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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended: SEPTEMBER 30, 1996 Commission File Number: 1-12238
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MHM SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 52-1223048
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8000 TOWERS CRESCENT DRIVE, SUITE 810, VIENNA, VIRGINIA 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 749-4600
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
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The aggregate market value of the Registrant's voting stock held by
nonaffiliates (based upon the closing price of $.375) on December 30, 1996, was
approximately $700,000. As of December 30, 1996, there were 3,310,448 shares
of Common Stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997 are incorporated by reference into Part III.
The Index to Exhibits begins on page 55.
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PART I
ITEM 1. BUSINESS
GENERAL
MHM Services, Inc., through its wholly-owned subsidiaries, MHM of
Colorado, Inc. ("Hospital Division") and MHM Extended Care Services, Inc.
("Extended Care Services Division") (collectively, the "Company"), offers,
arranges for and manages nonacute healthcare services primarily in
institutional settings. Since its founding, the Company's goal has been to
offer the highest quality, cost-effective care in the industry. Until April
1996, the Company's Hospital Division operated seven freestanding psychiatric
and substance abuse facilities, which generated 86% of the Company's net
revenues for fiscal 1995, and had comprised 77% of the Company's total assets
at the end of fiscal 1995. As a result of the sale of five of the freestanding
facilities in May 1996, and one facility in April 1996, the Hospital Division
represented only 67% of net revenues for fiscal 1996. See "Sale of
Freestanding Facilities/Continued Operation of Mountain Crest Hospital." The
Company's Extended Care Services Division provides specialized medical and
behavioral healthcare services to residents of approximately 655 nursing homes
in ten states, and, through its MHM Counseling Services division, provides a
wide range of outpatient behavioral healthcare services to children,
adolescents, adults and families in multiple clinics located in Massachusetts
as well as in home-based and outreach locations, including public schools,
nursing homes, vocational centers, day treatment centers, assisted living
facilities, group homes, rehabilitation hospitals, dialysis centers, and
workshops for the developmentally delayed. The Extended Care Services Division
also provides behavioral healthcare services to more than 2,000 Medicaid
patients residing in nursing homes under a contract with the State of Georgia.
Historically, the Company's principal businesses were the operation of
freestanding behavioral healthcare facilities and the management of behavioral
healthcare programs under contracts with acute care hospitals. The market for
behavioral healthcare has undergone dramatic changes in recent years. Pressure
on providers to reduce costs has resulted in an increase in the development and
utilization of alternatives to long-term in-patient care, and a decrease in the
utilization of in-patient care and reimbursement rates. With market forces
emphasizing managed care approaches to healthcare, this trend is anticipated to
continue.
In response to these changes and their adverse impact on the Company's
operating results, significant changes have been made in the structure of the
Company's operations over the past several years. In 1994, the Company merged
its contract management business (which represented 29% of the Company's net
revenues in fiscal 1994) with a competitor through the creation of a joint
venture. In 1995, the Company sold its interest in the joint venture to such
competitor. In addition, the Company sold six of its seven freestanding
facilities by May 1996 which represented 51% of the Company's net revenue in
fiscal 1996. Further, the Company decided to pursue a growth strategy focused
on its Extended Care Services Division (which represented 33% and 14% of the
Company's net revenues in fiscal 1996 and 1995, respectively) through the
pursuit of non-physician practice acquisitions and management opportunities.
As a result of the Company's continued negative operating results, as
well as reduced collections of accounts receivable, including reimbursement
review of certain Medicare claims in southern California, the Company has been
experiencing difficulty generating sufficient cash flows from operations to
meet its obligations and sustain its operations without the use of available
cash reserves.
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The report of the Company's independent auditors on the Company's financial
statements at September 30, 1996, includes an explanatory paragraph which
states that such conditions raise substantial doubt as to the Company's ability
to continue as a going concern. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Note 2 to the
Notes to Consolidated Financial Statements." In a continuing effort to improve
this situation for both the immediate future and the long-term, the Company
sold certain assets relating to its Hospital Division, and is taking steps to
reduce operating expenses, finance its working capital requirements,
restructure debt, raise additional capital and improve its cash flows.
Nevertheless, there can be no assurance that the Company's efforts will result
in positive effects on the Company's financial condition.
SALE OF FREESTANDING FACILITIES/CONTINUED OPERATION OF MOUNTAIN CREST HOSPITAL
On April 5, 1996, the Company sold Oakview Treatment Center to a
non-profit corporation affiliated with a privately-owned operator of two
psychiatric hospitals for $50,000 in cash and $2,150,000 evidenced by two
promissory notes payable to the Company. The notes are payable in monthly
installments of principal and interest (at prime) based on a fifteen year
amortization, with the remaining principal due in five years (or earlier under
certain circumstances). In connection with obtaining a waiver from MEDIQ
Incorporated ("MEDIQ") of an event of default provision of a note payable to
MEDIQ (the "MEDIQ Note") relating to the sale of the assets of a significant
subsidiary, the Company pledged one of the notes receivable (with a principal
balance of $1,875,000) as collateral for the Company's obligations under the
MEDIQ Note. The Company is reviewing with counsel the validity of the MEDIQ
Note and its legal rights and remedies in the event the MEDIQ Note's validity
is litigated. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
On May 31, 1996, the Company sold certain assets, consisting
principally of five of its freestanding behavioral healthcare facilities, to
Behavioral Healthcare Corporation, a Delaware corporation ("BHC"), with its
principal offices located in Nashville, Tennessee, pursuant to an Asset
Purchase Agreement (the "BHC Agreement"), dated as of January 24, 1996, and
amended as of April 11, 1996, by and between the Company and BHC (the "BHC
Sale"). The facilities were sold to BHC for approximately $10,209,000,
consisting of $9,049,000 in cash and $1,160,000 (reflecting post-closing
adjustments by both parties) in assumed liabilities of the freestanding
facilities.
The Company used a portion of the proceeds from the BHC Sale for (i)
the repayment of the principal amount outstanding under the Company's revolving
credit facility ($2,515,000, including related early termination fees of
$174,000); (ii) the extinguishment of a portion of the indebtedness not assumed
by BHC ($692,000, including early termination fees of $139,000), which
consisted primarily of indebtedness secured by certain of the assets
(particularly a facility and certain equipment) acquired by BHC; and (iii) the
funding of the Company's obligation to complete repairs to two of the
freestanding facilities in the amount of $284,000 (of which $216,000 remains in
escrow) The Company expects to continue to use the remainder of the proceeds
from the BHC Sale for general working capital, which the Company anticipates
will include expansion of the Extended Care Services Division. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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The Company's freestanding behavioral healthcare facilities
represented 86% and 68% of net revenues for the years ended September 30, 1995
and 1994, respectively. As a result of the sale of six facilities in 1996, the
freestanding behavioral healthcare facilities represented only 67% of net
revenues for fiscal 1996.
The Company continues to operate Mountain Crest Hospital a 60-bed
psychiatric hospital located in Fort Collins, Colorado, which also operates
seven alternative care programs for adult, adolescent and geriatric patients,
and serves communities in Colorado. The Company commenced operating this
facility in August 1994 pursuant to a sublease agreement. Mountain Crest
Hospital represented 16% of the Company's net revenue in fiscal 1996. See
"Item 2. Properties." As a result of Mountain Crest Hospital's positive
contribution to the Company's operating income, the Company has decided not to
actively seek a buyer for its sole remaining hospital. The Company anticipates
that Mountain Crest Hospital will contribute approximately 25-35% of the
Company's net revenues in fiscal 1997.
Mountain Crest Hospital is subject to compliance with various federal,
state and local statutes and regulations, including requirements relating to
facility use, licensure and inspection requirements, licensing or certification
requirements of federal, state and local health agencies and industry
accreditation agencies, such as the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO"). Mountain Crest Hospital is JCAHO
accredited.
Many states also have statutory requirements, known as certificate of
need laws, intended to avoid the proliferation of unnecessary or under-utilized
healthcare services and facilities by requiring a healthcare facility to obtain
approval prior to offering services or undertaking certain acts. Mountain Crest
Hospital has obtained the necessary certificate of need approval, and the
Company believes it is operating in compliance with the conditions of such
approval. Facilities used for healthcare programs must also comply with
licensing requirements of federal, state and local health agencies, and with
the requirements of municipal building, health and fire codes. In granting and
renewing a facility's license, state health agencies generally consider, among
other factors, the physical condition of the facility, the type of services
offered by the facility, the qualifications of administrative and professional
staff, the quality of professional and other services, and the continuing
compliance of such facility with the laws and regulations applicable to its
operations. Licensing, certificate of need, reimbursement and other applicable
regulations vary by jurisdiction and are subject to change. The Company
believes that the Mountain Crest Hospital is materially in compliance with all
applicable requirements. The Company is not able to predict the impact of
future changes in regulations affecting the industry.
Many healthcare providers receive reimbursement under one or more of
the Medicare or Medicaid programs for behavioral healthcare services. The
Company is reimbursed under such programs for services provided at Mountain
Crest Hospital. In order to receive reimbursement under such programs, each
facility must meet applicable requirements promulgated by the United States
Department of Health and Human Services relating to the type of facility, the
qualifications and requirements of personnel, standards of patient care and
compliance with applicable state and local laws, rules and regulations. The
Company believes that Mountain Crest Hospital, which is currently subject to
such certification, is materially in compliance with all applicable
requirements.
The Medicare prospective payment system uses predetermined
reimbursement rates based upon diagnosis-related groups ("DRGs"). The DRG
system established fixed payment amounts per discharge diagnoses generally
provided by acute care hospitals. Mountain Crest Hospital is currently exempt
from the DRG system. It is possible that, in the future, mental health
programs could be included in the DRG
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system. The Company is not able to predict the impact, if any, on its business
or operations of such a change in the Medicare reimbursement system.
Federal law contains certain provisions designed to ensure that
services rendered by healthcare providers to Medicare and Medicaid patients are
medically necessary and meet professionally recognized standards. Those
provisions include a requirement that admissions of Medicare and Medicaid
patients to hospitals must be reviewed in a timely manner to determine medical
necessity. In addition, these provisions state that a hospital may be required
to reimburse the government for the cost of Medicare paid services determined
by a peer review organization to have been medically unnecessary. Mountain
Crest Hospital has quality assurance programs and procedures for utilization
review and retrospective patient care evaluation. Various state and federal
laws regulate the relationships between providers of healthcare services and
referral sources. Among these laws are the Medicare and Medicaid anti-fraud
and abuse provisions (the "Fraud and Abuse Statute"). The Fraud and Abuse
Statute prohibits individuals or entities participating in the Medicare or
Medicaid programs from knowingly and willfully offering, paying, soliciting, or
receiving remuneration in order to induce referrals for items or services
reimbursed under those programs. The policy objective of this statute is to
ensure that the purpose for a referral is quality of care and not monetary gain
by the referring individual. This prohibition applies to Medicare patients,
Medicaid patients and other beneficiaries of certain federally-funded programs,
and imposes felony criminal penalties and civil sanctions, as well as exclusion
from the Medicare or Medicaid programs, for violations. This provision also
sets forth certain specific exceptions to the general prohibition, and
authorizes the Department of Health and Human Services to promulgate, by
regulation, additional payment practices (known as "safe harbors") which will
be immune from prosecution. In 1991, regulations were issued creating certain
"safe harbors" for relationships between healthcare providers and referral
sources. Any relationship that satisfies the terms of a safe harbor is
protected from criminal prosecution and civil sanctions. Failure to satisfy
the requirements of a safe harbor does not necessarily mean that the
relationship is prohibited; rather, the failure to fit within a safe harbor
means the arrangement is not immune from scrutiny and the possibility of
punishment. The Company has agreements with the physicians who provide
professional services at Mountain Crest Hospital, which generally provide for
payments to such persons by the Company as compensation for their
administrative services. The Company believes that its relationships comply
with the Fraud and Abuse Statute provisions and the safe harbor regulations,
and has an on-going compliance monitoring program.
The Omnibus Budget Reconciliation Act of 1993 includes provisions
prohibiting certain physician referrals. These provisions ("Stark II")
prohibit a physician who has a financial relationship with an entity from
referring to that entity for the furnishing of "designated health services" for
which payment would otherwise be made by Medicare or Medicaid. Furthermore,
the entity may not present a claim or bill an individual, third party payor or
other entity for "designated health services" furnished pursuant to such a
referral. Inpatient and outpatient hospital services are specifically included
in the definition of "designated health services."
Although the Fraud and Abuse Statute and Stark II prohibitions apply
to Medicare patients, Medicaid patients and other beneficiaries of certain
federally-funded programs, many state laws extend
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the prohibition to all payors. The Company believes its relationships comply
with all state and federal statutes and regulations restricting patient
referrals.
There are federal, state and local regulations relating to certain
aspects of the Company's business, including civil commitment of patients to
psychiatric programs and disclosure of information concerning patient
treatments. Many states have adopted "patient bill of rights" regulations
which set forth standards for least restrictive treatment, patient
confidentiality, patient access to mail and telephones, patient access to legal
counsel and requirements that patients be treated with dignity. Moreover, many
states have reporting requirements and procedures. The Company's facilities
have adopted and implemented policies and procedures consistent with such
regulations.
In recent years, media and public attention has been focused on
allegations of fraudulent practices related to the nature and duration of
patient treatments and related billing practices by certain psychiatric care
providers. These alleged practices have been the subject of federal and state
investigations, as well as legal proceedings. Although not involving the
Company, there is a possibility that such activities and investigations could
have a negative impact on the entire industry. The Company is not able to
determine the extent of such impact, if any, on the Company's business or
operations. Several large companies have suffered financial difficulties
resulting from their psychiatric care operations. These companies have been
prompted to sell, close or convert to other uses many facilities throughout the
United States.
SALE OF CONTRACT MANAGEMENT BUSINESS
In August 1994, the Company combined its contract management business
with that of Horizon Mental Health Services, Inc. ("Horizon") of Denton, Texas
through the formation of a new company, Horizon Mental Health Management,
L.L.C. (the "Joint Venture"). The Joint Venture, owned 27.5% by the Company
and 72.5% by Horizon, managed over 150 in-patient and alternative mental health
programs for acute care hospitals located in 34 states, and was the leading
contract manager of mental health programs offered by general acute care
hospitals in the United States. In March 1995, Horizon completed an initial
public offering of its stock and, in accordance with the terms of the Joint
Venture agreement, acquired the Company's interest in the Joint Venture for
approximately $9,600,000 (net of related expenses). The sale resulted in a
gain of approximately $500,000 (net of income taxes of $3,000,000). In
connection with the sale, the Company assigned to Horizon all of its rights and
interests in its management contracts, including related accounts receivable.
The Company's contract management business represented approximately 29% of net
revenues for the year ended September 30, 1994. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EXTENDED CARE SERVICES DIVISION
General. The Company's Extended Care Services Division represented
approximately 33% and 14% of net revenues for the years ended September 30,
1996 and 1995, respectively. The increase resulted from the Company's sale of
six of its seven freestanding facilities and the growth in the business of the
Extended Care Services Division, primarily relating to certain acquisitions.
Going forward, the Company's strategy is to continue to grow its Extended Care
Services Division through internal expansion and acquisitions. Subsequent to
September 30, 1996, the Company acquired Liberty Bay Colony Health
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Services, Inc.'s. extended care operations servicing approximately 60 extended
care facilities in Massachusetts. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company
believes that this strategy will enable the Company to establish regional
low-cost provider networks and secure contracts with managed care and other
third party payors at competitive rates.
The Company's Extended Care Services Division was formed in October
1993 to pursue opportunities to provide on-site care to nursing home residents
and other patients needing less acute care. In November 1993, the Company
acquired the assets of Atlanta-based ICH Services, L.L.C. (successor to HCI
Services, Inc.), which provides behavioral health and other specialized medical
services to residents of extended care facilities, such as nursing homes,
skilled nursing facilities and assisted living facilities. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The focus of the Company's on-site medical and behavioral healthcare
service programs is to arrange for the provision of clinically-appropriate
cost-effective care to residents of extended care facilities. The aim of the
programs is to maximize the level of functioning and improve the quality of
life of residents, as well as decrease the frequency and duration of in-patient
treatment.
The market for specialized medical and behavioral healthcare services
for residents of extended care facilities has benefitted from adoption of the
Omnibus Budget Reconciliation Act ("OBRA") by the Federal government in 1987
(as amended in 1989, 1992 and 1996). OBRA mandated that all long-term care
facilities make mental health and other specialized medical services, such as
dental, podiatry and optometry, available to their residents in order for the
facility to continue to be certified for Medicare and Medicaid. OBRA also
created the requirement for Pre-Admission Screening and Annual Resident Review
("PASARR") of nursing home residents to evaluate their physical and mental
health prior to admission and annually thereafter. The 1996 OBRA amendments
repealed the annual review of mentally ill and mentally retarded residents of
nursing facilities but required such facilities to promptly notify appropriate
state authorities after a significant change in the physical or mental
condition of a resident who is mentally ill or mentally retarded and mandated
that an assessment review be conducted of the resident after such notification.
In the fourth quarter of fiscal 1994, the Extended Care Services
Division began providing mental health services to Medicaid patients residing
in nursing homes in the State of Georgia under a contract pursuant to the
PASARR Program. This program was created by the State of Georgia to provide a
way for extended care facilities to comply with the OBRA mandate. The contract
with the State of Georgia, which is for a term of three and one-half years, is
renewable on an annual basis. In July 1996, the Company received notification
that it had been approved to commence the third year of the contract. There is
no assurance that the Company will be successful in renewing the contract
following its termination in November 1997. As of September 30, 1996,
Georgia's PASARR program included approximately 2,400 residents in 320 nursing
homes. The Company believes that the Georgia contract could present a model
for other extended care facilities and other states to establish programs to
comply with OBRA.
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Growth Strategy. The internal expansion activities of the Extended
Care Services Division are designed to increase market share in existing
markets. The Company screens professional recruitment candidates by examining
their professional experience, business background, availability and other
factors. The Company credentials all healthcare professionals to insure that
they satisfy applicable licensure, certification or registration requirements.
There can be no assurance that the Company will be successful in its efforts to
expand the operations of the Extended Care Services Division, or that the
Extended Care Services Division will generate operating profits.
In addition, the Company believes that the Extended Care Services
Division provides a platform to expand into the non-physician practice
management business, providing management services to professionals such as
psychologists, social workers, nurses, dentists, podiatrists and optometrists.
The operations of the Extended Care Services Division comprise the principal
management services which can be provided to professionals to enhance their
efficiency and competitiveness by reducing the time spent on administration and
enabling increased clinical efforts. Management services provided would
include billing, collections, marketing, payroll and other administrative
services.
In furtherance of this strategy, the Company has completed several
acquisitions (described below), routinely reviews potential acquisition
candidates, and is pursuing other acquisition and management opportunities.
The Company plans to continue its expansion into the practice management
business, which is the thrust of the Company's long-term growth strategy, by
acquiring additional practices and/or securing long-term management agreements
with additional practices. Other than the Liberty Bay Colony Health Services
acquisition discussed below, the Company has not entered into definitive
agreements with respect to other acquisitions, and there can be no assurances
that any acquisitions will be completed or management opportunities will be
secured. In addition, based upon the Company's limited liquidity and capital
resources, there can be no assurance that the Company will have sufficient
resources to pursue and/or complete any other acquisitions. Depending upon the
availability of working capital, the Company's plans to further expand the
Extended Care Services Division could be extremely restricted, and the
Company's results of operations and financial condition may be adversely
affected. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Acquisition of SCC/Recent Determination to Discontinue Operations. In
July 1995, the Company's Extended Care Services Division acquired certain
assets of Supportive Counseling Care ("SCC"). SCC, based in Manhattan Beach,
California, is a professional corporation which provided behavioral healthcare
services to residents of approximately 50 extended care facilities. As
consideration for the acquired assets, the Company paid $500,000 in cash and
notes. The Company's Extended Care Services Division also entered into a
40-year management contract to provide administrative services to SCC. The
transaction represented expansion of the Company's operations into the West
Coast region and expansion into non-physician practice management.
In November 1996, the Company decided to discontinue the operations of
SCC based upon SCC's continued operating losses and negative cash flow,
resulting in part from significant delays in Medicare reimbursement. The
Company shut down SCC's operations in early December 1996. Fixed assets of
approximately $12,000 will either be sold or redeployed elsewhere in the
Company. All other SCC assets have been written off as of September 30, 1996.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Acquisition of Clinic Operations in Massachusetts (MHM Counseling
Services). In December 1995, the Company's Extended Care Services Division
acquired the operations of several behavioral
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health clinics located in the metropolitan Boston, Massachusetts area from
National Mentor, Inc. As consideration for the acquired assets, the Company
paid $150,000 in cash and agreed to pay $338,000 in 36 equal monthly
installments. The main clinic in Charlestown, Massachusetts, and the one
satellite clinic in Taunton, Massachusetts, employ approximately 70 behavioral
health professionals, and provided clinical behavioral healthcare services to
approximately 1,400 patients in 1996. The Company has changed the name of the
clinics to MHM Counseling Services. MHM Counseling Services offers diverse
programs designed to meet the needs of often overlooked and underserved
populations: school children, the mentally impaired and physically disabled,
those with chronic medical illnesses, and older adults. Services can be
obtained at a number of convenient clinic sites across Massachusetts as well as
in home-based and outreach locations, including public schools, nursing homes,
vocational centers, day treatment centers, assisted living facilities, group
homes, rehabilitation hospitals, dialysis centers, and workshops for the
developmentally delayed. The clinics provide scheduling, administration,
billing and marketing services. The acquisition expanded the Company's
geographic reach into Massachusetts and the Northeast region of the United
States. The programs of the clinics also expand the Company's product
offerings, particularly in counseling services for schools. The Company
further expects to add some of the clinics' product offerings to its existing
operations.
Acquisition of Extended Care Operations in Massachusetts (Liberty
Bay). Effective as of December 1, 1996, the Company's Extended Care Services
Division acquired, pursuant to an Agreement (the "Liberty Bay Agreement") by
and among the Company, MHM Extended Care Services, Inc., Liberty Bay Colony
Health Services, Inc ("Liberty Bay") and Liberty Management Group, Inc.
("Liberty Management"), certain assets and contractual rights from Liberty Bay
which constituted Liberty Bay's geropsychiatric management services operations
in Massachusetts. Liberty Bay, a wholly-owned subsidiary of Liberty
Management, provided behavioral healthcare services on a contract basis to
residents of approximately 60 extended care facilities in Massachusetts. The
Company has commenced integrating these operations with MHM Counseling
Services. The combined operations will operate under the name "MHM/Bay Colony
Counseling Services", and, as a result of the acquisition, will serve
approximately 80 extended care facilities. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
As consideration for the purchase, the Company paid Liberty Bay
$150,000 in cash and issued a promissory note in the principal amount of
$150,000 (the "Liberty Bay Note"). The Liberty Bay Note provides for quarterly
interest payments at an annual rate of 9% and the payment of the principal
amount in one installment on December 1, 1999. The Company also agreed to pay
Liberty Bay additional consideration consisting of 20% of "cash flow" (as such
term is defined in the Liberty Bay Agreement) from the acquired contracts over
the five year period commencing December 1, 1996. Such additional
consideration is payable annually by the Company and is calculated on a
contract-by-contract basis.
Operations of the Extended Care Services Division. In general, the
Company's extended care services are provided under annual contracts with
extended care facilities, which are typically cancelable upon thirty days
notice. The Company schedules provider visits to the facilities and handles
billing and administration. The Company's professionals visit the facilities
either on an as-needed basis or at regularly scheduled intervals. The
obligations of the facility are generally limited to providing space in the
facility for the Company's professional to meet with residents and assisting
the Company in locating
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residents who may need care. The Company's Extended Care Services Division
does not receive any compensation from the facility. The services provided by
the Company's professionals are provided only as needed by the resident. The
residents are not required by the facility or the Company to utilize the
Company's professionals.
The healthcare professionals providing services under the Company's
programs are either employees of the Company or render their services on an
independent contract basis pursuant to annual agreements with the Company,
which typically are renewed automatically on an annual basis and cancelable
upon sixty days notice.
As of December 15, 1996, the Extended Care Services Division
(including the operations of MHM/Bay Colony Counseling Services and the
Georgia PASARR contract) had contracts to arrange for professionals (employed
by or under contract with the Company) to provide services (including mental
health, podiatric, optometry and dental services) to residents of 655 extended
care facilities in the following states:
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State Number of Facilities
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Florida 17
Georgia 324
Indiana 54
Massachusetts 84
New Jersey 2
North Carolina 125
Ohio 5
Pennsylvania 3
Tennessee 24
Virginia 17
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Total 655
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The Extended Care Services Division competes with national, regional
and local companies which provide services to residents of extended care
facilities in a manner similar to that of the Company. In addition, the
Company competes with community-based acute care hospitals which operate
programs to serve the needs of residents of extended care facilities, as well
as national hospital chains which have targeted this market for expansion. The
Company also competes with regional and local behavioral healthcare and other
medical professionals (and their affiliated professional corporations) which
provide services in extended care facilities. Some of the Company's
competitors are larger and have greater financial and other resources than the
Company. The Company believes that competition in this business is primarily
on the basis of quality, range of services and availability of professionals.
Based upon increased pressure to control healthcare costs and improve
operating efficiencies, the Company believes an opportunity exists for the
Company to consolidate the operations and management of regional and local
practices into provider networks. The Company also competes for professional
practice acquisition and management opportunities with other practice
management businesses which are larger and have greater financial and other
resources than the Company. The Company believes that
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competition for acquisition and management opportunities is primarily on the
basis of price, terms of the transaction and value-added services that the
acquiror can provide to the practice. There can be no assurance that the
Company will be able to successfully compete against such other businesses.
The business of the Extended Care Services Division is affected by
federal, state and local laws and regulations concerning, among other matters,
professional licensure and reimbursement. Licensing, reimbursement and other
applicable regulations vary by jurisdiction and are subject to change. The
Company is not able to predict the impact of future changes in regulations
affecting the industry. Certain of the services provided by the Company's
professionals to residents of extended care facilities are reimbursed under the
Medicare and/or Medicaid programs. Accordingly, certain of the Company's
relationships and arrangements are subject to compliance with the Medicare and
Medicaid Fraud and Abuse Statute described above. As mentioned, this statute
sets forth certain specific exceptions to the general prohibition, and
authorizes the Department of Health and Human Services to promulgate, by
regulation, additional payment practices (known as "safe harbors") which will
be immune from prosecution. In 1991, regulations were issued creating certain
"safe harbors" for relationships between healthcare providers and referral
sources. Any relationship that satisfies the terms of a safe harbor is
protected from criminal prosecution and civil sanctions. However, failure to
satisfy the requirements of a safe harbor condition does not necessarily mean
that the relationship is prohibited; rather, the failure to fit within a safe
harbor means the arrangement is not immune from scrutiny and the possibility of
prosecution and sanctions. The Company believes that its relationships comply
with the Fraud and Abuse Statute as well as all other state and federal
statutes and regulations restricting patient referrals.
The services provided by the Company's Extended Care Services Division
are also reimbursed under the Medicare and/or Medicaid programs. Certain of
such services are federally-mandated for residents of extended care facilities.
Any changes in Medicare and/or Medicaid reimbursement methodologies or program
mandates could have an adverse impact on the results of the Extended Care
Services Division. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Current Medicare regulations do not require a physician to certify the
need for outpatient mental health services for each patient (other than for
partial hospitalization treatment). However, these regulations do require that
such services be part of an established plan of treatment. Some of the fiscal
intermediaries administering the Medicare program in specific geographic
regions require a physician's referral and an established plan of treatment to
qualify for reimbursement for mental health services.
The Company anticipates that some Medicaid administrators may contract
with managed care organizations to administer the delivery of care to Medicaid
participants. The Company is implementing a marketing strategy to attract
managed care opportunities. In this situation, the Company's Extended Care
Services Division and/or the professionals providing services at extended care
facilities under the Company's programs require approval by such managed care
organizations in order to receive reimbursement under the Medicaid programs.
Psychiatrists, psychologists, social workers and nurses are required
to be licensed in the state or states in which they practice. Licensure
requirements are administered by state agencies. The
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<PAGE> 12
Company's screening process includes confirmation of necessary licensure, and
the Company continually monitors license status, as well as satisfaction of
continuing education and other related requirements.
In certain states, the employment of psychiatrists, psychologists,
other mental healthcare professionals and other medical professionals by
business corporations is a permissible practice. However, many states,
including some states in which the Company operates, prohibit or otherwise
limit business corporations, such as the Company, from providing behavioral
health and other medical services through the direct employment of
psychiatrists, psychologists and other professionals. In such states, the
Company contracts with professional corporations owned by such professionals,
and arranges for the provision of such services. The Company believes that the
operations of the Extended Care Services Division are structured in compliance
with such rules, or, if necessary, can be restructured in a cost-effective
manner. However, there can be no assurance that other states in which the
Company operates will not enact similar or more restrictive legislation or
regulations.
EMPLOYEES
As of December 15, 1996, the Company had 53 full-time employees and 43
part-time employees engaged in the operations of the Mountain Crest
freestanding facility and 154 full-time employees and 32 part-time employees
engaged in the operations of the Extended Care Services Division (including
MHM/Bay Colony Counseling Services). In addition, as of such date, the Company
had 12 employees engaged in corporate and administrative operations. The
Company leases its employees under a contract with Administaff Companies, Inc.
("Administaff"). The contract was executed June 30, 1996, and may be
terminated by either party upon thirty days prior written notice. Under the
contract, Administaff and the Company are each responsible for compliance with
specified laws and for specified purposes but also are considered co-employers
for certain other purposes. The Company pays Administaff a fee based upon a
percentage of the Company's gross payroll. The Company believes that it has
reduced its overall costs related to employees through this contract with
Administaff which represents one aspect of its general efforts to reduce its
operating expenses. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's employees include healthcare professionals, such as
psychiatrists, psychologists, social workers, nurses, counselors and
occupational and activities therapists, and employees engaged in corporate,
finance, marketing, administration and other support positions. None of the
Company's employees are covered by a collective bargaining agreement, and the
Company considers its employee relations to be good. The Company's
relationships with certain healthcare professionals are pursuant to contracts
with each professional establishing independent contractor relationships.
COMPANY HISTORY
The Company was incorporated in 1981 in the Commonwealth of Virginia,
and in October 1994 changed its state of incorporation to Delaware. From 1986
to August 1993, the Company was a wholly-owned subsidiary of MEDIQ Incorporated
("MEDIQ"). In August 1993, MEDIQ distributed the stock of the Company to
MEDIQ's shareholders.
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<PAGE> 13
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements based on management's
current plans and expectations, relating to, among other matters, the proposed
business activities of the Company, estimates of amounts that are not yet
determinable and the proposed activities of the Company relating to improving
its liquidity. Such statements involve risks and uncertainties which may cause
actual future activities and results of operations to be materially different
from that suggested in this report, including, among others, the use of
available cash resources to fund continued operating losses, the amount and
timing of receipt of government reimbursement and the results of the review of
SCC's claims by the Medicare fiscal intermediary, risks associated with
industry consolidation and acquisitions, the need to manage growth, the
possible need to use the net cash proceeds from the sale of freestanding
facilities for the retirement of certain indebtedness and competition.
ITEM 2. PROPERTIES
The Company's executive offices are located in Vienna, Virginia
pursuant to a lease expiring in December 1998. Pursuant to such lease, the
Company pays annual rent of $22.61 per square foot on approximately 6,600
square feet, with annual increases in an amount equal to 3% of the prior
year's base rent. In its efforts to reduce its operating costs, the Company
terminated its prior lease in McLean, Virginia with annual rent of
approximately $307,000 in favor of its present lease with annual rent of
approximately $150,000. Mountain Crest Hospital is operated pursuant to a
sublease expiring in 2000 and requires base rental payments of $20,000 monthly
and additional rent equal to 6.5% of the net revenues of the facility and 50%
of the facility's excess cash flows (as defined in the lease agreement). In
addition, the Extended Care Services Division leases office space in
California, Georgia and Massachusetts for its operations. The Company believes
that its facilities are adequate to carry on its business as currently
conducted.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in two lawsuits with Horizon and one or more
of its affiliates. The Company sued Horizon, Horizon Mental Health Management,
Inc. and the Joint Venture in the Delaware Court of Chancery on August 9, 1995
(C.A. No. 14465) under several agreements governing the distribution of profits
to the Company from the Joint Venture. The Delaware Chancery Court granted the
Company's motion for summary judgment that entitled it to receive its pro rata
share of the Joint Venture's net cash flow for March 1995 with accrued interest
which, through October 3, 1996, amounted to $433,330. That judgment has been
appealed by Horizon to the Delaware Supreme Court. On July 31, 1996, Horizon
and Horizon Mental Health Management, Inc. sued an affiliate of the Company,
MHM/LLC, Inc., in the District Court of Denton County, Texas, 211th Judicial
District (Cause No. 96-30528). Plaintiffs' Petition alleges breach by the
Company of its indemnity obligations under certain Joint Venture agreements and
seeks unspecified damages which the Company believes total no more than
$120,000. The Company intends to vigorously contest this action.
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<PAGE> 14
The Company is involved in various other legal proceedings incidental
to its business, some of which may be covered by insurance. The Company knows
of no litigation, either pending or threatened, which is likely to have a
material adverse effect on the Company's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended September 30, 1996.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
MARKET INFORMATION
The following table sets forth, for the periods indicated, the high
and low prices for the common stock as listed on the American Stock Exchange
("AMEX").
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year ended September 30, 1996:
First Quarter $3.750 $1.750
Second Quarter 2.625 1.000
Third Quarter 1.875 1.250
Fourth Quarter 1.500 .750
Year ended September 30, 1995:
First Quarter $3.938 $2.500
Second Quarter 3.313 1.875
Third Quarter 3.438 2.000
Fourth Quarter 3.750 2.250
</TABLE>
Based upon the Company's financial condition and operating results, it
falls within the AMEX guidelines for suspension and delisting. The AMEX has
discretion to consider a variety of factors in making a decision to suspend or
delist a security, including a company's prospects for growth. There can be no
assurance that the Company will continue to be listed on the AMEX or satisfy
the standards for listing on another exchange or Nasdaq. Failure to be listed
on an exchange or Nasdaq would adversely affect the price of the Company's
common stock and the ability of the Company's shareholders to sell their
shares.
COMMON STOCK HOLDERS
As of December 27, 1996, there were approximately 1,669 holders of
record of the Company's common stock. Since a portion of the common stock is
held in "street" name or nominee name, the Company is unable to determine the
exact number of beneficial holders.
DIVIDENDS
The Company has never declared or paid any cash dividends. The
declaration of dividends in the future will at all times be subject to the sole
discretion of the Company's Board of Directors, and will depend upon the
operating results, capital requirements and financial position, general
economic conditions and other pertinent conditions or restrictions relating to
any future financing.
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<PAGE> 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial information presented below has
been derived from the audited financial statements of the Company. This data
is qualified in its entirety by reference to, and should be read in conjunction
with the Company's Consolidated Financial Statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere herein.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------------
1996 1995(1) 1994(1) 1993 1992
------------- ----------- --------------- --------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues $ 34,670 $ 41,109 $ 48,286 $ 46,667 $ 46,446
Costs and expenses:
Operating 25,765 28,918 33,895 31,760 31,631
General and administrative 9,718 10,085 10,644 8,448 7,964
Provision for bad debts 6,320 4,467 2,009 1,444 1,311
Depreciation and amortization 1,034 1,603 1,617 1,826 2,329
Loss on sale of facilities (2) 4,440 -- -- -- --
Writedown of long-term assets (3) 461 2,228 -- -- --
Restructuring charges (4) -- -- 966 -- --
Writedown of goodwill (5) -- -- -- -- 23,141
Management fees - MEDIQ (6) -- -- -- 1,111 3,266
Other (credits) charges:
Equity in earnings of Joint
Venture -- (835) (292) -- --
Gain on sale of Joint Venture -- (3,542) -- -- --
Interest expense - MEDIQ 1,097 1,171 932 834 1,051
Interest expense -other 290 366 389 328 413
Other (income) expense-net (233) (223) (33) (50) (105)
---------- ---------- ---------- --------- ----------
Income (loss) before income tax
expense (benefit), extraordinary
item and cumulative effect of a
change in accounting principle (14,222) (3,129) (1,841) 966 (24,555)
Income tax (benefit) expense (308) 894 (525) 451 (158)
Extraordinary item (7) (463) -- -- -- -
Cumulative effect of a change in
accounting principle (8) (732)
---------- ---------- ---------- --------- ----------
Net (loss) income $ (14,377) $ (4,023) $ ( 2,048) $ 515 $ (24,397)
========== ========== ========== ========= ==========
(Loss) earnings per share $ (4.34) $ (1.22) $ (.63) $ .17 $ (8.18)
========== ========== ========== ========= ==========
Weighted average shares outstanding 3,310 3,310 3,267 2,980 2,980
========== ========== ========== ========= ==========
</TABLE>
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<PAGE> 17
BALANCE SHEET DATA
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------
1996 1995(1) 1994(1) 1993 1992
(in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ 2,947 $ 5,923 $ 485 $ 7,377 $ 3,837
Total assets 10,828 30,283 41,900 37,364 36,407
Long term debt, less current maturities 257 2,422 716 4,532 157
Due to MEDIQ, less current maturities 9,967 10,733 11,500 11,500 11,009
Stockholders' (deficit) equity (3,582) 10,795 14,818 15,546 15,031
</TABLE>
See Notes to Selected Consolidated Financial Data
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<PAGE> 18
Notes to Selected Consolidated Financial Data:
(1) Effective August 1, 1994, the Company formed a joint venture ("Joint
Venture") to combine its contract management business with that of
Horizon Mental Health Services, Inc. ("Horizon"). The Joint Venture,
which was owned 27.5% by the Company and 72.5% by Horizon, managed
both companies' hospital behavioral health care contracts. The
operating results of the contract management business were included in
the Company's results of operations through the commencement of the
Joint Venture on August 1, 1994. On March 20, 1995, Horizon completed
its initial public offering and, in accordance with the terms of the
Joint Venture Agreement, acquired the Company's interest in the Joint
Venture for approximately $9,600,000 (net of related expenses). The
sale resulted in a pre-tax gain of $3,542,000 (approximately $500,000
net of taxes).
(2) The Company completed the sale of six of its seven freestanding
behavioral health facilities in 1996 and recorded a loss of $4,440,000
consisting primarily of the write off of intangibles related to the
facilities of $3,184,000, loss on the sale of certain property, plant,
and equipment aggregating $319,000, transaction expenses of $568,000,
severance expenses of $349,000, and other expenses of $680,000, offset
by estimated Medicare depreciation recapture income of approximately
$660,000.
(3) In the fourth quarter of 1996, the Company wrote off the assets
related to the discontinued operations of SCC including property,
plant and equipment and goodwill resulting in a charge of $461,000.
In the fourth quarter of 1995, the Company determined that the
recoverability of certain of the assets, including property, plant and
equipment and goodwill, related to one of the Company's freestanding
facilities, was impaired, other than temporarily. Accordingly, the
carrying value of such assets was reduced to estimated fair value,
resulting in a charge of $2,228,000.
(4) In connection with the commencement of the Joint Venture, the Company
recorded a restructuring charge of $966,000 related to the downsizing
of its corporate activities.
(5) In 1992, MEDIQ determined that the value of goodwill related to the
Company was impaired, other than temporarily. Accordingly, the
carrying value of such goodwill was reduced to its estimated fair
value resulting in a charge of $23,141,000.
(6) Represents primarily an allocation of MEDIQ's claimed overhead, as
well as claimed costs to provide services to the Company. In
anticipation of the August 1993 distribution of the Company's stock to
MEDIQ's stockholders, MEDIQ discontinued charging management fees to
the Company effective April 1, 1993. The Company had continued to
obtain certain services from MEDIQ pursuant to a services agreement
which terminated in 1996. Fees for services rendered by MEDIQ were
$38,000, $140,000 and $138,000 in 1996, 1995 and 1994, respectively,
and were included in general and administrative expenses.
(7) The Company recorded an extraordinary item in the amount of $463,000
consisting primarily of costs related to the early retirement of the
Company's long-term debt and the subsequent write off of associated
loan acquisition costs.
(8) Represents the cumulative effect of a change in the Company's method
of accounting for certain preopening costs and certain costs incurred
in securing management contracts.
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements, and notes thereto, included elsewhere in this report.
GENERAL
In response to continuing changes in the behavioral healthcare
industry, the Company made significant changes in its operations in 1994, 1995
and 1996, including the divestiture of the Company's contract management
business and substantially all of its freestanding behavioral healthcare
facilities (see "Recent Developments"), so that the Company could focus on its
principal remaining business -- its Extended Care Services Division (which
commenced operations in the Fall of 1993). The Extended Care Services Division
has experienced growth through internal development (principally from a
contract with the State of Georgia) and acquisitions.
As a result of the Company's continued negative operating results, as
well as reduced collections of accounts receivable, the Company has been
experiencing difficulty generating sufficient cash flows from operations to
meet its obligations and sustain its operations without the use of available
cash resources. The report of the Company's independent auditors on the
Company's financial statements for the fiscal year ended September 30, 1996,
includes an explanatory paragraph which states that such conditions raise
substantial doubt as to the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. In a continuing effort to improve this
situation for both the immediate future and the long-term, the Company sold
certain assets relating to its Hospital Division, and is taking steps to reduce
operating expenses, finance its working capital requirements, restructure debt,
raise additional capital and improve its cash flows. Nevertheless, there can
be no assurance that the Company's efforts will result in positive effects on
the Company's financial condition.
RECENT DEVELOPMENTS
Based upon the adverse impact on the Company's operating results of
cost-reduction pressures on in-patient care and the Company's belief that such
pressures would likely continue to have an adverse impact on future results,
the Company decided to pursue a strategy focused on growing its Extended Care
Services Division. As a result, the Company sold six of its seven freestanding
behavioral health facilities. In 1995, the operations of the freestanding
facilities represented 86% of net revenues and had comprised 77% of the
Company's total assets at the end of fiscal 1995. As a result of the sale of
six facilities in 1996, the freestanding facilities represented only 67% of net
revenues for fiscal 1996.
On April 5, 1996, the Company sold Oakview Treatment Center (the
"Oakview Sale") to a non-profit corporation affiliated with a privately-owned
operator of two psychiatric hospitals for
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<PAGE> 20
$50,000 in cash and $2,150,000, evidenced by two promissory notes payable to
the Company. For financial statement purposes, the notes were recorded at an
estimated net realizable value of $1,400,000. The notes are payable in monthly
installments of principal and interest (at prime) based on a 15 year
amortization, with the remaining principal due in five years (or earlier under
certain circumstances). In connection with obtaining consent to the Oakview
Sale as required under the terms of the Company's revolving credit facility,
the Company pledged both of the notes receivable relating to the Oakview Sale
as collateral for the Company's obligations under the revolving credit
facility. In connection with obtaining a waiver from MEDIQ of an event of
default provision of the MEDIQ Note relating to the sale of the assets of a
significant subsidiary, the Company pledged one of the notes receivable (with a
principal balance of $1,875,000) as collateral for the Company's obligations
under the MEDIQ Note. In connection with the BHC Sale (discussed below) the
revolving credit facility has been repaid and the pledges under the revolving
credit facility have been terminated, but the pledge under the MEDIQ Note
continues. See "Liquidity and Capital Resources."
