shall be created a series of the Preferred Stock
of the Corporation, to be designated as "Series A" of such Preferred
Stock and to consist of 1,125,000 shares of such Preferred Stock,
which will have relative rights, preferences and limitations as
follows:
Series A Preferred Stock
------------------------
Dividends.
----------
1. Stock Dividends. Each outstanding share of the Series A Preferred
---------------
Stock (a "Share") will accrue dividends, from the date of issuance of such
Share, at the rate of 7.25% per
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<PAGE>
annum, which shall be payable in kind in additional Shares (including fractional
Shares). The date on which the Corporation initially issues or is required
hereunder to issue any Share will be deemed to be its "date of issuance"
----------------
regardless of the number of times transfer of such Share is made on the stock
records maintained by or for the Corporation and regardless of the number of
certificates which may be issued at any time and from time to time to evidence
such Share.
2. Dividend Reference Dates. Accrued dividends on the Shares shall be
------------------------
payable on December 31 of each year while any Shares remain outstanding, and on
an interim basis during each calendar year in the event and to the extent that
the holder thereof may elect to convert any accrued but unissued dividends in
accordance with the conversion rights hereinbelow provided, and/or in the event
and to the extent that any accrued but unissued dividends are to be redeemed as
hereinbelow provided.
3. Distribution of Partial Dividend Payments. Except as otherwise
-----------------------------------------
provided herein, if at any time the Corporation issues less than the total
amount of dividends then accrued with respect to the Series A Preferred Stock,
such issuance will be allocated and made ratably among the holders thereof based
upon the number of Shares held by each such holder; provided, however, that this
-------- -------
Section 1.3 shall not apply with respect to any mid-year issuances of dividends
for purposes of conversions by or redemptions from less than all of the holders
of Series A Preferred Stock; and further provided, that nothing herein contained
--- ------- --------
shall be deemed to permit the issuance of less than the total amount of
dividends issuable on any required date for the issuance of dividends.
-2-
<PAGE>
Liquidation.
------------
Upon any liquidation, dissolution or winding up of the Corporation, each
holder of Series A Preferred Stock will be entitled to be paid, out of the net
assets of the Corporation available for distribution to stockholders of the
Corporation, and before any distribution or payment is made upon any Junior
Securities, an amount in cash equal to the aggregate Liquidation Value of all
Shares (including any accrued but unissued dividends) held by such holder, and
the holders of Series A Preferred Stock will not be entitled to any further
payment. If upon any such liquidation, dissolution or winding up of the
Corporation, the Corporation's assets to be distributed among the holders of the
Series A Preferred Stock and the holders of all outstanding shares of any other
series or class of preferred stock that are not Junior Securities and rank on a
parity as to liquidation with the Series A Preferred Stock are insufficient to
permit payment to such holders of the aggregate amounts which they are entitled
to be paid, then the entire assets to be distributed will be distributed ratably
among such holders based upon the aggregate Liquidation Value of the Series A
Preferred Stock (including any accrued but unissued dividends) and such other
preferred stock held by each such holder. The Corporation will mail written
notice of such liquidation, dissolution or winding up, not less than thirty (30)
days prior to the payment date stated therein, to each record holder of Series A
Preferred Stock. Neither the consolidation or merger of the Corporation into or
with any other entity or entities, nor the sale or transfer by the Corporation
of all or any part of its assets, nor the reduction of the capital stock of the
Corporation, will be deemed to be a liquidation, dissolution or winding up of
the Corporation within the meaning of this Section 2.
-3-
<PAGE>
Priority of Series A Preferred Stock on Redemptions.
----------------------------------------------------
So long as any Series A Preferred Stock remains outstanding, neither
the Corporation nor any Subsidiary will redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities (other than redemption, in
accordance with the terms thereof, of publicly traded warrants of the
Corporation which are outstanding on the first date on which any Shares are
issued), nor will the Corporation directly or indirectly pay or declare any
dividend or make any distribution upon any Junior Securities, other than
dividends payable solely in Junior Securities.
Redemptions.