On May 31, 1996, the Company sold certain assets, consisting
principally of five of its freestanding behavioral healthcare facilities (Aspen
Hill Hospital, Pacific Shores Hospital, Pinon Hills Hospital, Pinon Hills
Residential Treatment Center and Windsor Hospital) (the "Hospitals"), to BHC
pursuant to the BHC Agreement. The Hospitals were sold for approximately
$10,209,000, consisting of $9,049,000 in cash and $1,160,000 in assumed
liabilities of the freestanding facilities (reflecting post-closing adjustments
by both parties). The BHC Agreement, as amended, also provides for certain
Medicare depreciation recapture amounts to be allocated between the Company
(85%) and the purchaser (15%). Such recapture amounts relate to potential
adjustments for prior years to reflect the loss on the sale of the Hospitals as
a retroactive increase in the Company's depreciation expense for purposes of
cost-based reimbursements. The Company estimates that its share of the amounts
to be collected pursuant to such Medicare recapture will be approximately
$1,270,000 of which the Company recorded approximately 50% and that it will
receive final settlements within one to three years from the filing date of
October 31, 1996. See "Liquidity and Capital Resources."
The Company used a portion of the proceeds from the BHC Sale for (i)
the repayment of the principal amount outstanding under the Company's revolving
credit facility ($2,515,000, including related early termination fees of
$174,000); (ii) the extinguishment of a portion of the indebtedness not assumed
by BHC and paid by the Company at the closing of the sale ($692,000, including
early termination fees of $139,000), which consisted primarily of indebtedness
secured by certain of the assets (particularly a facility and certain
equipment) acquired by BHC; and (iii) the funding of the Company's obligation
to complete repairs to two of the freestanding facilities sold to BHC in the
amount of $284,000 (of which $216,000 remains in escrow). The Company expects
to continue to use the proceeds from the BHC Sale for general working capital,
which the Company anticipates will include expansion of the Extended Care
Services Division. See "Liquidity and Capital Resources."
The Company's freestanding facilities represented the majority of the
Company's historical business and have contributed significantly to the
Company's cash flows. In addition, the freestanding facilities helped to
absorb certain corporate-related expenses that now have to be borne primarily
by the Extended Care Services Division. Since its founding in October 1993,
the Extended Care Services Division has generated 33%, 14% and 3% of net
revenues for the years ended September 30, 1996, 1995, and 1994, respectively.
Going forward, the Extended Care Services Division will account for a
substantial portion of the Company's revenues. The expansion of the Extended
Care Services Division has also resulted in increased costs, and thus, with the
allocation of corporate overhead related to the operations of the Extended Care
Services Division, the Extended Care Services Division has not yet achieved
profitable results. No assurances can be given that the Company will be
successful in
20
<PAGE> 21
generating profits from the Extended Care Services Division, or that
the strategy of focusing on growing the Extended Care Services Division through
internal expansion and acquisition will not result in further increased costs.
The Company has recently completed three acquisitions described below,
routinely reviews potential acquisition candidates, and is pursuing other
acquisition and management opportunities. The Company plans to continue its
expansion into the practice management business, which is the thrust of the
Company's long-term growth strategy, by acquiring additional practices and/or
securing long-term management agreements with additional practices. To date,
however, the Company has not entered into definitive agreements with respect to
other acquisitions, and there can be no assurances that any acquisitions will
be completed or management opportunities will be secured. In addition, since
the Company's liquidity and capital resources may be limited by certain future
events, there can be no assurance that the Company will have sufficient
resources to pursue and/or complete any other acquisitions. For example, in
the event the Company continues to use the remainder of the proceeds of the BHC
Sale to fund its continued operating losses or needs to use such funds to repay
the amounts outstanding under the MEDIQ Note, as described below, the Company's
plans to expand the Extended Care Services Division would be significantly
hampered, and the Company's results of operations and financial condition may
be adversely affected.
Acquisition of Supportive Counseling Care/Recent Determination to
Discontinue Operations. In July 1995, the Company's Extended Care Services
Division acquired certain assets of Supportive Counseling Care ("SCC") of
Manhattan Beach, California, a provider of behavioral healthcare services to
extended care facilities, and entered into a 40-year management contract to
provide administrative services to SCC. As consideration for the acquired
assets, the Company paid $500,000 in cash and notes. The Company's Extended
Care Services Division also entered into a 40-year management contract to
provide administrative services to SCC. The operating results related to these
assets are included in the Company's consolidated results of operations from
the date of acquisition. The operations of SCC are primarily responsible for
an increase in the Company's provision for bad debts from the prior year
period. See "Results of Operations - Fiscal Year 1996 Compared to Fiscal Year
1995." In November 1996, the Company decided to discontinue the operations of
SCC based upon SCC's continued operating losses and negative cash flow,
resulting in part from significant delays in Medicare reimbursement. The
Company shut down SCC's operations in early December 1996. Fixed assets of
approximately $12,000 will either be sold or redeployed elsewhere in the
Company. All other SCC assets have been written off as of September 30, 1996.
See "Liquidity and Capital Resources."
The Company issued a purchase warrant in connection with the SCC
acquisition. Such warrant provides the holder thereof, upon the occurrence of
certain events (such as an initial public offering of such subsidiary, MHM
Extended Care Services, Inc.), the right (subject to certain vesting
conditions) until July 1998 to acquire 9,000 shares (subject to adjustment
under certain circumstances) of the common stock of such subsidiary at a
purchase price of $1.00 per share (subject to adjustment under certain
circumstances). Such subsidiary currently has 1,000,000 and 100,000 shares of
its common stock, par value $.01 per share, authorized and issued,
respectively.
Acquisition of Clinic Operations in Massachusetts (MHM Counseling
Services). In December 1995, the Company's Extended Care Services Division
acquired the behavioral healthcare clinic
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<PAGE> 22
operations of National Mentor, Inc. located in Charlestown and Taunton,
Massachusetts. As consideration for the acquired assets, the Company paid
$150,000 in cash and agreed to pay $338,000 in 36 equal monthly installments.
The Company renamed the operations "MHM Counseling Services". The operating
results of the acquired business are included in the Company's consolidated
results of operations from the date of acquisition.
Acquisition of Extended Care Operations in Massachusetts (Liberty
Bay). Effective as of December 1, 1996, the Company's Extended Care Services
Division acquired, pursuant to an Agreement (the "Liberty Bay Agreement") by
and among the Company, MHM Extended Care Services, Inc., Liberty Bay Colony
Health Services, Inc ("Liberty Bay") and Liberty Management Group, Inc.
("Liberty Management"), certain assets and contractual rights from Liberty Bay
which constituted Liberty Bay's geropsychiatric management services operations
in Massachusetts. Liberty Bay, a wholly-owned subsidiary of Liberty
Management, provided behavioral healthcare services on a contract basis to
residents of approximately 60 extended care facilities in Massachusetts. The
Company has commenced integrating these operations with MHM Counseling Services
and the combined operations will operate under the name "MHM/Bay Colony
Counseling Services," and, as a result of the acquisition, will serve
approximately 80 extended care facilities.
As consideration for the purchase, the Company paid Liberty Bay
$150,000 in cash and issued a promissory note in the principal amount of
$150,000 (the "Liberty Bay Note"). The Liberty Bay Note provides for quarterly
interest payments at an annual rate of 9% and the payment of the principal
amount in one installment on December 1, 1999. The Company also agreed to pay
Liberty Bay additional consideration consisting of 20% of "cash flow" (as such
term is defined in the Liberty Bay Agreement) from the acquired contracts over
the five year period commencing December 1, 1996. Such additional
consideration is payable annually by the Company and is calculated on a
contract-by-contract basis.
OVERVIEW OF REVENUE SOURCES
Patient service revenues, which represented approximately 67%, 86%,
and 68% of net revenues in 1996, 1995 and 1994, respectively, were derived by
the Company's freestanding facilities based on covered charges billed primarily
to third party payors, including Medicare, Medicaid and other
government-sponsored programs. Such revenues can be significantly affected by
changes in utilization and reimbursement rates. Typically, payments from such
payors are made at amounts less than the amounts charged, based on existing
contractual relationships or reimbursement methodologies. The Company records
net patient service revenues based upon expected reimbursement. Certain
government-sponsored programs pay primarily on a cost reimbursement basis. The
Company is reimbursed for cost reimbursable items at a tentative rate, with
final settlement generally determined several years after submission of fiscal
year cost reports and audits thereof by the fiscal intermediary. Differences
between amounts recorded as tentative settlements and final audited amounts are
reflected as adjustments to contractual allowances in the year in which
settlement is determined. The Company also receives patient service revenues
under payment agreements with commercial insurance carriers, health maintenance
organizations and preferred provider organizations.
The Company's Extended Care Services Division generates revenues from
administrative services for physicians and other healthcare professionals
providing care to residents of extended care facilities. Such revenues
represented approximately 33%, 14% and 3% of total revenues in 1996, 1995 and
1994, respectively.
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<PAGE> 23
Contract management revenues represented approximately 29% of the
Company's revenues in 1994.
JOINT VENTURE
In August 1994, the Company formed a joint venture (the "Joint
Venture") to combine its contract management business with that of Horizon
Mental Health Services, Inc. ("Horizon") of Denton, Texas. The Joint Venture,
which was owned 27.5% by the Company and 72.5% by Horizon, managed both
companies' hospital behavioral healthcare contracts. The operating results of
the Company's contract management business were included in the Company's
results of operations through the commencement of the Joint Venture on August
1, 1994. From August 1994 to March 20, 1995, the Company's 27.5% interest in
the operating results of the Joint Venture was included as "equity in earnings
of joint venture" in the Consolidated Statement of Operations. On March 20,
1995, Horizon completed an initial public offering of its stock, and, in
accordance with the terms of the Joint Venture agreement, acquired the
Company's interest in the Joint Venture for approximately $9,600,000 (net of
related expenses). The sale resulted in a gain of approximately $500,000 (net
of income taxes of $3,000,000).
ACQUISITION OF MOUNTAIN CREST HOSPITAL
In connection with the commencement of the Joint Venture in August
1994, the Company began operating Mountain Crest Hospital, a 60-bed psychiatric
facility in Fort Collins, Colorado, under a sublease agreement with Horizon
expiring in December 2000. This sublease agreement requires base rental
payments of $20,000 monthly and additional rent equal to 6.5% of the net
revenues of the facility and 50% of the facility's excess cash flows (as
defined in the lease agreement).
ACQUISITION OF BUSINESS OF ICH SERVICES, L.L.C./MODIFICATION TO DEFERRED
CONSIDERATION OBLIGATIONS
In November 1993, the Company acquired the assets of Atlanta-based
ICH Services, L.L.C. ("ICH") (successor to HCI Services, Inc.), which provides
behavioral health and other specialized medical services to residents of
extended care facilities. The acquired operations formed the core of the
Company's Extended Care Services Division. The purchase price for the assets
consisted of 330,000 shares of the Company's common stock, as well as certain
additional consideration payable, in cash or additional shares of the Company's
common stock at the option of the former ICH members, after the third
anniversary of the acquisition in an amount equal to approximately twenty
percent of the appraised fair market value of the acquired operations as of
such third anniversary.
In an effort to avoid the time, expense, and possibility of
disagreement inherent to the appraisal process, the Company has had discussions
with ICH for the purpose of modifying the terms of the additional
consideration. Although no definitive agreement has been reached to date, the
Company expects to execute such an agreement with the former ICH members in the
near future. As proposed, such agreement, which would replace the existing
additional consideration provisions, would require the Company to issue an
aggregate of an additional 266,089 shares of Common Stock to the former ICH
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<PAGE> 24
members as soon as practicable after obtaining listing approval from the
American Stock Exchange for such shares and pay the former ICH members (in the
aggregate) approximately $52,562 in cash. The Company would agree to promptly
file a listing application with the AMEX (or any other exchange or Nasdaq, as
the case may be, should the Company's shares be delisted from the AMEX. See
"Market Information"). The proposed amendment would require the Company to pay
to each former ICH member on November 1, 1997, a one time adjustment payment
equal to the positive difference, if any, between (i) $3.56 per share
multiplied by the number of Company shares such former ICH member received as
additional consideration and (ii) the gross proceeds received by such former
ICH member from the sale of all of such former ICH member's shares of common
stock of the Company received as additional consideration.
There can be no assurance that the Company and ICH will reach a
definitive agreement. If no agreement is reached, the Company would be
required to comply with the terms of the original agreement. The original
agreement did not contain any ceiling on the number of shares of common stock
of the Company that the Company could be required to issue under the earn-out.
Under the terms of the original agreement, within 90 days of November 18, 1996,
the Company would have had to provide the former ICH members additional
consideration of approximately 20% of MHM Extended Care Services, Inc.'s fair
market value as determined by an independent valuation in cash or shares of the
common stock of its parent, MHM Services, Inc.
CHANGE IN ACCOUNTING PRINCIPLE
Effective October 1, 1993, the Company changed its method of
accounting for certain preopening costs and certain costs incurred in securing
management contracts. Prior to the change, these costs were deferred and
amortized over the estimated periods of benefit, ranging from 3 to 5 years.
Based on trends in industry practice, management reevaluated such policy. In
light of the type and nature of the costs involved and changes in the Company's
business, management concluded that it was preferable to expense these costs as
incurred. The cumulative effect on prior years of the change in accounting
principle as of October 1, 1993, was $1,110,000, or $732,000 net of income
taxes. The effect of the change in 1994 was an increase in loss before the
cumulative effect of the change in accounting principle of $473,000, or
$312,000 net of income taxes.
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<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship that components of the Company's results of operations
bear to net revenues.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1996 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Costs and expenses:
Operating 74.3 70.3 70.2
General and administrative 28.0 24.5 22.0
Provision for bad debts 18.2 10.9 4.2
Depreciation and amortization 3.0 3.9 3.3
Loss on sale of freestanding facilities 12.8 -- --
Writedown of long-term assets 1.3 5.4 --
Restructuring charges -- -- 2.0
Other (credits) charges:
Equity in earnings of Joint Venture -- (2.0) (.6)
Gain on sale of Joint Venture -- (8.6) --
Interest expense - MEDIQ 3.2 2.8 1.9
Interest expense - other .8 .9 .8
Other (income) expense - net (.6) (.5) --
----- ----- -----
Loss before income taxes, extraordinary item and
cumulative effect of a change
in accounting principle (41.0) (7.6) (3.8)
Income tax (benefit) expense (.9) 2.2 (1.1)
----- ----- -----
Loss before extraordinary item and cumulative
effect of a change in accounting principle (40.1) (9.8) (2.7)
Extraordinary item - loss on early extinguishment of debt (1.3) -- --
- ---
Cumulative effect of a change in accounting principle -- -- (1.5)
----- ----- -----
Net loss (41.4)% (9.8)% (4.2)%
========= ========= =========
</TABLE>
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<PAGE> 26
Fiscal Year 1996 Compared to Fiscal Year 1995
Net revenues for 1996 were $34,670,000 as compared to $41,109,000 for
the prior year, a decrease of $6,439,000 or 16%, reflecting an increase in net
revenues from the Extended Care Services Division, more than offset by
decreased net revenues from the freestanding facilities. Net revenues from
freestanding facilities were $23,255,000 (including $5,694,000 from Mountain
Crest Hospital, the Company's remaining freestanding facility) in 1996, a
decrease of $12,116,000, or 34%, as compared to the prior year. The decrease
in net revenues resulted primarily from the sale of five of the freestanding
facilities on May 31, 1996 and the sale of Oakview Treatment Center on April 5,
1996. Going forward, the Extended Care Services Division will account for a
substantial portion of the Company's net revenues. Net revenues from the
Extended Care Services Division were $11,415,000 in 1996, as compared to
$5,738,000 in the prior year. This increase is the result of net revenues of
$4,448,000 (as compared to $1,317,000 in 1995) attributable to an acquisition
in July 1995 (SCC) and $1,456,000 attributable to an acquisition in December
1995 (MHM Counseling Services), as well as increased net revenues under a
contract with the State of Georgia to provide mental health services to
Medicaid patients in nursing homes. SCC operations were discontinued in early
December 1996. See provision for bad debts discussion below.
Operating expenses for 1996 were $25,765,000 as compared to
$28,918,000 in the prior year. This decrease was attributable to the sale of
six of the Company's seven freestanding behavioral healthcare facilities,
offset by increases in costs associated with the expansion of the Extended Care
Services Division. The level of operating costs of the Extended Care Services
Division, together with the increased provision for bad debts (described below)
and general and administrative expenses, have had an adverse impact on
operating results.
General and administrative expenses for 1996 were $9,718,000 or 28% of
net revenues, as compared to $10,085,000 or 25% of net revenues, in the prior
year. This decrease was attributable to the sale of six of the Company's seven
freestanding behavioral healthcare facilities, offset by increases in costs
associated with the expansion of the Extended Care Services Division. The
level of operating costs of the Extended Care Services Division, together with
the increased provision for bad debts (described below) and general and
administrative expenses, have had an adverse impact on operating results.
The provision for bad debts for 1996 increased to $6,320,000 as
compared to $4,467,000 in the prior year. As a percentage of net revenues, bad
debt expense was 18%, as compared to 11% in the prior year. The increase in
the provision for bad debts resulted primarily from the operations of SCC
(acquired in July 1995) which are subject to Medicare reimbursement limits,
with the remaining charges billed to the patients or other third party payors.
In March 1996, the Company became aware that SCC's claims, as well as claims
submitted by other industry providers in the region, for reimbursement under
the Medicare program were being subjected to a pre-payment review process by
the Medicare fiscal intermediary in Southern California commencing in April
1996. Under applicable Medicare rules, therefore, SCC is now required to
include specified supporting documentation with its claims for reimbursement.
Since the commencement of this prepayment review, SCC received an increased
number of denials and requests for additional information. In addition, SCC
received notice of a proposed suspension of Medicare payments based upon a
review of certain claims by such fiscal intermediary. This suspension is not
expected to become effective pending the review of additional information
provided by SCC to the fiscal intermediary. SCC plans to appeal the denied
claims, as well as pursue the claims under review by the fiscal intermediary,
and is actively engaged in data collection and analysis in order to support the
claims submitted to Medicare. SCC will not receive reimbursement
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<PAGE> 27
for claims that are not reversed on appeal. In addition, it is
possible that the fiscal intermediary's review of SCC's claims may result in
further investigation and possible sanctions against SCC, which may include
repayment of any alleged overpayments, suspension or exclusion from the
Medicare program, fines or other penalties. Based upon the number of denials,
the Company's assessment of available documentation and knowledge of, and
experience with, the appeal process, the Company has increased its provision
for bad debts by approximately $1,000,000 in the third and fourth quarters of
fiscal 1996. The allowance for doubtful accounts represents approximately 90%
of the Company's net accounts receivable balance from SCC's operations as of
September 30, 1996. In addition, the number of denials has had an adverse
impact on the Company's cash flow from operations. There can be no assurance
that the appeal process will result in a significant percentage of reversals,
that additional denials will not be received by SCC or the Company's other
operations, that actual bad debt experience will not exceed the Company's
estimates or that the review of SCC's claims will not result in further
investigation and sanctions. In November 1996, the Company decided to
discontinue the operations of SCC based upon SCC's continued operating losses
and negative cash flow, resulting in part from significant delays in Medicare
reimbursement. The Company shut down SCC's operations in early December 1996.
Fixed assets of approximately $12,000 will either be sold or redeployed
elsewhere in the Company. All other SCC assets have been written off as of
September 30, 1996
Depreciation and amortization expense for 1996 was $1,034,000 as
compared to $1,603,000 in the prior year. The decrease in depreciation and
amortization expense was attributable to the sale of the six freestanding
facilities.
The Company completed the sale of six of its seven freestanding
behavioral health facilities in 1996 and recorded a loss of $4,440,000
consisting primarily of the write off of intangibles related to the facilities
of $3,184,000, loss on the sale of certain property, plant, and equipment
aggregating $319,000, transaction expenses of $568,000, severance expenses of
$349,000, and other expenses of $680,000, offset by estimated Medicare
depreciation recapture income of approximately $660,000.
In the fourth quarter of 1996, the Company wrote off the assets
related to the discontinued operations of SCC including property, plant and
equipment and intangibles resulting in a charge of $461,000.
Interest expense for 1996 was $1,387,000, as compared to $1,537,000 in
the prior year. The decrease is primarily attributable to the extinguishment
of the working capital line of credit and paydown on the MEDIQ note.
Pretax loss for 1996 before extraordinary item was $14,222,000 as
compared to pretax loss of $3,129,000 in the prior year. The pretax loss for
the current period included a loss of $4,440,000 related to the sale of the
freestanding behavioral health facilities, increases in the bad debt provision
related to SCC reimbursement denials of approximately $1,000,000 and write off
of long-term assets of $461,000 related to the closing of SCC in December 1996.
The prior period included a pretax gain of $3,542,000 on the sale of the
Company's interest in the Joint Venture as well as earnings of $835,000 related
to the Joint Venture offset by the writedown of certain assets in the amount of
$2,228,000 described below. In
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<PAGE> 28
addition, the increase in costs associated with expansion of the Extended Care
Services Division, as well as the increased provision for bad debts, have had
an adverse impact on operating results for 1996.
In 1996, the Company recorded an extraordinary item in the amount of
$463,000, consisting primarily of costs related to the early retirement of the
Company's long-term debt and the subsequent write off of associated loan
acquisition costs.
Fiscal Year 1995 Compared to Fiscal Year 1994
Net revenues were $41,109,000, as compared to $48,286,000 for 1994, a
decrease of $7,177,000, or 15%. This decrease reflects the elimination of
contract management revenues which were $13,825,000 in the prior year (see
Joint Venture above), partially offset by an increase in net revenues from
freestanding facilities and the Extended Care Services Division. Net revenues
from freestanding facilities increased $2,292,000, or 6.9% to $35,371,000. This
increase reflects net revenues of $5,723,000 from the freestanding facility
acquired in August 1994 (as compared to $909,000 in 1994), partially offset by
a decrease of $2,522,000, or 7.8%, in same store revenues. The decrease in
same store revenues resulted from lower average reimbursement rates and
decreases in inpatient average lengths of stay, partially offset by a 3.3%
increase in admissions and an increase in equivalent patient days. Same store
equivalent patient days increased 4.7% over the prior year as a result of the
continued growth of alternative care programs in response to managed care and
other market forces. These same market forces have resulted in a 9.2% decrease
in average lengths of stay for inpatient programs, which reflects increased
utilization at one of the Company's residential treatment centers, which
traditionally have longer lengths of stay than the Company's other freestanding
facilities, offset by a 15.1% decrease in average lengths of stay at the
Company's other freestanding facilities. Market forces have also resulted in
decreased inpatient reimbursement rates as a result of changes in payor mix,
including higher charity care utilization, and lower average reimbursement
rates for alternative care programs as compared to inpatient programs. The
combination of these factors resulted in a 14% decrease in net revenue per
equivalent patient day.
Net revenues from the Extended Care Services Division were $5,738,000,
as compared to $1,329,000 in the prior year. This increase was primarily the
result of a full year of revenues under a contract with the State of Georgia to
provide mental health services to Medicaid patients in nursing homes. The
contract, which commenced in the fourth quarter of fiscal 1994, is under the
Pre-Admission Screening and Annual Resident Review (PASARR) Program, has a term
of three and one-half years, renewable annually during its term, and provides
for fixed fees based upon the number of residents participating in the program.
This contract represented 47% of net revenues of the Extended Care Service
Division in 1995. The increase also reflects $1,317,000 of revenues
attributable to SCC, acquired in July 1995.
Operating expenses were $28,918,000, as compared to $33,895,000 in
1994. This decrease was primarily attributable to the restructuring of the
Company's business in connection with the formation of the Joint Venture,
resulting in a decrease in operating expenses of $10,277,000. This decrease
was partially offset by a full year of expenses of the freestanding facility
acquired in August 1994 of $3,345,000 (as compared to $549,000 in 1994),
increased costs associated with the growth of the Extended Care Services
Division of $2,103,000 and increased operating expenses at the Company's same
store freestanding facilities of $401,000. The increase in operating expenses
at the Company's same store facilities was primarily a result of higher
personnel costs associated with increased utilization at certain of the
Company's freestanding facilities and the expansion of alternative care
programs. Operating expenses, as a percentage of net revenues, were comparable
with the prior year period.
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<PAGE> 29
General and administrative expenses were $10,085,000, as compared to
$10,644,000 in 1994. The restructuring of the Company's operations in 1994
resulted in a decrease in general and administrative expenses of approximately
$2,300,000. This decrease was partially offset by a full year of expenses of
the freestanding facility acquired in August 1994 of $1,802,000 (as compared to
$307,000 in 1994) and an increase in general and administrative expenses
associated with growth at the Extended Care Services Division of $457,000.
General and administrative expenses, as a percentage of net revenues, increased
to 24.5%, as compared to 22.0% in the prior year, as a result of the addition
of the freestanding facility in August 1994. General and administrative
expenses at this facility are higher, as a percentage of net revenue, than the
Company's other freestanding facilities as a result of higher lease expense.
The provision for bad debts increased $2,458,000 to $4,467,000 and, as
a percentage of net revenues, increased to 10.9%, from 4.2% in 1994. These
increases primarily resulted from management's assessment of collection
patterns which were adversely affected by admissions screening problems at
certain of the freestanding facilities. The Company is taking steps to
correct such screening problems. The increase in the provision for bad debts
also resulted from an acquisition in July 1995 (SCC), changes in payor mix and
the elimination of contract management revenues, which had only nominal amounts
of bad debt expense.
Depreciation and amortization expense of $1,603,000 was comparable to
1994.
Interest expense was $1,537,000, an increase of $216,000 from 1994,
primarily attributable to increases in interest rates.
In the fourth quarter of 1995, the Company determined that the
recoverability of certain assets, including property, plant and equipment and
goodwill, related to one of the Company's freestanding facilities was impaired,
other than temporarily. Such determination was based upon management's
evaluation of the key indicators of the Company's business, including
continuing operating losses at such facility. Based upon management's analysis
of expected future operating losses and cash flows, management determined that
the facility's cash flows would not be sufficient to enable the Company to
recover its investment, and that an impairment in the value of such facility
had occurred. Upon reaching this conclusion, and consistent with the policy
described above, the amount of such impairment was determined to be $2,228,000.
This determination was based upon the difference between the carrying value and
the fair value. Fair value was estimated through internal evaluation by the
Company's management and confirmed by an independent valuation of the
freestanding facility and a proposal from a third party to buy the facility.
Based upon future operating results and cash flows, management's assessment of
recoverability of the investment in the other freestanding facilities does not
indicate permanent impairment. However, in the event these facilities are sold
as anticipated, the Company would be unable to recover its investments and
would incur losses on such sales. See "Note 5 to Notes to the Consolidated
Financial Statements" regarding loss on subsequent sale of freestanding
facilities.
Pretax loss for 1995 was $3,129,000, as compared to $1,841,000 in the
prior year, which included a restructuring charge of $966,000 recorded in
connection with the formation of the Joint
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<PAGE> 30
Venture. The current period included a pretax gain of $3,542,000 on the sale
of the Company's interest in the Joint Venture as well as earnings of $835,000
related to the Joint Venture offset by a charge of $2,228,000 related to the
writedown of certain assets, described above. Operating results from the
Company's freestanding facilities were adversely affected in 1995 by lower
average reimbursement rates and decreases in inpatient average lengths of stay
as a result of managed care and other market forces. Management expects
operating results for the near future to continue to be adversely affected by
these factors. See "Recent Developments."
INCOME TAXES
The Company's effective tax rates were disproportionate to the
statutory tax rates primarily as a result of operating losses on which no prior
year income taxes can be recovered for 1996, permanent differences related to
the disposition of the Company's interest in the Joint Venture for 1995 and as
a result of the amortization of goodwill for 1995 and 1994. Effective October
1, 1993, the Company adopted on a prospective basis the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes".
IMPACT OF INFLATION
Behavioral health programs are labor intensive. As wages and employee
benefit costs increase during inflationary periods, and outside suppliers pass
cost increases through to the Company, costs rise proportionately. The Company
has implemented systems to monitor and control increases in expenses.
Government-sponsored programs, including Medicare and Medicaid, which represent
a substantial portion of the Company's revenues, and contractual arrangements
with other third party payors, may limit the Company's ability to obtain
corresponding revenue increases.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash and cash equivalents of
$3,611,000. At that date, such funds were currently invested in short-term
interest bearing securities.
Cash used in operating activities was $4,882,000 for 1996, as compared
to $2,348,000 for the prior year. The increase is the result of using
available cash resources to fund continued operating losses. In a continuing
effort to improve this situation for both the immediate future and the
long-term, the Company sold certain assets relating to its Hospital Division,
and is taking steps to reduce operating expenses, finance its working capital
requirements, restructure debt, raise additional capital and improve its cash
flows.
Cash provided by investing activities in 1996 included $9,049,000 in
proceeds from the BHC Sale and $50,000 in proceeds from the sale of the Oakview
Treatment Center. Cash used in investing activities for 1996 included $273,000
for capital expenditures and $150,000 for the acquisition of clinic operations
in Massachusetts. The Company anticipates capital expenditures of
approximately $50,000 during 1997, primarily for computer equipment. The
Company has used and anticipates using a portion of the proceeds from the sale
of its freestanding facilities to continue its expansion of the Extended Care
Services Division. However, based upon the Company's liquidity and capital
resources, there can be no assurance the Company will have sufficient resources
to expand this division. See "Recent Developments." Non-cash investing
activities also included notes received in connection with the sale of Oakview
Treatment Center recorded at net estimated realizable value of $1,400,000 and
net liabilities assumed by BHC of $1,160,000 (reflecting post-closing
adjustments by the Company and BHC).
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<PAGE> 31
Net cash used in financing activities for 1996 included debt
repayments of $3,280,000. The Company used a portion of the proceeds from the
BHC Sale for the repayment of the principal amount outstanding under the
Company's revolving credit facility ($2,515,000, including related early
termination fees of $174,000). In connection with this repayment, the facility
was terminated. Non-cash financing activities included a $338,000 note payable
incurred in connection with the acquisition of clinic operations in
Massachusetts, payable in 36 monthly installments.
As of September 30, 1996, the Company had $10,733,000 outstanding
under its note payable to MEDIQ Incorporated ("MEDIQ") (original principal
amount of $11,500,000) that was executed in connection with the distribution of
the Company's stock to MEDIQ's stockholders (the "MEDIQ Note"). The Company is
reviewing with counsel the validity of the MEDIQ Note and its legal rights and
remedies in the event the MEDIQ Note's validity is litigated. The MEDIQ Note
bears interest at prime plus 1.5% per annum, with monthly payments of interest
only through September 1995, and then monthly principal and interest payments
for the following three years, based on a fifteen year amortization period,
with the remaining balance due in August 1998. The MEDIQ Note may be prepaid
in whole or in part without penalty. The MEDIQ Note is collateralized by a
note receivable (in the amount of $1,875,000) obtained by the Company as
partial consideration for the sale of the Oakview Treatment Center, one of the
Company's former freestanding facilities. The Company pledged the note
receivable to MEDIQ in connection with obtaining a waiver from MEDIQ of an
event of default provision of the MEDIQ Note relating to the sale of the assets
of a significant subsidiary in connection with such sale.
The Company does not anticipate that cash flows from operations will
be sufficient to repay the MEDIQ Note upon maturity in 1998. In addition, as
reflected in the financial statements of the Company for the fiscal year ended
September 30, 1996, and the report of the Company's independent auditors
thereon, the Company has been experiencing difficulty generating sufficient
cash flows to meet its obligations and sustain its operations and, as a result,
may not be able to meet the monthly principal and interest obligations under
the MEDIQ Note. A portion of the net proceeds from the BHC Sale has been used,
and is expected to continue to be available to the Company to fund the monthly
obligations and a portion of the principal obligations upon maturity, if
necessary, of the MEDIQ Note. MEDIQ has pledged the MEDIQ Note as collateral
for certain of its indebtedness to a third party unaffiliated with MEDIQ or the
Company. In the event of default by MEDIQ on such indebtedness, such third
party would obtain all of MEDIQ's rights under the MEDIQ Note, including the
right to the payment of principal and interest as and when due in accordance
with the terms of the MEDIQ Note.
The MEDIQ Note also provides for certain events of default, including:
"The . . . sale of all or substantially all of the assets of [the Company] . .
." In an attempt to preclude the possibility of a dispute as to whether the
BHC Sale constituted the sale of all or substantially all of the assets of the
Company for purposes of the MEDIQ Note, the Company, prior to the sale, sent
MEDIQ a letter requesting a waiver of this provision in connection therewith.
MEDIQ sent the Company a letter in which MEDIQ declined to grant such a waiver.
Since the completion of the BHC Sale, the Company has not received any notice
of default under the MEDIQ Note on this basis. The Company, based upon
discussions with legal counsel, does not believe the MEDIQ Note is in default.
Nevertheless, in the event MEDIQ attempts to accelerate the MEDIQ Note, the
Company intends to aggressively defend its position in any legal
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<PAGE> 32
proceeding. There can be no assurances that the Company would be able to
obtain a favorable decision in such a legal proceeding. In the event the
Company were to receive an adverse decision on this matter, the outstanding
principal balance on the MEDIQ Note would become immediately due and payable in
full. In that event, the Company may be required to apply any remaining
proceeds from the BHC Sale toward the repayment of the outstanding principal of
the MEDIQ Note, obtain alternative sources of cash with which to satisfy such
obligation, or obtain from MEDIQ a modification to the MEDIQ Note. The
remaining balance of the net proceeds from the BHC Sale is insufficient to
repay the entire outstanding principal balance of the MEDIQ Note. There can be
no assurance that the Company will have sufficient cash to repay the
outstanding principal balance of the MEDIQ Note or that other sources of cash
will be available to the Company in the event the Company was to receive an
adverse decision on such matter. In such event, the Company may be unable to
fulfill its debt obligations and also sustain operations at a level at which
the Company could continue as a going concern.
As a result of the Company's continued negative operating results and
reduced collections of accounts receivable from certain government-funded
payors, as well as other administrative delays by third party payors (including
reimbursement review of certain Medicare claims in Southern California, as
described above), the Company has been experiencing difficulty generating
sufficient cash flows from operations to meet its obligations and sustain its
operations without the use of available cash. In an effort to improve this
situation, the Company has pursued opportunities to sell its freestanding
facilities and is taking steps to reduce operating expenses, attempting to
raise additional capital, and working to improve its cash flows. The Company
has sold six of its seven freestanding facilities. See "Recent Developments."
With respect to its efforts to reduce operating expenses, the Company reduced
its office lease expense by decreasing the amount of its leased space and has
reduced personnel expenses by leasing its employees and eliminating staff. The
Company's liquidity could also be improved by: (i) the collection of additional
outstanding receivables; (ii) increasing profits through acquisitions; (iii)
significant reductions in the operating losses of the Company's remaining
businesses; (iv) significant additional reductions in overhead; and (v)
obtaining additional capital and/or financing sources. However, there can be
no assurance that any of such events will occur or, if they do occur, that the
impact on cash flows will be sufficient to enable the Company to continue its
operations. In the event that the Company is unable to enhance its liquidity,
the Company may be required to renegotiate the terms of its financial
obligations, significantly curtail its level of operations or otherwise
significantly reduce operating expenses.
The Company has had discussions with potential investors with the
objective of raising additional capital. To date, such efforts have been
unsuccessful. The Company believes that it may be unable to obtain additional
capital without obtaining modifications to its financial obligations to MEDIQ.
The Company has commenced discussions with representatives of MEDIQ
with the objective of renegotiating the terms of the MEDIQ Note. To date, such
discussions have not resulted in any modification to the Company's financial
obligations to MEDIQ. As a result, there can be no assurance that the Company
will be successful in restructuring such obligations, or that the Company will
be successful in raising additional capital.
As of September 30 , 1996, the Company had a liability to third party
payors of approximately $2,500,000, of which approximately $1,730,000 relates
to sold facilities. This liability relates to outstanding Medicare cost report
settlements from fiscal years 1995 and 1996 and outstanding Medicaid cost
reports from fiscal years 1992 through 1996 at two closed facilities.
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<PAGE> 33
As a result of the sale by the Company of five of its hospitals to
BHC on May 31 , 1996, the Company filed terminating Medicare and Medicaid cost
reports with each hospital's fiscal intermediary on October 31, 1996.
The terminating cost reports filed by the Company included claims for
approximately $1,492,000 in Medicare depreciation recapture. The BHC Agreement
provides that this recapture amount be allocated between the Company (85%) and
the purchaser (15%). The Company estimates that its share of the Medicare
recapture amounts to be collected will be approximately $1,270,000, of which
the Company has recorded approximately 50%, and that it will receive final
settlements on these claims within one to three years from the date of filing.
The Company expects the costs associated with discontinuing the
operations of SCC to be nominal. The Company believes that the loss of SCC's
reduced revenues following increased delays in claims processing by the
Medicare fiscal intermediary will be offset by reduced personnel and overhead
costs. The Company will continue to employ administrative personnel to pursue
SCC claims and will redeploy two employees with employment contracts through
July 1998 elsewhere within the Company.
In addition, the Company estimates that it will take three to four
months to process SCC's outstanding accounts receivable, including the appeals
for previously denied claims, at a cost approximating $100,000. There can be
no assurance that the appeal process will result in a significant percentage of
reversals, additional denials will not be received by SCC, actual bad debt
experience will not exceed the Company's estimates or that the review of SCC's
claims will not result in potential liability for the Company.
This report includes forward-looking statements based on management's
current plans and expectations, relating to, among other matters, the
anticipated use of proceeds from the sale of freestanding facilities, the
proposed business activities of the Company, estimates of amounts that are not
yet determinable and the proposed activities of the Company relating to
improving its liquidity. Such statements involve risks and uncertainties which
may cause actual future activities and results of operations to be materially
different from that suggested in this report, including, among others, the use
of available cash resources to fund continued operating losses, the amount and
timing of receipt of government reimbursement and the results of the review of
SCC's claims by the Medicare fiscal intermediary, risks associated with
industry consolidation and acquisitions, the need to manage growth, the
possible need to use the net cash proceeds from the sale of freestanding
facilities for the retirement of certain indebtedness and competition.
33
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report 35
Consolidated Statements of Operations -
Three Years Ended September 30, 1996 36
Consolidated Balance Sheets -
September 30, 1996 and 1995 37
Consolidated Statements of Stockholders' (Deficit) Equity -
Three Years Ended September 30, 1996 38
Consolidated Statements of Cash Flows -
Three Years Ended September 30, 1996 39-40
Notes to Consolidated Financial Statements 41-54
</TABLE>
34
<PAGE> 35
Independent Auditors' Report
Board of Directors and Stockholders
MHM Services, Inc.
Vienna, Virginia
We have audited the accompanying consolidated balance sheets of MHM Services,
Inc. and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' (deficit) equity, and cash
flows for each of the three years in the period ended September 30, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14. These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MHM Services, Inc. and
subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
aggregated net losses of $20,448,000 for the three years ended September 30,
1996 and has a stockholders' deficiency of $3,582,000 as of September 30, 1996
and is experiencing difficulty in generating sufficient cash flows to meet its
obligations and sustain its operations, as discussed in Note 2 to the
consolidated financial statements. Such conditions raise substantial doubt as
to the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 2 to the consolidated
financial statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Washington, D.C.
December 30, 1996
35
<PAGE> 36
MHM SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenues $34,670,000 $41,109,000 $48,286,000
Costs and expenses:
Operating 25,765,000 28,918,000 33,895,000
General and administrative 9,718,000 10,085,000 10,644,000
Provision for bad debts 6,320,000 4,467,000 2,009,000
Depreciation and amortization 1,034,000 1,603,000 1,617,000
Loss on sale of freestanding facilities 4,440,000 -- --
Writedown of long-term assets 461,000 2,228,000 --
Restructuring charges -- 966,000
Other (credits) charges:
Equity in earnings of Joint Venture -- (835,000) (292,000)
Gain on sale of Joint Venture -- ( 3,542,000) --
Interest expense - MEDIQ 1,097,000 1,171,000 932,000
Interest expense - other 290,000 366,000 389,000
Other (income) expense - net (233,000) (223,000) (33,000)
------------ ------------ ------------
Loss before income taxes, extraordinary item and
cumulative effect of a change in accounting principle (14,222,000) ( 3,129,000) (1,841,000)
Income tax (benefit) expense (308,000) 894,000 (525,000)
------------ ------------ ------------
Loss before extraordinary item and cumulative
effect of a change in accounting principle (13,914,000) (4,023,000) (1,316,000)
Extraordinary item-loss on early extinguishment of debt (463,000) --
Cumulative effect of a change in accounting principle
(net of income taxes of $378,000) -- -- (732,000)
------------ ------------ ------------
Net loss $(14,377,000) $(4,023,000) $(2,048,000)
============= ============ ============
Loss per share:
Loss before extraordinary item and cumulative
effect of a change in accounting principle $ ( 4.20) $ (1.22) $ (.40)
Extraordinary item ( .14) -- --
Cumulative effect of a change in
accounting principle -- -- (.23)
------------- ------------ ------------
Net loss $ (4.34) $ (1.22) $ (.63)
============= ============ ============
Weighted average shares outstanding 3,310,000 3,310,000 3,267,000
============= ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
36
<PAGE> 37
MHM SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1995
---- ----
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,611,000 $ 3,084,000
Accounts receivable, less allowances of $4,404,000 - 1996;
$1,299,000 - 1995 1,680,000 7,618,000
Prepaid expenses 237,000 397,000
Income taxes refundable 662,000 --
Other receivable 660,000 --
Other current assets 258,000 976,000
------------ ------------
Total current assets 7,108,000 12,075,000
Property, plant and equipment, net 538,000 12,581,000
Goodwill, net of accumulated amortization of $188,000 - 1996;
$2,467,000 - 1995 1,375,000 4,519,000
Notes receivable 1,229,000 196,000
Other intangibles, net 230,000 587,000
Other assets 348,000 325,000
------------ ------------
Total assets $ 10,828,000 $ 30,283,000
============ ============
<CAPTION>
Liabilities and Stockholders' (Deficit) Equity
----------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 805,000 $ 1,672,000
Accrued payroll , vacation, severance, and related taxes 503,000 866,000
Accrued expenses - MEDIQ 321,000 377,000
Other accrued expenses 1,441,000 1,814,000
Income taxes payable 131,000 204,000
Current maturities of long-term debt 960,000 1,219,000
------------ ------------
Total current liabilities 4,161,000 6,152,000
Long-term debt, less current maturities:
MEDIQ 9,967,000 10,733,000
Other 257,000 2,422,000
Other liabilities 25,000 181,000
Commitments and contingencies
Stockholders' (deficit) equity:
Preferred stock ($.01 par value; authorized:
5,000,000; issued and outstanding: none)
Common stock ($.01 par value; authorized, 15,000,000;
issued and outstanding: 3,310,000) 33,000 33,000
Additional paid-in capital 41,699,000 41,699,000
Accumulated deficit (45,314,000) (30,937,000)
------------ ------------
Total stockholders' (deficit) equity (3,582,000) 10,795,000
------------ ------------
Total liabilities and stockholders' (deficit) equity $ 10,828,000 $ 30,283,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
37
<PAGE> 38
MHM SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional
Shares Paid-in Accumulated
Issued Amount Capital Deficit Total
------ ------ ------------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balance October 1, 1993 2,980,000 $30,000 $40,382,000 $(24,866,000) $15,546,000
Issuance of common stock -
Acquisition of HCI 330,000 3,000 1,317,000 -- 1,320,000
Net loss -- -- -- (2,048,000) (2,048,000)
--------- ------- ----------- ------------- ------------
Balance September 30, 1994 3,310,000 33,000 41,699,000 (26,914,000) 14,818,000
Net Loss -- -- -- (4,023,000) (4,023,000)
--------- ------- ----------- ------------- ------------
Balance September 30, 1995 3,310,000 33,000 41,699,000 (30,937,000) 10,795,000
Net Loss -- -- -- (14,377,000) (14,377,000)
--------- ------- ----------- ------------- ------------
Balance September 30, 1996 3,310,000 $33,000 $41,699,000 $(45,314,000) $(3,582,000)
========= ======= =========== ============= ============
</TABLE>
See Notes to Consolidated Financial Statements
38
<PAGE> 39
MHM SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1996 1995 1994
------------------ -------------- ----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
-------------------------------------
Net loss $(14,377,000) $ (4,023,000) $ (2,048,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,034,000 1,603,000 1,617,000
Provision for bad debts 6,320,000 4,467,000 2,009,000
Provision (benefit) for deferred income taxes 500,000 (215,000) (330,000)
Loss on sale of freestanding facilities 4,440,000 -- --
Undistributed earnings from Joint Venture -- (835,000) (292,000)
Gain on sale of Joint Venture -- (3,542,000) --
Writedown of long-term assets 461,000 2,228,000 --
Net effect of change in accounting principle -- -- 732,000
Other 57,000 85,000
Increase (decrease) from changes in:
Accounts receivable (382,000) (2,596,000) (5,406,000)
Income taxes refundable (662,000)
Prepaid and other current assets (42,000) 803,000 (206,000)
Accounts payable (867,000) (514,000) 2,481,000
Accrued payroll and related taxes (363,000) 118,000 (226,000)
Accrued expenses - MEDIQ (56,000) (616,000) (12,000)
Other accrued expenses (815,000) (271,000) 985,000
Income taxes payable (73,000) 988,000 (973,000)
----------- ----------- -----------
Net cash used in operating activities (4,882,000) (2,348,000) (1,584,000)
----------- ----------- -----------
Cash Flows From Investing Activities:
-------------------------------------
Proceeds from sale of freestanding facilities and Joint
Venture 9,099,000 9,609,000 --
Capital expenditures for property, plant and
equipment (273,000) (631,000) (1,100,000)
Distributions from (investment in) Joint Venture -- 1,000,000 (1,920,000)
Acquisitions of businesses (150,000) (100,000) --
Deferred costs 69,000 -- --
Other assets (30,000) -- --
Other liabilities (6,000) (589,000) (34,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities 8,709,000 9,289,000 (3,054,000)
----------- ----------- -----------
Cash Flows From Financing Activities:
-------------------------------------
Borrowings -- 1,679,000 6,273,000
Debt repayments (3,280,000) (6,271,000) (4,104,000)
Other (20,000) -- --
----------- ----------- -----------
Net cash (used in) provided by financing activities (3,300,000) (4,592,000) 2,169,000
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 527,000 2,349,000 (2,469,000)
Cash and cash equivalents:
Beginning of year 3,084,000 735,000 3,204,000
------------ ------------ ------------
End of year $ 3,611,000 $ 3,084,000 $ 735,000
============ ============ ============
</TABLE>
39
<PAGE> 40
<TABLE>
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid $1,398,000 $ 1,577,000 $ 1,279,000
========== ============ ============
Income taxes (refunded) paid, net $ (71,000) $ 121,000 $ 1,078,000
========== ============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Property and equipment and other assets financed
with capital leases and long-term debt $ 63,000 $ 487,000 $ 120,000
========== ============ ============
Acquisition - portion financed with long-term debt $ 338,000 $ -- $ --
========== ============ ============
Note received from sale of freestanding facility $1,400,000 $ -- $ --
========== ============ ============
Liabilities assumed - BHC $1,160,000 $ -- $ --
========== ============ ============
Issuance of stock - acquisition of HCI $ -- $ -- $ 1,320,000
---------- ------------ ============
</TABLE>
See Notes to Consolidated Financial Statements
40
<PAGE> 41
MHM SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The accompanying consolidated financial statements include the
accounts of MHM Services, Inc. and its subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. The Company offers, arranges for, and manages nonacute
healthcare services primarily in institutional settings. In October 1986, the
Company was acquired by MEDIQ Incorporated ("MEDIQ"). Effective August 31,
1993, MEDIQ distributed to its shareholders the shares of the Company's common
stock (the "Distribution") (see Note 11). The Company's investment in the Joint
Venture was accounted for under the equity method (see Note 4).
For the years ended September 30, 1996, and 1995, approximately 70% of revenue
and for the year ended September 30, 1994, approximately 45% of revenue was
generated from Medicare/Medicaid payments. The Company operates in the
following states: Florida (17 facilities), Georgia (324 facilities), Indiana
(54 facilities), Massachusetts (84 facilities), New Jersey (2 facilities),
North Carolina (125 facilities), Ohio (5 facilities), Pennsylvania (3
facilities), Tennessee (24 facilities), Virginia (17 facilities) and Colorado
(1 freestanding facility.)
Patient Service Revenue Recognition - Net patient service revenues are reported
at the estimated net realizable amounts from patients and third party payors
for services rendered, including estimated retroactive adjustments under
reimbursement agreements with third party payors. Retroactive adjustments are
accrued on an estimated basis in the period in which the related services are
rendered and adjusted in future periods as final settlements are determined.
Contract Management Revenue Recognition - Contract management revenues were
reported as earned based upon patient census data or on a cost plus fixed fee
basis (See Note 4).
Extended Care Services Revenue Recognition - Net revenues from extended care
services are reported at the estimated net realizable amounts from patients and
third party payors for services rendered, less amounts payable to professionals
for the provision of such services.
Charity Care - The Company has a policy of providing charity care at its
behavioral health facilities to patients who are unable to pay. Such patients
are identified based on financial information obtained from the patient and
subsequent analysis. Since the Company does not expect payment, estimated
charges for charity care are not included in revenues. The amount of charity
care provided, at established rates, was $682,000, $1,081,000, and $625,000 for
1996, 1995 and 1994, respectively.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The more
significant estimates include the allowance for potential losses from
uncollectible accounts receivable, medicare depreciation recapture income,
estimates of assets and liabilities due from/to third party payors, and the
estimated net realizable value of certain promissory notes.
41
<PAGE> 42
Cash Equivalents - Cash equivalents include all liquid investments with
purchased maturities of three months or less.
Accounts Receivable - The Company's accounts receivable from its freestanding
facilities and Extended Care Services Division are due from its patients and
other third party payors, primarily Medicare, Medicaid, Blue Cross and various
commercial insurance companies. The Company maintains an allowance for
potential losses from uncollectible accounts.
Property, plant and equipment - Property, plant and equipment are stated at
cost. Capital leases are recorded at the present value of future lease
payments. The Company provides for depreciation and amortization on a
straight-line basis as follows:
Buildings and improvements 30 years
Furniture, fixtures and equipment 5-8 years
Equipment under capital lease 5-8 years
Goodwill - Goodwill represents the excess of the purchase price over the fair
value of net assets acquired and is amortized on a straight-line basis over 20
to 40 years (see Note 7).
Carrying Value of Long-Term Assets - At September 30, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The Company evaluates the carrying value of long-term assets, including
property, plant and equipment, goodwill and other intangible assets, based upon
current and anticipated net income and undiscounted cash flows, and recognizes
an impairment when it is probable that such estimated future net income and/or
cash flows will be less than the carrying value of the asset. Measurement of
the amount of impairment, if any, is based upon the difference between carrying
value and fair value. The effect of adopting SFAS No. 121 was not significant.
(See Note 7)
Income Taxes - Effective October 1, 1993, the Company adopted on a prospective
basis the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes". The effect of adopting SFAS No. 109
was not significant.
Malpractice Insurance Coverage - Medical malpractice claims are covered by an
occurrence-basis medical malpractice insurance policy.
Earnings (Loss) Per Share - Earnings (loss) per share is computed using the
weighted average number of shares outstanding during the year. Stock options
have not been included because their effect would be antidilutive.
Fair Value of Financial Instruments - The fair value of cash, accounts
receivable, accounts payable and accrued expenses are equivalent to their
carrying value because of the short-term maturity of those instruments. The
fair values of the Company's long-term debt (see Note 11) are considered to be
equivalent to their carrying values based upon consideration of borrowings with
similar credit ratings, collateral and maturities.
42
<PAGE> 43
Reclassifications - Certain items in the prior years' financial statements have
been reclassified to conform with the 1996 presentation.
NOTE 2 - LIQUIDITY
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. The Company has incurred aggregated net losses of $20,448,000 for
the three years ended September 30, 1996, and has a stockholders' deficiency of
$3,582,000 as of September 30, 1996. The Company is experiencing difficulty in
generating sufficient cash flows to meet its obligations and sustain its
operations. Such conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result should the Company be unable
to continue as a going concern.
Based upon the adverse impact on the Company's operating results of
cost-reduction pressures on in-patient care and the Company's belief that such
pressures would be likely to continue to have an adverse impact on future
results, the Company has focused its strategy on pursuing opportunities to grow
its Extended Care Services Division. As a result, the Company sold six of its
seven owned and/or operated freestanding behavioral health facilities which
represented 51% of net revenues in 1996. In a continuing effort to improve
this situation for both the immediate future and the long-term, the Company is
taking steps to reduce operating expenses, finance its working capital
requirements, restructure debt, raise additional capital and improve its cash
flows. Nevertheless, there can be no assurance that the Company's efforts will
result in positive effects on the Company's financial condition.
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLE
Effective October 1, 1993, the Company changed its method of accounting for
certain preopening costs and certain costs incurred in securing management
contracts. Prior to the change, these costs were deferred and amortized over
the estimated periods of benefit, ranging from three to five years. Based on
trends in industry practice, management reevaluated such policy. In light of
the type and nature of the costs involved and changes in the Company's
business, management concluded that it was preferable to expense these costs as
incurred.
The cumulative effect of the change in accounting principle on years prior to
1994 was $1,110,000 ($732,000 net of income taxes) which was recorded in the
operating results for the year ended September 30, 1994. The effect of the
change on the year ended September 30, 1994, was an increase in net loss before
the cumulative effect of the change in accounting principle of $312,000.
NOTE 4 - JOINT VENTURE
Effective August 1, 1994, the Company formed a joint venture ("Joint Venture")
to combine its contract management business with that of Horizon Mental Health
Services, Inc. ("Horizon") of Denton, Texas. The Joint Venture, which was
owned 27.5% by the Company and 72.5% by Horizon, managed both companies'
hospital behavioral health care contracts. The operating results of the
contract management
43
<PAGE> 44
business were included in the Company's results of operations through the
commencement of the Joint Venture on August 1, 1994.
The terms of the Joint Venture provided for the Company's continued ownership
of its management contracts and the assignment to the Joint Venture of the
operating responsibilities and revenues related to such contracts. The
Company's investment in the Joint Venture represented $1,920,000 of cash for
working capital purposes. The Company allocated goodwill attributable to the
contract management business in the amount of $4,090,000 (net of accumulated
amortization). The original amount of goodwill allocated to the contract
management business and the freestanding hospitals was determined based upon
projected income and cash flows of the contract management business and the
freestanding hospitals and the facts and circumstances that existed at the time
of the acquisition of the Company by MEDIQ in 1986. The amount of goodwill
related to the contract management business was reduced to estimated fair value
in 1992 in connection with the recognition of the impairment in the value of
goodwill. No gain or loss resulted from the Joint Venture transaction.
On March 20, 1995, Horizon completed its initial public offering, and, in
accordance with the terms of the Joint Venture Agreement, acquired the
Company's interest in the Joint Venture for approximately $9,600,000 (net of
related expenses). The sale resulted in a gain of approximately $500,000 (net
of income taxes of $3,000,000). In connection with the sale, the Company
assigned to Horizon all of its rights and interests in its management
contracts.
In connection with the commencement of the Joint Venture, the Company recorded
a restructuring charge of $966,000, representing expenses solely related to the
contract management business. The restructuring charge includes $496,000 for
employee severance and related costs for the termination of 22 employees
involved directly in the activities of the contract management business,
$150,000 for the write off of fixed assets and other assets used in the
contract management business and $230,000 for resulting excess office space
under lease through 1998. The fixed assets consisted principally of furniture
and fixtures and computer equipment. Also included in the charge was $90,000
for legal and consulting services related specifically to the restructuring,
which were substantially incurred prior to July 31, 1994. The amount of actual
termination benefits subsequently paid and charged against the liability and
the actual number of employees terminated did not differ significantly from
original estimates. During 1995, the restructuring was completed and the
remaining charges were paid.
In connection with the Joint Venture, commencing in August 1994, the Company
began operating Mountain Crest Hospital, a 60-bed psychiatric facility in Fort
Collins, Colorado, under a sublease agreement with Horizon expiring in December
2000.
NOTE 5 - SALE OF FREESTANDING FACILITIES
On April 5, 1996, the Company sold Oakview Treatment Center to a non-profit
corporation affiliated with a privately-owned operator of two psychiatric
hospitals for $50,000 in cash and $2,150,000, evidenced by two promissory
notes payable to the Company. For financial statement purposes, the notes were
recorded at an estimated net realizable value of $1,400,000. The notes are
payable in monthly installments of principal and interest (at prime) based on a
15 year amortization, with the remaining principal due in five years (or
earlier under certain circumstances). In connection with obtaining a waiver
from MEDIQ of an event of default provision of the MEDIQ Note relating to the
sale of the
44
<PAGE> 45
assets of a significant subsidiary, the Company pledged one of the notes
receivable (with a principal balance of $1,875,000) as collateral for the
Company's obligations under the MEDIQ Note (see Note 11).
On May 31, 1996, the Company sold certain assets, consisting principally of
five of its freestanding behavioral healthcare facilities, to Behavioral
Healthcare Corporation, pursuant to an Asset Purchase Agreement (the "BHC
Agreement"), dated as of January 24, 1996, and amended as of April 11, 1996, by
and between the Company and BHC (the "BHC Sale"). The facilities were sold to
BHC for approximately $10,209,000, consisting of $9,049,000 in cash and
$1,160,000 in assumed liabilities of the freestanding facilities (reflecting
post-closing adjustments by both parties).
The Company used a portion of the proceeds from the BHC Sale for (i) the
repayment of the principal amount outstanding under the Company's revolving
credit facility ($2,515,000, including related early termination fees of
$174,000); (ii) the extinguishment of a portion of the indebtedness not assumed
by BHC at the closing of the sale ($692,000, including early termination fees
of $139,000), which consisted primarily of indebtedness secured by certain of
the assets (particularly a facility and certain equipment) acquired by BHC; and
(iii) the funding of the Company's obligation to complete repairs to two of the
freestanding facilities sold to BHC in the amount of $284,000 (of which
$216,000 remains in escrow).
The pretax loss on the sale of six of its seven freestanding behavioral health
facilities in 1996 was $4,440,000 consisting primarily of the write off of
intangibles related to the facilities of $3,184,000, loss on the sale of
certain property, plant, and equipment aggregating $319,000, transaction
expenses of $568,000, severance expenses of $349,000, and other expenses of
$680,000, offset by estimated Medicare depreciation recapture income of
approximately $660,000.
NOTE 6 - ACQUISITIONS
MHM Counseling Services - In December 1995, the Company's Extended Care
Services Division acquired the behavioral healthcare clinic operations of
National Mentor, Inc. located in Charlestown and Taunton, Massachusetts. The
Company changed the name of the clinics to MHM Counseling Services. The
purchase price included cash of $150,000 and a $338,000 term loan payable in 36
monthly installments. The operating results of the acquired business are
included in the Company's consolidated results of operations from the date of
acquisition.
Supportive Counseling Care - In July 1995, the Company acquired certain assets
of Supportive Counseling Care ("SCC") of Manhattan Beach, California, a
provider of behavioral healthcare services to extended care facilities, for
$500,000, and entered into a 40 year management contract to provide
administrative services to SCC. The purchase price was allocated primarily to
intangible assets. The operating results of the acquired business are included
in the Company's consolidated results of operations from the date of
acquisition. This business was discontinued in December 1996 (See Note 7).
HCI Services - On November 18, 1993, the Company acquired substantially all of
the assets and assumed certain liabilities of ICH Services, L.L.C. (successor
to HCI Services) ("HCI") of Atlanta, Georgia, a provider of specialized medical
and behavioral health services under annual contracts with extended care
facilities, for 330,000 shares of the Company's common stock, with a fair
market value of $1,320,000. Additional consideration in cash or additional
shares of the Company's common stock, at
45
<PAGE> 46
the option of the seller, will be payable after the third anniversary of the
acquisition in an amount equal to twenty percent of the appraised fair market
value of HCI as of November 18, 1996. (See Note 18).
Upon the acquisition, HCI's contracts were identified as intangible assets. The
contracts, which had one-year terms with annual renewals and could be canceled
upon 30 days' notice, were between HCI and the extended care facilities and
permitted HCI to provide services to residents through licensed professionals.
HCI did not receive any compensation from the facility or the resident and its
activities were limited to scheduling visits to the facility and billing third
party payors on behalf of the independent professional. HCI derived revenues
based on a percentage of the revenues received by the professionals who
provided medical services. Such services were provided only as needed by the
resident. The residents were not required by the extended care facility or HCI
to utilize HCI's professionals. In addition, the historical results of such
contracts had negative operating profits and cash flows. Based upon
management's analysis, including the factors described above, the Company did
not assign any value to the contracts. Accordingly, the excess of the purchase
price over the fair values of the net assets acquired, in the amount of
$1,207,000, was recorded as goodwill, which is amortized over 20 years. The
operating results are included in the Company's consolidated results of
operations from the date of acquisition.
NOTE 7 - WRITEDOWN OF LONG-TERM ASSETS
In November 1996, the Company decided that its SCC operation was to be
discontinued because of its continuing losses. The Company shut down
operations in early December 1996. Fixed assets of approximately $12,000 will
either be sold or redeployed elsewhere in the Company. As a result, the
carrying value of all other assets related to SCC, primarily intangibles, have
been written off resulting in a charge of $461,000 in the year ended September
30, 1996.
In fiscal 1995, the Company determined that the recoverability of certain of
the assets, including property, plant and equipment and goodwill, related to
one of the Company's freestanding facilities was impaired, other than
temporarily. Accordingly, the carrying value of such assets was reduced to the
estimated fair value, resulting in a charge of $2,228,000 based upon an
independent appraisal.
The Company completed the sale of six of its seven freestanding behavioral
health facilities in 1996 and recorded a loss of $4,440,000 consisting
primarily of write off of intangibles related to the facilities of $3,184,000,
loss on the sale of certain property, plant and equipment aggregating
$319,000, transaction expenses of $568,000, severance expenses of $349,000, and
other expenses of $680,000, offset by estimated Medicare depreciation recapture
income of approximately $660,000.
NOTE 8 - THIRD PARTY PAYORS
The Company has agreements with third party payors that provide for payments
for patient services at amounts which differ from its established rates. A
summary of the payment arrangements with major third party payors follows.
Medicare - In-patient nonacute services, certain outpatient services and
defined capital costs related to Medicare beneficiaries are paid primarily on a
cost reimbursement basis. The Company is reimbursed
46
<PAGE> 47
for cost reimbursable items at a tentative rate with final settlement
determined after submission of annual cost reports by the Company and audits
thereof by the Medicare fiscal intermediary.
Other Third Party Payors - The Company has also entered into payment agreements
with certain commercial insurance carriers, health maintenance organizations
and preferred provider organizations. The basis for payment to the Company
under these agreements includes prospectively determined rates per discharge,
discounts from established charges and prospectively determined daily rates.
Services rendered to Blue Cross subscribers are paid based upon the provisions
of individual plans and include payment of predetermined rates or a percentage
of charges.
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
September 30,
-------------------------------------------
1996 1995
---------------- -------------------
<S> <C> <C>
Land $ -- $ 1,663,000
Buildings and improvements 18,000 13,213,000
Furniture, fixtures and equipment 836,000 5,176,000
Equipment under capital lease 314,000 679,000
------- ----------
1,168,000 20,731,000
Less accumulated depreciation and amortization 630,000 8,150,000
--------- ----------
$ 538,000 $12,581,000
========== ===========
</TABLE>
See Note 5 for description of sale of freestanding facilities.
Depreciation and amortization expense related to property, plant and equipment
was $735,000, $1,272,000 and $1,195,000 for 1996, 1995 and 1994, respectively.
NOTE 10 - OTHER ACCRUED EXPENSES
Other accrued expenses included the following:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
1996 1995
---------------- -----------------
<S> <C> <C>
Accrued rent $ 218,000 $ 290,000
Accrued refunds 345,000 64,000
Accrued professional fees 196,000 176,000
Other accrued expenses 682,000 1,284,000
---------- ----------
$1,441,000 $1,814,000
========== ==========
</TABLE>
NOTE 11 - LONG-TERM DEBT
In connection with the Distribution, the Company executed a five-year note (the
"MEDIQ Note") for the balance of unpaid management fees and intercompany
interest in the original principal amount of $11,500,000, which bears interest
at a rate of prime plus 1.5% (9.75% at September 30, 1996), with monthly
payments of interest only through September 1995 and then monthly principal and
interest payments for the following three years (principal payments of $767,000
were made in 1996, and
47
<PAGE> 48
principal payments of $766,000 are due in 1997), based on a fifteen year
amortization period, with the balance due on August 31, 1998.
The MEDIQ Note provides for certain events of default, including the
"sale of all or substantially all of the assets" of the Company. In an attempt
to preclude the possibility of a dispute as to whether the BHC Sale constitutes
the sale of all or substantially all of the assets of the Company for purposes
of the MEDIQ Note, the Company, prior to the sale, sent MEDIQ a letter
requesting a waiver of this provision in connection therewith. MEDIQ sent the
Company a letter in which MEDIQ declined to grant such a waiver. Since the
completion of the BHC Sale, the Company has not received any notice of default
under the MEDIQ Note. The Company, based upon discussions with legal counsel,
does not believe the MEDIQ Note is in default. Therefore, the MEDIQ Note is
classified as noncurrent at September 30, 1996. In the event MEDIQ attempts to
accelerate the MEDIQ Note, the Company intends to aggressively defend its
position in any legal proceeding. There can be no assurances that the Company
would be able to obtain a favorable decision in such a legal proceeding.
Other long-term debt is as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
1996 1995
-------------- -----------------
<S> <C> <C>
Revolving credit facility (prime + 2%) $ -- $1,679,000
Term loans 289,000 900,000
Capital lease obligations 162,000 295,000
---------- ----------
451,000 2,874,000
Less current maturities 194,000 452,000
---------- ----------
$ 257,000 $2,422,000
========== ==========
</TABLE>
On August 14, 1995, the Company entered into a new $5,000,000 revolving credit
facility with a commercial lender. The facility bore interest at the prime
rate plus 2% (10.75% at September 30, 1995), was secured by accounts receivable
from the freestanding facilities and property, plant and equipment at two of
the freestanding facilities. The Company repaid the outstanding balance of the
revolving credit facility with proceeds from the sale of the freestanding
facilities (see Note 5).
In March 1995, the Company utilized a portion of the proceeds from the sale of
its investment in the Joint Venture (see Note 4) to repay the $5,100,000
outstanding principal balance of another revolving credit facility, which was
scheduled to mature March 31, 1995.
At September 30, 1996, term loans include unpaid debt incurred related to the
acquisition in December, 1995 (MHM Counseling Services) of approximately
$254,000 which is being paid monthly (see Note 6) and unpaid debt incurred
related to the acquisition in July, 1995 (SCC - see Note 6) of approximately
$35,000. The term loans at September 30, 1995, consisting of debt incurred in
connection with the acquisition of a freestanding facility, were repaid in
connection with the sale of the freestanding facilities (see Note 5).
Capital lease obligations are payable in monthly installments, including
interest at rates approximating 10% through 2001. The leases are
collateralized by certain furniture, fixtures and equipment, which have a net
book value of $143,000 at September 30, 1996. The Company repaid capital leases
of
48
<PAGE> 49
approximately $237,000 (including early termination fees of $139,000) secured
by certain assets sold to BHC with a portion of the proceeds from the sale of
the freestanding facilities (see Note 5).
In 1996, the Company recorded an extraordinary item in the amount of $463,000,
consisting primarily of costs related to the early retirement of the Company's
long-term debt and the write off of associated loan acquisition costs.
Scheduled maturities of long-term debt (including the MEDIQ Note) are as
follows:
<TABLE>
<S> <C>
Year Ending September 30,
1997 $ 960,000
1998 10,131,000
1999 73,000
2000 15,000
2001 5,000
--------------
$ 11,184,000
==============
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases - The Company leases certain equipment and office facilities under
noncancelable leases. The future minimum lease payments required under
operating leases are as follows:
<TABLE>
<S> <C>
Year Ending September 30,
1997 $ 955,000
1998 930,000
1999 756,000
2000 149,000
2001 26,000
-----------
Total minimum lease payments $ 2,816,000
===========
</TABLE>
Lease expense was $1,433,000, $2,053,000, and $1,240,000 for 1996, 1995 and
1994, respectively. The terms of the lease for its facility in Fort Collins,
Colorado, expiring in December 2000, require additional rent based upon 6.5% of
the net revenues of the facility and 50% of excess cash flow (as defined in the
lease agreement).
Litigation - The Company is involved in various legal proceedings incidental to
its business, some of which may be covered by insurance. The Company knows of
no litigation, either pending or threatened, which is likely to have a material
adverse effect on the Company's consolidated financial statements.
NOTE 13 - COMMON STOCK AND PREFERRED STOCK
The Company's stockholders approved, effective October 28, 1994, a restatement
of the Company's Certificate of Incorporation reducing the number of authorized
shares of common stock from 25,000,000 to 15,000,000 and preferred stock from
10,000,000 to 5,000,000.
49
<PAGE> 50
NOTE 14 - INCOME TAXES
Income tax (benefit) expense consisted of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal $(662,000) $ 670,000 $(213,000)
State (146,000) 439,000 18,000
---------- ----------- ----------
(808,000) 1,109,000 (195,000)
---------- ----------- ----------
Deferred:
Federal 500,000 (200,000) (334,000)
State -- (15,000) 4,000
---------- ----------- ----------
500,000 (215,000) (330,000)
---------- ----------- ----------
Total income tax (benefit) expense $(308,000) $ 894,000 $(525,000)
========== =========== ==========
</TABLE>
The differences between the effective income tax (benefit) expense and the
income tax (benefit) expense computed using the U.S. Federal income tax rate
were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Statutory benefit $(4,888,000) $(1,064,000) $(626,000)
State income taxes, net of federal (benefit) tax (96,000) 280,000 15,000
Valuation reserve 4,658,000 -- --
Effect of disposition of Joint Venture -- 1,206,000 --
Writedown of long-term assets -- 300,000 --
Goodwill amortization 18,000 65,000 83,000
Other items - net -- 107,000 3,000
--------- --------- ---------
Income tax (benefit) expense $(308,000) $894,000 $(525,000)
========= ========= =========
</TABLE>
50
<PAGE> 51
Significant components of deferred tax assets and liabilities follows:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1996 1995
---------------------- --------------------
<S> <C> <C>
Assets
------
Allowance for doubtful accounts $1,136,000 $ 326,000
Capital loss carryforward 832,000 --
Net operating loss carryforwards 3,195,000 632,000
Writedown of long-term assets 157,000 486,000
Other 112,000 302,000
Valuation allowance (5,290,000) (632,000)
---------- ---------
142,000 1,114,000
Liabilities
-----------
Prepaid expenses 77,000 119,000
Depreciation and amortization 34,000 278,000
Other 31,000 217,000
--------- --------
142,000 614,000
------ --------
Net deferred tax asset $ -0- $500,000
=========== ========
</TABLE>
At September 30, 1996, for income tax purposes, the Company had federal and
state net operating loss carryforwards of approximately $6,900,000 and
$14,000,000, respectively, expiring through 2011 and federal capital loss
carryforwards of $2,400,000 expiring in 2001. The change in valuation
allowance was $4,658,000 in 1996 and $151,000 in 1995.
NOTE 15 - RELATED PARTY TRANSACTIONS
Accrued expenses - MEDIQ - Amounts payable to MEDIQ primarily represent unpaid
federal taxes for the period in which the Company was included in MEDIQ's
consolidated federal tax return and expenses incurred by MEDIQ on behalf of the
Company. Pursuant to an informal arrangement between MEDIQ and the Company,
such amounts are expected to be paid with available working capital.
Interest Expense - MEDIQ - The Company incurred interest expense related to the
note payable to MEDIQ of $1,097,000, $1,171,000 and $932,000 in 1996, 1995 and
1994, respectively.
Services Agreement - MEDIQ - Since April 1, 1993, the Company has obtained
certain legal, accounting, tax and risk management services from MEDIQ at
prescribed rates pursuant to a services agreement. The services agreement
terminated in 1996. Fees for such services were $38,000, $140,000 and
$138,000 for 1996, 1995 and 1994, respectively, and are included in general
and administrative expenses.
Insurance - Prior to May 29, 1993, the Company obtained certain of its
insurance coverages through MEDIQ's insurance program. Insurance expense under
these programs was $64,000 and $212,000 for 1995 and 1994, respectively.
Insurance expense for 1995 and 1994 included retroactive premium adjustments
based upon the development of outstanding claims.
Tax Allocation/Sharing Agreement - Pursuant to a tax allocation/sharing
agreement, the Company will reimburse MEDIQ for any future tax assessments
against MEDIQ resulting from the Company's operations, the Company will be
reimbursed by MEDIQ for any future tax benefit derived by MEDIQ resulting from
the Company's operations and the Company will be indemnified for certain tax
liabilities,
51
<PAGE> 52
in each case, for periods during which the Company had been a member of MEDIQ's
consolidated group.
NOTE 16 - STOCK OPTION PLANS
In August 1993, the Company's Board of Directors adopted a Stock Option Plan
(the "Stock Option Plan") and a Stock Option Plan for Non-Employee Directors
(the "Directors' Stock Option Plan"). Under the Stock Option Plan, up to
350,000 shares of the Company's Common Stock may be subject to stock options
granted to officers and key employees of the Company. Options may not be
granted for a term in excess of ten years from the date of grant. As of
September 30, 1996, options to acquire 147,600 shares of stock were exercisable
under the Stock Option Plan and options to acquire 10,000 shares of stock were
exercisable under the Directors' Stock Option Plan. Exercise prices of stock
options granted represent fair market value of the Common Stock at date of
grant. A summary of activity for 1996 and 1995 follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
---------- -------------
<S> <C> <C>
October 1, 1994 264,600 $3.75 to $5.25
Granted 64,000 $3.00
Terminated (59,000) $3.00 to $5.25
---------- --------------
September 30, 1995 269,600 $3.00 to $5.25
Granted 61,500 $1.00 to $3.00
Terminated (71,500) $3.00 to $5.25
---------- --------------
September 30, 1996 259,600 $1.00 to $4.25
========== ==============
</TABLE>
The Company will be required to adopt Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation", in
fiscal year 1997. The Company will elect to continue to measure compensation
cost using APB Opinion No. 25 and, accordingly, will provide the disclosures
required by SFAS No. 123.
NOTE 17 - RETIREMENT PLAN
The Company has a 401(k) plan (the "Plan"). Employees are eligible to join the
Plan upon completion of one year of service during which they have worked a
minimum of 1,000 hours and are age 21 or older. The Plan provides that the
Company will make a matching contribution equal to $0.50 for each $1.00
contributed by a participant not to exceed 3% of a participant's compensation.
The Company's matching contribution is made in cash to be used to purchase
shares of common stock of the Company for the accounts of the participants.
For the years ended September 30, 1996, 1995 and 1994, the Company's
contributions were $70,000, $81,000, and $11,000 respectively.
52
<PAGE> 53
NOTE 18 - SUBSEQUENT EVENTS
Acquisition of Extended Care Operations in Massachusetts (Liberty Bay).
Effective as of December 1, 1996, the Company's Extended Care Services Division
acquired, pursuant to an Agreement (the "Liberty Bay Agreement") by and among
the Company, MHM Extended Care Services, Inc., Liberty Bay Colony Health
Services, Inc ("Liberty Bay") and Liberty Management Group, Inc. ("Liberty
Management"), certain assets and contractual rights from Liberty Bay which
constituted Liberty Bay's geropsychiatric management services operations in
Massachusetts. Liberty Bay, a wholly-owned subsidiary of Liberty Management,
provided behavioral healthcare services on a contract basis to residents of
approximately 60 extended care facilities in Massachusetts. The Company has
commenced integrating these operations with MHM Counseling Services and the
combined operations will operate under the name "MHM/Bay Colony Counseling
Services", and, as a result of the acquisition, will serve approximately 80
extended care facilities.
As consideration for the purchase, the Company paid Liberty Bay $150,000 in
cash and issued a promissory note in the principal amount of $150,000 (the
"Liberty Bay Note"). The purchase price will be primarily allocated to
intangible assets. The Liberty Bay Note provides for quarterly interest
payments at an annual rate of 9% and the payment of the principal amount in one
installment on December 1, 1999. The Company also agreed to pay Liberty Bay
additional consideration consisting of 20% of "cash flow" (as such term is
defined in the Liberty Bay Agreement) from the acquired contracts over the five
year period commencing December 1, 1996. Such additional consideration is
payable annually by the Company and is calculated on a contract-by-contract
basis.
Discontinuance of SCC Operations. The Company expects the costs associated
with discontinuing the operations of SCC to be nominal. The Company believes
that the loss of SCC's reduced revenues following increased delays in claims
processing by the Medicare financial intermediary will be offset by reduced
personnel and overhead costs. The Company will continue to employ
administrative personnel to pursue SCC claims and will redeploy two employees
with employment contracts through July 1998 elsewhere within the Company.
In addition, the Company estimates that it will take three to four months to
process SCC's outstanding accounts receivable, including the appeals for
previously denied claims, at a cost approximating $100,000. There can be no
assurance that the appeal process will result in a significant percentage of
reversals, additional denials will not be received by SCC, actual bad debt
experience will not exceed the Company's estimates or the review of SCC's
claims will not result in potential liability for the Company.
ICH Services Acquisition and Agreement. In an effort to avoid the time,
expense and possibility of disagreement inherent to the appraisal process,
related to the additional consideration of the acquisition, the Company has had
discussions with ICH for the purpose of modifying the terms of the additional
consideration. Although no definitive agreement has been reached to date, the
Company expects to execute such an agreement with the former ICH members in the
near future. As proposed, such agreement, which would replace the existing
additional consideration provisions, would require the Company to issue an
aggregate of an additional 266,089 shares of Common Stock to the former ICH
members as soon as practicable after obtaining listing approval from the
American Stock Exchange for such shares and pay the former ICH members (in the
aggregate) approximately $52,562 in cash. The
53
<PAGE> 54
proposed amendment would also require the Company to pay to each former ICH
member on November 1, 1997, a one time adjustment payment equal to the positive
difference, if any, between (i) $3.56 per share multiplied by the number of
Company shares such former ICH member received as additional consideration and
(ii) the gross proceeds received by such former ICH member from the sale of all
of such former ICH member's shares of common stock of the Company received as
additional consideration. The additional consideration will be recorded as
goodwill and amortized over 20 years.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in nor disagreements with accountants on
accounting and financial disclosure.
PART III
The information required to be included herein has been incorporated herein by
reference to the Company's proxy statement for the Annual Meeting of
Stockholders to be held in 1997.
54
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a)(1) The response to this portion of Item 14 is submitted as a
separate section of this report commencing on page 34.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts and Reserves
Other schedules are omitted because of the absence of
conditions under which they are required.
(a)(3) EXHIBITS. The Exhibits are listed in the Exhibit Index
appearing below.
(b) REPORTS ON FORM 8-K: The Company submitted a Current
Report on Form 8-K on September 6, 1996 with its restated
Articles of Incorporation and on September 13, 1996 to
announce a new Director, William P. Ferretti, to replace
Abraham D. Gosman.
(c) EXHIBITS (numbered in accordance with Item 601 of Regulation
S-K).
Exhibit # Description and Method of Filing
- -----------------------------------------------------------
2.1 Distribution Agreement by and between MHM and MEDIQ (1)
2.2 Agreement regarding L.L.C. dated August 1, 1994 (2)
2.3 Limited Liability Agreement dated August 1, 1994 (2)
3.1 Restated Articles of Incorporation of MHM (6)
3.2 Amended Bylaws of MHM (7)
4.1 Specimen MHM Common Stock Certificate (3)
10.1 Tax Indemnification Agreement, dated August 31, 1993 by and
between MHM and MEDIQ (1)
10.2 Services Agreement, dated August 31, 1993 by and between MHM
and MEDIQ (1)
10.3 Insurance Liability Agreement, dated August 31, 1993 by and
between MHM and MEDIQ (1)
10.4 Promissory Note of MHM to MEDIQ, dated August 31, 1993 (1)
10.5 MHM 1993 Stock Option Plan (1)
10.6 MHM 1993 Non-Employee Director Stock Option Plan (1)
10.7 MHM 1993 Bonus Plan (3)
10.8 MHM 1996 Non-Employee Directors' Stock Option Plan (4)
10.9 MHM Amendment to 1993 Stock Option Plan (4)
10.10 Agreement by and among the Company and ICH Services, L.L.C.,
dated November 18, 1993(5)
10.11 Agreement by and among the Company, MHM Extended Care
Services, Inc., and Liberty Management Group, Inc., and
Liberty Bay Colony Health Services, Inc. dated November 22,
1996 (10)
55
<PAGE> 56
10.12 Form of Purchase Warrant Agreement between the Company and
Murray I. Firestone (10)
10.13 Form of Repurchase Agreement between the Company and Murray I.
Firestone dated July 7, 1995 (10)
10.14 Amendment to Repurchase Agreement between the Company and
Murray I. Firestone dated August 22, 1995 (10)
10.15 Asset Purchase Agreement between the Company and Behavioral
Healthcare Corporation (8)
10.16 Asset Purchase Agreement between the Company and Oakview
Treatment Center (9)
10.17 Sublease Agreement dated June 1996 between the Company and
Stanley Martin Companies, Inc. (10)
10.18 Client Service Agreement and Addendum dated June 30, 1996
between the Company and Administaff Companies, Inc. (10)
10.19 Client Service Agreement and Addendum dated June 30, 1996
between MHM Extended Care Services, Inc. and Administaff
Companies, Inc. (10)
10.20 Client Service Agreement and Addendum dated June 30, 1996
between MHM of Colorado, Inc. and Administaff Companies, Inc.
21 Subsidiaries of MHM (10)
27 Financial Data Schedule (10)
- ----------------
(1) Incorporated by reference to the Registrant's Form 10-K report for
fiscal 1993, as amended.
(2) Incorporated by reference to the Registrant's Form 10-Q report for the
Quarter Ended June 30, 1994.
(3) Incorporated by reference to the Registrant's Form 10 filed August 13,
1993, as amended.
(4) Incorporated by reference to the Registrant's 1996 Annual Meeting
Proxy Statement.
(5) Incorporated by reference to the Registrant's Form 8-K report, dated
December 2, 1993.
(6) Incorporated by reference to the Registrant's Form 8-K/A, dated May
15, 1996.
(7) Incorporated by reference to the Registrant's Form 10-K report for
fiscal 1995, as amended.
(8) Incorporated by reference to the Registrant's May 1, 1996 Special
Meeting Proxy Statement.
(9) Incorporated by reference to the Registrant's Form 8-K dated April 18,
1996.
(10) Filed herewith.
56
<PAGE> 57
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: MHM SERVICES, INC.
By: /s/ Michael S. Pinkert
--------------------------------------
Michael S. Pinkert, President
and Chief Executive Officer
By: /s/ Carolyn Zimmerman
--------------------------------------
Carolyn Zimmerman, Vice President-
Finance and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, which include at
least a majority of the Board of Directors on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Michael S. Pinkert President, Chief
- -------------------------- Executive Officer and
Michael S. Pinkert Director
/s/ William P. Ferretti Director
- -----------------------
William P. Ferretti
/s/ Kenneth A. Kessler, M.D. Director
- ----------------------------------
Kenneth A. Kessler, M.D.
/s/ H. Scott Miller Director
- --------------------------
H. Scott Miller
/s/ Michael F. Sandler Director
- --------------------------
Michael F. Sandler
57
<PAGE> 58
MHM SERVICES, INC.
AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
- ------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other at End
Description Period Expenses Accounts Deductions of Period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1996:
Allowance for doubtful accounts $ 1,299 $ 6,320 $ 3,215 $ 4,404
-----------------------------------------------------------------------
Year ended September 30, 1995:
Allowance for doubtful accounts $ 1,891 $ 4,467 $ 5,059 $ 1,299
-----------------------------------------------------------------------
Year ended September 30, 1994:
Allowance for doubtful accounts $ 1,690 $ 2,009 $ 526 (1) $ 2,334 $ 1,891
-----------------------------------------------------------------------
</TABLE>
(1) Represents the allowance for doubtful accounts related to the acquisition
of HCI.
58
<PAGE> 1
AGREEMENT
BY AND AMONG
MHM SERVICES, INC.
and
MHM EXTENDED CARE SERVICES, INC.,
and
LIBERTY MANAGEMENT GROUP, INC.,
and
LIBERTY BAY COLONY HEALTH SERVICES, INC.,
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph Title Page
- --------- ----- ----
No.