------------
1. Holder Optional Redemption. The holders of the Series A Preferred
--------------------------
Stock shall have the right, at any time and from time to time commencing on the
fifth (5th) anniversary of the first date on which any Shares were issued, and
upon sixty (60) days' prior written notice to the Corporation, to require the
Corporation to redeem any or all of the outstanding Shares of Series A Preferred
Stock (including any accrued but unissued dividends) at a price per Share equal
to the Liquidation Value. The Corporation shall not be required to make any
such payments, and the holders of the Series A Preferred Stock shall not be
entitled to receive or retain such payments, in the event and to the extent that
(a) at the time of any such payment, the funds of the Corporation legally
available for redemption of the subject Shares are insufficient to redeem the
total number of Shares to be redeemed on such date, or (b) at the time of any
such payment or after giving effect thereto, there would exist any "Event of
Default" or other such event (which has not been waived by the subject lender)
permitting the acceleration (or which, with notice or lapse of time or both,
would permit acceleration) of outstanding obligations of the Corporation under
any loan agreement, credit facility, indenture or other agreement or instrument
respecting borrowed money. In the event that the Corporation shall fail to make
any redemption payment hereunder by reason of the foregoing limitations, then
the Corporation shall (i) effect the requested redemption in cash to the extent
not so restricted, on a first-come, first-served basis in the event of multiple
or sequential redemption demands hereunder (and, within
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<PAGE>
each redemption demand, ratably as among the holders requesting redemption based
upon the number of Shares then requested to be redeemed by such holders), (ii)
give written notice to the affected holders, stating in reasonable detail the
extent of any payments not then being made in cash hereunder and the
circumstances giving rise to such non-payment, (iii) make payment for any Shares
to be redeemed but which are not paid for in cash by the issuance of unsecured
subordinated one-year promissory notes of the Corporation (the "Redemption
Notes"), each of which shall (A) bear interest at the rate of 12% per annum,
which shall accrue commencing on the subject Mandatory Redemption Date (as such
term is hereinafter defined), and shall, except as limited by the following
clause (B), be payable quarterly in arrears commencing three months after the
subject Mandatory Redemption Date, (B) provide that, if, at the time of any such
scheduled interest payment date, or after giving effect to such interest
payment, there would exist any "Event of Default" or other such event (which has
not been waived by the subject lender) permitting the acceleration (or which,
with notice or lapse of time or both, would permit acceleration) of outstanding
obligations of the Corporation under any loan agreement, credit facility,
indenture or other agreement or instrument respecting borrowed money (whether or
not any borrowings are actually outstanding at such time under such loan
agreement, credit facility, indenture or other agreement or instrument, provided
that the subject lender then has a funding commitment thereunder), then such
scheduled interest payment shall be suspended and deferred until such time as
such "Event of Default" or other such event has been waived by the subject
lender or has been cured, (C) provide that the holder shall not exercise any
remedies for enforcement of cash payments under such Redemption Note, or take
any action against the Corporation (including, without limitation, filing or
joining in the filing of any petition or proceeding under any bankruptcy,
insolvency, receivership, reorganization or other such or similar proceeding),
by reason of any non-payment or other non-performance by the Corporation or any
of its subsidiaries of any covenant or agreement (whether related or not related
to the Series A Preferred Stock or the Redemption Note) other than collection of
any accrued interest the payment of which was not prohibited under the foregoing
clause (B), (D) provide that, in the event of any bankruptcy, insolvency,
receivership, reorganization or other such or similar proceeding relating to the
Corporation, the
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<PAGE>
Corporation's senior secured lender(s) (which, on the date hereof, is Texas
Commerce Bank National Association) shall receive payment in full on the
indebtedness of the Corporation held by such lender(s), prior to any payment on
or in respect of such Redemption Note, (E) permit the prepayment of principal
thereunder at any time or from time to time at the option of the Corporation,
subject to any limitations imposed under any loan agreement, credit facility,
indenture or other agreement or instrument respecting borrowed money to which
the Corporation is subject (whether or not any borrowings are actually
outstanding at such time under such loan agreement, credit facility, indenture
or other agreement or instrument, provided that the subject lender then has a
funding commitment thereunder), (F) permit the holder thereof, at its option, at
any time and from time to time, to convert any or all outstanding principal
and/or unpaid accrued interest of such Redemption Note into Common Stock in a
manner consistent with Section 5.1 below (provided that the 9.9% limitation
contained in such Section 5.1 shall not be applicable to the Common Stock
issuable upon any conversion of Redemption Notes), (G) provide that, to the
extent that any principal of such Redemption Note shall be outstanding on the
first (1st) anniversary of the subject Mandatory Redemption Date, and provided