--
<S> <C> <C>
1. Purchase and Sale of Assets 2
2. Purchase Price 5
3. Representations and Warranties of Sellers 16
4. Representations and Warranties of Buyer 23
5. Covenants of Sellers 27
6. Covenants of Buyer 30
7. Conditions to Obligations of Buyer and Buyer Parent 32
8. Conditions to Obligations of Sellers 34
9. Provisions for Indemnification 35
10. Closing 41
11. Opinion of Counsel for Sellers 42
12. Opinion of Counsel for Buyer 43
13. Restrictive Covenant 44
14. Survival of Representations and Warranties 46
15. Further Assurances 46
16. Termination 47
17. Notices 47
18. Broker 49
19. Expenses 49
20. No Solicitation 50
21. Entire Agreement 50
22. Employees 51
23. Binding Effect 52
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
Paragraph Title Page
- --------- ----- ----
No.
--
<S> <C> <C>
24. Assignment 52
25. Headings 53
26. Law Governing 53
27. Counterparts 54
28. Consented Assignment 54
29. Guaranty of Buyer Parent 54
30. Guaranty of Seller Parent 55
31. Consent to Use of Name 55
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<CAPTION>
LIST OF EXHIBITS
----------------
Exhibit Number Description
- -------------- -----------
<S> <C>
1(a)(i) List of Facility Contracts
2(a)(ii) Promissory Note
2(c)(v) Cash Basis Bad Debt Reserve Percentage
2(e)(ii) Estimate of a Regional Allocation for the Period
Ended November 30, 1997
2(e)(iii) List of 15 Facility Contracts
3(c) Material Changes
3(d) Exceptions to Title to Assets
3(e) Breaches of Sun Contract
3(f) List of Claims
3(g) Exceptions to Required Sellers' Authorizations
3(h)
Notices
3(i)(i) Exceptions to Compliance with Laws
3(j) Union Activity - Business
4(d) Buyer Parent Financial Statements
4(f) Insurance for Buyer
4(g) Union Activity - Buyer Geripsych Business
10(a)(i) Bill of Sale and Assignment
22 List of Employees
</TABLE>
(iii)
<PAGE> 5
AGREEMENT
THIS AGREEMENT (the "Agreement"), made this 22nd day of November, 1996
by and among MHM Services, Inc., a corporation organized and existing under the
laws of the State of Delaware (hereafter referred to as "Buyer Parent") and its
wholly owned subsidiary MHM Extended Care Services, Inc., a corporation
organized and existing under the laws of the State of Delaware (hereinafter
referred to as "Buyer") and Liberty Management Group, Inc., a corporation
organized and existing under the laws of the Commonwealth of Massachusetts
(hereinafter referred to as "Seller Parent"), and its wholly owned subsidiary
Liberty Bay Colony Health Services, Inc., a corporation organized and existing
under the laws of the Commonwealth of Massachusetts (hereinafter referred to as
"Seller Sub" and, collectively with Seller Parent, as "Sellers"). The term
"Sellers" as used herein shall mean the Sellers or each or either of them, as
the context requires.
W I T N E S S E T H :
WHEREAS, the business of Seller Sub consists of managing the provision
of mobile professional geripsych services for skilled nursing facilities, adult
day care centers, and assisted living facilities in Massachusetts (currently
numbering approximately sixty facilities), and providing such services to
residents of such facilities as well as counseling services to such residents'
families in such facilities (which counseling services are currently billed
under Medicare Procedure Codes 90846 and 90847)
<PAGE> 6
(hereinafter referred to as the "Business").
WHEREAS, Buyer wishes to purchase from Sellers certain of the assets
and contractual rights of the Business owned by Sellers; and
WHEREAS, Sellers wish to sell the said assets and contractual rights
to Buyer upon, under and subject to certain terms and conditions agreed upon by
and among the parties as hereinafter set forth; and
NOW THEREFORE, intending to be legally bound hereby, and in
consideration of the mutual covenants herein contained and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. PURCHASE AND SALE OF ASSETS
(a) Buyer hereby agrees to purchase from Sellers and
Sellers agree to sell to Buyer the following assets and contractual rights
related to the Business (collectively, the "Assets"), owned by Sellers, for the
purchase price set forth in paragraph 2 hereinafter:
(i) All of Sellers' rights under or in
connection with certain agreements related to the Business in force on the
Closing Date (as hereinafter defined), as follows: agreements relating to
managing the provision of mobile professional geripsych services for skilled
nursing facilities, adult day care centers and assisted living facilities and
providing such services to residents of such facilities as well as counseling
services to families of such residents in such facilities (which services are
currently billed under Medicare Procedure Codes 90846
2
<PAGE> 7
and 90847), including, without limitation, the Sun Contract, as hereinafter
defined (each, a "Facility Contract" and collectively, "Facility Contracts") (a
list of those Facility Contracts in force on the date of this Agreement is
attached as EXHIBIT 1(a)(i) hereto). Buyer and Sellers agree that all of
Sellers' rights under, or in connection with, agreements to be transferred to
Buyer pursuant to this subparagraph 1(a)(i) at the Closing (as hereinafter
defined) shall be as set forth above and in EXHIBIT 1(a)(i), with such
additions and deletions between the time of the execution of this Agreement and
the Closing that are entered into in the ordinary course of business;
(ii) All customer lists, records and
files, plans, systems, methods, designs, protocols, policies and procedures,
and books and records relating to the operations, personnel, vendors, suppliers
and customers of the Business; and
(iii) All personnel and payroll records of
employees of Sellers who become employees of Buyer after the Closing.
(b) The Assets shall be transferred by Sellers to Buyer
free of all security interests, liens, encumbrances, and indebtedness of any
kind, provided, however, that all contracts are subject to the rights of the
other parties to such contracts.
(c) Buyer shall not assume, nor be obligated to perform,
fulfill or pay, any obligations or indebtedness of Sellers or the Business
whatsoever, except that Buyer shall assume all obligations and indebtedness
related to the Business with respect to acts,
3
<PAGE> 8
occurrences and obligations occurring or accruing on and after the Closing Date
under or in connection with the Assets.
(d) The Assets to be transferred to Buyer hereunder shall
not include, and Sellers shall retain for their own account, any other assets
of the Business, including, without limitation, any and all licenses, leases,
computers, and furniture; any part of the trade name (except as expressly set
forth in paragraph 31 hereof); accounts receivable and related contract rights
and claims for the period prior to the Closing Date and records relating
thereto to the extent such records do not also relate to services to be
provided on or after the Closing Date; and similar related items.
(e) Under the letter of intent dated September 17, 1996
between Sellers and Buyer, it was contemplated that Sellers would sell to Buyer
not only the Business but also a similar business in Connecticut operated by a
subsidiary of Seller Sub (the "Sellers' Connecticut Business"). After
consideration, Buyer has decided that it wants to purchase only the Business,
even though the Business and Sellers' Connecticut Business service some of the
same customers or affiliates thereof (collectively, the "Dual State
Customers"). Sellers have concluded that Buyer's purchase of the Business
makes the continuation of Sellers' Connecticut Business uneconomical and,
therefore, Sellers plan to close down or otherwise terminate Sellers'
Connecticut Business. Notwithstanding anything contained to the contrary in
this Agreement, Sellers shall not have any liability under this Agreement
whatsoever (except for
4
<PAGE> 9
any potential liability pursuant to the first sentence of Section 3(e)) if the
closure, termination or wind down of the Sellers' Connecticut Business results
in or contributes to the termination of any of the Facility Contracts by any
Dual State Customers.
2. PURCHASE PRICE
(a) As consideration for the purchase of the Assets and
the restrictive covenants of Sellers, Buyer shall deliver to Sellers as the
Purchase Price hereunder:
(i) One Hundred and Fifty Thousand Dollars
($150,000.00) payable to Sellers jointly at the Document Closing (as
hereinafter defined), by wire transfer of immediately available funds;
(ii) One Hundred and Fifty Thousand Dollars
($150,000.00) payable to Sellers jointly at the Document Closing by delivery of
an absolute, unconditional and fully negotiable promissory note dated as of the
Closing Date payable to the order of Sellers jointly, without offset or defense
of any kind or nature except for an offset of Seventy Five Thousand Dollars
($75,000.00) if the Sun Contract (as hereinafter defined) was invalid in its
entirety due to an act or omission of Sellers prior to the Closing (other than
the entry into of this Agreement or consummation of the transactions
contemplated hereby), guaranteed by Buyer Parent, which note shall provide for
quarterly payments of interest at the annual rate of nine percent (9%) and a
balloon payment of the principal amount (together with payment of interest for
the prior quarter) on the maturity date three years after the Closing Date,
5
<PAGE> 10
and shall be in the form attached as EXHIBIT 2(a)(ii) (the "Promissory Note");
and
(iii) Such Annual Earnout described in
subparagraph 2(b) thereof as may be payable on the dates and in accordance with
the terms specified in subparagraph 2(c) hereof.
(b) With respect to the period of five (5) years
commencing on December 1, 1996 (the "Earnout Commencement Date"), Buyer shall
pay to Sellers and Sellers will be entitled to receive from Buyer, subject to
the payment provisions of paragraph 2(c), twenty percent (20%) of the annual
Cash Flow of each Contract (as defined in paragraph 2(e) hereof) (the "Annual
Earnout").
(c) The Annual Earnout and Annual Net Revenue Target (as
defined in paragraph 2(e) hereof) shall be calculated on an accrual basis for
each annual period (each an "Annual Earnout Period") within ninety (90) days
after the end of each year after the Earnout Commencement Date for five (5)
years (each an "Annual Calculation Date") subject to the Final Cash Basis
Adjustment, if any, as described in paragraph 2(c)(v) hereof; provided,
however, that the Annual Earnout shall only be payable to Sellers as follows:
(i) On each Annual Calculation Date Buyer will
provide Seller Parent with detailed reports and calculations of the Annual Net
Revenue Target, Cash Flow of each Contract and Annual Earnout for the preceding
Annual Earnout Period, determined through the end of such Annual Earnout
Period, together with a certification by the Chief Financial Officer of Buyer
Parent of the
6
<PAGE> 11
completeness and accuracy of such calculations in accordance with the terms of
this Agreement. Seller Parent shall have the right to audit the records that
support all such detailed reports and calculations by Buyer, in accordance with
the provisions of subparagraph 2(g) hereof.
(ii) Within fifteen (15) days after the end of each
Annual Calculation Date and each quarterly period after the first Annual
Earnout Period (the "Quarterly Reporting Date") until the seventy-eighth month
after the Earnout Commencement Date, Buyer shall provide Seller Parent with:
(a) a detailed report of all collections received by Buyer during the preceding
Annual Earnout Period (in the case of reports to be provided on an Annual
Calculation Date) or the quarterly period ended on the last day of the month
preceding such Quarterly Reporting Date (in the case of reports to be provided
on a Quarterly Reporting Date) with respect to all Contract Net Revenues for
each preceding Annual Earnout Period, designating the Annual Earnout Period to
which such collections apply; and (b) a detailed report and calculation of the
Current Revenue Collection Percentage (as defined in subparagraph 2(e) hereof)
for each preceding Annual Earnout Period. Seller Parent shall have the right
to audit the records that support the detailed report and calculation of each
Current Revenue Collection Percentage, in accordance with the provisions of
subparagraph 2(g) hereof.
(iii) On each Annual Calculation Date and Quarterly
Reporting Date, Buyer shall pay to Sellers the sum of the products
7
<PAGE> 12
for all Annual Earnout Periods of: (a) the Annual Earnout for each such Annual
Earnout Period; multiplied by (b) the Current Revenue Collection Percentage for
each such Annual Earnout Period; provided, however, that such payments shall be
reduced by the amounts of the Annual Earnout previously paid with respect to
each Annual Earnout Period.
(iv) On each Annual Calculation Date and
Quarterly Reporting Date, as of which the Current Revenue Collection Percentage
for any Annual Earnout Period exceeds 100%, Buyer shall also pay to Seller (in
addition to the amounts referred to above), 20% of the amounts by which the
Contract Net Revenues actually collected exceed the Annual Net Revenue Target
for such Annual Earnout Period.
(v) On each Quarterly Reporting Date which
coincides with the fifteen month anniversary of the Annual Calculation Date for
each Annual Earnout Period, if the Current Revenue Collection Percentage for
such Annual Earnout Period is then less than 100%, Buyer shall recalculate the
Cash Flow of Each Contract and Annual Earnout for such Annual Earnout Period by
substituting in the formulas thereof, for the applicable Base Bad Debt Reserve
Percentage, the actual Cash Basis Bad Debt Reserve Percentage determined in a
manner consistent with the methodology discussed on EXHIBIT 2(c)(v) (the "Final
Cash Basis Adjustment"). Within 30 days after Seller receives detailed
calculations of the Final Cash Basis Adjustment, for any Annual Earnout Period
(subject to Sellers' rights to audit such information as described below)
8
<PAGE> 13
Sellers shall refund to Buyer the aggregate amounts by which: (x) the
cumulative cash payments received by the Seller applicable to the Annual
Earnout for such Annual Earnout Period calculated on an accrual basis pursuant
to paragraph 2(b) and 2(e)(iii) hereof; exceeds (y) the Annual Earnout
calculated in the Final Cash Basis Adjustment.
(d) The Cash Flow of each Contract during each Annual
Earnout Period will be determined separately and not cumulatively with other
Facility Contracts or other Annual Earnout Periods for purposes of calculating
any Annual Earnout. If there is Cash Flow for any Facility Contract in any
such Annual Earnout Period, calculation of the Annual Earnout for such Annual
Earnout Period shall be due for such Facility Contract for such period and
shall not be affected by any net loss on any other Facility Contract, whether
in the same or any other Annual Earnout Period. Sellers shall not be obligated
to return any payment on account of an Annual Earnout in the event of any net
loss incurred under any Facility Contract with respect to any Annual Earnout
Period after such payment is made.
(e) As used herein, the following terms have the
following meanings:
(i) "Annual Net Revenue Target" shall mean
(for such Annual Earnout Period) the amount of the Contract Net Revenues (as
defined in paragraph 2(e)(vii) hereof) from all Facility Contracts during such
Annual Earnout Period; minus a reasonably projected bad debt reserve for such
Contract Net Revenues, not to
9
<PAGE> 14
exceed 10% thereof for the first two Annual Earnout Periods (the "Base Bad Debt
Reserve Percentage"). Collections in excess of the Annual Net Revenue Target
for each respective Annual Earnout Period will result in additional payments by
Buyer to Seller as provided in paragraph 2(c)(iv) hereof, and the Base Bad Debt
Reserve Percentage for the final three Annual Earnout Periods may be adjusted
as of the third Annual Calculation Date, by applying the methodology described
on Exhibit 2(c)(v) hereto, to the actual collection experience for the first
Annual Earnout Period. In the event the Base Bad Debt Reserve Percentage for
any Annual Earnout Period is increased pursuant to the Final Cash Basis
Adjustment outlined in paragraph 2(c)(v), then paragraph 2(c)(iv) will apply to
all collections received thereafter for the Net Contract Revenues of such
Annual Earnout Period.
(ii) "Aggregate Regional Overhead Costs"
shall mean reasonable and ordinary costs directly incurred by the Buyer in
connection with the operations of Buyer in Massachusetts (which are
substantially similar in nature, scope and category to the costs reflected in
Buyer's general ledger which were used to make the estimate of a Regional
Allocation for the period ended November 30, 1997, as set forth in EXHIBIT
2(e)(ii));
(iii) "Cash Flow of each Contract" shall
mean the Contract Net Revenues for each Facility Contract minus (a) the direct
costs of providing such services, which shall be estimated by multiplying the
Contract Net Revenues for such Facility Contract by the Contract Cost
Percentage; (b) a reserve for bad debts which
10
<PAGE> 15
will not exceed the applicable Base Bad Debt Reserve Percentage; (c) amounts
reasonably charged against revenues as refunds made with respect to payments
previously received by Buyer for services rendered pursuant to such Facility
Contract (the "Refunds"); and (d) an allocation of regional overhead to such
Facility Contract (the "Regional Allocation"), initially in the amount of
$7,000 for each separate nursing facility, adult day care center or assisted
living facility (i.e., related facilities on the same "campus" shall be
considered a single "facility" for such purpose) covered by a Facility Contract
(a "Business Facility") for the first Annual Earnout Period.
(w) For the first Annual Earnout Period only, the Regional Allocation
for each Business Facility may be increased above $7,000 by an amount
determined by taking 50% of the aggregate sum of the negative Cash Flow of each
Contract derived from the 15 Facility Contracts listed on EXHIBIT 2(e)(iii) for
the first Annual Earnout Period but not to exceed $100,000 in any event (the
"Unabsorbed Regional Overhead") and then dividing the resulting amount by the
total number of Business Facilities under contract to Buyer for the provision
of mobile geripsych management services that yielded a positive Cash Flow of
each Contract for the first Annual Earnout period.
(x) For each Annual Earnout Period after the first Annual Earnout
Period, such Regional Allocation for each Business Facility shall be made by
multiplying the Aggregate Regional Overhead Costs for such Annual Earnout
Period by the ratio of the Total Net
11
<PAGE> 16
Revenues to the total revenues of Buyer arising from its operations in
Massachusetts and dividing the resulting product by the total number of skilled
nursing facilities, adult day care centers and assisted living facilities in
Massachusetts under contract to Buyer for the provision of mobile geripsych
management services (each, a "Facility") (with any such Facility under contract
for less than the entire year to be counted in such total number based on the
fraction of the year for which such Facility was under contract); provided,
however, that for each Annual Earnout Period after the first Annual Earnout
Period, any proposed Regional Allocation for a Business Facility exceeding
$7,700 shall require the consent of Seller Parent, which consent shall not be
unreasonably withheld; and provided, further, that the Regional Allocation
shall in no event exceed $10,000 for each Business Facility for any Annual
Earnout Period.
(y) In reporting any proposed change in the Regional Allocation, Buyer
shall provide Seller Parent with a detailed report which compares each category
of expense and the allocation thereof by Facility for the preceding Annual
Earnout Period, to the same category of expense and the allocation thereof for
the Annual Earnout Period for which such change is proposed. Seller Parent
shall have the right to audit the records that support the detailed report and
calculation of any proposed change in the Regional Allocation. In the event
that Seller Parent withholds its consent to any proposed increase of the
Regional Allocation allocable to a Facility above $7,700 for more than thirty
(30) days after receipt
12
<PAGE> 17
of such detailed report and calculation, Seller Parent shall be deemed to have
given written notice to Buyer pursuant to subparagraph 2(g) hereof of its
election to exercise its right to audit the records supporting such detailed
report and calculation, and the dispute as to the proposed increase shall be
resolved in accordance with the procedures established in paragraph 2(g)
hereof.
(z) In calculating the "Cash Flow of each Contract," no deductions
from net revenues shall be made for interest, bad debts, depreciation,
amortization, corporate overhead or regional overhead (except for the Regional
Allocation and bad debt reserves expressly referred to hereinabove).
(iv) "Contract Cost Percentage" as used
herein shall mean (a) all direct costs incurred for professional mental
healthcare services directly related to the Business, including, without
limitation, salaries, fringe benefits, FICA, reasonable and ordinary payments
for services rendered pursuant to independent contract arrangements with a
professional, any insurance (including professional liability insurance)
covering professionals providing services under all of the Facility Contracts,
and reasonable ordinary and necessary business expenses, including, without
limitation, travel expenses (if reimbursed or paid by Buyer) incurred by any
professionals for such services divided by (b) the total Contract Net Revenues
for all Facility Contracts.
(v) "Current Revenue Collection Percentage"
shall mean, for each Annual Earnout Period preceding any Annual
13
<PAGE> 18
Calculation Date or Quarterly Reporting Date referred to above, the percentage
(which may exceed 100%) of the Annual Net Revenue Target for such Annual
Earnout Period which has actually been collected as of the end of the Annual
Earnout Period or quarterly period, as the case may be, immediately preceding
such Annual Calculation Date or Quarterly Reporting Date, as the case may be,
with respect to the Contract Net Revenues generated during such Annual Earnout
Period.
(vi) "Sun Contract" shall mean the Geripsych
Consulting Agreement dated as of October 1, 1995 between Seller Parent and
Seller Sub, on the one hand, and Sun Healthcare Group, Inc. and Sunrise
Healthcare Corporation (collectively, the "Sun Parties"), on the other hand.
(vii) "Contract Net Revenues" as used
herein shall mean gross revenues billed for services pursuant to each Facility
Contract, minus adjustments to reduce these revenues by provisions for discount
arrangements with commercial payers and other contractual or administrative
allowances with government payors. The differences between established billing
rates and amounts estimated to be received under such discount, contractual and
administrative arrangements are accounted for as "contractual adjustments".
(f) The Purchase Price shall be allocated as follows:
(i) Five Thousand Dollars ($5,000.00) to the
restrictive covenant set forth in paragraph 13; and
(ii) the balance of the Purchase Price to the
purchase of the Assets that are intangible.
14
<PAGE> 19
(g) Seller Parent may exercise its right to audit
detailed reports and calculations pursuant to paragraphs 2(c)(i), (ii) and (v),
and 2(e)(iii) hereof only in accordance with the procedures set out in this
paragraph. Seller Parent shall give written notice to Buyer within thirty (30)
days after receipt of a detailed report and calculation of its election to
exercise its right to audit the supporting records. If Seller Parent so
elects, it shall retain an accounting firm at its expense to conduct such audit
(or it may conduct such audit with representatives of the Seller Parent) and
shall provide a copy of the determination of such accounting firm or such
representatives (the "Seller Determination") to Buyer within thirty (30) days
after delivery of its written notice of election to Buyer. Buyer and Buyer
Parent shall provide such accounting firm or representatives with reasonable
access and cooperation with regard to the files and materials relevant to such
audit in order to facilitate and expedite such audit, including making
available in Massachusetts, at the expense of Sellers, copies of documents
maintained outside of Massachusetts, provided that such accounting firm or
representatives identify such documents with reasonable specificity. Seller
Parent shall take such measures to maintain the confidentiality of any
information obtained in any audit as it takes to maintain the confidentiality
of its own confidential information, and all such information will be destroyed
or returned to Buyer promptly after the conclusion of the audit, or in the
event of an arbitration, the issuance of an arbitration award. In
15
<PAGE> 20
the event there is a discrepancy between Buyer's detailed report and
calculation and the Seller Determination, and the parties hereto do not reach
an agreement on any adjustments to Buyer's detailed report and calculation
within twenty (20) days following Buyer's receipt of a copy of the Seller
Determination, then the matter shall be submitted to binding arbitration in
Boston, Massachusetts, before a single arbitrator who is a Certified Public
Accountant, in accordance with the commercial arbitration rules of the American
Arbitration Association ("AAA"). If the parties fail to agree on the selection
of an arbitrator within ten (10) days after the expiration of the
above-described twenty (20) day period, then the AAA shall promptly make the
selection, which decision shall be binding upon the parties. The disputed
issues shall be submitted to the arbitrator within five (5) days after
selection of the arbitrator and each issue shall be decided by the arbitrator
within thirty (30) days. The fees and expenses of the AAA and the arbitrator
shall be paid by the parties hereto in proportion to the dollar amount of the
disputed issues decided against each party. Judgment may be entered on any
decision rendered by the arbitrator, including the fees and expenses of the AAA
and the arbitrator.
3. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers jointly and severally represent and warrant, upon
which representations and warranties Buyer relies, and which representations
and warranties shall survive Closing for the period set forth in paragraph 14
hereinafter, as follows:
(a) Each Seller is a corporation duly organized, validly
16
<PAGE> 21
existing, and in good standing under the laws of its state of incorporation,
and has all requisite power and authority to own the Assets and carry on the
Business as it is now being conducted and to enter into this Agreement and to
consummate the transactions contemplated hereunder. The Articles of
Incorporation and all amendments thereto to date of Sellers and their Bylaws as
amended to date, all of which have been delivered to Buyer for review prior to
execution of this Agreement, are full, complete and correct to the date of this
Agreement. Sellers are not in violation of any of the provisions of their
Articles of Incorporation, as amended, nor of their Bylaws as amended.
(b) Sellers have delivered to Buyer unaudited compiled
financial information for the Business for the period(s) ending August 31, 1996
(the "Financial Information"). The Financial Information has been derived from
the books and records of Sellers, and in management's opinion fairly represents
the results of the operation of the Business for the periods presented in all
material respects, except as otherwise noted in the Financial Information. The
preparation of the Financial Information required management to make estimates
and assumptions that affect the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
(c) Since August 31, 1996 except as described on EXHIBIT
3(c) attached hereto and made a part hereof, there has not been (i) any
material change, or any material development, or the incurring of any material
liability which has affected in a
17
<PAGE> 22
materially adverse manner the Assets or the Business other than in the ordinary
course of business; or (ii) any modification affecting the term or economics or
termination of any Facility Contract, or failure to renew or extend any
Facility Contract (except in the ordinary course of business).
(d) Sellers own and have good and marketable title to all
the Assets, except, in the case of contractual rights, subject to the consent
of the other contracting party or parties before a transfer of such rights may
occur. Except as described on EXHIBIT 3(d) attached hereto and made a part
hereof, the Assets are not subject to any security interest, mortgage, deed of
trust, pledge, lien, encumbrance, option, or restriction or limitation on their
transferability (collectively, "Encumbrances"), and none of the Assets is
subject to any commitment or other arrangement for their sale or use by any
affiliate of Sellers or by any third party.
(e) Copies of all Facility Contracts have been delivered
to Buyer (or copies of the form of agreement have been delivered to Buyer and
access to the original, individual contracts has been granted to Buyer) and are
true and complete in all respects material to the term and economics thereof
(except for the copy of the Sun Contract, which is true and complete in all
respects). Sellers have substantially complied in all respects with all of the
provisions of all Facility Contracts, and are not in breach, violation or
default under any of them. No event has occurred with respect to the Sun
Contract that constitutes, or with the lapse of
18
<PAGE> 23
time or the giving of notice, or both, would constitute a breach, violation or
default under the Sun Contract that would permit the Sun Parties to terminate
the Sun Contract, or to recover damages or otherwise avail themselves of a
legal or equitable remedy thereunder, except as described on EXHIBIT 3(e).
(f) Except for those matters disclosed on EXHIBIT 3(f)
attached hereto and made part hereof, there is no action, suit, litigation,
claim, administrative, state, federal or local, or governmental or
quasi-governmental investigation or proceeding pending or, to the best of
Sellers' knowledge, threatened against Seller relating to the Business or the
Assets. Sellers are not party to, or the subject of, any action, suit,
litigation, claim, administrative proceeding or governmental or
quasi-governmental investigation relating to the Business or the Assets; nor to
the best of the knowledge of Sellers is any such action, suit, litigation,
proceeding or investigation threatened. Sellers are not subject to any order,
judgment, decree or obligation which would limit their ability to operate the
Business in the ordinary course or enter into this Agreement and consummate the
transactions contemplated hereby.
(g) This Agreement does not violate any existing statute,
law, regulation, rule, court or administrative judgment, order or decree which
is applicable to Sellers or the Assets or the Business, or to which Sellers are
subject or by which Sellers are bound, or Sellers' Articles of Incorporation or
Bylaws. Except as set forth in EXHIBIT 3(g) attached hereto and made a part
hereof,
19
<PAGE> 24
all actions of Sellers necessary to authorize Sellers to execute, deliver and
consummate this Agreement have been duly and validly authorized and taken; no
further actions or authorizations are required; and this Agreement constitutes
the valid, legally binding obligation of Sellers and is enforceable in
accordance with its terms, except as the enforceability may be limited by
bankruptcy, insolvency, or other similar laws affecting the enforcement of
creditors' rights generally, and further except to the extent that the
enforceability of such obligations is subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). This Agreement and the transactions contemplated herein
will not constitute a violation or breach of, or be in conflict with, or
constitute a default under the terms of, or require the consent not heretofore
obtained of any person under, any contract (other than the Facility Contracts),
agreement, equipment lease or other instrument to which Sellers or are subject,
or are parties, or are bound.
(h) No Seller has received any notice of any pending or
threatened claim, investigation, or inquiry by any governmental or
quasi-governmental authority asserting that any Seller has at any time engaged
in any unlawful activity in the operation of the Business, except as noted on
EXHIBIT 3(h) hereto.
(i) (i)To the best of Sellers' knowledge, except as set
forth in EXHIBIT 3(i)(i) Sellers have complied in all material respects with,
and are currently in compliance with, all existing statutes, laws, ordinances,
rules, regulations, judgments, decrees
20
<PAGE> 25
and orders, of any court or governmental or quasi-governmental authority, to
which the Business (or Sellers with respect to the Business) is subject or by
which either is bound and non-compliance with which could adversely affect the
Business in any material respect.
(ii) No Seller has executed any contracts or
agreements with any governmental authority or person expressly providing that
the Business shall provide a certain amount of free care.
(j) Except as described on EXHIBIT 3(j) attached hereto
and made part hereof:
(i) To the actual knowledge of Sellers, no
employees of the Business are represented by any labor organization with
respect to their employment in the Business and, as of the date hereof, no
labor organization or group of such employees of the Business has made a demand
to any Seller for recognition or has filed a petition with any Seller seeking a
representation proceeding or given Sellers notice of any intention to hold an
election of a collective bargaining representative. To the actual knowledge of
Sellers, there is no strike, work stoppage, or labor disturbance pending or
threatened which involves any such employee of the Business; and
(ii) To the actual knowledge of Sellers,
there are no unfair employment or labor practice charges or employment-related
litigation or administrative proceedings which are presently pending against
any Seller in relation to employees
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of the Business.
(k) No Seller, or any officer, director or employee, or
any agent with actual authority, of any Seller has at any time made gifts,
gratuities, or payments in any other form, whether in cash, goods or services,
to any persons or entities whatsoever, in payment for, or intended to induce or
encourage, or which resulted in or may have resulted in or had the effect of
inducing, obtaining, encouraging or continuing the referral of persons or
entities as customers for the Business, or inducing, obtaining, encouraging or
extending any contractual relationship, written or oral with respect to the
Business, in violation of any law; nor has any Seller or any officer, director,
employee, member or agent thereof (i) entered into any arrangement, written or
oral, under or pursuant to which bribes, kickbacks, rebates, payoffs or other
forms of illegal payments or remuneration have been or will be made, provided
for, or offered, either directly or indirectly with respect to the Business
through agents with actual authority, brokers, distributors, dealers or other
intermediaries, or (ii) made any illegal contribution of monies, services or
property to any political party, candidate or elected official for any purpose.
(l) There is no material fact about the Assets or the
Business or Sellers as of the Closing Date known to Sellers which Sellers have
not disclosed in this Agreement or in any Exhibit hereto which materially and
adversely affects or may reasonably be expected to affect, materially and
adversely, the Assets or the
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Business as of the Closing Date. Sellers make no warranties, representations
or covenants whatsoever regarding the prospects, projections, operations or
earnings, assets, liabilities or condition (financial or otherwise) of the
Assets or the Business after the Closing Date.
Buyer and Buyer Parent acknowledge that all of the Facility Contracts,
other than the Sun Contract, can be terminated without cause on relatively
short periods of time, generally 30 to 60 days. In addition, Buyer and Buyer
Parent acknowledge that Sellers do not have certain licenses which Buyer has in
Massachusetts which will allow the Buyer to run the Business in a more
efficient manner. Sellers acknowledge that the Business has not been
profitable prior to the date hereof. Buyer and Buyer Parent acknowledge that
the success or failure of the Business on a going forward basis will depend
largely on the Buyer's handling of the Facility Contracts in the future.
Notwithstanding anything to the contrary contained herein Sellers make no
representations, warranties or covenants as to the survival of any Facility
Contract after the Closing or as to the assignability of any of the Facility
Contracts.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers, upon which
representations and warranties Sellers rely, and which representations and
warranties shall survive Closing for the period set forth in paragraph 14
hereinafter, as follows:
(a) Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of
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Delaware, and has all requisite power and authority (corporate and other) to
enter into this Agreement and to consummate the transactions contemplated
hereby.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereunder by Buyer have been duly
and validly authorized and no further actions or authorizations are required;
and this Agreement has been duly executed and delivered by Buyer and
constitutes the valid, legally binding obligation of Buyer in accordance with
its terms, except as enforceability may be limited by bankruptcy, insolvency,
or other similar laws affecting the enforcement of creditors' rights generally,
and further except to the extent that the enforceability of such obligations is
subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law);
(c) The execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement will not:
(i) Result in any breach of, or constitute a
default under, the Certificate of Incorporation or Bylaws of Buyer, or any
contract, agreement, instrument or obligation to which either Buyer or Buyer
parent is a party or to which either of them is subject or by which either of
them is bound, or;
(ii) Violate any existing statute, law,
regulation, rule, court or administrative judgment, order, or decree applicable
to Buyer or to which it is subject or by which it
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is bound.
(d) Buyer has or will have by the Closing Date all
licenses and approvals necessary to conduct the Business after the Closing
Date. Buyer represents that it has adequate financial resources available to
it from Buyer Parent to finance the working capital needs of the Business after
the Closing Date as evidenced by copies of the most recent financial statements
for Buyer Parent filed with the Securities and Exchange Commission, copies of
which are attached hereto as EXHIBIT 4(d). Buyer is not subject to any order,
judgment, decree or obligation which would limit its ability to operate the
Business in the ordinary course after the Closing or enter into this Agreement
and consummate the transactions contemplated hereby. Buyer has not received
any notice of any pending or threatened claim, investigation, or inquiry by any
governmental authority or quasi-governmental authority asserting that Buyer has
at any time engaged in any unlawful activity in the operation of its business
of providing mobile professional geripsych services to residents of skilled
nursing facilities, adult day care centers and assisted living facilities and
counseling services to such residents' families as currently billed under
Medicare Procedure Codes 90846 and 90847 (the "Buyer Geripsych Business"). To
the best of Buyer's knowledge, Buyer has complied with, and is currently in
compliance with, all statutes, laws, ordinances, rules, regulations, judgments,
decrees and orders of any court or governmental or quasi-governmental
authority, to which Buyer is subject or by which it is bound, non-compliance
with
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which could adversely affect the Business in any material respect after the
Closing.
(e) Buyer has not executed any contracts or agreement
with any governmental authority or person expressly providing that Buyer shall
provide a certain amount of free care in Massachusetts in the Buyer Geripsych
Business.
(f) EXHIBIT 4(f) attached hereto and made part hereof
contains a complete and correct list of all policies of insurance of every kind
and nature maintained by or on behalf of Buyer relating to the Buyer Geripsych
Business, including policies of life, fire, liability, title, professional
liability, theft, employee fidelity, workers' compensation and all other forms
of casualty and liability insurance, indicating the insurer, the policy or
binder number, the type of coverage, the amount of coverage, and the expiration
date, with a brief description of the coverage afforded by each policy.
(g) Except as described on EXHIBIT 4(g) attached hereto
and made part hereof:
(i) To the actual knowledge of Buyer, no
employees of the Buyer Geripsych Business are represented by any labor
organization with respect to their employment in the Buyer Geripsych Business
and, as of the date hereof, no labor organization or group of such employees of
the Buyer Geripsych Business has made a demand to any Buyer for recognition or
has filed a petition with any Buyer seeking a representation proceeding or
given Buyer notice of any intention to hold an election of a
26
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collective bargaining representative. To the actual knowledge of Buyer, there
is no strike, work stoppage, or labor disturbance pending or threatened which
involves any such employee of the Buyer Geripsych Business; and
(ii) To the actual knowledge of Buyer, there
are no unfair employment or labor practice charges or employment-related
litigation or administrative proceedings which are presently pending against
any Buyer in relation to employees of the Buyer Geripsych Business.
(h) Neither Buyer nor Buyer Parent nor any officer,
director or employee, nor agent with actual authority, of Buyer or Buyer Parent
has at any time made gifts, gratuities, or payments in any other form, whether
in cash, goods or services, to any persons or entities whatsoever, in payment
for, or intended to induce or encourage, or which resulted in or may have
resulted in or had the effect of inducing, obtaining, encouraging or continuing
the referral of persons or entities as customers for the Buyer Geripsych
Business, or inducing, obtaining, encouraging or extending any contractual
relationship, written or oral with respect to the Buyer Geripsych Business, in
violation of any law; nor has the Buyer or Buyer Parent or any officer,
director or employee, member or agent with actual authority thereof (i) entered
into any arrangement, written or oral, under or pursuant to which bribes,
kickbacks, rebates, payoffs or other forms of illegal payments or remuneration
have been or will be made, provided for, or offered, either directly or
indirectly with respect to the Buyer
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Geripsych Business through agents, brokers, distributors, dealers or other
intermediaries, or (ii) made any illegal contribution of monies, services or
property to any political party, candidate or elected official for any purpose.
5. COVENANTS OF SELLERS
From the Document Closing to the Closing, Sellers jointly and
severally agree to use commercially reasonable efforts:
(a) To conduct the Business in the ordinary course of
business and substantially in accordance with past practice, except for such
changes as are required by applicable laws and regulations, and in material
compliance with applicable law; and not to make any material change of the
Business's operational, marketing, pricing or purchasing policies.
(b) Except in the ordinary course of business, not to
sell, mortgage, pledge, encumber, assign, or dispose of any material portion of
the Assets except as permitted under the provisions of this Agreement.
(c) To maintain the books and records of the Business
generally consistent in all material respects with prior practice.
(d) Except in the ordinary course of business, not to
take any other action which would cause any of the representations and
warranties made in this Agreement by Sellers to be materially untrue or
incorrect in any adverse respect on and as of the Closing Date with the same
force and effect as if such representations and warranties had been made on and
as of the Closing Date.
(e) During the period from the date of this Agreement to
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the Closing Date, to give Buyer, its counsel, accountants, agents, employees
and other representatives ("Buyer's Representatives"), reasonable access upon
prior notice to the offices, records, files and books of account of Sellers for
the purpose of becoming familiar with all matters relating to the Business and
the Assets; provided, however, that such process shall be conducted in a manner
that does not unreasonably interfere with the normal operations, and customer
and employee relationships, of Sellers. At the request of Buyer, Sellers shall
furnish to Buyer further information reasonably relating to the matters set
forth in paragraph 3 hereof and the exhibits thereto and copies of all
documents referred to therein, as well as any and all other matters reasonably
relating to Sellers' operation of the Business. Sellers shall use their
reasonable best efforts to cause their personnel to assist Buyer in such
process. During such process, Buyer shall have the right to make copies (at
Buyer's cost) of such records, files and other materials as it may deem
advisable for its own use and the use of Buyer's Representatives, and shall
maintain the confidentiality thereof prior to and, with respect to copies not
related to the Business, subsequent to Closing. If this Agreement is not
consummated, Buyer and its representatives shall, upon request of Sellers,
return to Sellers all copies made by Buyer and its representatives of material
belonging to Sellers and shall destroy all such confidential information
contained in any document of Buyer.
(f) To maintain Sellers as corporations in good standing
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under the laws of their respective states of organization, and under the laws
of each other state in which they are qualified to do business.
(g) To use reasonable best efforts in good faith to take
or cause to be taken all action reasonably necessary or desirable under this
Agreement on Sellers' part as promptly as reasonably practicable, so as to
permit the consummation of the transactions contemplated hereby, and to
cooperate fully with the other parties hereto to that end.
(h) Unless approved in advance by Buyer, not to issue any
press release or written statement for general or public circulation relating
to the transactions contemplated hereby, except as required by law in the
reasonable opinion of Sellers' counsel. Sellers shall use good faith efforts
to obtain Buyer's approval of the text of any public report, statement or
release to be made on behalf of Sellers.
(i) In cooperation with Buyer as required, to commence
all reasonable action, provide all reasonable information, and execute all
documents reasonably required to obtain all applicable consents, approvals and
agreements of, and to give all notices to and make all filings with, any third
parties as may be necessary to consummate the transactions contemplated hereby
(provided that no consents for the transfer of the Facility Contracts shall be
required), by a date early enough to allow the transactions to be consummated
by the Document Closing and effective as of the Closing Date except as
otherwise agreed in writing by the parties hereto.
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(j) Except in the ordinary course of business, not to
terminate or waive any material rights under any Facility Contract.
6. COVENANTS OF BUYER
From the Document Closing to Closing, Buyer agrees to use
commercially reasonable efforts:
(a) Not to take any other action which would cause any of
the representations and warranties made in this Agreement by Buyer to be
materially untrue or incorrect in any respect on and as of the Closing Date
with the same force and effect as if such representations and warranties had
been made on and as of the Closing Date.
(b) To maintain Buyer as a corporation in good standing
under the laws of its state of organization, and under the laws of each other
state in which it is qualified to do business.
(c) To use reasonable best efforts in good faith to take
or cause to be taken all action reasonably necessary or desirable under this
Agreement on its part as promptly as reasonably practicable, so as to permit
the consummation of the transactions contemplated hereby, and to cooperate
fully with the other party hereto to that end.
(d) Unless approved in advance by Seller Parent, not to
issue any press release or written statement for general or public circulation
relating to the transactions contemplated hereby, except as required by law in
the reasonable opinion of Buyer's counsel. Buyer agrees to use good faith
efforts to obtain Sellers' approval of the text of any public report, statement
or release to
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be made on behalf of Buyer or Buyer Parent.
(e) In cooperation with Sellers as required, to commence
all reasonable action, provide all reasonable information, and execute all
documents reasonably required to obtain all applicable consents, approvals and
agreements of, and to give all notices and make all filings with, any third
parties as may be necessary to consummate the transactions contemplated hereby,
by a date early enough to allow the transactions to be consummated by the
Document Closing and effective as of the Closing Date except as otherwise
agreed in writing by the parties hereto.
(f) Not to take any other action which would cause any of
the representations and warranties made in this Agreement by Sellers to be
materially untrue or incorrect in any adverse respect on and as of the Closing
Date with the same force and effect as if such representations and warranties
had been made on and as of the Closing Date.
7. CONDITIONS TO OBLIGATIONS OF BUYER AND BUYER PARENT
The obligations of Buyer and Buyer Parent hereunder with
respect to the Document Closing are subject to the fulfillment, at or prior to
the Document Closing, of each of the following conditions, performance of any
or all of which may be waived in writing by Buyer Parent; together with the
delivery by Sellers of the documents required to be delivered by them pursuant
to the provisions of paragraph 10 hereinafter:
(a) The Sellers' Representations and Warranties contained
in this Agreement shall be true and correct in all
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material respects at the Document Closing as though the Sellers'
Representations and Warranties were made at such time. Sellers shall have
performed and complied with all agreements, covenants and conditions required
by this Agreement to be performed and complied with by them prior to or at the
Document Closing. Buyer's counsel shall have obtained, with respect to each
Seller, a Good Standing Certificate if such a document is issued by the
appropriate department of the applicable state of incorporation, dated as of a
day proximately before the Document Closing. Each Seller shall have delivered
a Certificate signed by its authorized officer certifying to the truth of such
Seller's representations and warranties and such Seller's performance and
compliance.