that all interest payments under such Redemption Note are current at such time,
then all such outstanding principal shall on such date automatically be
converted into Common Stock in accordance with Section 5.1 below (provided that
the 9.9% limitation contained in such Section 5.1 shall not be applicable to the
Common Stock issuable upon any conversion of Redemption Notes), and (H) provide
that, in the event that interest payments under such Redemption Note are not
current on the first (1st) anniversary of the subject Mandatory Redemption Date,
then, at such later time as such interest payments are made current, such
Redemption Note shall thereupon automatically be converted into Common stock in
accordance with Section 5.1 below (provided that the 9.9% limitation contained
in such Section 5.1 shall not be applicable to the Common Stock issuable upon
any conversion of Redemption Notes), (iv) from time to time following the
requested redemption date, make any and all principal payments under the
Redemption Notes to the extent not prohibited by the limitations hereunder or
under the Redemption Notes as soon as practicable after such payments are no
longer prohibited, ratably among the affected holders as aforesaid, and on a
first-come, first-served
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<PAGE>
basis in the event of multiple or sequential redemption demands hereunder, and
(v) use all reasonable efforts to obtain or make available, as promptly as
practicable, additional funds which may be utilized to make principal payments
on the Redemption Notes without violation of the limitations hereunder or under
the Redemption Notes. In the event and to the extent that any holder shall
receive any redemption payment hereunder which, in accordance with the foregoing
limitations, it is not entitled to receive, then such holder shall immediately,
upon written notice to such holder, return the amount of the prohibited payment
to the Corporation, and pending such return, shall hold the amount of such
payment in trust for the benefit of the Corporation and any Persons claiming
thereunder. Any date fixed for redemption under this Section 4.1 is herein
referred to a "Mandatory Redemption Date."
-------------------------
2. Corporation Optional Redemptions. The Corporation may at any time
--------------------------------
and from time to time redeem all or any portion of the Series A Preferred Stock
then outstanding (including any accrued but unissued dividends), as designated
by the Corporation in connection with each such redemption. On any such
redemption, the Corporation will pay a price per Share in accordance with the
following:
Time Elapsed From First
Date on Which Any Shares
Were Issued to Date of
Optional Redemption Redemption Price Per Share
- ------------------------- --------------------------
6 months or less $7.00
more than 6 months, and up $7.35
to 1 year
more than 1 year, and up $7.75
to 2 years
more than 2 years, and up $8.10
to 3 years
more than 3 years, and up $8.50
to 4 years
more than 4 years $9.00
-7-
<PAGE>
Any optional redemption by the Corporation hereunder will be made upon not less
than thirty (30) days' prior written notice and not more than forty-five (45)
days' prior written notice to the holders of the outstanding Series A Preferred
Stock. Upon the giving of any such notice, and until the date fixed therein for
redemption, the conversion rights (as provided in Section 5 below) in respect of
the Shares called for redemption shall be suspended, and in lieu thereof, any
and all holders of the Shares called for redemption may elect, at any time prior
to the expiration of the notice period, to convert any or all of the Shares
called for redemption into shares of Common Stock at the rate of one Share of
Series A Preferred Stock for each share of Common Stock; provided, however, that
-------- -------
if the number of Shares of Series A Preferred Stock which (i) have theretofore
been converted into Common Stock and are still held by any of the Persons (or
any of their respective affiliates) to whom Series A Preferred Stock was issued
on the first date on which any Shares were issued, and (ii) are then requested
to be converted into Common Stock, exceeds, in the aggregate, 4.9% of the total
outstanding Common Stock (after giving effect to all such conversions), then, at
the Corporation's option, each electing holder of Series A Preferred Stock may
be limited to converting a portion of such holder's Series A Preferred Stock
equal to the product of (i) the maximum number of shares of Common Stock which
could then be issued without causing the aforesaid 4.9% limit to be exceeded,
multiplied by (ii) a percentage equal to (A) the number of shares of Series A
Preferred Stock then requested to be converted by such holder, divided by (B)
the total number of shares of Series A Preferred Stock then requested to be
converted by all holders of Series A Preferred Stock. On the date fixed for
redemption, the Corporation shall, in accordance with Section 4.3 below, issue
shares of Common Stock to those holders requesting conversion of any or all of
their Series A Preferred Stock as aforesaid (subject to the aforedescribed cut-
back), and shall pay to the holders thereof the applicable redemption price for
all other shares of Series A Preferred Stock called for redemption (such payment
to be made, at the Corporation's option, by wire transfer of immediately
available funds or by certified or bank cashier's check). Each date fixed for
any such optional redemption is herein referred to as an "Optional Redemption
-------------------
Date." The Corporation shall not be required to issue any fractional shares of
- ----
Common Stock upon any conversion pursuant to this Section 4.2, and any such
fractional
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<PAGE>
share that would otherwise be issuable to any holder shall be eliminated.