(b) There shall not have been any material adverse change
in the Business.
(c) No suit, action or other legal or administrative
proceeding shall have been instituted or threatened, or claim or demand made
against Buyer or Sellers before any court or other governmental body, seeking
to restrain or prohibit, or to obtain substantial damages with respect to, the
consummation of the transactions contemplated hereby, or which questions their
validity or legality, or which might materially and adversely affect the
Business.
(d) All proceedings to be taken and all documents to be
executed and delivered by Sellers in connection with the consummation of the
transactions contemplated hereby shall be reasonably satisfactory as to form
and substance to Buyer and its
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counsel.
(e) The Board of Directors and, if required by law or
contract, the shareholders of each Seller shall have ratified and approved the
execution and performance of this Agreement, and each Seller shall have
delivered to Buyer a true and correct copy of such resolutions, certified by
such Seller's Secretary or Assistant Secretary.
(f) All consents, approvals and waivers from governmental
authorities, if any, and other parties necessary to permit Sellers to transfer
the Assets to Buyer as contemplated hereby and to permit Buyer to operate the
Business after the Closing shall have been obtained, provided that nothing
herein shall be construed so as to require or make the Document Closing or
Closing conditional upon the Buyer having obtained the consent of the parties
to the Facility Contracts to the transactions contemplated hereby.
(g) The Boards of Directors of Buyer and Buyer Parent
shall have ratified and approved the execution and performance of this
Agreement, the Promissory Note, and the Bill of Sale and Assignment.
8. CONDITIONS TO OBLIGATIONS OF SELLERS
The obligations of Sellers hereunder with respect to the
Document Closing are subject to the fulfillment, on or prior to the Document
Closing, of each of the following conditions, performance of any or all of
which may be waived in writing by Sellers; together with the delivery by Buyer
and Buyer Parent of the
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documents required to be delivered by them pursuant to the provisions of
paragraph 10 hereinafter:
(a) The representations, warranties and covenants of
Buyer contained in this Agreement shall be true and correct in all material
respects at the Document Closing as though such representations, warranties and
covenants were made at such time. Buyer shall have performed and complied with
all agreements, covenants and conditions required by this Agreement to be
performed and complied with by Buyer prior to or at the Document Closing.
Buyer shall have delivered a Good Standing Certificate issued by the
appropriate department of its state of incorporation, dated as of a day
proximately before the Document Closing, as well as a certificate signed by its
President or Vice President certifying to the truth of such representations and
warranties and such performance and compliance.
(b) No suit, action or other legal or administrative
proceeding shall have been instituted or threatened, or claim or demand made
against Buyer or Sellers before any court or other governmental body, seeking
to restrain or prohibit, or to obtain substantial damages with respect to, the
consummation of the transactions contemplated hereby, or which questions their
validity or legality.
(c) All proceedings to be taken and all documents to be
executed and delivered by Buyer in connection with the consummation of the
transactions contemplated hereby shall be reasonably satisfactory as to form
and substance to Sellers and their counsel.
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(d) The Board of Directors and shareholder of Buyer and
the Board of Directors of Buyer Parent shall have ratified and approved the
execution and performance of this Agreement, and Buyer and shall have delivered
to Sellers a true and correct copy of each such resolution, certified by the
Secretary or Assistant Secretary of the applicable party.
(e) All consents, approvals and waivers from governmental
authorities, if any, and other parties necessary to permit Sellers to transfer
the Assets to Buyer as contemplated hereby shall have been obtained, provided
that nothing herein shall be construed so as to require or make the Document
Closing or Closing conditional upon the Buyer having obtained the consent of
the parties to the Facility Contracts to the transactions contemplated hereby.
(f) The Board of Directors and Shareholder of the Seller and
the Board of Directors of Seller Parent shall have ratified and approved the
execution and performance of this Agreement.
9. PROVISIONS FOR INDEMNIFICATION
(a) Sellers hereby jointly and severally agree to
indemnify Buyer and Buyer Parent and save and hold them harmless from, against,
for and in respect of any and all damages, losses, obligations, liabilities,
costs and expenses incident to any suit, action, investigation, claim or
proceeding, including, without limitation, interest, penalties, reasonable
attorneys' fees and reasonable amounts paid in defense and/or settlement of any
of the foregoing (collectively, "Buyers' Damages"), suffered, sustained,
36
<PAGE> 41
incurred or required to be paid by Buyer or Buyer Parent by reason of, or in
connection with, or arising out of:
(i) Any breach of any warranty or
representation made by Sellers in this Agreement or any Exhibit hereto or in
any certificate or document delivered pursuant to this Agreement;
(ii) Any loss or damage resulting to Buyer or
Buyer Parent by reason of any claim, debt, liability or obligation of Sellers,
except for liabilities or obligations of Sellers expressly assumed by Buyer
pursuant to the provisions of subparagraph 1(c) of this Agreement; and
(iii) All liabilities and obligations,
fixed or contingent, known or unknown, actual or alleged, asserted against,
imposed upon or incurred by Buyer or Buyer Parent as a proximate result of or
in connection with any act, failure to act, misconduct, unlawful act,
dereliction of duty or negligence on the part of any Seller relating to such
Seller's ownership and/or operation of the Business and/or Assets on or prior
to the Closing Date.
Without restricting the generality of the foregoing, Sellers
hereby agree to indemnify Buyer and Buyer Parent and save and hold them
harmless from, against, for and in respect of any and all Buyers' Damages
arising if any disallowance or demand for refund by a third party payor or
patient with respect to a billing for services rendered prior to the Closing
results in a setoff by such payor or patient against a billing for services
rendered by Buyer after the Closing.
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(b) Buyer hereby agrees to indemnify Sellers and save and
hold them harmless from, against, for and in respect of any and all damages,
losses, obligations, liabilities, costs and expenses incident to any suit,
action, investigation, claim or proceeding, including, without limitation,
interest, penalties, reasonable attorneys' fees and reasonable amounts paid in
defense and/or settlement of any of the foregoing (collectively, "Sellers'
Damages") suffered, sustained, incurred or required to be paid by Sellers by
reason of, or in connection with, or arising out of:
(i) Any breach of any warranty or
representation made by Buyer in this Agreement or any Exhibit hereto or in any
certificate or document delivered pursuant to this Agreement;
(ii) Any loss or damages resulting to Sellers
by reason of any claim, debt, liability or obligation of Buyer or Buyer Parent
for the liabilities and obligations of Sellers expressly assumed by Buyer
pursuant to the provisions of subparagraph 1(c) of this Agreement;
(iii) All liabilities and obligations,
fixed or contingent, known or unknown, actual or alleged, asserted against,
imposed upon or incurred by Sellers as a proximate result of or in connection
with any act, failure to act, misconduct, unlawful act, dereliction of duty or
negligence on the part of Buyer or Buyer Parent relating to the Buyer's
ownership and/or operation of the Business and the Assets on and after the
Closing Date; and
(iv) All liabilities and obligations
resulting to Sellers as a result of Buyer's use of the name "MHM Bay Colony".
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(c) Any party, whether Buyer or Seller, claiming a right
to indemnification under the provisions of this paragraph 9 (hereinafter, the
"Indemnitee") shall give written notice as promptly as practicable (and in any
event, within ten (10) days after receipt of notice or service of any citation,
Summons, Complaint or lawsuit) to the other parties of each claim for
indemnification hereunder, specifying the amount and nature of the claim, and
of any matter which, in the opinion of the claiming party, is likely to give
rise to an indemnification claim. Notwithstanding the foregoing, the failure
to give timely notice shall not affect rights to indemnification hereunder,
except to the extent that the party or parties against whom such indemnity is
sought to be recovered (hereinafter, the "Indemnitor") shall demonstrate damage
caused by such failure. Indemnitor shall have the right to undertake the
defense of any such matter at Indemnitor's sole cost and expense, and through
legal counsel reasonably acceptable to Indemnitee, provided that Indemnitor
proceeds in good faith, expeditiously and diligently. No final determination
shall be made pursuant to subparagraph 9(d) below while such defense is still
being made until the earlier of (x) the resolution of such claim by Indemnitor
with the claimant, or (y) the termination of the defense by Indemnitor against
such claim or the failure of Indemnitor to prosecute such defense in good faith
and in an expeditious and diligent manner. Indemnitee, at its option and at its
sole cost and expense, shall have the right to participate in any defense
undertaken by Indemnitor, with legal
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<PAGE> 44
counsel of its own selection. No settlement or compromise may be made by
Indemnitor without the prior written consent of Indemnitee unless (x) prior to
such settlement or compromise Indemnitor acknowledges in writing Indemnitor's
obligation to pay in full the amount of the settlement or compromise and all
associated expenses; (y) Indemnitee is furnished with security reasonably
satisfactory to Indemnitee that Indemnitor will in fact pay such amount and
expenses; and (z) if any part of the settlement or compromise establishes an
obligation other than payment and the making of customary releases and filings,
the Indemnitee is not required to fulfill any such obligation.
(d) Indemnitor shall pay to Indemnitee the amount of
established claims for indemnification within twenty (20) days after the
establishment thereof by final judgment thereon after all appeals have been
taken or applicable appeal periods have expired (the "Due Date") in cash or by
certified check. Any amounts not paid by Indemnitor on or before the Due Date
shall bear interest from the Due Date thereof (if and when Indemnitee pays
same) until the date paid at a rate equal to the prime rate of interest as
published in the Wall Street Journal under "Money Rates" from time to time or,
if such a rate is no longer published by the Wall Street Journal, the rate most
comparable to the prime rate.
(e) The indemnifications provided in this paragraph 9
shall survive Closing, provided that any claim for indemnification hereunder
shall be made no later than two (2) years after Closing.
(f) Notwithstanding anything to the contrary contained
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<PAGE> 45
herein, no indemnity shall be payable by Buyer or Sellers hereunder with
respect to claims until the amount of all claims of the Indemnitee pursuant to
this paragraph 9 shall exceed $25,000.00 in the aggregate and any indemnity
payable hereunder with respect to such claims shall be limited to the excess of
the amount of all claims over $25,000, provided that such indemnity shall be
payable only in respect of claims of $5,000 or more. Notwithstanding anything
to the contrary contained herein, the aggregate maximum indemnity obligation
payable by Sellers shall in no event exceed the aggregate amounts paid to
Sellers by the Buyer and Buyer Parent under this Agreement; provided, however,
that in the event that Buyer does not use "Bay Colony" in its name, and only in
such event, the foregoing maximum shall be increased by $300,000 only with
respect to any indemnity obligation payable by Sellers due to a breach of
paragraphs 3(f) (but only with respect to a claim based on an action, suit,
litigation, claim, or investigation by a governmental entity or an order,
judgment, decree, or obligation obtained by a governmental entity), 3(h), and
3(k) asserted prior to the first anniversary of the Closing Date.
10. CLOSING
The Document Closing shall take place on November 22, 1996
(the "Document Closing") and at such time and according to such modalities as
shall be agreed upon in writing by Counsel for Seller and Buyer, said time
being of the essence. All proceedings to be taken and all documents to be
executed and delivered by all parties at the Document Closing shall be deemed
to have been taken
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and executed simultaneously, and no proceedings shall be deemed taken nor any
documents executed or delivered, until all have been taken, executed and
delivered. At the Document Closing:
(a) Sellers shall deliver or cause to be delivered to
Buyer:
(i) A Bill of Sale and Assignment,
substantially in the form attached hereto as EXHIBIT 10(a)(i), transferring to
Buyer good and marketable title to the Assets, to be effective as of December
1, 1996 (the "Closing Date" or "Closing");
(ii) the certificates of each Seller
described in subparagraph 7(a);
(iii) the Secretaries' certifications of
corporate resolutions described in subparagraph 7(e); and
(iv) the Opinion of Counsel described in
paragraph 11.
(b) Buyer shall deliver to Sellers;
(i) One Hundred and Fifty Thousand Dollars
($150,000.00), by wire transfer of immediately available funds;
(ii) the Promissory Note to be issued to
Sellers pursuant to paragraph 2(a)(ii) hereof;
(iii) the certificate of Good Standing of
Buyer described in subparagraph 8(a);
(iv) the certificate of Buyer described in
subparagraph 8(a);
(v) the Secretarys' certifications of
corporate resolutions described in subparagraph 8(d); and
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(vi) the Opinion of Counsel described in
paragraph 12.
11. OPINION OF COUNSEL FOR SELLERS
Sellers shall deliver to Buyer and Buyer Parent at the
Document Closing an opinion of Seller Parent's General Counsel, in form and
substance reasonably acceptable to Buyer's counsel, dated as of the date of the
Document Closing, addressed to Buyer and Buyer Parent, to the effect that:
(a) Each Seller is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation,
with full corporate power to carry on its business as it is being conducted.
(b) The execution, delivery and performance of this
Agreement and all documents and agreements required to be executed by Sellers
by this Agreement have been duly authorized and approved by all necessary
corporate and other required action, and neither the execution, delivery or
performance of, or consummation of the transactions contemplated by, this
Agreement by Sellers require any further actions or authorizations. This
Agreement and all such documents and agreements delivered pursuant to this
Agreement have been duly executed and delivered by Sellers, require no further
actions or authorizations, and constitute their respective legal, valid and
binding obligations, enforceable in accordance with their respective terms,
except as the enforceability of all such documents and agreements may be
limited by bankruptcy, insolvency, or other similar laws affecting the
enforcement of creditors'
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<PAGE> 48
rights generally, and further except to the extent that the enforceability of
such obligations is subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
12. OPINION OF COUNSEL FOR BUYER
Buyer shall deliver to Sellers at the Document Closing an
opinion of Simon, Turnbull & Martin, Chartered, counsel for Buyer and Buyer
Parent, in form and substance reasonably acceptable to Seller's counsel, dated
as of the date of the Document Closing, addressed to Sellers, to the effect
that:
(a) Each of Buyer and Buyer Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, with full corporate power to carry on its business as it is being
conducted.
(b) The execution, delivery and performance of this
Agreement and all documents and agreements required to be executed by Buyer and
Buyer Parent by this Agreement have been duly authorized and approved by all
necessary corporate and other required action, and neither the execution,
delivery or performance of, or consummation of the transactions contemplated
by, this Agreement by Buyer and Buyer Parent require any further actions or
authorizations. This Agreement and all such documents and agreements delivered
pursuant to this Agreement have been duly executed and delivered by Buyer and
Buyer Parent, require no further actions or authorizations, and constitute
their respective legal, valid and binding obligations, enforceable in
accordance
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<PAGE> 49
with their respective terms, except as the enforceability of all such documents
and agreements may be limited by bankruptcy, insolvency, or other similar laws
affecting the enforcement of creditors' rights generally, and further except to
the extent that the enforceability of such obligations is subject to general
principles of equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law).
13. RESTRICTIVE COVENANT
(a) The parties understand and agree that it is the
intention of Buyer to expand markets and marketing activities, utilizing the
Assets, beyond those engaged in by Sellers; and further that such operations
are intended in the future to be throughout the Commonwealth of Massachusetts.
Therefore, Sellers agree that for a period of three (3) years from and after
Closing hereunder, no Sellers will, directly or indirectly, within the
Commonwealth of Massachusetts, carry on or engage in, whether by owning an
interest in, leasing, managing, operating, providing services to, or otherwise,
any business which shall provide mobile professional geripsych services to
residents of or geripsych management services to, skilled nursing facilities,
adult day care centers, and assisted living facilities or counseling services
to, or management of counseling services for, residents' families in any of the
foregoing facilities (which counseling services are currently billed under
Medicare Procedure Codes 90846 and 90847), or any similar business with respect
to residents of such facilities.
45
<PAGE> 50
(b) Sellers acknowledge that the restrictions contained
in subparagraph 13(a), in view of the nature of the business activities in
which Buyer intends to utilize the Assets, are reasonable and necessary in
order to protect the legitimate interests of Buyer, and that any violation
thereof would result in irreparable injuries to Buyer. Sellers therefore
acknowledges that in the event of a breach or threatened breach of the
provisions of subparagraph 13(a) by Seller, Buyer shall be entitled to obtain
from any court of competent jurisdiction, preliminary and permanent injunctive
relief restraining Sellers from any violation of the foregoing, provided that
Buyer shall not be entitled to an injunction contrary to the public health,
safety or welfare. If the period of time or geographic area specified should
be deemed unreasonable in any proceeding, then the period of time or geographic
area will be reduced by the elimination or reduction of a portion thereof so
that such restrictions may be enforced for such time and area as is adjudged to
be reasonable.
(c) Nothing herein shall be construed as prohibiting
Buyer from pursuing any other remedies available to it for such breach or
threatened breach, including recovery of damages and an equitable accounting of
all earnings, profits and other benefits arising from such violation, from
Seller.
14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The parties hereto agree that the representations and
warranties contained in this Agreement and the Exhibits hereto, and in each
certificate, document or instrument delivered in connection
46
<PAGE> 51
herewith, shall survive the execution and delivery of this Agreement and the
Closing hereunder, regardless of any investigation made by any of the parties
hereto; and shall continue to exist as to each such representation and warranty
for a period of two (2) years from and after Closing.
15. FURTHER ASSURANCES
Subsequent to the Document Closing and Closing, Seller and
Buyer shall each, at the reasonable request of the other, furnish, execute and
deliver such documents, instruments, certificates, notices and other and
further assurances as counsel for the requesting party shall reasonably require
as necessary or desirable to effect complete consummation of this Agreement and
to carry out the transactions contemplated hereunder, or in connection with the
preparation and filing of reports (including tax returns and reviews thereof)
required or requested by governmental agencies, stock exchanges or other
regulatory bodies. Without restricting the generality of the foregoing, Buyer
shall cooperate with and assist Sellers in the collection of accounts
receivable of the Business and the Facility Contracts with respect to periods
prior to the Closing by having its employees respond to questions and requests
regarding such accounts receivable (for no consideration) to the extent such
cooperation and assistance becomes necessary as a result of the transactions
contemplated hereby and Sellers make available to Buyer such patient records as
Buyer may reasonably request in connection with post-closing provision of
services to patients. If Buyer or either Seller
47
<PAGE> 52
receives funds to which the other party is entitled, such party shall promptly
transfer such funds to such other party.
16. TERMINATION
This Agreement may be terminated by written notice from either
Buyer or Sellers to the other party if the Document Closing has not occurred on
or before November 22, 1996, without further liability of either party to the
other, except with respect to the confidentiality of materials delivered by
each party to the other.
17. NOTICES
(a) Each notice, demand, request, consent, report,
approval or communication ("Notice") which is or may be required to be given by
any party to any other party in connection with this Agreement and the
transactions contemplated hereby, shall be in writing, and given by telecopy,
personal delivery, recognized overnight courier service, receipted delivery
service, or by certified mail, return receipt requested, prepaid and properly
addressed to the party to be served as shown in subparagraph 17(b) below.
(b) Notices shall be effective on the date sent via
telecopy, the date delivered personally or by receipted delivery service or by
recognized overnight courier service, or three (3) days after the date mailed:
If to Sellers: c/o Mr. William J. Hartigan
President
Liberty Management Group, Inc.
21 Custom House Street
Suite 500
Boston, MA 02110
Fax No. (617) 439-8829
48
<PAGE> 53
In each case,
with copies to: Liberty Management Group, Inc.
21 Custom House Street
Suite 500
Boston, MA 02110
Fax No. (617) 439-8829
Attn: General Counsel
If to Buyer
or Buyer Parent: Mr. Michael S. Pinkert
President
MHM Services, Inc.
8000 Towers Crescent Drive
Suite 810
Vienna, VA 22182
Fax No. (703) 749-4604
In each case,
with copies to: Lowell D. Turnbull, Esq.
Simon, Turnbull & Martin,
Chartered
1299 Pennsylvania Avenue, N.W.
Suite 1050 East
Washington, D.C. 20004-2400
Fax No. (202) 508-9809
(c) Each party may designate by Notice to the others in
writing, given in the foregoing manner, a new address to which any Notice may
thereafter be so given, served or sent.
18. BROKER
No broker's or finder's fee, expense, commission or other form
of compensation (collectively, "Fee") is due or payable from or by Buyer or
Sellers; nor has any such Fee been earned by any third party on behalf of any
of the foregoing in connection with the negotiation and execution of this
Agreement, or in any other manner affecting or involving the Business, or the
consummation of any transaction contemplated hereby, or in connection with any
proposed sale of the Business or any of the Assets, or any restructuring or
merger or similar transaction involving Sellers.
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<PAGE> 54
Sellers agree to indemnify and save Buyer harmless from and against any and all
claims or demands for Fee by or from any person or persons whatsoever, based on
any arrangement made by Sellers. Buyer agrees to indemnify and save Sellers
harmless from and against any and all claims or demands for Fee by or from any
person or persons whatsoever, based on any arrangement made by Buyer.
19. EXPENSES
Whether or not the transactions contemplated hereby are
consummated, Sellers shall be solely responsible for the payment of, and shall
pay, the fees, expenses, commissions or other forms of compensation
(collectively, "Expenses") due or payable to, or earned by, attorneys,
accountants, bankers investment bankers, consultants, analysts and advisors
(collectively, "Advisors") selected or retained by Sellers, and Buyer shall be
solely responsible for the payment of, and shall pay, the Expenses of Advisors
selected or retained by Buyer, in connection with the negotiation,
authorization, preparation, execution and performance of this Agreement, and
the consummation of the transactions contemplated hereby.
20. NO SOLICITATION
Unless and until this Agreement shall have been terminated
pursuant to the provisions of paragraph 16 hereof, Sellers shall not, and shall
use their best efforts to cause each of Seller's officers, directors and
affiliates not to:
(a) Solicit or initiate, directly or indirectly,
discussions or negotiations with any corporation, partnership,
50
<PAGE> 55
person or other entity or group concerning any sale of Assets or similar
transaction involving the Business (a "Takeover Proposal"); or
(b) Except as required by law, knowingly disclose,
directly or indirectly, any information not customarily disclosed to any person
(other than Buyer and its Advisors) concerning the business and properties of
Seller, knowingly afford to any other Person access to the properties, books or
records of Seller regarding the Business with respect to a possible Takeover
Proposal or otherwise knowingly assist or encourage any person (other than
Buyer, and its Advisors) in connection with a Takeover Proposal.
21. ENTIRE AGREEMENT
This Agreement, together with the Exhibits hereto, constitutes
and sets forth the entire agreement and understanding of the parties pertaining
to the subject matter hereof, and there are no other prior or contemporaneous
written or oral agreements, understandings, undertakings, negotiations,
promises, discussions, warranties or covenants not specifically referred to or
contained herein or attached hereto. No supplement, modification, termination
in whole or in part, or waiver of this Agreement shall be binding unless
executed in writing by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed, or shall constitute, a waiver of
any other provision hereof (whether or not similar), nor shall any such waiver
constitute a continuing waiver unless otherwise expressly provided.
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<PAGE> 56
22. EMPLOYEES
Buyer agrees that, upon Closing, Buyer or, at the option of
Buyer, its employee leasing service, Administaff Companies, Inc.
("Administaff") will employ those employees of the Business listed on EXHIBIT
22 on an at-will basis or upon such other basis as specifically negotiated upon
by the employee and Buyer. Sellers agree that on or prior to the Closing Date,
Larry Steinhauser, Ph.D. may enter into an employment contract with Buyer or,
at the option of Buyer, Administaff, the terms of which shall be mutually
satisfactory to Buyer and Dr. Steinhauser, with annual compensation at least
equal to his current compensation and otherwise consistent with his employment
obligations with Seller Sub. All compensation payable by Buyer to Dr.
Steinhauser shall be considered a part of the expense in Aggregate Regional
Overhead Costs. Buyer agrees that, for a period of 90 days after the Closing
Date, Doctor Steinhauser shall be available to consult with the Sellers on the
closing, wind down or termination and transition of the Sellers' Connecticut
Business. Such services shall be provided to Sellers at no cost to Sellers
except for any out-of-pocket costs reasonably incurred by Buyer or Doctor
Steinhauser in connection with the rendering of such services by Doctor
Steinhauser (which will be promptly paid by Sellers to Buyer upon presentation
by Buyer of reasonable documentation of the incurrence of such costs) and
Doctor Steinhauser shall not be obligated to spend more than two days a week
rendering such services during such period.
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<PAGE> 57
23. BINDING EFFECT
Subject to the provisions of paragraph 24 hereinafter, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto, their and each of their respective heirs, executors, administrators,
successors and permitted assigns, and no other person shall have or derive any
right, benefit or obligation hereunder.
24. ASSIGNMENT
Neither this Agreement nor any of the rights or obligations
hereunder may be assigned by either party without the prior written consent of
the other party; except that Buyer may, without such consent, assign any or all
such rights and such obligations to a wholly-owned subsidiary of Buyer, which
shall assume all obligations and liabilities hereunder so assigned, but without
releasing Buyer or Buyer Parent with respect to any such obligations or
liabilities except with the prior written consent of Sellers in their sole
discretion. Notwithstanding the foregoing, Seller Sub may on or after the
Document Closing Date assign any or all of its rights hereunder to Seller
Parent and any of the Sellers may negotiate the Promissory Note without the
consent of the Buyer.
25. HEADINGS
The headings or titles of the various paragraphs of this
Agreement are inserted merely for the purpose of convenience and do not
expressly or by implication or intention, limit, define, extend or affect the
meaning or interpretation of this Agreement or the specific terms or text of
the paragraph so designated.
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<PAGE> 58
26. LAW GOVERNING
This Agreement shall be governed in all respects, whether as
to validity, construction, interpretation, capacity, performance or otherwise,
by the laws of the Commonwealth of Massachusetts. If any provision of this
Agreement shall be held invalid by a court with jurisdiction over the parties
to this Agreement, then and in that event, such provision shall be deleted from
the Agreement, which shall then be construed to give effect to the remaining
provisions thereof. Except as aforesaid, if any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then and in that event, to the maximum extent permitted by law, such
invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement or any other such instrument. Nothing herein
shall be construed so as to modify or diminish Buyer's offset rights as
specifically refered to in paragraph 2(a)(ii).
27. COUNTERPARTS
This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which taken together
shall constitute one and the same instrument.
28. CONSENTED ASSIGNMENT
Anything contained herein or therein to the contrary
notwithstanding, as between the Buyer and third parties, this Agreement and the
assignments to be granted by Sellers hereunder shall not constitute an
assignment or an agreement to assign any
54
<PAGE> 59
claim, right or contract if an attempted assignment thereof without the consent
of another party thereto would constitute a breach thereof or in any material
way affect the rights of Sellers thereunder, unless such consent is obtained.
If such consent is not obtained, or if an attempted assignment would be
ineffective or would materially affect Sellers' rights thereunder so that Buyer
would not in fact receive all such rights, Sellers shall cooperate in any
reasonable arrangement designed to provide the Buyer the benefits under any
such claim, right or contract, including, without limitation, enforcement of
any and all rights of Sellers against the other party or parties thereto
arising out of the breach or cancellation by such other parties or otherwise.
29. GUARANTY OF BUYER PARENT
For value received and hereby acknowledged, Buyer Parent
hereby unconditionally and absolutely guaranties the full and prompt payment
and performance, as and when due, of all indebtedness, obligations, agreements
and liabilities of every kind, nature and description of Buyer under this
Agreement and the Promissory Note (collectively, the "Obligations"). This
guaranty is a continuing guaranty of the full and punctual payment and
performance of the Obligations and not merely of their collectibility. Buyer
Parent hereby waives notice of acceptance hereof and reliance hereon, notice of
any action taken or omitted by Seller Sub or Seller Parent in reliance hereon,
suretyship defenses, presentment, demand, protest, notice of nonpayment, notice
of dishonor and notice of any default by the Buyer except as
55
<PAGE> 60
specifically set forth herein.
30. GUARANTY OF SELLER PARENT
For value received and hereby acknowledged, Seller Parent
hereby unconditionally and absolutely guaranties the full and prompt payment
and performance, as and when due, of all indebtedness, obligations, agreements
and liabilities of every kind, nature and description of Seller Sub under this
Agreement (collectively, the "Obligations"). This guaranty is a continuing
guaranty of the full and punctual payment and performance of the Obligations
and not merely of their collectibility. Seller Parent hereby waives notice of
acceptance hereof and reliance hereon, notice of any action taken or omitted by
Buyer or Buyer Parent in reliance hereon, suretyship defenses, presentment,
demand, protest, notice of nonpayment, notice of dishonor and notice of any
default by the Buyer except as specifically set forth herein.
31. CONSENT TO USE OF NAME. Without making any representation or
warranty with respect to the rights of any third party to object thereto or
that such name is exclusive or protected Sellers consent to Buyer doing
business in Massachusetts under the name "MHM Bay Colony" for no more than one
year after the Closing.
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<PAGE> 61
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective duly authorized officers and have affixed their
respective corporate seals, all on the day and year first above written.
Buyer:
-----
MHM Extended Care Services, Inc.
By: /s/ MICHAEL S. PINKERT
-------------------------------
Michael S. Pinkert
President and Chief Executive
Officer
Buyer Parent:
------------
MHM Services, Inc.
By: /s/ MICHAEL S. PINKERT
-------------------------------
Michael S. Pinkert
President and Chief Executive
Officer
Sellers:
-------
Liberty Management Group, Inc.
By: /s/ ROBERT D. EULA
--------------------------------
V.P.
Liberty Bay Colony Health Services, Inc.
By: /s/ ROBERT D. EULA
--------------------------------
V.P.
57
<PAGE> 62
PROMISSORY NOTE
$150,000.00 December 1, 1996
FOR VALUE RECEIVED, the undersigned MHM Extended Care Services, Inc.,
a Delaware corporation (the "Company"), promises to pay to the order of Liberty
Management Group, Inc., a Massachusetts corporation, and Liberty Bay Colony
Health Services, Inc., a Massachusetts corporation, jointly, (collectively, the
"Payees"), the principal sum of ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000.00)
in one (1) installment on December 1, 1999, together with interest on the unpaid
balance of this Note from time to time outstanding, at the rate hereinafter set
forth, from the date hereof until payment in full of all principal and interest
hereunder. This Note may be prepaid in whole or in part at any time and from
time to time, without premium or penalty.
1. Interest. Interest on the unpaid balance hereof shall be payable
quarterly in arrears on the 1st day of each March, June, September, and
December, commencing March 1, 1997 and shall be at the rate of nine percent (9%)
per annum (computed on the basis of a year of three hundred sixty (360) days for
the actual number of days elapsed). Any payment not made when due and the
entire unpaid balance after default or maturity shall accrue interest at the
rate of eighteen percent (18%) per annum, or, if less, the highest rate
allowable by applicable law.
2. Event of Default. Upon the occurrence of any of the following
events (each hereinafter called an "Event of Default"):
(a) The Company shall fail to pay any installment of principal
or interest hereunder when due and shall have failed to cure such nonpayment
within five business days after receiving notice from Payees of such failure to
pay; provided, however, that after Payees send such a notice as a result of the
failure of the Company to pay any installment when due, any failure by the
Company to pay when due any other installment due during the twelve months after
the date of the first such notice shall constitute an Event of Default.
(b) The Company shall fail to cure any breach of this Note
(other than a failure to pay any installment of principal or interest) within
thirty (30) days after receiving notice from Payees of such breach.
(c) The Company shall fail to pay promptly when due any
indemnity obligation under that certain Asset Purchase Agreement of even date by
and among the Company, MHM Services, Inc. ("MHM"), and Payees.
<PAGE> 63
(d) The dissolution, termination of existence, insolvency,
business failure, cessation, suspension or termination of the active conduct of
the normal business activities of the Company or MHM; the service upon either
Payee of a writ or other court document in which such Payee is named as trustee
of the Company or MHM, which attachment remains undischarged for a period of 45
days; the calling of a meeting of creditors, appointment of a committee of
creditors or liquidating agents, or offering of a composition or extension to
creditors by, for or of the Company or MHM; the Company or MHM shall make any
assignment for the benefit of creditors, or enter into any composition, trust
mortgage or similar arrangement with its respective creditors; the Company or
MHM shall cease, be unable or admit in writing its inability to pay its
respective debts as they mature; or the commencement by or against the Company
or MHM of a case under the federal bankruptcy laws, as now or hereafter
constituted, or under any other applicable federal or state bankruptcy,
insolvency or other laws relating to relief for debtors, or the readjustment,
reorganization, composition or extension of debt; or
(e) The entry of a decree or order against, or consent by the
Company or MHM to the appointment of a receiver, liquidator, assignee,
custodian, trustee or sequestrator (or similar official) of the Company or MHM
or for any part of the property of the Company or MHM or the winding up or
liquidation of the affairs of either;
then, and in any such event, and at any time thereafter if any Event of Default
shall then be continuing, the principal of and accrued interest on this Note
shall, at Payees' option, forthwith become, due and payable without presentment,
demand, protest or notice of any kind, all of which are hereby waived by the
Company; provided that, if an Event of Default specified in Section 2(d) shall
occur, the principal of, and accrued interest on, this Note shall automatically
and immediately become due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby waived by the Company.
3. Waivers. The Company hereby (a) waives all presentment, demand
for performance, notice of nonperformance (except to the extent expressly
required by the provisions hereof), protest, notice of protest and notice of
dishonor, and all other demands and notices in connection with the delivery,
acceptance, performance, default or enforcement of this Note, (b) assents to any
extension or postponement of the time of payment or any other indulgence and/or
to the addition or release or any party or person primarily or secondarily
liable, (c) waives any requirement of diligence or promptness on the part of the
Payees in the enforcement of their rights under this Note, (d) waives all
notices of every kind which may be required to be given by any statute or rule
of law, (e) waived any valuation, stay, appraisement or redemption laws and (f)
waives any defense of any kind (other than payment) including
2
<PAGE> 64
all suretyship defenses which it may now or hereafter have with respect to its
liability under this Note.
4. Course of Dealing. No course of dealing between the parties
shall operate as a waiver of any of the parties' respective rights under this
Note. No delay or omission on the part of Payees in exercising any right under
this Note shall operate as a waiver of such right or any other right hereunder.
No amendment or waiver hereof shall be binding unless it is in writing and
signed by the parties.
5. Payments; Notices. All payments to the holder hereof shall be
made at the address set forth below or at such other address as the holder
hereof shall specify in writing to the company. Any notice or demand in
connection with this Note shall be deemed to be delivered if in writing
addressed as provided below (or at such other address as the addressee shall
have specified by notice actually received by the addressor) and if either (a)
actually delivered at such address; (b) telecopied to the party's telecopy
number set forth below or (c) in the case of a letter, (i) three business days
shall have elapsed after the same shall have been deposited in the United States
mail, postage prepaid and registered or certified or (ii) one day has elapsed
after the same shall have been delivered to Federal Express or other recognized
overnight courier for overnight delivery.
If to Payees, to them at the following address:
Liberty Management Group, Inc.
21 Custom House Street, Suite 500
Boston, MA 02110
Attention: President
Telecopier Number: (617) 439-8829
If to the Company, to it at the following address:
MHM Extended Care Services, Inc.
8000 Towers Crescent Drive, Suite 810
Vienna, VA 22182
Attention: President
Telecopier Number: (703) 749-4604
With a copy to:
Lowell D. Turnbull, Esq.
Simon, Turnbull & Martin, Chartered
1299 Pennsylvania Avenue, N.W.
Suite 1050 East
Washington, D.C. 20004-2400
Telecopier Number: (202) 508-9809
3
<PAGE> 65
6. Costs. The Company hereby agrees to pay all reasonable expenses
of the holder hereof (including reasonable attorney fees and expenses) in
connection with the enforcement and collection of this Note.
7. Assignability; Governing Law. This Note shall bind and inure to
the benefit of the Company and Payees and their respective successors and
assigns, including as such successors and assigns of Payees any holder of this
Note, provided that the obligations of the Company hereunder may not be assigned
except with the prior written consent of the holder hereof. This Note shall be
governed by and construed in accordance with the laws (other than the conflict
of laws rules) of the Commonwealth of Massachusetts. The word "holder" as used
in this Note shall refer to Payees and all assignees, endorsees or transferees
of payees.
8. Limited Offset and Defenses. This Note is an absolute,
unconditional and fully negotiable promissory note without offset or defense of
any kind or nature except for an offset of $75,000 if the Sun Contract (as
defined below) was invalid in its entirety due to an act or omission of any of
the Payees prior to the date hereof other than the assignment of the Sun
Contract to, or purchase of the Sun Contract by, the Company. As used herein,
the "Sun Contract" shall mean the Geripsych Consulting Agreement dated as of
October 1, 1995 between the Payees, and Sun Healthcare Group, Inc. and Sunrise
Healthcare Corporation.
IN WITNESS WHEREOF, the undersigned Company has caused this Note
to be executed as an agreement under seal by its duly authorized officer as of
the date first above written.
WITNESS: MHM EXTENDED CARE SERVICES, INC.
By:
- ------------------------------------ ------------------------------------
Name:
Title:
4
<PAGE> 66
GUARANTY BY MHM SERVICES. INC.
For value received and hereby acknowledged, MHM Services, Inc. hereby
unconditionally and absolutely guaranties the full and prompt payment and
performance, as and when due, of all indebtedness, obligations, agreements and
liabilities of every kind, nature and description of the Company under this Note
(the "Obligations"). This guaranty is a continuing guaranty of the full and
punctual payment and performance of the Obligations and not merely of their
collectibility.
MHM Services, Inc. hereby waives notice of acceptance hereof and
reliance hereon, notice of any action taken or omitted by the Payees in reliance
hereon, suretyship defenses, presentment, demand, protest, notice of nonpayment,
notice of dishonor, protest of any dishonor, notice of protest, and giving
notice of any default by the Company except as specifically set forth herein.
MHM SERVICES, INC.
By:
--------------------------------------
Its:
5
<PAGE> 1
THIS WARRANT AND THE SHARES OF COMMON STOCK (OR OTHER SECURITIES) ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
PURCHASE WARRANT
ISSUED BY
MHM EXTENDED CARE SERVICES, INC.
TO
MURRAY I. FIRESTONE, Ph.D.
DATED: JULY 7, 1995
<PAGE> 2
THIS WARRANT AND THE SHARES OF COMMON STOCK (OR OTHER SECURITIES) ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
PURCHASE WARRANT
FOR THE PURCHASE OF 9,000* SHARES OF COMMON STOCK OF
MHM EXTENDED CARE SERVICES, INC.,
EXPIRES JULY 7, 1998
W I T N E S S E T H
WHEREAS, MHM EXTENDED CARE SERVICES, INC., a corporation organized and
existing pursuant to the laws of the State of Delaware, with its principal
offices located at 990 Hammond Drive, Suite 310, Atlanta, GA 30328 ("Issuer")
has entered into an employment agreement dated July 7, 1995 (the "Employment
Agreement") with Murray I. Firestone ("Holder"); and
WHEREAS, Issuer and Holder have agreed that in connection with the
Employment Agreement, a portion of the compensation of the Holder for his
services under the Employment Agreement will be in the form of a Warrant, which
Warrant will grant the right to Holder to purchase and acquire an equity
interest in Issuer in the form of shares of common stock, par value $.01 per
share, ("Common Stock") of the Issuer, on the terms and conditions hereinafter
set forth; and
WHEREAS, the aggregate number of shares of Common Stock the Issuer is
presently authorized to issue is 1,000,000, and there are presently 100,000
shares outstanding; and
WHEREAS, Issuer is duly authorized to issue to Holder this Warrant,
which Warrant shall, upon the occurrence of a Trigger Event (as hereinafter
defined), entitle, until exercise or prior expiration or termination, the
Holder by exercise thereof to purchase that number of shares of Common Stock
more fully described herein at a certain price (the "Exercise Price") as
hereinafter set forth, subject to adjustment as hereinafter provided, until
July 7, 1998 (the "Expiration Date") unless extended or earlier terminated
pursuant to the terms hereinafter set forth; and
- -------------------
* Subject to adjustment and termination as more fully described hereinafter.
<PAGE> 3
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WHEREAS, Issuer and Holder have agreed to provide herein for the
terms, conditions and provisions respecting this Warrant, the terms upon which
the Warrant shall be issued and exercised, and the respective rights and
limitations of rights of the Issuer and of Holder concerning the same; and
WHEREAS, Issuer and Holder have agreed that this Warrant, upon
execution by the Issuer shall be, and shall remain until its exercise or its
prior expiration, the valid, binding and legal obligation of Issuer.
NOW, THEREFORE, in consideration of the terms and conditions set forth
herein and in the Purchase Agreement pursuant to which this Warrant is issued,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, Issuer
hereby agrees as follows:
1.1. The Warrant.
This Warrant evidences the right of the Holder hereof, for a
period of thirty (30) days following the occurrence of a Trigger Event as set
forth in Section 1.2 herein, to purchase 9,000 shares of Common Stock (the
"Shares") on the date of exercise (an "Exercise"), subject to adjustment from
time to time, pursuant to the provisions of paragraph 3 hereof, and subject to
termination as provided herein. Such thirty (30) day period shall not be
reduced in the event the Expiration Date is within said period.
1.2 Trigger Events.
(a) This Warrant shall only be exercisable for a period of
thirty (30) days following the occurrence of one of the following events
("Trigger Events"):
(i) the initial public offering by the Issuer of shares
of Common Stock; or
(ii) the disposition of the shares of Common Stock of
the Issuer by Mental Health Management, Inc., the present sole stockholder of
the Issuer, ("MHM") in a public offering, distribution to its stockholders or
sale or transfer for value to an unaffiliated third party;
(iii) the sale by the Issuer of all or substantially
all of its assets to an unaffiliated third party.
<PAGE> 4
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(b) In the event of a Trigger Event, a notice thereof shall be
sent by the Issuer to the Holder, at least thirty (30) days before the
effective date of the Trigger Event (which date shall be specified in such
notice). Such notice shall also specify the date on which the right to
Exercise the Warrant shall expire, as provided in Section 1.1 of this Warrant.
1.3 Termination and Partial Termination.
(a) In the event the Holder's employment with the Issuer is
terminated for cause by the Issuer at any time during the term of this Warrant
, then this Warrant and all rights contained herein, shall immediately
terminate.
(b) In the event the Holder's employment with the Issuer
ceases at any time prior to the first anniversary of the date of this Warrant
because Holder voluntarily ceases employment with the Issuer, then, thereafter,
this Warrant shall only entitle the Holder to purchase one-third (1/3) of the
Shares, and all rights contained herein which relate to the Shares shall
thereafter relate to only one-third (1/3) of the Shares.
(c) In the event the Holder's employment with the Issuer
ceases at any time following the first anniversary of the date of this Warrant
but prior to the second (2nd) anniversary of the date of this Warrant because
Holder voluntarily ceases employment with the Issuer, then, thereafter, this
Warrant shall only entitle the Holder to purchase two-thirds (2/3) of the
Shares, and all rights contained herein which relate to the Shares shall
thereafter relate to only two-thirds (2/3) of the Shares.