3. Redemption Procedure. For each Share which is to be redeemed, the
--------------------
Corporation will be obligated on the subject Optional Redemption Date or
Mandatory Redemption Date (subject to the limitations in Section 4.1 above) to
pay to the holder thereof (upon surrender by such holder at the Corporation's
principal office of the certificate representing such Share) shares of Common
Stock and/or an amount in immediately available funds equal to applicable
redemption price therefor pursuant to Section 4.1 or 4.2 above (as the case may
be).
4. Reissuance of Certificates. In case fewer than the total number
--------------------------
of Shares represented by any stock certificate are redeemed or converted, a new
certificate representing the number of unredeemed and unconverted Shares will be
issued to the holder thereof without cost to such holder within five (5)
business days after surrender of the certificate representing the redeemed or
converted Shares.
5. No Dividends After Redemption Date. No Share will be entitled to
----------------------------------
any dividends accruing after the date on which the applicable redemption price
of such Share is paid to the holder thereof, or such Share is converted into
Common Stock in accordance with Section 4.2 above. On such date, all rights of
the holder of such Share will cease, and such Share will not be deemed to be
outstanding.
6. Redeemed or Otherwise Acquired Shares. Any Shares which are
-------------------------------------
redeemed or otherwise acquired by the Corporation, or which are converted into
Common Stock in accordance with Section 4.2 above, will be canceled, and (a) so
long as any Series A Preferred Stock remains outstanding, such Shares may be
reissued for the purpose of paying dividends on outstanding Series A Preferred
Stock, and (b) from and after such time as no Series A Preferred Stock shall be
outstanding, such Shares may thereafter be reissued as a part of a new series of
Preferred Stock of the Corporation to be created by resolution or resolutions of
the Board of Directors of the Corporation.
Conversion into Common Stock.
----------------------------
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<PAGE>
1. Conversion Rights. The holders of outstanding Series A
-----------------
Preferred Stock may, at any time and from time to time, convert outstanding
Shares (including any accrued but unissued dividends) into Common Stock at the
rate of one Share for each share of Common Stock. In addition, in the event
that, commencing with the Corporation's fiscal quarter ending December 31, 1997,
the mean average daily last reported sale price of the Common Stock (the
"Average Closing Price") in any fiscal quarter of the Corporation shall be less
than $7.00 per share, then, at any time and from time to time during the next
succeeding fiscal quarter of the Corporation, the holders of the outstanding
Series A Preferred Stock shall have the right to convert any or all of their
Shares (including any accrued but unissued dividends) into Common Stock, with
each outstanding Share being convertible into a number of shares of Common Stock
equal to (i) the Liquidation Value, divided by (ii) the Average Closing Price
during the preceding fiscal quarter of the Corporation. With respect to each
conversion election, the Corporation shall have the right to limit such
conversion in a manner consistent with Section 4.2 above (provided that the 4.9%
limitation stated in Section 4.2 above shall instead be 9.9% for purposes of
this Section 5.1), and the Corporation shall not be required to issue any
fractional shares of Common Stock upon any conversion pursuant to this Section
5.1, and any such fractional shares shall be eliminated.
2. Voting of Conversion Shares. Any and all shares of Common Stock
---------------------------
issued upon conversion of Series A Preferred Stock (whether such conversion
occurs under this Section 5, or pursuant to Section 4.2 above) shall be subject,
during the one (1) year period following the date of issuance thereof, to a full
discretionary proxy in favor of the Chairman of the Corporation (with full power
of substitution) on all matters to be voted upon or approved by stockholders of
the Corporation; and at the time of any conversion, and as a condition to the
Corporation's obligations to issue the subject Common Stock and reflect the
converting holder as the holder of record of the subject Common Stock, such
converting holder shall execute and deliver to the Chairman of the Corporation a
written proxy consistent with the requirements of this Section 5.2.
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3. No Dividends after Conversion Date. No Share will be entitled to
----------------------------------
any dividends accruing after the date on which the holder thereof elects to
convert such Share into Common Stock. On such date, all rights of the holder of
such Share will cease, and such Share will not be deemed to be outstanding.
4. Converted Shares. Any Shares which are converted into Common
----------------
Stock under this Section 5 will be canceled and (a) so long as any Series A
Preferred Stock remains outstanding, such Shares may be reissued for the purpose
of paying dividends on outstanding Series A Preferred Stock, and (b) from and
after such time as no Series A Preferred Stock shall be outstanding, such Shares
may thereafter be reissued as a part of a new series of Preferred Stock of the
Corporation to be created by resolution or resolutions of the Board of Directors
of the Corporation.
Voting Rights.
--------------
Except as otherwise provided herein and as otherwise required by law, the
Series A Preferred Stock will have no voting rights; provided, however, that in
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the event that and at such time as there shall be continuing any Default, each
outstanding Share of Series A Preferred Stock shall entitle the holder thereof
on the subject record date for such vote, voting with the holders of Common
Stock as a single class on all matters submitted to the Corporation's
stockholders for voting or approval, to cast a number of votes equal to the
maximum number of shares of Common Stock that would be issuable upon conversion
of such Share of Series A Preferred Stock into Common Stock on the record date
for the subject vote.
Adjustments.
------------
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<PAGE>
In the event that, at any time and from time to time subsequent to the
first date on which any Shares were issued, there shall occur any stock split,
stock dividend, combination of shares, recapitalization or other such event
relating to the outstanding Common Stock, then the number of shares of Common
Stock issuable upon conversion pursuant to Section 4.2 above and the first
sentence of Section 5.1 above, the $7.00 per share threshold amount provided in
Section 5.1 above, and the last reported sale prices utilized in any calculation
of Average Closing Price for the subject fiscal quarter, shall be appropriately
arithmetically adjusted to reflect the effects of such event.
Costs.
-----
The Corporation shall pay all documentary, stamp, transfer or other
transactional taxes attributable to the issuance or delivery of shares of Common
Stock upon conversion of any shares of the Series A Preferred Stock; provided,
--------
however, that the Corporation shall not be required to pay any federal or state
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income taxes or other taxes which may be payable in respect of any transfer
involved in the issuance or delivery of any certificate for such shares in a
name other than that of the holder of the shares of the Series A Preferred Stock
in respect of which such shares are being issued.
Consolidation, Merger, Sale, Lease or Conveyance.
------------------------------------------------
In case of any consolidation with or merger of the Corporation with or
into another corporation or other Person,or in case of any sale, lease or
conveyance to another corporation or other Person of the assets of the
Corporation as an entirety or substantially as an entirety, each share of the
Series A Preferred Stock shall after the date of such consolidation, merger,
sale, lease or conveyance be convertible into the number of shares of stock or
other securities or property (including cash) to which the Common Stock issuable
(at the time of such consolidation, merger, sale, lease or conveyance) upon
conversion of such share of the Series A Preferred Stock would have been
entitled upon such consolidation, merger, sale, lease or conveyance; and in any
such case, if necessary, the provisions set forth herein with respect to the
rights and interests thereafter of the holders of the
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<PAGE>
shares of the Series A Preferred Stock shall be appropriately adjusted so as to
be applicable, as nearly as may reasonably be, to any shares of stock or other
securities or property thereafter deliverable on the conversion of the shares of
the Series A Preferred Stock.
Reservation of Shares.
---------------------
The Corporation shall at all times reserve and keep available, out of its
authorized but unissued shares of Common Stock or out of shares of Common Stock
held in its treasury, the full number of shares of Common Stock into which all
shares of the Series A Preferred Stock having conversion privileges from time to
time outstanding are convertible.
Registration of Transfer.
-------------------------
The Corporation will keep at its principal office a register for the
registration of Series A Preferred Stock. Upon the surrender of any certificate
representing Series A Preferred Stock at such place, the Corporation will, at
the written request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares represented
by the surrendered certificate. Each such new certificate will be registered in
such name and will represent such number of Shares as is requested by the holder
of the surrendered certificate and will be substantially identical in form to
the surrendered certificate, and dividends will accrue on the Shares represented
by such new certificate from the date to which dividends have been fully paid on
the Shares represented by the surrendered certificate.