2. Exercisability.
Upon the occurrence of a Trigger Event, Holder shall be
entitled to purchase the Shares and to receive a certificate or certificates
for the Shares so purchased, upon presentation and surrender to the Issuer,
with a form of subscription duly executed, and accompanied by payment of the
Exercise Price, either in cash or by certified or bank cashier's check payable
to the order of the Issuer, or by wired funds pursuant to the directions of
Issuer. Such issuance shall be under and subject to the terms and conditions
set forth in this Warrant.
<PAGE> 5
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2.1 Issuer consents and agrees that the Shares to be delivered
upon exercise of this Warrant will, upon delivery, be free from all taxes,
liens, and charges with respect to the purchase thereof hereunder.
2.2 This Warrant may be exercised at any time permitted by
Sections 1.1 and 1.2, subject to termination and partial termination as set
forth in Section 1.3, except that if notice has been given as provided in
Section 5 of this Warrant in connection with the liquidation, dissolution, or
winding up of Issuer, the right to Exercise shall expire at the close of
business on the third full business day before the date specified in such
notice.
2.3 This Warrant shall entitle Holder, upon the occurrence of a
Trigger Event as set forth in Sections 1.1 and 1.2, to purchase the number of
Shares stated herein at the Exercise Price of $1.00 per Share, subject to
adjustment as set forth in this Warrant and subject to the provisions of
Section 1.3 of this Warrant. The Exercise Price represents the net book value
per share of the Shares, as reflected on its financial statements as of March
31, 1995. The parties hereto acknowledge that such amount shall be the
Exercise Price notwithstanding any changes in the net book value per share of
the Issuer which may have occurred from March 31, 1995 to the date of this
Warrant. For the purposes of this Warrant, the net book value per share of the
Issuer shall be determined by reference to the balance sheet for the Issuer's
most recently completed fiscal quarter, prepared in accordance with generally
accepted accounting principles applied in a manner consistent with the Issuer's
prior practices, and shall be deemed to be equal to the difference between the
total assets and total liabilities of the Issuer as reflected on such balance
sheet. The determination of the net book value per share of the Issuer shall
be made by the Issuer, and shall not be subject to contest.
2.4 This Warrant shall be exercised by surrendering it, together
with a subscription in the form annexed as Exhibit A hereto, duly executed,
accompanied by the tender of funds for the Exercise Price. The Warrant may be
surrendered at the office of the Company, to the attention of the Secretary of
the Company. As soon as practicable after the Warrant has been so exercised,
Issuer shall issue and deliver to, the order of Holder, or in such name or
names as may otherwise
<PAGE> 6
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be directed by Holder, a certificate or certificates for the number of full
Shares to which Holder is entitled. All Warrants surrendered shall be
cancelled by Issuer.
2.5 The Issuer shall not be required to issue fractional shares
upon Exercise of this Warrant, but in lieu thereof shall issue, in addition to
Shares, a cash payment representing any fractional Share which might otherwise
be issuable except for this provision. The amount of the cash payment
hereunder shall be determined by the Issuer by multiplying the amount of such
fractional Share by the difference between the net book value per share of the
Issuer (as determined pursuant to Section 2.3 of this Warrant and the Exercise
Price then in effect.
2.6 All Shares issued upon the exercise of this Warrant, or any
replacement or substitution therefor, shall at all times be validly issued and
outstanding.
2.7 (a) This Warrant shall expire and no longer be exercisable
after 5:00 p.m. on the Expiration Date, unless extended or earlier terminated
pursuant to the terms set forth in this Warrant.
(b) In the event the Holder's employment with the Issuer is
continued after the initial term of the Employment Agreement, the term of this
Warrant shall be deemed to be extended for the duration of such continued
employment; provided, however, that no such extension shall extend the term of
this Warrant beyond an aggregate term, including the initial three-year term,
of five (5) years from the date of this Warrant.
3. Adjustments, Dividends, Etc.
The number of Shares for which this Warrant is exercisable,
and the price at which such Shares may be purchased upon exercise of this
Warrant, shall be subject to adjustment from time to time as set forth in this
Section 3. The Issuer shall give Holder notice of any event described below
which requires an adjustment pursuant to this Section 3 in accordance with
Section 9(b).
3.1 Stock Dividends, Subdivisions and Combinations. If at any
time the Issuer shall:
(a) take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend payable in, or other
distribution of, shares of Common Stock;
<PAGE> 7
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(b) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock; or
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock;
then (i) the number of Shares for which this Warrant is exercisable immediately
after the occurrence of any such event shall be adjusted to equal the number of
shares of Common Stock which a record holder of the same number of shares of
Common Stock for which this Warrant is exercisable immediately prior to the
occurrence of such event would own or be entitled to receive after the
happening of such event, and (ii) the Exercise Price shall be recalculated
after giving effect to the adjustment in the number of shares of Common Stock
for which this Warrant is exercisable pursuant to clause (i) above so that the
aggregate Exercise Price for the purchase of all of the Shares for which this
Warrant is exercisable is the same immediately before and after the happening
of such event.
A reclassification of the Common Stock (other than a change in par
value, or from par value to no par value or from no par value to par value)
into shares of Common Stock and shares of any other class of stock shall be
deemed a distribution by the Company to the holders of its Common Stock of such
shares of such other class of stock within the meaning of Section 3.8 and, if
the outstanding shares of Common Stock shall be changed into a larger or
smaller number of shares of Common stock as a part of such reclassification,
such change shall be deemed a subdivision or combination, as the case may be,
of the outstanding shares of Common Stock within the meaning of this Section
3.1.
3.2 Issuance of Additional Shares of Common Stock.
(a) If at any time the Issuer shall issue or sell any additional
shares of Common Stock in exchange for consideration in an amount per
additional share of Common Stock less than the net book value per share of the
Issuer (as determined pursuant to Section 2.3), then (i) the number of shares
of Common Stock for which this Warrant is exercisable shall be adjusted to
equal the number of shares of Common Stock which is equal to nine (9%) percent
of the
<PAGE> 8
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outstanding shares of Common Stock immediately after the issuance or sale of
such additional shares; and (ii) the Exercise Price shall be recalculated after
giving effect to the adjustment in the number of shares of Common Stock for
which this Warrant is exercisable pursuant to clause (i) above so that the
aggregate Exercise Price for the purchase of all of the Shares for which this
Warrant is exercisable is the same immediately before and after the happening
of such event.
(b) The provisions of this Section 3.2 shall not apply to
any issuance of additional shares of Common Stock for which an adjustment is
provided under Section 3.1. No adjustment of the number of Shares for which
this Warrant shall be exercisable shall be made under this Section 3.2 upon the
issuance of any additional shares of Common Stock which are issued pursuant to
the exercise of any warrants or other subscription or purchase rights or
pursuant to the exercise of any conversion or exchange rights in any
convertible securities, if any such adjustment shall previously have been made
upon the issuance of such warrants or other rights or upon the issuance of such
convertible securities (or upon the issuance of any warrant or other rights
therefor) pursuant to Section 3.3 or Section 3.4.
3.3 Issuance of Warrants or Other Rights. If at any time the
Issuer shall take a record of the holders of its Common Stock for the purpose
of entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which the Company is the surviving
corporation) issue or sell, any warrants or other rights to subscribe for or
purchase any additional shares of Common Stock or any convertible securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is issuable upon
the exercise of such warrants or other rights or upon conversion or exchange of
such convertible securities shall be less than the net book value per share of
the Issuer (as determined pursuant to the provisions of Section 2.3 of this
Warrant), then the number of Shares for which this Warrant is exercisable and
the Exercise Price shall be adjusted as provided in section 3.2 on the basis
that the maximum number of additional shares of Common Stock issuable pursuant
to all such warrants or other rights or necessary to effect the conversion or
exchange of all such convertible securities shall be deemed to have been issued
and
<PAGE> 9
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outstanding and the Issuer shall have received all of the consideration payable
therefor, if any, as of the date of the actual issuance of such warrants or
other rights. No further adjustments of the number of Shares for which this
Warrant is exercisable or the Exercise Price shall be made upon the actual
issue of such Common Stock or of such convertible securities upon exercise of
such warrants or other rights or upon the actual issue of such Common Stock
upon such conversion or exchange of such convertible securities.
3.4 Issuance of Convertible Securities. If at any time the Issuer
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which the Issuer is the surviving
corporation) issue or sell, any convertible securities, whether or not the
rights to exchange or convert thereunder are immediately exercisable, and the
price per share for which Common Stock is issuable upon such conversion or
exchange shall be less than the net book value per share of the Issuer (as
determined pursuant to the provisions of Section 2.3 of this Warrant), then the
number of shares of Common Stock for which this Warrant is exercisable and the
Exercise Price shall be adjusted as provided in Section 3.2 on the basis that
the maximum number of additional shares of Common Stock necessary to effect the
conversion or exchange of all such convertible securities shall be deemed to
have been issued and outstanding and the Issuer shall have received all of the
consideration payable therefor, if any, as of the date of actual issuance of
such convertible securities. No further adjustment of the number of shares of
Common Stock for which this Warrant is exercisable and the Exercise Price shall
be made under this Section 3.4 upon the issuance of any convertible securities
which are issued pursuant to the exercise of any warrants or other subscription
or purchase rights therefor, if any such adjustment shall previously have been
made upon the issuance of such warrants or other rights pursuant to Section
3.3. No further adjustments of the number of shares of Common Stock for which
this Warrant is exercisable and the Exercise Price shall be made upon the
actual issuance of such Common Stock upon conversion or exchange of such
convertible securities.
<PAGE> 10
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3.5 Superseding Adjustment. If, at any time after any adjustment
of the number of Shares for which this Warrant is exercisable and the Exercise
Price shall have been made pursuant to Section 3.3 or Section 3.4 as the result
of any issuance of warrants, other rights or convertible securities,
(a) such warrants or other rights, or the right of
conversion or exchange in such other convertible securities, shall expire, and
all or a portion of such other convertible securities, as the case may be,
shall not have been exercised; or
(b) the consideration per share for which shares of Common
Stock are issuable pursuant to such warrants or other rights, or the terms of
such other convertible securities, shall be increased solely by virtue of
provisions therein contained for an automatic increase in such consideration
per share upon the occurrence of a specified date or event, then as to this
Warrant such previous adjustment shall be rescinded and annulled and the
additional shares of Common Stock which were deemed to have been issued by
virtue of the computation made in connection with the adjustment so rescinded
and annulled shall no longer be deemed to have been issued by virtue of such
computation. Thereupon, a recomputation shall be made of the effect of such
warrants, other rights or options or other convertible securities on the basis
of treating the number of additional shares of Common Stock or other property,
if any, theretofore actually issued or issuable pursuant to the previous
exercise of any such warrants or other rights or any such right of conversion
or exchange, as having been issued on the date or dates of any such exercise
and for the consideration actually received and receivable therefor, and
treating any such warrants or other rights or any such other convertible
securities which then remain outstanding as having been granted or issued
immediately after the time of such increase of the consideration per share for
which shares of Common Stock or other property are issuable under such warrants
or other rights or other convertible securities; whereupon a new adjustment of
the number of Shares for which this Warrant is exercisable and the Exercise
Price shall be made, which new adjustment shall supersede the previous
adjustment so rescinded and annulled.
<PAGE> 11
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3.6 Other Provisions Applicable to Adjustments under this Section.
The following provisions shall be applicable to the making of adjustments of
the number of Shares for which this Warrant is exercisable and the Exercise
Price provided for in this Section 3.
(a) Computation of Consideration. To the extent that any
additional shares of Common Stock or any convertible securities or any warrants
or other rights to subscribe for or purchase any additional shares of Common
Stock or any convertible securities shall be issued for cash consideration, the
consideration received by the Company therefor shall be the amount of the cash
received by the Issuer therefor, or, if such additional shares of Common Stock
or convertible securities are offered by the Issuer for subscription, the
subscription price, or, if such additional shares of Common Stock or
convertible securities are sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price (in any such
case subtracting any amounts paid or receivable for accrued interest or accrued
dividends and deducting any compensation, discounts or expenses paid or
incurred by the Issuer for and in the underwriting of, or otherwise in
connection with, the issuance thereof). To the extent that such issuance shall
be for a consideration other than cash, then, except as herein otherwise
expressly provided, the amount of such consideration shall be deemed to be the
fair value of such consideration at the time of such issuance as determined by
the Board of Directors of the Issuer. In case any additional shares of Common
Stock or any convertible securities or any warrants or other rights to
subscribe for or purchase such additional shares of Common Stock or convertible
securities shall be issued in connection with any merger in which the Issuer
issues any securities, the amount of consideration therefor shall be deemed to
be the fair value, as determined by the Board of Directors of the Issuer, of
such portion of the assets and business of the nonsurviving corporation as such
Board shall determine to be attributable to such additional shares of Common
Stock, convertible securities, warrants or other rights, as the case may be.
The consideration for any additional shares of Common Stock issuable pursuant
to any convertible securities, warrants or other rights to subscribe for or
purchase the same shall be the consideration received by the Issuer for issuing
such convertible securities, warrants or other rights plus the additional
<PAGE> 12
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consideration, if any, payable to the Issuer upon exercise, conversion or
exchange of such convertible securities, warrants or other rights. In case of
the issuance of any additional shares of Common Stock or convertible securities
in payment or satisfaction of any dividends upon any class of stock other than
Common Stock, the Issuer shall be deemed to have received for such additional
shares of Common Stock or convertible securities a consideration equal to the
amount of such dividend so paid or satisfied.
(b) When Adjustments Made. The adjustments required by this
Section 3 shall be made whenever and as often as any specified event requiring
an adjustment shall occur, except that any adjustment of the number of Shares
for which this Warrant is exercisable or the Exercise Price that would
otherwise be required may be postponed (except in the case of a subdivision or
combination of shares of Common Stock, as provided for in Section 3.1) up to,
but not beyond the date of exercise of this Warrant if such adjustment either
by itself or together with other adjustments not previously made adds or
subtracts less than one (1%) percent of the Shares for which this Warrant is
exercisable immediately prior to the making of such adjustment. Any adjustment
representing a change of less than the minimum amount (except as aforesaid)
which is postponed shall be carried forward and made upon the earlier of: (i)
as soon as such adjustment, together with other adjustments required by this
Section 3 and not previously made, would result in a minimum adjustment; or
(ii) on the date of exercise. For the purposes of any adjustment, any
specified event shall be deemed to have occurred at the close of business in
the date of its occurrence.
(c) Fractional Interests. In computing adjustments under this
Section 3, fractional interests in Common Stock shall be taken into account to
the nearest 10th of a share.
(d) When Adjustment Not Required. If the Issuer shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and
shall, thereafter and before the distribution to stockholders thereof, abandon
its plan to pay or deliver such dividend, distribution, subscription or
purchase rights, then thereafter no adjustment shall be required by reason of
the taking of such
<PAGE> 13
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record and any such adjustment previously made in respect thereof shall be
rescinded and annulled.
(e) Escrow of Warrant Stock. If after any property becomes
distributable pursuant to this Section 3 by reason of the taking of any record
of the holders of Common Stock, but prior to the occurrence of the event for
which such record is taken, and Holder exercises this Warrant (or any part
thereof), any Shares issuable upon exercise by reason of such adjustment shall
be deemed to be the last Shares for which this Warrant is exercised
(notwithstanding any other provision to the contrary herein) and such shares or
other property shall be held by the Issuer in escrow for Holder to be issued to
Holder upon and to the extent that the event actually takes place, upon payment
of the Exercise Price. Notwithstanding any other provision to the contrary
herein, if the event for which such record was taken fails to occur or is
rescinded, then such escrowed shares shall be cancelled by the Issuer and
escrowed property returned to the Issuer.
(f) Employee Benefits. Notwithstanding anything to the
contrary contained in this Section 3, there shall be no adjustment in the
Exercise Price or the number of Shares for which this Warrant is exercisable
upon the issuance of shares of Common Stock or options or warrants or other
rights for the purchase of Common Stock issued, sold or granted on or after the
date hereof by the Issuer to its officers, employees or directors pursuant to a
bona fide employee stock purchase, option or similar benefit plans or other
arrangements approved by the Board of Directors of the Issuer.
3.7 Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Issuer shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Issuer is not the surviving corporation or where there
is a change or distribution with respect to the Common Stock of the Issuer), or
sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of Common Stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants
<PAGE> 14
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or other subscription or purchase rights) in addition to or in lieu of common
stock of the successor or acquiring corporation ("Other Property"), are to be
received by or distributed to the holders of Common Stock of the Issuer, then
Holder shall have the right thereinafter to receive, upon exercise of this
Warrant, the number of shares of common stock of the successor or acquiring
corporation or of the Issuer (if it is the surviving corporation) and Other
Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a holder of
the number of shares of Common Stock of the Issuer for which this Warrant is
exercisable immediately prior to such event. For purposes of this Section 3.7,
"common stock of the successor or acquiring corporation" shall include stock of
such corporation of any class which is not preferred as to dividends or assets
on liquidation and which is not subject to redemption and shall also include
any evidences of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either immediately or upon
the arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 3.7 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
3.8 No Adjustment for Certain Other Distributions. If at any
time the Issuer shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive any dividend or other distribution of
cash, any evidences of its indebtedness, any shares of stock of any class or
any other securities or property of any nature whatsoever (other than cash,
convertible securities or additional shares of Common Stock), or any warrants
or other rights to subscribe for or purchase any evidences of its indebtedness,
any shares of stock of any class or any other securities or property of any
nature whatsoever (other than cash, convertible securities or additional shares
of Common Stock); then Holder shall not be entitled to receive in respect of
this Warrant any amount in respect of such dividend or distribution.
3.9 Other Actions Requiring Adjustment. If at any time during the
term of this Warrant, Issuer shall take any action (other than as set forth in
Section 3.8 hereof) similar in
<PAGE> 15
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nature or effect to the transactions described in Sections 3.1, 3.2, 3.3, 3.4
or 3.7; provided, however, that this Section 3.9 shall not be construed to
expand the provisions of such Sections 3.1, 3.2, 3.3, 3.4 or 3.7 hereof, then
the Issuer shall make appropriate adjustment to (i) the number of Shares for
which this Warrant is exercisable commensurate with the adjustments
contemplated by Sections 3.1, 3.2, 3.3, 3.4 and/or 3.7 hereof, and (ii) the
Exercise Price shall be recalculated after giving effect to the adjustment in
the number of shares of Common Stock for which this Warrant is exercisable
pursuant to clause (i) above so that the aggregate Exercise Price for the
purchase of all of the Shares for which this Warrant is exercisable is the same
immediately before and after the happening of such event.
4. Dividends and Interest.
Holder shall not, upon any exercise of this Warrant, be
entitled to any dividends that may have accrued with respect to Shares, or to
any interest that may have accrued upon any evidences of indebtedness, prior to
the date of its Exercise.
5. Liquidation, Dissolution, Winding Up.
In the event of the liquidation, dissolution, or winding up of
the Issuer, a notice thereof shall be sent by the Issuer to the Holder, at
least thirty (30) days before the record date (which date shall be specified in
such notice) for determining holders of Shares entitled to receive any
distribution upon such liquidation, dissolution, or winding up. Such notice
shall also specify the date on which the right to Exercise the Warrant shall
expire, as provided in Section 2.2 of this Warrant.
6. No Registration of Warrant and Shares.
Neither this Warrant nor the Shares issuable upon the Exercise
thereof are being registered with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933 (the "Act"). This Warrant, and any
replacement or substitution therefor, shall bear
<PAGE> 16
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on the face thereof a legend substantially similar to the notice endorsed on
the first page of this Warrant. Each certificate for shares of Common Stock
(or other securities) issued pursuant to the exercise of this Warrant shall
bear on the face thereof a legend substantially as follows:
THE SHARES OF COMMON STOCK (OR OTHER SECURITIES) ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.
7. No Rights as Securityholder Conferred.
This Warrant shall not entitle the Holder to any voting rights
or other rights as a shareholder or other securityholder of Issuer, or to any
other rights whatsoever except the rights herein expressed and set forth, and
no dividends shall be payable or accrue with respect of this Warrant or the
interest represented hereby or the Shares purchasable hereunder, until or
unless, and except to the extent that, this Warrant shall have been Exercised.
In addition, the Issuer shall have sole discretion with respect to all matters
involving the business, operations and financial condition of the Issuer,
including without limitation, matters relating to equity or debt financing,
dispositions of assets or property or security interests therein, transactions
or arrangements with MHM and other affiliates, declarations and payments of
dividends and distributions on Issuer's capital stock and acquisitions of
assets or property, or any reorganization, reclassification, merger,
consolidation, business combination or other corporate transaction whether
extraordinary or ordinary, and shall not be limited in any respect whatsoever
by any provision of this Warrant or any rights of the Holder.
8. Non-Transferability.
This Purchase Warrant is not transferable at any time.
<PAGE> 17
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9. Miscellaneous Provisions.
(a) The validity, interpretation, and performance of this
Warrant shall be governed by the laws of the State of Delaware.
(b) Each notice which is or may be required to be given in
connection with this Warrant shall be in writing, and given by telex, telegram,
telecopy, personal delivery, receipted delivery service, or by certified mail,
return receipt requested, prepaid and properly addressed as shown below.
Notices shall be effective on the date sent via telex, telegram or telecopy,
the date delivered personally or by receipted delivery service, or three (3)
days after the date mailed:
If to Issuer: MHM Extended Care Services, Inc.
990 Hammond Drive, Suite 310
Atlanta, GA 30328
With a copy to: Alan S. Einhorn, Esq.
General Counsel
Mental Health Management, Inc.
7601 Lewinsville Road, Suite 200
McLean, VA 22102
If to Holder: Murray I. Firestone, Ph.D.
--------------------------
--------------------------
(c) This Warrant contains the entire agreement of the parties with
respect to the subject matter hereof. It may not be changed orally, but only
by an agreement in writing executed by the
<PAGE> 18
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party against whom enforcement of any waiver, change, modification, extension
or discharge is sought.
(d) The section headings contained in this Warrant are for convenience
only and in no manner shall be construed as part of this Agreement.
IN WITNESS WHEREOF, Issuer has caused this Purchase Warrant to be
executed by its duly authorized officers, and its corporate seal hereunto
affixed.
Corporate Seal MHM EXTENDED CARE SERVICES, INC.
By:
-----------------------------
Michael S. Pinkert,
President
Attest:
------------------------------
Alan S. Einhorn
Assistant Secretary
<PAGE> 19
EXHIBIT A
SUBSCRIPTION FORM
[TO BE EXECUTED ONLY UPON EXERCISE OF WARRANT]
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for the purchase of ____ shares of Common Stock of MHM Extended
Care Services, Inc., and herewith makes payment therefor, all at the price and
on the terms and conditions specified in this Warrant and requests that
certificates for the shares of Common Stock hereby purchased (and any
securities or other property issuable upon such exercise) be issued in the name
of and delivered to _______________________ whose address is
_______________________________________.
----------------------------------------
(Name of Registered Owner)
----------------------------------------
(Signature of Registered Owner)
----------------------------------------
(Street Address)
----------------------------------------
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the name
as written upon the face of the Warrant in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE> 20
EXHIBIT B
TERMS AND CONDITIONS OF
INCIDENTAL REGISTRATION RIGHTS
------------------------------
1. Certain Definitions.
As used in this Agreement, the following terms shall have the following
respective meanings:
"Commission" means the Securities and Exchange Commission, or any other
federal agency at the time administering the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any similar federal statute, and the rules and regulations of the Commission
issued under that Act, as they each may, from time to time, be in effect.
"Person" means an individual, a corporation, a partnership, a trust, an
unincorporated organization, or a government or any department, agency or
political subdivision thereof.
"Incidental Registration Statement" means a registration statement
(other than on Form S-8 (unless the Registrable Shares may be registered
thereunder), Form S-4, or any successor forms thereto, or on any other forms for
use solely in connection with mergers or other combinations or issuances of
securities to employees) filed by the Company with the Commission for a public
offering and sale or common stock of the Company, whether on behalf of the
Company or any stockholder.
<PAGE> 21
"Registration Expenses" means the expenses described in paragraph 6 of
this Agreement.
"Registrable Shares" means (i) shares of Stock issued to Firestone
pursuant to the Warrant and (ii) any other shares of Stock issued in respect of
such stock (because or stock splits, stock dividends, reclassifications,
recapitalizations, mergers, consolidations, or similar events); provided,
however, that any shares of Stock previously sold by Firestone pursuant to a
registered public offering, Sections 4(1) or 4(2) or Rule 144 under the
Securities Act shall cease to be Registrable Shares.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission issued
under that Act, as they each may, from time to time, be in effect.
2. Incidental Registration Right.
(a) Whenever the Company proposes to file a Registration
Statement at any time or from time to time after the date hereof, it will, prior
to such filing, give written notice to Firestone of its intention to do so
(which notice shall include a list of the jurisdictions in which the Company
intends to attempt to qualify such securities under the applicable Blue Sky or
other state securities laws), and upon the written request of Firestone, given
within 20 days after receipt of any such notice (which request shall state the
intended methods of distribution of Registrable Shares by Firestone), the
Company will include in such registration (and any related qualification
2
<PAGE> 22
under Blue Sky or other compliance filings) all Registrable Shares which the
Company has been requested by Firestone to register, to the extent necessary to
permit the sale or other disposition in accordance with the intended methods of
distribution specified in the request of Firestone. The Company shall only be
obligated to include such Registrable Shares in such registration statement if
Stockholder has indicated an intention to dispose of at least five hundred
thousand ($500,000) dollars in value of such shares.
(b) If the offering to which the proposed registration under this
paragraph 2 relates is to be distributed by or through an underwriter or
underwriters, Firestone, if requested by such underwriters, shall agree to sell
those Registrable Shares which are subject to the Incidental Registration
Statement to or through such underwriters at the same price and on the same
terms to be paid to the Company; provided, however, that if in the written
opinion of the underwriter or managing underwriter the registration of all or
part of the Registrable Shares which Firestone has requested to be included
would materially and adversely affect such public offering, then and in that
event the Company shall be required to register only that number of Registrable
Shares, if any, which the underwriter or managing underwriter believes may be
sold without causing such adverse effect. If Firestone proposes to distribute
its stock through such underwriting, Optionee shall
3
<PAGE> 23
enter into an underwriting agreement with the underwriter or underwriters
selected for underwriting by the Company.
3. Opinion.
As a condition to including the Registrable Shares of Firestone in any
registration statement pursuant to paragraph 2 hereof, Firestone shall, if
requested by the Company, present an opinion of independent counsel reasonably
acceptable to the Company to the effect that no proposed public sale of the
Registrable Shares requested to be registered by said Firestone may be made
unless a registration statement under the Securities Act shall be in effect with
respect to such Registrable Shares.
4. Indemnification.
(a) In the event of any registration of any of the
Registrable Shares under the Securities Act pursuant to this Agreement, the
Company will indemnify and hold harmless Firestone against any losses, claims,
damages or liabilities, joint or several, to which Firestone may become subject
under the Securities Act, the Exchange Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement under which such Registrable Shares
were registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact
4
<PAGE> 24
required to be stated therein or necessary to make the statements therein not
misleading; and the Company will reimburse Firestone for any legal or other
out-of-pocket expenses reasonably incurred by Firestone in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable to Firestone in any such
case if, and to the extent that, any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or omission made in the
Registration Statement, preliminary prospectus or prospectus, or the amendment
or supplement in reliance upon and in conformity with information furnished to
the Company by or on behalf of Firestone in writing, for use in the preparation
thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, Firestone will
indemnify and hold harmless the Company, each of its directors and officers and
each underwriter (if any) and each person, if any, who controls the Company or
any such underwriter within the meaning of the Securities Act against any
losses, claims, damages or liabilities, joint or several, to which the Company
or any such director, officer, underwriter or controlling person may become
subject under the Securities Act, the Exchange Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereto)
arise out of or are based upon any untrue statement or alleged untrue statement
or any material fact contained in any Registration
5
<PAGE> 25
Statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to the Registration
Statement, or arise out of or are based upon the omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, if the statement or omission was made in
reliance upon and in conformity with information furnished to the Company by or
on behalf of Firestone for use in connection with the preparation of the
Registration Statement or prospectus, or arise out of or are based upon any
other violation by Firestone of any Federal or state securities law or rule or
regulation thereunder and Firestone will reimburse the Company and each such
director, officer, underwriter and controlling person for any legal or other
out-of-pocket expenses reasonably incurred by the Company or any such director,
officer, underwriter or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action.
(c) For purposes of administering the indemnification provisions of
this paragraph 4, the following procedures shall apply:
(i) After receipt by an indemnified party under this paragraph
4 of any notice of the commencement of any action, such indemnified party will,
if a claim in respect
6
<PAGE> 26
thereof is to be made against an indemnifying party, notify the indemnifying
party in writing of the commencement thereof.
(ii) After notification is given as aforesaid, the indemnifying
party shall be entitled to participate in such action and, at its sole
discretion, to assume the defense thereof with counsel mutually satisfactory to
the indemnified and indemnifying parties.
7
<PAGE> 27
REPURCHASE AGREEMENT
THIS AGREEMENT, made this 7th day of July, 1995, by and among MHM
Extended Care Services, Inc., a Delaware corporation (the "Company") and Murray
I. Firestone, Ph.D., an individual, (the "Holder").
W I T N E S S E T H :
WHEREAS, pursuant to a Warrant (the "Warrant") issued on even date
herewith, the Company has issued certain rights to Holder to purchase shares of
the Company's Common Stock; and
WHEREAS, the Company and the Holder wish to make provision for the
Holder to require the Company to purchase all of the Holder's rights, title and
interest in the Warrant, all upon terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. Ownership of the Warrant. As of the date of the execution of
this Agreement, the Holder is the legal and equitable owner of all of the
rights and privileges of, and all of the responsibilities under, the Warrant.
2. Purchase of Warrant at the Option of Holder. If the Holder
shall desire to sell all of the Holder's rights, title and interest in the
Warrant upon the last day of the initial or extended term of the Warrant (the
"Repurchase Date"), then the Holder shall send a notice (in the form set forth
as Exhibit A, attached hereto) to the Company within ninety (90) days prior to
the Repurchase Date, and, if it has received a properly completed notice, the
Company shall, within thirty (30) days following the Repurchase Date, be
obligated to repurchase from the Holder all of the Holder's rights, title and
interest in the Warrant at such time, at a price equal to the Fair Market Value
of the Warrant (as hereinafter defined) on the Repurchase Date. The purchase
price shall be paid in cash within thirty (30) days after the Repurchase Date.
For the purposes of this Agreement, the "Fair Market Value of this Warrant"
shall mean an amount equal to (a) the
<PAGE> 28
-2-
Company's net revenues for its most recently completed fiscal year multiplied
by one and then (b) multiplied by the number of shares of the Company's Common
Stock which the Holder is then entitled to purchase under the terms of the
Warrant. For the purposes of this Agreement, the net revenues of the Company
shall be determined by reference to the Company's income statements, prepared
in accordance with generally accepted accounting principles, applied in a
manner consistent with the Company's prior practices. The right to require the
Company to repurchase the Holder's interest in the Warrant may only be
exercised within the time period set forth above. If this right is not
exercised, it shall immediately expire.
3. Intentionally Deleted.
4. Notices.
(a) Each notice, demand, request, consent, report, approval or
communication ("Notice") under this Agreement shall be in writing and given by
telex, telegram, telecopy, personal delivery or receipted delivery service or
certified U.S. mail, return receipt requested, prepaid and properly addressed
to the address of the party to be served as shown below. Notice shall be
effective on the date it was sent via telex, telegram or telecopy, the date
delivered personally or by receipted delivery service, or three (3) days after
the date the Notice was mailed.
(b) Each notice which is or may be required to be given in
connection with this Warrant shall be in writing, and given by telex, telegram,
telecopy, personal delivery, receipted delivery service, or by certified mail,
return receipt requested, prepaid and properly addressed as shown below.
Notices shall be effective on the date sent via telex, telegram or telecopy,
the date delivered personally or by receipted delivery service, or three (3)
days after the date mailed:
If to the Company: MHM Extended Care Services, Inc.
990 Hammond Drive, Suite 310
Atlanta, GA 30328
With a copy to: Alan S. Einhorn, Esq.
General Counsel
Mental Health Management, Inc.
7601 Lewinsville Road, Suite 200
McLean, VA 22102
<PAGE> 29
-3-
If to Holder: Murray I. Firestone, Ph.D.
--------------------------
--------------------------
(c) Each party may designate by Notice to the others in writing,
given in the foregoing manner, a new address to which any Notice may thereafter
be so given, served or sent.
5. Captions. The section headings contained in this Agreement are
for convenience only and in no manner shall be construed as part of this
Agreement.
6. Non-Transferability. The rights granted to the Holder
hereunder are personal and many not be transferred at any time.
7. Governing Law. The validity, interpretation, and performance
of this Agreement shall be governed by the laws of the State of Delaware.
8. Further Assurances. The parties hereto agree to execute any
and all other and further instruments and perform any and all acts which are or
may become necessary to effectuate the terms of this Agreement.
9. Binding Effect; Assignability. This Agreement shall be
binding upon and shall inure to the benefit of the parties, their respective
heirs, personal representatives, successors and, to the extent permitted,
assigns, but may not be assigned by any party without the prior written consent
of the other party. Notwithstanding the foregoing, the Company shall have the
right to assign all of its rights and obligations under this Agreement to a
wholly-owned subsidiary of the Company.
<PAGE> 30
-4-
10. Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties pertaining to the subject matter
hereof, and there are no other prior or contemporaneous, written or oral
agreements, understandings, undertakings, negotiations, promises, discussions,
warranties or covenants not specifically referred to or contained herein or
attached hereto. No supplement, modification, termination in whole or in part
or waiver of this Agreement shall be binding unless executed in writing by the
party to be bound thereby. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver of any other provision
hereof (whether or not similar), nor shall any such waiver constitute a
continuing waiver unless otherwise expressly provided.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the corporate party hereto has caused this
Agreement to be executed by its respected duly authorized officers and has
affixed its respected corporate seals, and the individual party has hereunto
set his hand and seal, all on the day and year first above written.
Corporate Seal MHM Extended Care Services, Inc.
By:
------------------------------
Michael S. Pinkert, President
Attest:
--------------------------
Alan S. Einhorn
Secretary
[SIG] [SIG] (SEAL)
- ------------------------- ---------------------------------
Witness Murray I. Firestone
<PAGE> 31
TERMS AND CONDITIONS OF
INCIDENTAL REGISTRATION RIGHTS
1. Certain Definitions.
As used in herein, the following terms shall have the following
respective meanings:
"Commission" means the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Company" means Mental Health Management, Inc., a corporation
organized and existing under the laws of the State of Delaware.
"Corporation" means ICH Services, Inc., L.L.C., a limited liability
company formerly organized and existing under the laws of the State of
Delaware.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
issued under that Act, as they each may, from time to time, be in effect.
"Former ICH Members" means the former Members of the Corporation.
"Person" means an individual, a corporation, a partnership, a trust,
an unincorporated organization, or a government or any department, agency or
political subdivision thereof.
"Incidental Registration Statement" means a registration statement
(other than on Form S-8 (unless the Registrable Shares may be registered
<PAGE> 32
thereunder), Form S-4, or any successor forms thereto, or on any other forms
for use solely in connection with mergers or other combinations or issuances of
securities to employees) filed by the Company with the Commission for a public
offering and sale of Common Stock of the Company, whether on behalf of the
Company or any stockholder.
"Registration Expenses" means the expenses described in paragraph 5
hereof.
"Registrable Shares" means (i) shares of Common Stock of the Company
issued pursuant to paragraphs 3(h) (in respect of a payment of a reproration
amount only) or 3(i) of that certain Agreement dated November 18, 1993 by and
among the Company, the Corporation and the Members of the Corporation listed
therein (the "Members"), as amended by Amendment No. 1 thereto dated as of
October 12, 1995 and (ii) any other shares of Common Stock of the Company
issued in respect of such Common Stock (because of stock splits, stock
dividends, reclassifications, recapitalizations, mergers, consolidations, or
similar events); provided, however, that any such shares of Common Stock of the
Company previously sold by any Former ICH Member or its transferee pursuant to
a registered public offering, Sections 4(l) or 4(2) or Rule 144 shall thereupon
cease to be Registrable Shares.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission issued
under that Act, as they each may, from time to time, be in effect.
<PAGE> 33
2. Incidental Registration Right.
(a) Whenever the Company proposes to file a Registration
Statement at any time or from time to time after the issuance to the Former ICH
Members of any Registrable Shares, it will, prior to such filing, give written
notice to the registered holders of the Registrable Shares (each, a "Holder,"
collectively, the "Holders") of its intention to do so (which notice shall
include a list of the jurisdictions in which the Company intends to attempt to
qualify such securities under the applicable Blue Sky or other state securities
laws), and upon the written request of any Holder, given within 20 days after
receipt of any such notice (which request shall state the intended methods of
distribution of Registrable Shares by said Holders), the Company will include
in such registration (and any related qualification under Blue Sky or other
compliance filings) all Registrable Shares which the Company has been requested
by said Holders to register, to the extent necessary to permit the sale or
other disposition in accordance with the intended methods of distribution
specified in the request of said Holders.
(b) If the offering to which the proposed registration
under this paragraph 2 relates is to be distributed by or through an
underwriter or underwriters, the Holders, if requested by such underwriters,
shall agree to sell those Registrable Shares which are subject to the
Incidental Registration Statement to or through such underwriters at the same
price and on the same terms to be paid to the Company; provided, however, that
if in the written opinion of the managing underwriter the registration of all
or part of the Registrable Shares which the Holders have requested to be
included in addition to the shares being sold
<PAGE> 34
by the Company pursuant to such offering, would materially and adversely affect
such public offering, then and in that event the Company shall be required to
register only that number of Registrable Shares, if any, which the underwriter
or managing underwriter reasonably believes may be sold without causing such
adverse effect. If any Holder proposes to distribute their Common Stock of the
Company through such underwriting, said Holder shall enter into an underwriting
agreement with the underwriter or underwriters selected for underwriting by the
Company containing such terms as are customary in such agreements; provided,
however, said Holder shall not be required to indemnify the underwriters for
any misstatement or omission contained in the Registration Statement except to
the extent it relates to information requested of and furnished by said Holder.
3. Amendments.
If the Company has delivered preliminary or final prospectuses to any
Holder pursuant to paragraph 2 hereof, and after having done so the prospectus
should be amended to comply with the requirements of the Securities Act, the
Company shall promptly notify said Holders, and if requested, said Holders
shall immediately cease making offers of Registrable Shares and return all
prospectuses in their possession relating to such registration to the Company.
The Company shall promptly amend its registration statement and provide said
Holders with revised prospectuses, and following receipt of the revised
prospectuses, said Holders shall be free to resume making offers of the
Registrable Shares in accordance with the terms thereof.
<PAGE> 35
4. Opinion.
As a condition to including the Registrable Shares of any Holder in
any registration statement pursuant to paragraph 2 hereof, said Holder shall,
if requested by the Company, present an opinion of independent counsel
reasonably acceptable to the Company to the effect that no proposed public sale
of the Registrable Shares requested to be registered by said Holder may be made
unless a registration statement under the Securities Act shall be in effect
with respect to such Registrable Shares; provided, however, that no such
opinion shall be required for any registration statement to become effective
within two years after the issuance of the Registrable Shares.
5. Allocation of Expenses.
"Registration Expenses" shall mean all expenses pertaining to the
Registrable Shares incurred by the Company in complying with the terms hereof,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel and accountants for the Company,
state Blue Sky fees and expenses, exchange listing fees and expenses and the
expense of any special audits incident to or required by any such registration,
but excluding underwriting discounts and selling commissions. All Registration
Expenses incurred as a result of any registration made pursuant to paragraph 2
hereof (an "Incidental Registration Statement"), shall be borne by the Company.
<PAGE> 36
6. Indemnification.
(a) In the event of any registration of any of the
Registrable Shares under the Securities Act pursuant to this Exhibit, the
Company will indemnify and hold harmless any selling Holders against any losses,
claim damages or liabilities, joint or several, to which said Holders may
become subject under the Securities Act, the Exchange Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon: (i) any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement under
which such Registrable Shares were registered under the Securities Act; (ii)
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto; or (iii) an omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statement therein not misleading; and the Company will reimburse each
selling Holder for any legal or other out-of-pocket expenses reasonably
incurred by selling Holders in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable to any selling Holder in any such case if, and to
the extent that, any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or omission made in the Registration Statement,
preliminary prospectus or prospectus, or the amendment or supplement in
reliance upon and in conformity with information furnished to the Company by or
on behalf of said selling Holder in writing, for use in the preparation
thereof.
<PAGE> 37
(b) In the event of any registration of any of the
Registrable Shares under the Securities Act pursuant to this Exhibit, each
selling Holder will indemnify and hold harmless the Company, each of its
directors and officers and each underwriter (if any) and each person, if any,
who controls the Company or any such underwriter within the meaning of the
Securities Act against any losses, claims, damages or liabilities, joint or
several, to which the Company or any such director, officer, underwriter or
controlling person may become subject under the Securities Act, the Exchange
Act or otherwise, insofar such losses, claims, damages or liabilities (or
actions in respect thereto arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of any material fact contained in any
Registration Statement under which such Registrable Shares were registered
under the Securities Act; (ii) any preliminary prospectus or final prospectus
contained in the Registration Statement, or any amendment or supplement to the
Registration Statement; or (iii) an omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; with respect to each of the foregoing, if the statement
or omission was made in reliance upon and in conformity with information
furnished to the Company by or on behalf of said Holder for use in connection
with the preparation of the Registration Statement or prospectus, or arise out
of or are based upon any other violation by the selling Holder of any Federal
or state securities law or rule or regulation thereunder and the selling Holder
will reimburse the Company and each such director, officer, underwriter and
controlling person for any legal or other out-
<PAGE> 38
of-pocket expenses reasonably incurred by the Company or any such director,
officer, underwriter or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action.
(c) For purposes of administering the indemnification
provisions of this paragraph 4, the following procedures shall apply:
(i) After receipt by an indemnified party under
this paragraph 4 of any notice of he commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, notify the identifying party in writing of the commencement
thereof.
(ii) After notification is given as aforesaid, the
indemnifying party shall be entitled to participate in such action and, at its
sole discretion, to assume the defense thereof with counsel mutually
satisfactory to the indemnified and indemnifying parties.
7. Assignment.
The incidental registration rights afforded hereunder shall inure to
the benefit of and shall be binding upon the heirs, executors and personal
representatives of and successors of each Holder and transferees of the
Registrable Shares. The rights hereunder may be assigned to each Holder's
transferees.
<PAGE> 39
The Former ICH Members acknowledge that the certificates for
such MHM Stock will bear a legend on the face thereof
substantially as follows:
"The shares represented by this certificate have been
acquired for investment and have not been registered under the
Securities Act of 1933 or under applicable state securities
laws. The shares may not be sold except pursuant to an
exemption therefrom, the availability of which must be
established to the satisfaction of the Buyer."