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<PAGE>
Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the Corporation of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares and in the case of any such loss, theft or destruction, upon
receipt of indemnity reasonably satisfactory to the Corporation (provided that
if the holder is a financial institution, an entity whose securities are traded
or listed on any national securities exchange or recognized automated quotation
system, or any subsidiary of the foregoing, then the holder's own agreement will
be satisfactory), or, in the case of any such mutilation upon surrender of such
certificate, the Corporation will (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
Shares represented by such lost, stolen, destroyed or mutilated certificate and
dated the date of such lost, stolen, destroyed or mutilated certificate, and
dividends will accrue on the Shares represented by such new certificate from the
date to which dividends have been fully paid on the Shares represented by the
lost, stolen, destroyed or mutilated certificate.
Definitions.
-----------
For purposes hereof, the following terms have the meanings set forth
below:
"Common Stock" means the Corporation's Common Stock.
--------------
"Default" means (a) any default by the Corporation in the issuance of any
---------
dividends on the Series A Preferred Stock as and when such dividends shall be
issuable in accordance herewith or in the performance of any of the
Corporation's other duties or obligations hereunder in respect of the Series A
Preferred Stock, and/or (b) any uncured "Event of Default" or other such event
(which has not been waived by the subject lender) permitting the acceleration of
outstanding obligations of the Corporation in a principal amount in excess of
$3,000,000 under any loan agreement, credit facility, indenture or other
agreement or instrument in respect of borrowed money.
"Junior Securities" means any equity securities of the Corporation other
-------------------
than (a) the Series A Preferred Stock, or (b)
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<PAGE>
any series or class of capital stock of the Corporation as to which, by the
written consent or affirmative vote of the holders of a majority of the Series A
Preferred Stock outstanding at the time of such consent or vote, is accorded
parity with or seniority to the Series A Preferred Stock.
"Liquidation Value" of any Share as of any particular date will be equal
-------------------
to Seven ($7.00) Dollars per Share.
"Person" means an individual, a partnership, a corporation, a limited
--------
liability company, an association, a joint stock company, a joint venture, an
unincorporated organization or any other business entity, a trust or a
governmental entity or any department, agency or political subdivision thereof.
"Subsidiary" means, with respect to any Person, any corporation,
------------
partnership, limited liability company, association or other business entity of
which (a) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (b) if a partnership,
limited liability company, association or other business entity, a majority of
the partnership or other similar ownership interests thereof are at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons will be deemed to have a majority ownership interest in a
partnership, limited liability company, association or other business entity if
such Person or Persons are allocated a majority of partnership, limited
liability company, association or other business entity gains or losses or
control the managing director or member or general partner of such partnership,
limited liability company, association of other business entity.
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Amendment and Waiver.
--------------------
No amendment, modification or waiver will be binding or effective with
respect to any provision of Sections 1 through 15 hereof without the prior
written consent or affirmative vote of the holders of a majority of the Series A
Preferred Stock outstanding at the time such action is taken; provided that
without the prior written consent of the holders of at least 75% of the Series A
Preferred Stock then outstanding, no such action will change (a) the rate at
which or the manner in which dividends on the Series A Preferred Stock accrue or
the times at which such dividends become payable or the amount payable on
redemption of the Series A Preferred Stock or the times at which redemption of
Series A Preferred Stock is to occur, or (b) the percentage required to approve
any amendment, modification, waiver or change described in this Section 14.
Notices.
-------
Except as otherwise expressly provided hereunder, all notices referred to
herein will be in writing and will be delivered by registered or certified mail,
return receipt requested and postage prepaid, or by reputable overnight courier
service, charges prepaid, and will be deemed to have been given when so mailed
or sent (a) to the Corporation, at its principal executive offices, and (b) to
any stockholder, at such holder's address as it appears in the stock records of
the Corporation (unless otherwise indicated by notice given by any such holder).
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<PAGE>
RESOLVED: That the statements contained in the foregoing resolution
creating and designating the said "Series A" issue of the Preferred
Stock of the Corporation and fixing the number, powers, preferences
and relative, optional, participating and other special rights and the
qualifications, limitations, restrictions and other distinguishing
characteristics thereof shall, upon the effective date of said Series,
be deemed to be included in and be a part of the certificate of
incorporation of the Corporation pursuant to the provisions of
Sections 104 and 151 of the Delaware General Corporation Law.
Signed and attested to on November 13, 1996.
/s/ Brad A. Hummel
---------------------------
Brad A. Hummel, President
Attest:
/s/ Shahe Sinanian
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Shahe Sinanian, Secretary
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