2. Each of the Former ICH Members represent and warrant that they
are "assignees" of ICH within the meaning of the Agreement and, therefore, are
entitled to receive any payment of Additional Consideration or following a
Disposition to be made to the Company under the Agreement.
3. Continuation of Agreement. The Agreement as amended hereby
shall continue in full force and effect.
4. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have each executed and
delivered this Amendment as of the date first above written.
MENTAL HEALTH MANAGEMENT, INC.
By:
----------------------------
Michael S. Pinkert
President
FORMER ICH MEMBERS:
POINT VENTURE PARTNERS, L.P.
By: /s/ KENT L. ENGELMEIER
----------------------------
Name: KENT L. ENGELMEIER
--------------------------
Title: GENERAL PARTNER
-------------------------
.6-
<PAGE> 40
POINT VENTURE PENNSYLVANIA, L.P.
By: /s/ KENT L. ENGELMEIER
----------------------------
Name: KENT L. ENGELMEIER
--------------------------
Title: GENERAL PARTNER
-------------------------
VENTURE FIRST II, L.P.
By: [SIG]
----------------------------
Name:
--------------------------
Title:
-------------------------
CANADIAN IMPERIAL BANK
OF COMMERCE TRUST COMPANY
(BAHAMAS) LIMITED, TRUSTEE
/s/ CARLOS E. CHISHOLM
By: /s/ LINDA L. WILLIAMS
----------------------------
Name: CARLOS E. CHISHOLM
& LINDA L. WILLIAMS
--------------------------
Title: MANAGER, TRUST DEPT. AND
TRUST OFFICER
-------------------------
WALNUT CAPITAL CORP.
By: /s/ JOEL S. KANTER
----------------------------
Name: JOEL S. KANTER
--------------------------
Title: PRESIDENT
-------------------------
WINDY CITY, INC.
By: /s/ JOEL S. KANTER
----------------------------
Name: JOEL S. KANTER
--------------------------
Title: PRESIDENT
-------------------------
By:
-------------------------------
H. Charles Mohler, DDS
.7-
<PAGE> 41
/s/ DAVID C. WINTERS
-------------------------------
David C. Winters
/s/ JAMES D. STRAUSBURG
-------------------------------
James D. Strausburg
/s/ THOMAS C. NEWBILL, JR.
-------------------------------
Thomas C. Newbill, JR.
-------------------------------
W. C. McGraw
.8 -
<PAGE> 42
AMENDMENT TO REPURCHASE AGREEMENT
THIS AMENDMENT TO REPURCHASE AGREEMENT ("Amendment") is made and
executed this 22 day of August, 1995, by and between MHM Extended Care
Services, Inc., a Delaware corporation (the "Company") and Murray I. Firestone,
Ph.D. (the "Holder")
W I T N E S S E T H
WHEREAS, the Company and the Holder entered into a certain Repurchase
Agreement dated and effective as of the 7th day of July, 1995 (the "Agreement")
in connection with a Purchase Warrant issued by the Company to the Holder on
the same date (the "Warrant");
WHEREAS, the Company, in reviewing the Agreement, has determined that
the calculation provided in Section 2 of the Agreement that defines the "Fair
Market Price of the Warrant" could lead to potentially inequitable results that
would be detrimental to the Company, and desires to amend the Agreement to
avoid such potentially inequitable results;
WHEREAS, the Holder, acting in good faith and with a desire to deal
fairly with the Company, is willing to amend the Agreement in accordance with
the Company's desires, based on the Holder's belief that if the Holder
determines subsequently that any provision of the Warrant or the Agreement is
susceptible to an interpretation that could lead to potentially inequitable
results detrimental to the Holder, that the Company will reciprocate the
Holder's good faith and fair dealing in entering into this Amendment and will
amend the Warrant and/or the Agreement as necessary to avoid any such inequity;
WHEREAS, the Company acknowledges the Holder's willingness to enter
into this Amendment in accordance with the Company's desires, and agrees that
if the Holder determines subsequently that any provision of the Warrant or the
Agreement is susceptible to an interpretation that could lead to potentially
inequitable results detrimental to the Holder, the Company will reciprocate the
Holder's good faith and fair dealing and will amend the Warrant and/or the
Agreement as necessary to avoid any such inequity; and
NOW, THEREFORE, intending to be legally bound hereby, and in
consideration of the foregoing recitals, the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto and each of them do agree as
follows:
1. Paragraph 2 of the Agreement is hereby amended and restated in
its entirety as follows:
-1-
<PAGE> 43
2. Purchase of Warrant at the Option of Holder. If the Holder shall
desire to sell all of the Holder's rights, title and interest in the
Warrant upon the last day of the initial or extended term of the Warrant
(the "Repurchase Date"), then the Holder shall send a notice (in the form
set forth as Exhibit A, attached hereto) to the Company within ninety (90)
days prior to the Repurchase Date, and, if it has received a properly
completed notice, the Company shall, within thirty (30) days following the
Repurchase Date, be obligated to repurchase from the Holder all of the
Holder's rights, title and interest in the Warrant at such time, at a price
equal to the Fair Market Value of the Warrant (as hereinafter defined) on
the Repurchase Date. The purchase price shall be paid in cash within
thirty (30) days after the Repurchase Date. For the purposes of this
Agreement, the "Fair Market Value of the Warrant" shall mean an amount
equal to the product of (a) the Company's net revenues for its most
recently completed fiscal year, (b) divided by the total number of shares
of the Company's Common Stock outstanding on the Repurchase Date, (c)
multiplied by the number of shares of the Company's Common Stock which the
Holder is then entitled to purchase under the terms of the Warrant. For
the purposes of this Agreement, the net revenues of the Company shall be
determined by reference to the Company's income statements, prepared in
accordance with generally accepted accounting principles, applied in a
manner consistent with the Company's prior practices. The right to require
the Company to repurchase the Holder's interest in the Warrant may only be
exercised within the time period set forth above. If this right is not
exercised, it shall immediately expire.
2. In all other respects, except as otherwise provided for herein,
all other terms and conditions of the Agreement shall remain unchanged and in
full force and effect. Any conflict between the terms and conditions of the
Agreement and this Amendment (including the recitals hereto) shall be construed
in favor of this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment the
date and year first above written.
Corporate Seal MHM Extended Care Services, Inc.
By: /s/ MICHAEL S. PINKERT
------------------------------
Michael S. Pinkert President
-2-
<PAGE> 44
Attest: /s/ CAROLYN ZIMMERMAN
---------------------------------
Carolyn Zimmerman, Secretary
/s/ MURRAY I. FIRESTONE
- ----------------------------- ----------------------------------------
Witness Murray I. Firestone, Ph.D.
-3-
<PAGE> 1
REPURCHASE AGREEMENT
THIS AGREEMENT, made this 7th day of July, 1995, by and among MHM
Extended Care Services, Inc., a Delaware corporation (the "Company") and Murray
I. Firestone, Ph.D., an individual, (the "Holder").
W I T N E S S E T H :
WHEREAS, pursuant to a Warrant (the "Warrant") issued on even date
herewith, the Company has issued certain rights to Holder to purchase shares of
the Company's Common Stock; and
WHEREAS, the Company and the Holder wish to make provision for the
Holder to require the Company to purchase all of the Holder's rights, title and
interest in the Warrant, all upon terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. Ownership of the Warrant. As of the date of the execution of
this Agreement, the Holder is the legal and equitable owner of all of the
rights and privileges of, and all of the responsibilities under, the Warrant.
2. Purchase of Warrant at the Option of Holder. If the Holder
shall desire to sell all of the Holder's rights, title and interest in the
Warrant upon the last day of the initial or extended term of the Warrant (the
"Repurchase Date"), then the Holder shall send a notice (in the form set forth
as Exhibit A, attached hereto) to the Company within ninety (90) days prior to
the Repurchase Date, and, if it has received a properly completed notice, the
Company shall, within thirty (30) days following the Repurchase Date, be
obligated to repurchase from the Holder all of the Holder's rights, title and
interest in the Warrant at such time, at a price equal to the Fair Market Value
of the Warrant (as hereinafter defined) on the Repurchase Date. The purchase
price shall be paid in cash within thirty (30) days after the Repurchase Date.
For the purposes of this Agreement, the "Fair Market Value of this Warrant"
shall mean an amount equal to (a) the
<PAGE> 2
-2-
Company's net revenues for its most recently completed fiscal year multiplied
by one and then (b) multiplied by the number of shares of the Company's Common
Stock which the Holder is then entitled to purchase under the terms of the
Warrant. For the purposes of this Agreement, the net revenues of the Company
shall be determined by reference to the Company's income statements, prepared
in accordance with generally accepted accounting principles, applied in a
manner consistent with the Company's prior practices. The right to require the
Company to repurchase the Holder's interest in the Warrant may only be
exercised within the time period set forth above. If this right is not
exercised, it shall immediately expire.
3. Intentionally Deleted.
4. Notices.
(a) Each notice, demand, request, consent, report, approval or
communication ("Notice") under this Agreement shall be in writing and given by
telex, telegram, telecopy, personal delivery or receipted delivery service or
certified U.S. mail, return receipt requested, prepaid and properly addressed
to the address of the party to be served as shown below. Notice shall be
effective on the date it was sent via telex, telegram or telecopy, the date
delivered personally or by receipted delivery service, or three (3) days after
the date the Notice was mailed.
(b) Each notice which is or may be required to be given in
connection with this Warrant shall be in writing, and given by telex, telegram,
telecopy, personal delivery, receipted delivery service, or by certified mail,
return receipt requested, prepaid and properly addressed as shown below.
Notices shall be effective on the date sent via telex, telegram or telecopy,
the date delivered personally or by receipted delivery service, or three (3)
days after the date mailed:
If to the Company: MHM Extended Care Services, Inc.
990 Hammond Drive, Suite 310
Atlanta, GA 30328
With a copy to: Alan S. Einhorn, Esq.
General Counsel
Mental Health Management, Inc.
7601 Lewinsville Road, Suite 200
McLean, VA 22102
<PAGE> 3
-3-
If to Holder: Murray I. Firestone, Ph.D.
--------------------------
--------------------------
(c) Each party may designate by Notice to the others in writing,
given in the foregoing manner, a new address to which any Notice may thereafter
be so given, served or sent.
5. Captions. The section headings contained in this Agreement are
for convenience only and in no manner shall be construed as part of this
Agreement.
6. Non-Transferability. The rights granted to the Holder
hereunder are personal and many not be transferred at any time.
7. Governing Law. The validity, interpretation, and performance
of this Agreement shall be governed by the laws of the State of Delaware.
8. Further Assurances. The parties hereto agree to execute any
and all other and further instruments and perform any and all acts which are or
may become necessary to effectuate the terms of this Agreement.
9. Binding Effect; Assignability. This Agreement shall be
binding upon and shall inure to the benefit of the parties, their respective
heirs, personal representatives, successors and, to the extent permitted,
assigns, but may not be assigned by any party without the prior written consent
of the other party. Notwithstanding the foregoing, the Company shall have the
right to assign all of its rights and obligations under this Agreement to a
wholly-owned subsidiary of the Company.
<PAGE> 4
-4-
10. Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties pertaining to the subject matter
hereof, and there are no other prior or contemporaneous, written or oral
agreements, understandings, undertakings, negotiations, promises, discussions,
warranties or covenants not specifically referred to or contained herein or
attached hereto. No supplement, modification, termination in whole or in part
or waiver of this Agreement shall be binding unless executed in writing by the
party to be bound thereby. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver of any other provision
hereof (whether or not similar), nor shall any such waiver constitute a
continuing waiver unless otherwise expressly provided.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the corporate party hereto has caused this
Agreement to be executed by its respected duly authorized officers and has
affixed its respected corporate seals, and the individual party has hereunto
set his hand and seal, all on the day and year first above written.
Corporate Seal MHM Extended Care Services, Inc.
By:
------------------------------
Michael S. Pinkert, President
Attest:
--------------------------
Alan S. Einhorn
Secretary
[SIG] [SIG] (SEAL)
- ------------------------- ---------------------------------
Witness Murray I. Firestone
<PAGE> 1
AMENDMENT TO REPURCHASE AGREEMENT
THIS AMENDMENT TO REPURCHASE AGREEMENT ("Amendment") is made and
executed this 22 day of August, 1995, by and between MHM Extended Care
Services, Inc., a Delaware corporation (the "Company") and Murray I. Firestone,
Ph.D. (the "Holder")
W I T N E S S E T H
WHEREAS, the Company and the Holder entered into a certain Repurchase
Agreement dated and effective as of the 7th day of July, 1995 (the "Agreement")
in connection with a Purchase Warrant issued by the Company to the Holder on
the same date (the "Warrant");
WHEREAS, the Company, in reviewing the Agreement, has determined that
the calculation provided in Section 2 of the Agreement that defines the "Fair
Market Price of the Warrant" could lead to potentially inequitable results that
would be detrimental to the Company, and desires to amend the Agreement to
avoid such potentially inequitable results;
WHEREAS, the Holder, acting in good faith and with a desire to deal
fairly with the Company, is willing to amend the Agreement in accordance with
the Company's desires, based on the Holder's belief that if the Holder
determines subsequently that any provision of the Warrant or the Agreement is
susceptible to an interpretation that could lead to potentially inequitable
results detrimental to the Holder, that the Company will reciprocate the
Holder's good faith and fair dealing in entering into this Amendment and will
amend the Warrant and/or the Agreement as necessary to avoid any such inequity;
WHEREAS, the Company acknowledges the Holder's willingness to enter
into this Amendment in accordance with the Company's desires, and agrees that
if the Holder determines subsequently that any provision of the Warrant or the
Agreement is susceptible to an interpretation that could lead to potentially
inequitable results detrimental to the Holder, the Company will reciprocate the
Holder's good faith and fair dealing and will amend the Warrant and/or the
Agreement as necessary to avoid any such inequity; and
NOW, THEREFORE, intending to be legally bound hereby, and in
consideration of the foregoing recitals, the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto and each of them do agree as
follows:
1. Paragraph 2 of the Agreement is hereby amended and restated in
its entirety as follows:
-1-
<PAGE> 2
2. Purchase of Warrant at the Option of Holder. If the Holder shall
desire to sell all of the Holder's rights, title and interest in the
Warrant upon the last day of the initial or extended term of the Warrant
(the "Repurchase Date"), then the Holder shall send a notice (in the form
set forth as Exhibit A, attached hereto) to the Company within ninety (90)
days prior to the Repurchase Date, and, if it has received a properly
completed notice, the Company shall, within thirty (30) days following the
Repurchase Date, be obligated to repurchase from the Holder all of the
Holder's rights, title and interest in the Warrant at such time, at a price
equal to the Fair Market Value of the Warrant (as hereinafter defined) on
the Repurchase Date. The purchase price shall be paid in cash within
thirty (30) days after the Repurchase Date. For the purposes of this
Agreement, the "Fair Market Value of the Warrant" shall mean an amount
equal to the product of (a) the Company's net revenues for its most
recently completed fiscal year, (b) divided by the total number of shares
of the Company's Common Stock outstanding on the Repurchase Date, (c)
multiplied by the number of shares of the Company's Common Stock which the
Holder is then entitled to purchase under the terms of the Warrant. For
the purposes of this Agreement, the net revenues of the Company shall be
determined by reference to the Company's income statements, prepared in
accordance with generally accepted accounting principles, applied in a
manner consistent with the Company's prior practices. The right to require
the Company to repurchase the Holder's interest in the Warrant may only be
exercised within the time period set forth above. If this right is not
exercised, it shall immediately expire.
2. In all other respects, except as otherwise provided for herein,
all other terms and conditions of the Agreement shall remain unchanged and in
full force and effect. Any conflict between the terms and conditions of the
Agreement and this Amendment (including the recitals hereto) shall be construed
in favor of this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment the
date and year first above written.
Corporate Seal MHM Extended Care Services, Inc.
By: /s/ MICHAEL S. PINKERT
------------------------------
Michael S. Pinkert President
-2-
<PAGE> 3
Attest: /s/ CAROLYN ZIMMERMAN
---------------------------------
Carolyn Zimmerman, Secretary
/s/ MURRAY I. FIRESTONE
- ----------------------------- ----------------------------------------
Witness Murray I. Firestone, Ph.D.
-3-
<PAGE> 1
EXHIBIT 10.17
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT ("Sublease") is made and entered into this
______ day of June, 1996, by and between STANLEY MARTIN COMPANIES, INC., a
Maryland corporation, herein referred to as "Tenant", and MHM SERVICES, INC., a
Delaware corporation, herein referred to as "Subtenant".
RECITALS:
A. Tenant is leasing a part of the premises located on the Eighth
Floor in the building (the "Building") having an address of 8000 Towers
Crescent Drive, Vienna, Virginia 22182, located in the County of Fairfax,
Virginia, under a certain Agreement of Lease dated September 15, 1988, by and
between J.T.L. Tycon Towers I Limited Partnership, predecessor in interest to
the current landlord, Tycon Tower I Investment Limited Partnership
("Landlord"), and the Tenant (said Agreement of Lease, as amended from time to
time prior to or subsequent to the dated hereto, is hereinafter referred to as
the "Lease"), said Lease being hereby incorporated herein by reference for all
purposes.
B. Tenant wishes to sublease a portion of the premises covered by
the Lease (the "Premises") to the Subtenant on the terms stated herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
rights, obligations and covenants contained herein, the parties agree as
follows:
1. SUBLEASED PREMISES USE. The Tenant hereby subleases to the
Subtenant, and the Subtenant hereby hires and leases from the Tenant, a portion
of the Premises containing approximately 6597 rentable square feet, as more
particularly described on Exhibit "A" attached hereto and incorporated herein
by reference, together with use in common with Tenant of the reception and
lobby area in the Premises as shown on Exhibit "A" attached hereto, which area
is herein collectively referred to as the "Subleased Premises". Subtenant
shall also be entitled, without charge other than the Base Rent (as hereinafter
defined) and the Additional Rent (as hereinafter defined) as set forth herein,
to (i) non-exclusive use of twenty-three (23) non-reserved parking spaces in
the parking garage which are allocated to Tenant under the Lease, (ii) use of
the conference room in the Premises on a quarterly basis for Subtenant's Board
of Directors meetings and for other meetings from time to time at such times to
be coordinated with Tenant's use of such conference room and which does not
interfere with Tenant's ordinary use of the conference room (Tenant agrees not
to interfere with Subtenant's previously scheduled use of the conference room),
and (iii) the services of Tenant's receptionist for the purposes of greeting
and announcing visitors to the Subtenant. Subtenant agrees to use the
Subleased Premises only for general office purposes and otherwise strictly in
accordance with the terms, covenants and conditions contained in the Lease.
<PAGE> 2
2. TERM: The term of this Sublease shall commence on August 15,
1996 (the "Commencement Date") and shall expire on December 31, 1998 (the
"Term"), unless sooner terminated as provided herein.
3. RENT. The total base rent ("Base Rent") for the initial year
of the Term commencing on September 1, 1996, shall be One Hundred Forty-Nine
Thousand One Hundred and No/100 Dollars ($149,100.00), payable in equal monthly
installments of Twelve Thousand Four Hundred Twenty-Five and No/100 Dollars
($12,45.00) per month which shall be due and payable on the first day of each
calendar month during the Term. On the first business day after Subtenant
receives notice that Tenant has obtained Landlord's approval of this Sublease
pursuant to Section 24 hereof, Subtenant shall deliver to Tenant payment in the
amount of $6,815.00 which constitutes the Base Rent for the time period
beginning on the Commencement Date and ending August 31, 1996, together with
payment of the Base Rent for the final month of the Term of this Sublease (in
the amount of $13,181.00). In the event that this Sublease terminates prior to
the final month of the Term, then such payment of Base Rent for the final month
of the Term shall be handled in the same manner as the Security Deposit is
handled pursuant to Section 4 below (i.e., returned to Subtenant or applied by
Tenant to any damages, injuries, expenses or liabilities incurred by Tenant as
a result of a default by Subtenant hereunder). The Base Rent for each year of
the Term of this Sublease shall increase on an annual basis by an amount equal
to three percent (3%) of the Base Rent payable for the just-completed year of
the Term, with the first Base Rent adjustment occurring effective as of
September 1, 1997, with an additional such adjustment being made effective
September 1, 1998. All payments of Base Rent, Additional Rent and all other
payments required to be made by Subtenant to Tenant hereunder shall be
delivered to Tenant by check or bank wire transfer, as Subtenant may elect, at
8000 Towers Crescent Drive, The Eighth Floor, Vienna, Virginia 22182, or (if by
bank wire transfer) to the bank account designated by Tenant.
4. SECURITY DEPOSIT. On the first business day after Subtenant
receives notice that Tenant has obtained Landlord's approval of this Sublease
pursuant to Section 24 hereof, Seven Thousand and No/100 Dollars (#37,000.00).
Upon the occurrence of a default hereunder by Subtenant, then Tenant, without
prejudice to any other remedy which may be available to Tenant hereunder or
under applicable law, may apply such Security Deposit to any damages, injuries,
expenses or liabilities incurred by Tenant as a result of such default (but
such Security Deposit shall not be considered as liquidated damages int he
event of such default by Subtenant). In the event that Tenant so applies the
Security Deposit during the term of this Sublease but does not terminate this
Sublease as a result of such default by Subtenant, then within ten (10) days
after a written demand by Tenant to Subtenant, Subtenant shall restore the
Security Deposit to its original amount of $37,000.00. Tenant shall not be
required to hold the Security Deposit in a separate account and the Security
Deposit may be commingled with other funds of Tenant, and Tenant shall not be
required to accrue or pay interest on the Security Deposit. So long as
Subtenant is not in default under this Sublease, two-thirds (2/3) of the
Security Deposit then being held by Tenant shall be applied on a pro rata basis
of the Base Rent payable of reach of the months of June through November,
inclusive, of 1998. If Subtenant fully performs all of its covenants,
obligations and agreements under the terms of this Sublease, the remaining
portion of
<PAGE> 3
the Security Deposit shall be returned to Subtenant within thirty (30) days
after the expiration of the Term hereof.
5. NET EASE. This Sublease shall be deemed and construed to be a
"net lease", and Subtenant shall pay the Base Rent, Additional Rent and other
payments hereunder to Tenant absolutely net throughout the Term, free of any
charges, assessments, impositions, or deductions of any kind and without
abatement, deduction or setoff. To the extent that Landlord has agreed to
furnish certain utilities and services to Tenant, such as air conditioning,
heat, elevators, electric current, water and other utility services, Tenant
agrees that to the extent such services are furnished to the Subleased Premises
that Subtenant shall be entitled to the use and benefit of such services;
provided, however, that Tenant shall not have any liability or responsibility
to Subtenant for the quality of such utilities and services. Subtenant agrees
to reimburse Tenant for all amounts charged to Tenant as a result of "after
hour" services to the Subleased Premises ordered by Subtenant, including heat,
air conditioning, electricity and other services, within ten (10) days after
delivery by Tenant to Subtenant of a request for payment, which request shall
include a copy of any invoice for such services received by Tenant from
Landlord.
6. ADDITIONAL RENT. The Lease requires Tenant to make payments
to Landlord on the basis of increases in operating expenses and real estate
taxes. Subtenant agrees to pay Tenant additional ren t(the "Additional Rent")
equal to Subtenant's pro rata share of such increases above the amount payable
by Tenant to Landlord during the Base Year (as hereinafter defined). For
purposes of this Paragraph 6, the Base year shall be calendar year 1996, and
Subtenant's pro rata share shall be the product of (i) the amount of such
increases above the Base Year payable from time to time by Tenant under the
Lease, multiplied by (ii) a fraction, the numerator of which shall be 7,100
square feet, and the denominator of which shall be the total number of square
feet of rentable area leased from time to time by Tenant pursuant to the Lease.
Payments of Additional Rent by Subtenant shall commence on January 1, 1997, and
shall be paid to Tenant on the same basis and at the same time that Tenant is
required to pay such additional rent to Landlord under the Lease. Tenant
agrees to furnish to Subtenant a copy of any statement received by Tenant from
Landlord showing the amounts of additional rent to be paid by Tenant under the
Lease and a statement setting forth the calculation of Subtenant's pro rata
share of such amounts to be paid by Subtenant as Additional Rent. Tenant
agrees to reimburse to Subtenant a pro rata share of any reimbursements made by
Landlord to Tenant that result from any overpayments of additional rent made by
Tenant during the preceding calendar year which apply tot he time period during
the Term hereof within thirty (30) days after Tenant receives such
reimbursement from Landlord.
7. LATE FEES. If any installment of Base Rent, Additional Rent
or other sums are not paid by Subtenant within five (5) business days of the
date when the same becomes due, there shall be imposed a late payment charge of
five percent (5%) of the amount of such installment, which charge shall be
immediately due and payable. All payments received shall be applied first to
unpaid late charges, if any, commencing with the earliest late charge imposed,
then to any delinquent installments of Base Rent and/or Additional Rent,
commencing with the earliest installment then unpaid, and finally to the most
current installment of Base Rent and/or Additional Rent due. No express
designation of any payment by the Subtenant shall vary the
<PAGE> 4
application of payment as aforesaid. Nothing herein shall be deemed to limit
or supersede the remedies of Tenant as set forth herein.
8. TERMS OF LEASE. All of the terms, provisions, covenants and
conditions of the Lease are incorporated herein by reference and are hereby
made a part hereof and are superior to this Sublease. As between the parties
hereto, Subtenant hereby assumes all of the obligations and liabilities of the
Tenant with respect to the Subleased Premises, as the "tenant" under the Lease,
other than the obligation to pay Landlord rent or other payments thereunder,
and Tenant shall have all of the rights of the Landlord under the Lease as
against Subtenant with respect to Subtenant's occupancy and use of the
Subleased Premises, except (i) to the extent such rights are modified by or
inconsistent with the terms of this Sublease, (ii) Tenant shall have no right
to terminate this Sublease under Section 29 of the Lease, and (iii) Tenant's
liability to Subtenant shall not be limited by Section 16(c) of the Lease.
Subtenant expressly covenants and agreed with Tenant that Subtenant will not
commit or permit to occur any event which would constitute an event of default
under the Lease or omit to do anything with respect to the Subleased Premises
which Subtenant is obligated to do under the terms of this Sublease or under
the terms of the Lease which would constitute and event o default under the
Lease.
9. DEFAULT OF SUBTENANT. If Subtenant shall (i) fail to pay any
monthly installment of Base Rent or any installment of Additional Rent or shall
fail to timely make any other payment required by the terms and provisions of
this Sublease (although no legal or formal demand has been made therefor) and
such default continues for five (5) days after the date that such payment is
due and payable, or (ii) violate or fail to perform any other terms,
conditions, covenants or agreements herein made by Subtenant and such default
continues for ten (10) days after delivery of written notice thereof by Tenant
or Subtenant, or (iii) abandon or vacate the Subleased Premises, or (iv) make
or consent to an assignment for benefit of creditors or a common law
composition of creditors, or a receiver of Subtenant's assets is appointed, or
Subtenant files a voluntary petition in any bankruptcy or insolvency
proceeding, or an involuntary petition in any bankruptcy or insolvency
proceeding si filed against Subtenant and not discharged by Subtenant within 30
days, or Subtenant is adjudicated a bankruptcy, or (v) default under the terms,
covenants and conditions of the Lease which Subtenant is required to perform or
observe pursuant to the terms of this Sublease and the expiration of any
applicable notice and/or cure period provided under the Lease, then, and in any
of said events, this Sublease, at the option of Tenant, shall cease and
terminate, and Tenant shall provide notice to quit and Tenant may proceed to
recover possession under and by virtue of the provisions of the laws of the
Commonwealth of Virginia or by such other proceedings, including re-entry and
possession, as may be applicable, and Tenant shall further be entitled to
recover all damages from Subtenant and to pursue any other rights at law or in
equity which may be available to Tenant as a result of such default by
Subtenant. All rights, powers and remedies of Tenant shall be cumulative, and
the exercise of any one or more of such rights or remedies shall not impair
Tenant's right to exercise any other right or remedy, either concurrently or at
a later time.
10. CONDITION OF SUBLEASED PREMISES. The Subtenant has examined
and knows the condition of the Subleased Premises, and hereby acknowledges that
the Subleased Premises are in good order and repair and acceptable to him,
subject to the Renovation Work (as
<PAGE> 5
defined below) to be performed by Tenant pursuant to Section 11 below.
Subtenant expressly acknowledges that it is accepting possession of the
Subleased Premises in an "As Is, Where Is" condition without any warranties,
express or implied, and without Tenant being required to make any alterations,
improvements, repairs or decorations whatsoever to the Subleased Premises
either at the time possession is delivered to Subtenant or during the entire
term of this Sublease except for the Renovation Work. Subtenant agrees to keep
the Subleased Premises in good repair, order and condition in compliance with
the Lease, and to yield up the Subleased Premises in such condition. Upon the
termination or expiration of this Sublease, Subtenant will remove all of
Subtenant's property from the Subleased Premises on or before the expiration or
termination date an deliver possession of the Subleased Premises, thoroughly
clean and in good condition, reasonable wear and tear excepted, and in
compliance with the Lease and such reasonable conditions as may be set forth by
Tenant. Subtenant will be liable for any damages Tenant may suffer due to
Subtenant's failure to leave the Subleased Premises in the condition required
under this Section 10.
11. RENOVATION WORK ALTERATIONS. Within forty-five (45) days
after full execution hereof, Tenant agrees to perform the following work on the
Subleased Premises:
(i) Tenant shall paint or "touch up", as appropriate, the
walls within the Subleased Premises and shall clean the carpet and perform
appropriate cleaning of the wood floor within he Subleased Premises;
(ii) Tenant shall obtain a space plan from Bert Primo,
submit such plan to Subtenant for its approval (which approval shall not be
unreasonably withheld or delayed) and reconfigure the Subleased Premises
generally as shown on Exhibit "B" attached hereto and incorporated herein by
reference (if Subtenant does not approve such plans and Subtenant and Tenant
are unable to reach an agreement on the plans on or before July 11, 1996, then
either party shall be entitled to terminate this Sublease by delivery of
written notice thereof to the other party and thereupon the Security Deposit
and all installments of Base Rent previously paid by Subtenant to Tenant shall
be promptly refunded to Subtenant); and
(iii) Tenant will remove the peach colored wallpaper within
the Subleased Premises and repaint the subject wall.
The work to be performed by Tenant pursuant to subparagraphs (i), (ii)
and (iii) above is herein sometimes collectively referred to as the "Renovation
Work". In the event that the total costs and expenses incurred by Tenant for
performing the Renovation Work described in subparagraphs (ii) and (iii) above
exceeds Sixteen Thousand and No/10-0 Dollars ($16,000.00), in the aggregate,
then such excess costs and expenses shall be payable by Subtenant to Tenant
within five (5) business days after completion by Tenant of such Renovation
Work and delivery by Tenant to Subtenant of an invoice and other reasonable
supporting evidence reflecting the total costs and expenses incurred by Tenant
for such Renovation Work. The failure by Subtenant to pay such excess amount
within such five (5) business day period shall be a default hereunder by
Subtenant. Tenant intends to use it sown laborers, carpenters and other
workers to complete the Renovation Work. If Tenant's costs and expenses for
the Renovation Work is less than the
<PAGE> 6
aggregate amount of Sixteen Thousand and No/100 Dollars ($16,000.00), then such
difference shall be promptly paid by Tenant to Subtenant.
In addition to the Renovation Work to be performed by Tenant
hereunder, Tenant, at its expense, agrees to remove the signage presently
located on the wall behind the receptionist's desk area in the reception area
and replace such signage with new sinange reasonably acceptable to Tenant and
Subtenant identifying the location of Subtenant and Tenant within the Premises.
Tenant shall also use reasonably diligent efforts to cause Landlord to display
in the main lobby of the Building a building directory listing for Subtenant
and a reasonable number of Subtenant's key personnel as reasonably specified by
Subtenant. In addition, Subtenant, at its sole cost and expense, will install
any telephone lines necessary to connection the receptionist's phone system to
the phone system to be operated by Subtenant within the Subleased Premises so
that the receptionist can appropriately announce the arrival of visitors of
Subtenant. Subtenant shall have the right to obtain access to the Building and
Subleased Premises no later than July 22,m 1996, for the purpose of installing
a telephone system, computer network wiring, and electrical outlets for
Subtenant's use, which installation will be subtenant's sole cost, risk and
expense and which system shall remain the property of Subtenant; provided,
however, that the indemnification provisions of Section 19 below shall apply to
such installation.
Subtenant shall not make or install any additions, renovations,
alterations, improvements or other changes in or to the Subleased Premises,
including (without limitation) the walls, floors, ceilings and fixtures located
therein without first obtaining the prior written consent of Tenant and without
first obtaining any approvals required from the Landlord pursuant to the terms
and condition of the Lease.
1.2 LIENS. Subtenant shall keep the Subleased Premises free and
clear of all liens arising out of any work performed, materials furnished, or
obligations incurred by Subtenant or at Subtenant's request, and shall cause
any such liens which may be filed to be released within fifteen (15) days of
the filing thereof.
13. ASSIGNMENT AND SUBLETTING. The Subtenant shall not assign, or
further sublet the Subleased Premises or any part hereof without the prior
written consent of Tenant, which may be withheld in Tenant's sole and absolute
discretion. Any attempted assignment or sublet by Subtenant without obtaining
Tenant's prior written consent as required pursuant to this Section 13 shall
constitute a default hereunder by Subtenant and shall automatically be null and
void and of no force or effect.
14. TERMINATION OF LEASE. In the event that the Lease terminates
for any reason, this Sublease Agreement shall automatically terminate upon such
termination or cancellation of the Lease, and all obligations hereunder of the
parties hereto shall be extinguished as of the termination date other than
those obligations that expressly survive termination hereunder. As soon as
reasonably practical after Tenant becomes aware of any fact or circumstance
that could result in a termination of the Lease prior to December 31, 1998,
including (without limitation) a notice from Landlord regarding a default under
the Lease by Tenant, then Tenant shall give written notice to Subtenant of such
fact or circumstance and
<PAGE> 7
thereafter will keep Subtenant reasonably informed of any material developments
relating thereto. In addition, Tenant shall not reach an agreement with
Landlord regarding any such early termination without Subtenant receiving at
least sixty (60) days prior notice of the termination date.
15. INSURANCE. The Subtenant agrees to provide and keep in effect
during the Term hereof and pay for a public liability insurance policy and a
property damage insurance policy secured from an insurance company or companies
reasonably acceptable to Tenant, in which the limits shall not be less than the
amounts required under the Lease, and the protection for Tenant arising out of
the use and occupancy of the Subleased Premises, including the Building and
common areas, shall be equivalent to the protection obtained by Landlord from
Tenant under Section 14 of the Lease. Such insurance policies shall name
Tenant and Landlord as additional insureds thereunder, shall contain such other
provisions in favor of Tenant and Landlord as Tenant's insurance policies are
required to contain in favor of Landlord pursuant to the Lease, and shall
provide that such policies cannot be canceled without thirty (30) days prior
written notice to Tenant and Landlord. Subtenant shall provide Tenant with
receipts evidencing payment of premiums for all such insurance policies and
evidence of policy renewals at least thirty (30) days prior to the expiration
date of each policy. Tenant is to be furnished a copy of said policy or
suitable evidence of insurance, and failure to provide such insurance policy
within fifteen (15) days prior to the Commencement Date shall be considered an
event of default giving Tenant the right to terminate this Sublease pursuant to
the terms of this Sublease Agreement.
16. ACCESS. At all times during the term of this Sublease, Tenant
and its officers, employees and representatives and Landlord and its officers,
employees and representatives shall have the right to enter upon the Subleased
Premises in accordance with the terms and conditions set forth in the Lease for
the purpose of inspecting or making repairs, alterations or additions to the
Subleased Premises or to make certain that all covenants and agreements of this
Sublease are being kept and maintained by Subtenant.
17. HOLDING OVER. In the event that Subtenant does not fully
vacate the Subleased Premises on the expiration date of this Sublease (or
earlier termination date), then Subtenant shall be deemed to be a tenant at
sufferance and Tenant shall be entitled to pursue any cause of action which may
be available to Tenant at law or in equity to cause Subtenant to fully vacate
the Subleased Premises, and Subtenant shall be liable for rent during such
holdover period in an amount equal to One Hundred Fifty Percent (150%) of the
Base Rent in effect during the last month of the term of this Sublease,
calculated on a per diem basis.
18. GOVERNING LAW. Subtenant hereby indemnifies, defends and
holds Tenant harmless from and against any and all actions, claims, demands,
damages, costs, expenses and liabilities (including, without limitation,
reasonable attorneys' fees) asserted against, imposed upon or incurred by
Tenant by reason of (a) any violation caused, suffered or permitted by
Subtenant, its agents, servants, employees or invitees, of any of the terms,
covenants or conditions of the Lease, and (b) any damage or injury to persons
or property occurring upon or in connection with the use or occupancy by
Subtenant of the Subleased Premises.
<PAGE> 8
20. NOTICE. Whenever under this Sublease Agreement a provision is
made for notice of any kind, such notice shall be deemed sufficient notice and
service thereof, effect upon receipt or refusal to accept delivery, if such
notice is delivered by hand or mailed to Subtenant or Tenant at the following
addresses:
Tenant: Stanley Martin Companies, Inc.
8000 Towers Crescent Drive, Eighth Floor
Vienna, Virginia 22182
Attention: Martin K. Alloy, President
Subtenant: Until August 14, 1996:
MHM Services, Inc.
7601 Lewinsville Road
McLean, Virginia 22102
Attention: Michael S. Pinkert, President and
Chief Executive Officer
After August 14, 1996:
MHM Services, Inc.
8000 Towers Crescent Drive, Eighth Floor
Vienna, Virginia 22182
Attention: Michael S. Pinkert, President and
Chief Executive Officer
Such mailing shall be by certified mail, return receipt requested.
21. COMMISSION. Tenant shall pay commissions in connection with
this Sublease to Grubb and Ellis and to Zalco Realty Incorporated
(collectively, the "Brokers") in accordance with separate agreements entered
into by Tenant with the Brokers, such commissions to be payable upon the
Commencement Date so long as Subtenant takes possession of the Subleased
Premises and pays the initial installment of the Base Rent and all other sums
payable at or prior to the Commencement Date. Except for such commission to be
paid to Brokers by Tenant, Tenant and Subtenant each warrant to the other that
they have dealt with no agent or broker with respect to the transaction
contemplated by this Sublease. In the event that any claim for commission or
finder's fee is brought by any person or entity whatsoever as a consequence of
the transaction contemplated hereby and as a result of any action or omission
of either Tenant or Subtenant, then Tenant or Subtenant (whichever party is
alleged to have committed the act or omission which is the basis for such
claim), as the case may be, shall indemnify, defend and hold harmless the other
party against any loss, cost or expense of any nature, including (without
limitation) court costs and reasonable attorneys' fees arising as a consequence
of such claim for the commission or fee.
22. TIME. Time is of the essence with respect to all time periods
under this Sublease.
<PAGE> 9
23. LITIGATION. In the event that any party is required to resort
to litigation to enforce its rights under this Sublease, Tenant and Subtenant
agree that any judgment awarded to the prevailing party shall include all
litigation expenses of the prevailing party, including (without limitation)
reasonable attorneys' fees and court costs.
24. CONSENT OF LANDLORD. Subtenant acknowledges that it has been
advised by Tenant that Tenant must obtain the prior approval of Landlord for
this Sublease and the Renovation Work, and this Sublease is subject to Tenant
obtaining Landlord's approval (such approval of this Sublease shall include
Subtenant's listing in the Building directory as described in Section 11
hereof). Tenant agrees to diligently pursue obtaining such approval on or
before July 21, 196, then either party may terminate this Sublease by delivery
of written notice thereof to the other party and thereupon the Security Deposit
and all installments of Base Rent previously paid by Subtenant to Tenant shall
be promptly refunded to Subtenant.
25. PARTIES BOUND. Subject to the restrictions on assignment and
subletting by Subtenant pursuant to Section 13 hereof, this Sublease shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns.
26. COUNTERPART ORIGINALS. This Sublease may be executed in
multiple original counterparts, each of which shall be deemed to be an original
but all of which, taken together, shall be deemed to be one (1) Sublease.
WITNESS the following signatures and seals:
SUBTENANT:
MHM SERVICES, INC.
By: (SEAL)
--------------------------
Michael S. Pinkert, President
and Chief Executive Officer
TENANT:
STANLEY MARTIN COMPANIES, INC.
By: (SEAL)
--------------------------
Martin K. Alloy, President
<PAGE> 10
LIST OF EXHIBITS
Exhibit "A" Plan Showing Subleased Premises
Exhibit "B" Reconfiguration Plan for Subleased Premises
<PAGE> 1
EXHIBIT 10.18
ADMINISTAFF(R)
CLIENT SERVICE AGREEMENT
THIS CLIENT SERVICE AGREEMENT ("the Agreement"), is made by and between
Administaff Companies, Inc., ("Administaff"), a Delaware corporation with its
principal place of business at 19001 Crescent Springs Drive, Kingwood, Texas
77339-3802, and MHM Services, Inc. ("Client").
I. PERSONNEL
Subject to the terms of this Agreement, Administaff agrees to furnish Client,
and Client agrees to engage from Administaff, employees for the job functions
listed in Exhibit A ("Confidential Census"). Client warrants that information
supplied to Administaff concerning the employee functions is accurate.
II. TERM OF AGREEMENT
This Agreement shall commence on the date this Agreement is executed and remain
in force and effect for a term of one (1) year ("Initial Term"). Following the
Initial Term, this Agreement shall remain in full force and effect for
successive monthly terms (the "Extended Terms") until either (i) the Agreement
is renewed; or, (ii) the Agreement is terminated. During the Initial Term, and
any Extended Term of this Agreement, either Administaff or Client may terminate
this Agreement by giving thirty (30) days prior written notice.
III. ADMINISTRATION
3.1 There are a number of federal and state statutory, common law and
regulatory provisions which define the employer-employee relationship.
"Employer" status is based upon the function for which the employer-employee
relationship is being considered.
3.2 Administaff is the employer of those persons furnished to Client and
listed on Exhibit A and is liable as such for the following purposes:
a. compliance with rules and regulations governing the reporting
and payment of all federal and state taxes on payroll wages
paid under this Agreement including, but not limited to: (i)
federal income tax withholding provisions of the Internal
Revenue Code; (ii) state and/or local income tax withholding
provisions, if applicable; (iii) Federal Insurance
Contributions Act (FICA); (iv) Federal Unemployment Tax Act
(FUTA); and (v) applicable state unemployment provisions;
b. except as provided in Paragraph 3.4g below, compliance with
applicable workers' compensation laws including, but not
limited to: (i) procuring workers' compensation insurance;
(ii) completing and filing all required reports; and (iii)
managing claims;
c. compliance with the Consolidated Omnibus Reconciliation Act
(COBRA);
d. compliance with the Immigration Reform and Control Act (IRCA);
e. compliance with the Consumer Credit Protection Act, Title III;
f. procuring and providing employee benefits;
g. monitoring and transmitting to Client changes in governmental
regulations relating to policies and practices governing the
employer-employee relationship including, but not limited to,
issues such as recruiting, interviewing, testing, selecting,
orientation of, training, evaluating, replacing, supervision,
disciplining and terminating employees.
3.3 Client is the employer of those persons furnished by Administaff and
listed on Exhibit A and is liable as such for the following purposes:
a. compliance with Occupational Safety and Health Administration
(OSHA) regulations;
b. compliance with Environmental Protection Agency (EPA)
regulations and any state and/or local equivalent;
c. compliance with government contracting provisions including,
but not limited to: (i) Executive Order 11246; (ii) Vocational
Rehabilitation Act of 1973; (iii) Vietnam Era Veterans'
Readjustment Assistance Act of 1974; (iv) Walsh-Healey Public
Contracts Act; (v) Davis-Bacon Act, and (vi) Service Contract
Act of 1965;
d. compliance with the Fair Labor Standards Act (FLSA);
e. compliance with the Worker Adjustment and Retraining
Notification Act (WARN);
f. compliance with any professional licensing requirements;
g. compliance with any fidelity bonding requirements;
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<PAGE> 2
h. professional liability, including but not limited to
malpractice or errors and omissions coverage and compliance
with any regulation mandating such coverage;
i. Section 414(o) of the Internal Revenue Code (avoidance of
certain pension and non-pension employee benefits
requirements) (except as provided in paragraph 3.4c below);
j. assignment to, and ownership of, all intellectual property
rights including, but not limited to, inventions, whether
patentable or not, and patents resulting therefrom, copyrights
and trade secrets and all confidentiality agreements regarding
proprietary information.
3.4 Administaff and Client will be considered co-employers ("dual or joint
employers") of those persons furnished to Client by Administaff and listed on
Exhibit A for the following purposes:
a. compliance with Title VII of the 1964 Civil Rights Act;
b. compliance with the Age Discrimination in Employment Act
(ADEA);
c. compliance with the Employee Retirement Income Security Act
(ERISA) (except as provided by paragraph 3.3i above);
d. compliance with the Polygraph Protection Act;
e. compliance with the Federal Drug Free Workplace Act and any
state and/or local equivalent;
f. compliance with state employment discrimination laws
including, but not limited to, Article 5221k, Texas Revised
Civil Statues;
g. employer liability under workers' compensation laws;
h. implementation of policies and practices relating to the
employer-employee relationship such as recruiting,
interviewing, testing, selecting, orientation of, training,
evaluating, replacing, supervision, disciplining and
terminating employees; and
i. selection of fringe benefits, including, but not limited to,
holidays, vacation, sick leave, parental leave, military
leave, and leave of absence.
3.5 Nothing in paragraphs 3.2, 3.3 or 3.4 above shall be construed to
require either Administaff or Client to provide any of the matters referred to
therein except as provided by law or as otherwise specifically provided by this
contract.
3.6 For the purposes of this Agreement, determination of employer status
for situations not set forth and not contemplated herein shall be made by
mutual agreement of Administaff and Client.
IV. SUPERVISION
Administaff shall designate one or more on-site supervisors from among its
employees furnished to Client and listed on Exhibit A. On-site supervisors
shall direct operational and administrative matters relating to services
provided by Administaff's employees and shall carry out Administaff's policies
and procedures formulated in accordance with Paragraph 3.4h above.
V. ENROLLMENT FEE
Client agrees to pay Administaff a non-refundable enrollment fee in the sum
specified in Exhibit B (Client Service Application). This enrollment fee is
due and payable at the time that this Agreement is signed by Client.
VI. SERVICE FEE
In exchange for the personnel services provided by Administaff hereunder,
Administaff and Client agree as follows:
6.1 The Administaff fee rate percentage is set forth in Exhibit B (Client
Service Application) and is calculated utilizing the data submitted by Client
in Exhibit A. If such information is inaccurate, Client shall immediately agree
to amend Exhibit A to reflect the current information and shall pay, within ten
(10) days notice from Administaff of the error, any additional costs incurred
by Administaff as a result of the inaccuracy.
6.2 Each pay period, Client shall pay Administaff its fee comprised of:
(i) the gross payroll of Administaff employees leased to Client during such pay
period; and, (ii) a service fee equal to the fee rate percentage specified in
Exhibit B multiplied by the actual gross payroll of Administaff employees
furnished to Client during such pay period.
6.3 Administaff shall not adjust the fee rate percentage for Client during
any term of this Agreement except for adjustments made necessary by:
2
<PAGE> 3
(i) statutory and regulatory changes, including, but not limited
to, adjustments to FICA, federal and/or state unemployment
taxes and workers' compensation; and/or
(ii) changes in the information supplied on Exhibit A (Confidential
Census) initiated by Client to the extent that such change,
when applied to the recalculation of the fee rate percentage,
causes an increase or decrease of at least one fee rate
percentage point.
6.4 In addition to the foregoing, during any Extended Term, Administaff
may adjust the fee rate percentage upon thirty (30) days written notice to
Client.
6.5 Any increases in the fee rate percentages for statutory or regulatory
changes in employment taxes, insurance costs or job functions shall be effective
on the date of such statutory or regulatory increase or change.
6.6 Any increase in the fee will be billed with the next effective payroll
and be kept current at all times except for retroactive changes or statutory
and/or regulatory changes known at the time the payroll is billed.
6.7 Any change in the fee rate percentage shall be reflected in a revised
Exhibit B which shall then be made a part of this Agreement.
6.8 The fee provided for by this Agreement shall be due and payable at
least one (1) working day prior to the date of payroll delivery.
6.9 Client shall use a method of payment approved in advance by
Administaff.
6.10 Client or on-site supervisor shall report to Administaff all time
worked by all Administaff employees furnished to Client each pay period and
shall provide Administaff with written verification of same.
6.11 Client shall notify Administaff within two (2) working days of any
error in billing.
6.12 Client shall reimburse Administaff for services not contemplated by
this Agreement which may be required by Client.
VII. INSURANCE
7.1 Administaff shall furnish, and keep in full force and effect at all
times during the term of this Agreement, worker's compensation insurance
covering all Administaff employees furnished to Client pursuant to the terms of
this Agreement. Upon written request by Client, Administaff shall furnish a
certificate of insurance verifying such coverage.
7.2 Client shall furnish, and keep in force and effect at all times during
the term of this Agreement, comprehensive general liability insurance including
products/completed operations coverage with minimum limits of $1,000,000 per
occurrence and $2,000,000 aggregate. Client shall cause its insurance carrier
to issue a certificate of insurance to Administaff, Inc. confirming this
coverage and to give not less than thirty (30) days advance notice of
cancellation or material change.
7.3 Client shall furnish, and keep in force and effect at all times during
the term of this Agreement, comprehensive automobile liability insurance
covering all owned, hired and non-owned automobiles with a minimum limit of
$1,000,000 per occurrence combined single limit bodily injury and property
damage liability. The policy shall also provide uninsured motorists insurance
with a minimum combined single limit of Sixty Thousand Dollars ($60,000.00). In
states where "no fault" laws apply, Personal Injury Protection (P.I.P.) or
equivalent coverage shall be required to meet the requirements of the state.
The client shall cause its insurance carrier to issue a certificate of
insurance to Administaff Inc. confirming this coverage and to give not less
than thirty (30) days advance notice of cancellation or material change.
7.4 Client shall deliver copies of all insurance certificates required
pursuant to this Article signed by authorized representatives of the insurance
companies to Administaff within fifteen (15) days of the commencement date of
this Agreement.
VII.I EMPLOYMENT AGREEMENT
Each employee furnished by Administaff to Client and listed on Exhibit A shall
be required to execute an Employment Agreement as set forth in Exhibit C
(Employment Agreement Form) before such employee shall commence the term of
assignment with Client.
IX. DEFAULT
9.1 Acts of default by Client shall include, but are not limited to:
a. failure of Client to pay a fee when due;
b. failure of Client to comply within thirty (30) days of any
directive of Administaff, when such directive is promulgated or
made necessary by: (i) a federal state or local governmental
body, department or agency; or (ii) an insurance carrier
providing coverage to Administaff and/or its employees;
3
<PAGE> 4
c. direct payment of taxable wages by Client to Administaff
employees for services contemplated by this Agreement;
d. commission or omission of any act that usurps any right or
obligation of Administaff as an employer of the employees
covered by this Agreement; and/or,
e. violation by Client of any provision of this Agreement.
9.2 In the event Administaff incurs any expenses, fines and/or liabilities
as a result of an act of default by Client as set forth above, Client shall
reimburse Administaff for all actual expenses, fines and/or liabilities,
including, but not limited to, reasonable attorneys' fees, court costs and any
related expenses.
9.3 In the event that this Agreement is terminated due to a default by
Client, Client shall pay Administaff a sum equal to the fee rate percentage
multiplied by the estimated gross payroll for the remaining contract period as
liquidated damages, but such payment does not release Client from its
obligations under this Agreement, or from liability for future breach of such
obligations.
9.4 Upon an act of default by Client other than under Paragraph 9.1c
above, Administaff shall have the option, in its sole and absolute discretion,
of terminating this Agreement, and in the event Administaff exercises such
option, this Agreement shall terminate on the date written notice of same is
delivered to Client. In the event, however, of an act of default by Client
under Paragraph 9.1c above, Administaff shall have the option in its sole and
absolute discretion of terminating this Agreement effective on the date of such
act.
X. INDEMNITY
10.1 Client hereby agrees to indemnify defend and hold Administaff harmless
from and against any and all liability, expense (including court costs and
attorneys' fees) and claims for damage of any nature whatsoever, whether known
or unknown and whether direct or indirect, as though expressly set forth and
described herein, which Administaff may incur, suffer, become liable for or
which may be asserted or claimed against Administaff as a result of the acts,
errors or omissions, including negligent acts and statutory violations, of
Client.
10.2 Administaff hereby agrees to indemnify, defend and hold Client
harmless from and against any and all liability, expense (including court costs
and attorneys' fees) and claims for damage of any nature whatsoever, whether
known or unknown and whether direct or indirect, as though expressly set forth
and described herein, which Client may incur, suffer, become liable for or
which may be asserted or claimed against Client as a result of the acts, errors
or omissions, including negligent acts and statutory violations, of
Administaff.
10.3 Client and Administaff expressly agree that the indemnification
provisions of this Agreement shall not be limited to claims, expenses, or
liabilities for which one of them is solely liable, but shall also apply to
claims, expenses and liabilities for which client and Administaff are jointly
and concurrently liable. In such event, if either of them advances funds in
connection with a claim, expense or liability which is subject to this Article X
in excess of its pro rata share, said party shall be indemnified by the other
party hereto for such excess amounts.
XI. MISCELLANEOUS
11.1 This Agreement may be amended from time to time as agreed by the
parties in writing. Such amendment shall become effective on the date so
designated when signed by both Administaff and Client.
11.2 Client and Administaff warrant and represent to each other that, prior
to the commencement of this Agreement, no separate agreements or arrangements
exist that would obligate Client or Administaff except as set forth herein.
11.3 Client and Administaff agree to immediately report to each other all
accidents and injuries involving Administaff employees assigned to Client.
11.4 Client agrees to comply, at its sole cost and expense, with any
applicable specific directives promulgated by: (i) a federal, state or local
governmental body, department or agency, (ii) an insurance carrier providing
coverage to Administaff and/or its employees affecting this Agreement, and/or
(iii) Administaff as made necessary by circumstances which currently or
specifically affect Administaff, Client or Administaff's employees.
11.5 This Agreement is between Administaff and Client and creates no
individual rights of Administaff employees as against Client.
11.6 Administaff and Administaff's workers' compensation insurance carrier
shall have the right to inspect Client's premises, including any job site to
which Client assigns Administaff's employees. To the extent possible, such
inspection shall be scheduled at a mutually convenient time.
XII. ARBITRATION
12.1 Administaff and Client agree and stipulate that all claims, disputes
and other matters in question between Administaff and Client arising out of, or
relating to this Agreement or the breach thereof will be decided by arbitration
in accordance with the Federal Arbitration Act (9 U.S.C. Sections 10 and 11)
and the Commercial Arbitration Rules of the American Arbitration Association
then obtaining subject to the limitations of this Article XII. This agreement
to so arbitrate and any other agreement or consent to arbitrate entered into in
accordance herewith as provided in this Article XII will be specifically
enforceable under the prevailing law of any court having jurisdiction.
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<PAGE> 5
12.2 Notice of the demand for arbitration will be filed in writing with the
other party to the Agreement and with the American Arbitration Association.
The demand for arbitration shall be made within a reasonable time after the
claim, dispute or other matter in question has arisen, and in no event shall
any such demand be made after the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter in question would be
barred by the applicable statute of limitations.
12.3 No arbitration arising out of, or relating to, this Agreement shall
include by consolidation, joinder or in any other manner any other person or
entity who is not a party to this contract unless:
a. the inclusion of such other person or entity is necessary if
complete relief is to be afforded among those who are already
parties to the arbitration, and/or such other person or entity
is substantially involved in a question of law or fact which
is common to those who are already parties to the arbitration
and which will arise in such proceedings; and,
b. the written consent of the other person or entity sought to be
included and Administaff and Client has been obtained for such
inclusion, which consent shall make specific reference to this
paragraph; but no such consent shall constitute consent to
arbitration of any dispute not specifically described in such
consent or to arbitration with any party not specifically
identified in such consent.
12.4 The award rendered by the arbitrators will be final, judgment may be
entered upon it in any court having jurisdiction thereof, and will not be
subject to modification or appeal except to the extent permitted by Sections 10
and 11 of the Federal Arbitration Act (9 U.S.C. Sections 10 and 11).
XIII. ASSIGNMENT
Neither party shall assign this Agreement or its rights and duties hereunder,
or any interest herein, without the prior written consent of the other party.
XIV. ATTORNEYS' FEES
The prevailing party in any enforcement action arising in respect to this
Agreement shall be entitled to recover from the other party all costs of such
enforcement action including, without limitation, reasonable attorneys' fees,
court costs and related expenses.
XV. GOVERNING LAW
EXCEPT FOR ARTICLE XII OF THIS AGREEMENT, WHICH SHALL BE GOVERNED BY THE
FEDERAL ARBITRATION ACT (9 U.S.C. Sections 10 AND 11), THIS AGREEMENT SHALL
BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
XVI. ENTIRE AGREEMENT
This instrument, including the Exhibits attached hereto, contains the entire
Agreement of the parties and supersedes all prior and contemporaneous
agreements or understandings, whether written or oral, with respect to the
subject matter hereof. No amendment or modification hereto shall be valid unless
in writing and signed by both parties hereto.
XVII. SEVERABILITY
If any provision of this Agreement or any amendment thereof, should be invalid,
the remaining provision shall remain in effect and be so construed as to
effectuate the intent and purposes of this Agreement and any amendments
thereto.
XVIII. NOTICES
All notices, requests and communications provided hereunder shall be in writing,
and hand delivered or mailed by United States registered, certified, or express
mail, return receipt requested, and addressed to the party's principal place of
business as set forth in this Agreement adjacent the signature of each party
(or to such other address provided in writing by such party).
XIX. WAIVER
The waiver by either party hereto of a breach of any term or provision of this
Agreement shall not operate or be construed as a waiver of a subsequent breach
of the same provision by any party or of a breach of any other term or
provision of this Agreement.
XX. EXHIBITS
The following exhibits are attached to this Agreement and incorporated herein
by reference for all purposes:
A. Exhibit A ("Confidential Census");
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B. Exhibit B ("Client Service Application"); and,
C. Exhibit C ("Employment Agreement Form").
D. ADDENDUM TO CLIENT SERVICE AGREEMENT DATED 6/30/96 [initials]
THIS AGREEMENT is duly executed this 30 day of June, 1996.
FOR CLIENT: MHM Services, Inc. ADMINISTAFF COMPANIES, INC.
-------------------------------- 19001 Crescent Springs Drive
(Company Name) Kingwood, Texas 77339-3802
(713) 358-8986
By: /s/ MICHAEL S. PINKERT
----------------------------------------
(Signature) President By: /s/ A. STEVE ARIZOF
--------------------------
Michael S. Pinkert Vice-President
----------------------------------------
(Name - Typed or Printed)
Address: 7601 Lewisville Road
----------------------------------
McLean, VA 22102
----------------------------------
----------------------------------
Tel. No.: 703-749-4610
----------------------------------
<PAGE> 7
ADDENDUM
This Addendum is attached to and made a part of that certain Client
Service Agreement (the Agreement) of even date, between Administaff Companies,
Inc. (Administaff), and MHM SERVICES, INC. (Client). In the event of a conflict
between this Addendum and the Agreement, this Addendum shall control.
ARTICLE I. PERSONNEL
Article I. Personnel, shall be amended to read as follows:
"Subject to the terms of this Agreement, Administaff agrees to furnish
Client, and Client agrees to engage form Administaff, employees for
the job classifications listed, by workers' compensation
classification codes, in Exhibit A ("Confidential Census"). Client
warrants that information supplied to Administaff concerning the codes
applicable to an employee is accurate."
ARTICLE II. TERM OF AGREEMENT
Article II, shall be amended to read as follows:
"This Agreement shall commence on June 30, 1996 and shall remain in
force and effect until terminated as provided for herein. Either
Administaff or Client may terminate this Agreement by giving thirty
(30) days prior written notice."
ARTICLE III. ADMINISTRATION
Article III, Administration, shall be amended to read as follows:
"3.1 Administaff and Client recognize that there are a number of
federal and state statutory, common law and regulatory provisions
which define the employer-employee relationship. It is the intent of
Administaff and Client that to the extent permitted by law,
"employer" status with respect to an employee furnished to Client by
Administaff shall be determined as set forth in paragraphs 3.2, 3.3,
3.4, and 3.7 and if not so determined, shall be based upon the
function for which the employer-employee relationship is being
considered and shall be determined in accordance with paragraph 3.6.
"3.2 Administaff is the employer of those persons furnished to
Client and is liable as such for the following purposes:
"a. compliance with rules and regulations governing the
reporting and payment of all federal and state taxes
on payroll wages paid under this Agreement including,
but
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<PAGE> 8
not limited to: (i) federal income tax withholding
provisions of the Internal Revenue Code; (ii) state
and/or local income tax withholding provisions, if
applicable; (iii) Federal Insurance Contributions Act
(FICA); (iv) Federal Unemployment Tax Act (FUTA); and
(v) applicable state unemployment provisions;
"b. except as provided in Paragraph 3.4 g., below,
compliance with applicable workers' compensation laws
including, but not limited to: (i) procuring workers'
compensation insurance; (ii) completing and filing
all required reports; and (iii) managing claims;
"c. compliance with the Consolidated Omnibus
Reconciliation Act (COBRA);
"d. compliance with the Immigration Reform and Control
Act (IRCA);
"e. compliance with the Consumer Credit Protection Act,
Title III;
"f. procuring and providing employee benefits;
"g. monitoring and transmitting to Client changes in
governmental regulations relating to policies and
practices governing the employer-employee
relationship including, but not limited to, issues
such as recruiting, interviewing, testing, selecting,
orientation of, training, evaluating, replacing,
supervision, disciplining and terminating employees.
"3.3 Client is the employer of those persons furnished by
Administaff and is liable as such for the following purposes:
"a. compliance with Occupational Safety and Health
Administration (OSHA) regulations,
"b. compliance with Environmental Protection Agency (EPA)
regulations and any state and/or local equivalent;
"c. compliance with government contracting provisions
including, but not limited to: (i) Executive Order
11246; (ii) Vocational Rehabilitation Act of 1973;
(iii) Vietnam Era Veterans' Readjustment Assistance
Act of 1974; (iv) Walsh-Healy Public Contracts Act;
(v) Davis-Bacon Act; and (vi) Service Contract Act of
1965;
"d. compliance with the Fair Labor Standards Act (FLSA);
"e. compliance with the Worker Adjustment and Retraining
Notification Act (WARN); provided, however, that so
long as Client is an employer of less than the
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number of employees required to make Client subject
to the application of WARN, and if Client would not
otherwise be subject to the jurisdiction or
application of WARN but for the fact that Administaff
is an employer of more than the jurisdictional
minimum number of employees required for the
compliance with WARN then Administaff shall be
responsible for compliance with WARN, in which case
Client covenants and agrees that it shall give
Administaff no less than ninety (90) days notice of
(i) the closing or shut down of an employment site
(or one or more facilities or operating units within
an employment site) resulting in an employment loss
for fifty (50) or more employees during any thirty
(30) day period; (ii) the mass layoff of employees
which does not result in the closing or shut down of
an employment site but which will result in the loss
of employment during any thirty (30) day period for
500 or more employees, or for 50 to 499 employees if
they make up at least 33% of the work force; or (iii)
any combination of the closing of an employment site
or mass layoff of employees which would not
individually trigger the WARN notice requirement if
it occurred within a thirty (30) day time period, but
which taken together during any ninety (90) day time
period reaches the threshold level of employment loss
that would require Administaff to give notice;
"f. compliance with any professional licensing
requirements;
"g. compliance with any fidelity bonding requirements;
"h. professional liability, including but not limited to
malpractice or errors and omissions coverage and
compliance with any regulation mandating such
coverage;
"i. Section 414(o) of the Internal Revenue Code
(avoidance of certain pension and non-pension
employee benefit requirements)(except as provided in
paragraph 3.4c below);
"j. the rendering of professional medical services,
including, but not by way of limitation, the services
of a psychologist and the diagnosis and treatment of
all patients under the Client's care; it being
specifically acknowledged and agreed that
Administaff's duties, responsibilities and functions
hereunder shall be administrative and managerial in
nature only, and that notwithstanding any other
provision of this Agreement to the contrary,
Administaff shall engage in no activity hereunder
that would constitute the corporate practice of
medicine as defined by applicable laws in any
jurisdiction in which the corporate practice of
medicine is prohibited. The parties understand and
agree that Client has the sole responsibility for the
coordination and provision of all medical services
and Administaff shall not interfere in any way with
the exercise of the professional medical judgment of
Client or Client's providers in connection with their
practice of medicine. All of Client's policies and
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procedures relating to the governance of its
physicians or psychologists who will work under the
direction of Client or its physicians or
psychologists shall be adopted from time to time in
the sole discretion of Client, its shareholders and
board of directors, as applicable. Such policies may
include practice standards, peer review and
corrective action, disciplinary matters, on-call
schedules, referral physician panel and services,
clinical procedures, utilization management and
quality management procedures, credentialing,
appointment and replacement of Association medical
directors, patient care decisions, physician and
other licensed health care professional compensation
and incentives, physician training, continuing
education, development and supervision and
shareholder eligibility. Should any function
assigned to Administaff hereunder be construed to be
within the practice of medicine such that, if
performed by Administaff, it would be violative of
applicable prohibitions on the corporate practice of
medicine, such function thereafter shall be assigned
to and become the responsibility of Client and any
such prior activities which were undertaken by
Administaff shall be considered to have been
undertaken by Client.
"3.4 Administaff and Client will be considered co-employers ("dual
or joint employers") of those persons furnished to Client by
Administaff for the following purposes:
"a. compliance with Title VII of the 1964 Civil Rights
Act;
"b. compliance with the Age Discrimination in Employment
Act (ADEA);
"c. compliance with the Employee Retirement Income
Security Act (ERISA) (except as provided by paragraph
3.3i above);
"d. compliance with the Polygraph Protection Act;
"e. compliance with the Federal Drug Free Workplace Act
and any state and/or local equivalent;
"f. compliance with state employment discrimination laws;
"g. employer liability under workers' compensation laws;
"h. implementation of policies and practices relating to
the employer-employee relationship such as
recruiting, interviewing, testing, selecting,
orientation of, training, evaluating, replacing,
supervision, disciplining and terminating employees;
and
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"i. selection of fringe benefits, including, but not
limited to, holidays, vacation, sick leave, parental
leave, military leave, and leave of absence.
"3.5 Nothing in paragraphs 3.2, 3.3, 3.4, or 3.7 shall be construed
to require either Administaff or Client to perform any matter not
referred to therein; provided that the foregoing shall not affect the
obligation of Administaff or Client to perform any matter required by
law or as otherwise specifically provided by this Agreement.
"3.6 For purposes of this Agreement, determination of employer status
for situations not set forth and not contemplated herein shall be made
by mutual agreement of Administaff and Client.
"3.7 Client is the employer of those persons furnished by Administaff
(i) with respect to the assignment and ownership of all intellectual
property rights including, but not limited to, inventions, whether
patentable or not, and patents resulting therefrom, copyrights and
trade secrets; and (ii) with respect to any confidentiality agreements
regarding proprietary information and any covenant not to compete."
ARTICLE VI. SERVICE FEE
Article VI., Service Fee, Paragraph 6.3(i) shall be amended to read as
follows:
"6.3 ADMINISTAFF shall not adjust the fee rate percentage for Client
more often than once annually during the term of this Agreement except
for adjustments made necessary by:
"(i) statutory and regulatory changes including, but not
limited to, adjustments to FICA and federal and/or
state unemployment taxes and workers' compensation;
and/or;
"(ii) changes in the information supplied on Exhibit A
(Confidential Census) initiated by Client to the
extent that such change, when applied to the
recalculation of the fee rate percentage, causes an
increase or decrease of at least one fee rate
percentage point."
Article VI., Paragraph 6.5 shall be amended to read as follows:
"6.5 Any increases in the fee rate percentages for statutory or
regulatory changes in employment taxes, insurance costs or job
functions shall be effective on the date of such statutory or
regulatory increase or change. Any such increase shall be no greater
than the amount necessary to cover the cost to Administaff of the
increase in employment taxes, insurance costs, or costs resulting from
the change in job functions."
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Article VI., Paragraph 6.8, shall be amended to read as follows:
"6.8 The fee provided for by this Agreement shall be due and payable
at least one (1) working day prior to the date of payroll delivery.
So long as Client is timely in the reporting of payroll information
and payment of the fee provided for by this Agreement Administaff
shall make payroll delivery to the employees furnished to the Client
on the regularly scheduled payday. In addition Administaff shall
provide Client on each payday with a report of the accrued leave for
each employee furnished to Client (including the leave currently
accrued by each employee while employed by Client prior to the
effective date of this Agreement, provided that such information is
timely and accurately provided to Administaff by Client for inclusion
on the payday accrued leave report)."
ARTICLE VII. INSURANCE
"7.1 Administaff shall furnish and keep in full force and effect at
all times during the term of this Agreement, workers' compensation
insurance covering all Administaff employees furnished to Client
pursuant to the terms of this Agreement. Upon written request by
Client, Administaff shall furnish a certificate of insurance verifying
such coverage. Such workers' compensation coverage will comply with
applicable law."
ARTICLE IX. DEFAULT
Article IX., Default, Paragraph 9.3 shall be amended to read as
follows:
"9.3 In the event that this Agreement is terminated due to a default
by Client, Client shall pay Administaff a sum equal to the fee rate
percentage multiplied by the estimated gross payroll for a thirty day
period as liquidated damages, but such payment does not release Client
from its obligations under this Agreement, or from liability for
future breach of such obligations."
Article IX., Default, shall be amended to add Paragraphs 9.5, 9.6, and
9.7 as follows:
"9.5 Acts of default by Administaff shall include, but are not
limited to:
"a. failure to pay wages to leased employees;
"b. failure to pay payroll taxes to a federal, state, or
local governmental body, department or agency when
due;
"c. failure to pay premiums to an insurance carrier
providing coverage to Administaff employees leased to
Client;
"d. violation by Administaff of any provision of this
Agreement."
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"9.6 Upon an act of default by Administaff, Client shall have the
option, in its sole and absolute discretion, of terminating this
Agreement, and in the event Client exercises such option, this
Agreement shall terminate on the date written notice of same is
delivered to Administaff."
"9.7 In the event Client incurs any expenses, fines and/or
liabilities as a result of an act of default by Administaff as set
forth above, Administaff shall reimburse Client for all actual
expenses, fines and/or liabilities, including, but not limited to,
reasonable attorneys' fees, court costs and any related expenses."
ARTICLE X. INDEMNITY
Article X., Indemnity, Paragraph 10.3, shall be amended to read as
follows:
"10.3 Client and Administaff expressly agree that the
indemnification provisions of this Agreement shall not be limited to
claims, expenses, or liabilities for which one of them is solely
liable, but shall also apply to claims, expenses and liabilities for
which Client and Administaff are jointly or concurrently liable. In
such event, if either of them advances funds or makes any other
payment in connection with a claim, expense or liability which is
subject to this Article X in excess of its pro rata share, said party
shall be indemnified by the other party hereto for such excess
amounts."
ARTICLE XI. MISCELLANEOUS
Article XI., Miscellaneous, Paragraph 11.2, shall be amended to read
as follows:
"11.2 Client and Administaff warrant and represent to each other
that, prior to the commencement of this Agreement, no separate
agreements or arrangements exist between the parties that would
obligate Client or Administaff except as set forth herein."
Article XI., Miscellaneous, Paragraph 11.4 shall be amended to read as
follows:
"11.4 Client agrees to comply, at its sole cost and expense, with
any applicable specific directives promulgated by: (i) a federal,
state, or local governmental body, department, or agency, (ii) an
insurance carrier providing coverage to Administaff and/or its
employees affecting this Agreement and/or, (iii) Administaff as made
necessary by circumstances which currently or specifically affect
Administaff, Client or Administaff's employees except where such
compliance is otherwise the responsibility of Administaff under the
terms of this Agreement."
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Article XI., Miscellaneous, shall be amended to add Paragraph 11.7 as
follows:
"11.7 Administaff hereby warrants that (i) the scope of benefits
available to eligible employees under the Administaff Benefit Plan
(the Administaff Plan) on the effective date of this Agreement are
substantially the same as are stated in the attached pamphlet entitled
Outline of Benefits attached; (ii) Administaff will give notice of any
material change in the Administaff Plan to all eligible participants
at least thirty-five (35) days prior to the effective date of such
material change; (iii) pre-existing conditions are covered by the
Major Medical Plan (the Administaff Medical Plan) which is part of the
Administaff Plan; (iv) amounts paid by a covered employee to defray a
covered expense under the Client's existing health or medical benefit
plan (Client's Plan) toward the deductible or co-payment requirements
of Client's Plan will be credited and apply to the satisfaction of the
deductible or co-payment requirement of the Administaff Medical Plan
provided that the amount paid otherwise satisfies the criteria for
credit or application to the satisfaction of the deductible or
co-payment requirements of the Administaff Medical Plan and its usual
proof of payment criteria; and (v) a former employee of Client which
is covered by COBRA under Client's Plan on the effective date of this
Agreement will be eligible for COBRA coverage under Administaff's
Medical Plan provided that Client has fully disclosed the scope and
extent of such existing COBRA coverage to Administaff prior to the
execution of this Agreement."
XVI. ENTIRE AGREEMENT
Article XVI., Entire Agreement, shall be amended to read as follows:
"This instrument, including the Exhibits attached hereto, contains the
entire Agreement of the parties and supersedes all prior and
contemporaneous agreements or understandings, whether written or
oral, with respect to the subject matter hereof. No amendment or
modification hereto shall be valid unless in writing and signed by
both parties hereto other than changes to Exhibit A (Confidential
Census) from time to time as may be necessary in the operation of
Client's business and the performance of the parties of their
respective obligations under this Agreement."
This Addendum is executed and effective of even date with the Client
Service Agreement dated June 30, 1996 between the parties hereto to which it is
attached and incorporated by reference.
ADMINISTAFF COMPANIES, INC. MHM SERVICES, INC.
By: /s/ A. STEVE ARIZOF By: /s/ MICHAEL PINKERT
------------------------------- -------------------------------
Vice President President
A. Steve Arizof
- ---------------------------------- ----------------------------------
Name: Typed or Printed Name: Typed or Printed
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<PAGE> 1
EXHIBIT 10.19
ADMINISTAFF(R)
CLIENT SERVICE AGREEMENT
THIS CLIENT SERVICE AGREEMENT ("the Agreement"), is made by and between
Administaff Companies, Inc., ("Administaff"), a Delaware corporation with its
principal place of business at 19001 Crescent Springs Drive, Kingwood, Texas
77339-3802, and MHM EXTENDED CARE SERVICES, INC. ("Client").
I. PERSONNEL
Subject to the terms of this Agreement, Administaff agrees to furnish Client,
and Client agrees to engage from Administaff, employees for the job functions
listed in Exhibit A ("Confidential Census"). Client warrants that information
supplied to Administaff concerning the employee functions is accurate.
II. TERM OF AGREEMENT
This Agreement shall commence on the date this Agreement is executed and remain
in force and effect for a term of one (1) year ("Initial Term"). Following the
Initial Term, this Agreement shall remain in full force and effect for
successive monthly terms (the "Extended Terms") until either (i) the Agreement
is renewed; or, (ii) the Agreement is terminated. During the Initial Term, and
any Extended Term of this Agreement, either Administaff or Client may terminate
this Agreement by giving thirty (30) days prior written notice.
III. ADMINISTRATION
3.1 There are a number of federal and state statutory, common law and
regulatory provisions which define the employer-employee relationship.
"Employer" status is based upon the function for which the employer-employee
relationship is being considered.
3.2 Administaff is the employer of those persons furnished to Client and
listed on Exhibit A and is liable as such for the following purposes:
a. compliance with rules and regulations governing the reporting
and payment of all federal and state taxes on payroll wages
paid under this Agreement including, but not limited to: (i)
federal income tax withholding provisions of the Internal
Revenue Code; (ii) state and/or local income tax withholding
provisions, if applicable; (iii) Federal Insurance
Contributions Act (FICA); (iv) Federal Unemployment Tax Act
(FUTA); and (v) applicable state unemployment provisions;
b. except as provided in Paragraph 3.4g below, compliance with
applicable workers' compensation laws including, but not
limited to: (i) procuring workers' compensation insurance;
(ii) completing and filing all required reports; and (iii)
managing claims;
c. compliance with the Consolidated Omnibus Reconciliation Act
(COBRA);
d. compliance with the Immigration Reform and Control Act (IRCA);
e. compliance with the Consumer Credit Protection Act, Title III;
f. procuring and providing employee benefits;
g. monitoring and transmitting to Client changes in governmental
regulations relating to policies and practices governing the
employer-employee relationship including, but not limited to,
issues such as recruiting, interviewing, testing, selecting,
orientation of, training, evaluating, replacing, supervision,
disciplining and terminating employees.
3.3 Client is the employer of those persons furnished by Administaff and
listed on Exhibit A and is liable as such for the following purposes:
a. compliance with Occupational Safety and Health Administration
(OSHA) regulations;
b. compliance with Environmental Protection Agency (EPA)
regulations and any state and/or local equivalent;
c. compliance with government contracting provisions including,
but not limited to: (i) Executive Order 11246; (ii) Vocational
Rehabilitation Act of 1973; (iii) Vietnam Era Veterans'
Readjustment Assistance Act of 1974; (iv) Walsh-Healey Public
Contracts Act; (v) Davis-Bacon Act; and (vi) Service Contract
Act of 1965;
d. compliance with the Fair Labor Standards Act (FLSA);
e. compliance with the Worker Adjustment and Retraining
Notification Act; (WARN);
f. compliance with any professional licensing requirements;
g. compliance with any fidelity bonding requirements;
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h. professional liability, including but not limited to
malpractice or errors and omissions coverage and compliance
with any regulation mandating such coverage;
i. Section 414(o) of the Internal Revenue Code (avoidance of
certain pension and non-pension employee benefits
requirements) (except as provided in paragraph 3.4c below);
j. assignment to, and ownership of, all intellectual property
rights including, but not limited to, inventions, whether
patentable or not, and patents resulting therefrom, copyrights
and trade secrets and all confidentiality agreements regarding
proprietary information.
3.4 Administaff staff and Client will be considered co-employers ("dual or
joint employers") of those persons furnished to Client by Administaff and
listed on Exhibit A for the following purposes:
a. compliance with Title VII of the 1964 Civil Rights Act;
b. compliance with the Age Discrimination in Employment Act
(ADEA);
c. compliance with the Employee Retirement Income Security Act
(ERISA) (except as provided by paragraph 3.3i above);
d. compliance with the Polygraph Protection Act,
e. compliance with the Federal Drug Free Workplace Act and any
state and/or local equivalent,
f. compliance with state employment discrimination laws
including, but not limited to, Article 5221k, Texas Revised
Civil Statues;
g. employer liability under workers' compensation laws;
h. implementation of policies and practices relating to the
employer-employee relationship such as recruiting,
interviewing, testing, selecting, orientation of, training,
evaluating, replacing, supervision, disciplining and
terminating employees; and
i. selection of fringe benefits, including, but not limited to,
holidays, vacation, sick leave, parental leave, military
leave, and leave of absence.
3.5 Nothing in paragraphs 3.2,3.3 or 3.4 above shall be construed to
require either Administaff or Client to provide any of the matters referred to
therein except as provided by law or as otherwise specifically provided by this
contract.
3.6 For the purposes of this Agreement, determination of employer status
for situations not set forth and not contemplated herein shall be made by
mutual agreement of Administaff and Client.
IV. SUPERVISION
Administaff shall designate one or more on-site supervisors from among its
employees furnished to Client and listed on Exhibit A. On-site supervisors
shall direct operational and administrative matters relating to services
provided by Administaff's employees and shall carry out Administaff's policies
and procedures formulated in accordance with Paragraph 3.4h above.
V. ENROLLMENT FEE
Client agrees to pay Administaff a non-refundable enrollment fee in the sum
specified in Exhibit B (Client Service Application). This enrollment fee is
due and payable at the time that this Agreement is signed by Client.
VI. SERVICE FEE
In exchange for the personnel services provided by Administaff hereunder,
Administaff and Client agree as follows:
6.1 The Administaff fee rate percentage is set forth in Exhibit B (Client
Service Application) and is calculated utilizing the data submitted by Client
in Exhibit A. If such information is inaccurate, Client shall immediately
agree to amend Exhibit A to reflect the current information and shall pay,
within ten (10) days notice from Administaff of the error, any additional costs
incurred by Administaff as a result of the inaccuracy.
6.2 Each pay period, Client shall pay Administaff its fee comprised of:
(i) the gross payroll of Administaff employees leased to Client during such pay
period; and, (ii) a service fee equal to the fee rate percentage specified in
Exhibit B multiplied by the actual gross payroll of Administaff employees
furnished to Client during such pay period.
6.3 Administaff shall not adjust the fee rate percentage for Client during
any term of this Agreement except for adjustments made necessary by:
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(i) statutory and regulatory changes, including, but not limited
to, adjustments to FICA, federal and/or state unemployment
taxes and workers' compensation; and/or
(ii) changes in the information supplied on Exhibit A (Confidential
Census) initiated by Client to the extent that such change,
when applied to the recalculation of the fee rate percentage,
causes an increase or decrease of at least one fee rate
percentage point.
6.4 In addition to the foregoing, during any Extended Term, Administaff may
adjust the fee rate percentage upon thirty (30) days written notice to Client.
6.5 Any increases in the fee rate percentages for statutory or regulatory
changes in employment taxes, insurance costs or job functions shall be
effective on the date of such statutory or regulatory increase or change.
6.6 Any increase in the fee will be billed with the next effective payroll
and be kept current at all times except for retroactive changes or statutory
and/or regulatory changes known at the time the payroll is billed.
6.7 Any change in the fee rate percentage shall be reflected in a revised
Exhibit B which shall then be made a part of this Agreement.
6.8 The fee provided for by this Agreement shall be due and payable at
least one (1) working day prior to the date of payroll delivery.
6.9 Client shall use a method of payment approved in advance by
Administaff.
6.10 Client or on-site supervisor shall report to Administaff all time
worked by all Administaff employees furnished to Client each pay period and
shall provide Administaff with written verification of same.
6.11 Client shall notify Administaff within two (2) working days of any
error in billing.
6.12 Client shall reimburse Administaff for services not contemplated by
this Agreement which may be required by Client.
VII. INSURANCE
7.1 Administaff shall furnish, and keep in full force and effect at all
times during the term of this Agreement, worker's compensation insurance
covering all Administaff employees furnished to Client pursuant to the terms of
this Agreement. Upon written request by Client, Administaff shall furnish a
certificate of insurance verifying such coverage.
7.2 Client shall furnish, and keep in force and effect at all times during
the term of this Agreement, comprehensive general liability insurance including
products/completed operations coverage with minimum limits of $1,000,000 per
occurrence and $2,000,000 aggregate. Client shall cause its insurance carrier
to issue a certificate of insurance to Administaff, Inc. confirming this
coverage and to give not less than thirty (30) days advance notice of
cancellation or material change.
7.3 Client shall furnish, and keep in force and effect at all times during
the term of this Agreement, comprehensive automobile liability insurance
covering all owned, hired and non-owned automobiles with a minimum limit of
$1,000,000 per occurrence combined single limit bodily injury and property
damage liability. The policy shall also provide uninsured motorists insurance
with a minimum combined single limit of Sixty Thousand Dollars ($60,000.00). In
states where "no fault" laws apply, Personal Injury Protection (P.I.P.) or
equivalent coverage shall be required to meet the requirements of the state.
The client shall cause its insurance carrier to issue a certificate of
insurance to Administaff, Inc. confirming this coverage and to give not less
than thirty (30) days advance notice of cancellation or material change.
7.4 Client shall deliver copies of all insurance certificates required
pursuant to this Article signed by authorized representatives of the insurance
companies to Administaff within fifteen (15) days of the commencement date of
this Agreement.
VIII. EMPLOYMENT AGREEMENT
Each employee furnished by Administaff to Client and listed on Exhibit A shall
be required to execute an Employment Agreement as set forth in Exhibit C
(Employment Agreement Form) before such employee shall commence the term of
assignment with Client.
IX. DEFAULT
9.1 Acts of default by Client shall include, but are not limited to:
a. failure of Client to pay a fee when due;
b. failure of Client to comply within thirty (30) days of any
directive of Administaff, when such directive is promulgated or
made necessary by: (i) a federal, state or local governmental
body, department or agency; or (ii) an insurance carrier
providing coverage to Administaff and/or its employees;
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c. direct payment of taxable wages by Client to Administaff
employees for services contemplated by this Agreement;
d. commission or omission of any act that usurps any right or
obligation of Administaff as an employer of the employees
covered by this Agreement; and/or,
e. violation by Client of any provision of this Agreement.
9.2 In the event Administaff incurs any expenses, fines and/or liabilities
as a result of an act of default by Client as set forth above, Client shall
reimburse Administaff for all actual expenses, fines and/or liabilities,
including, but not limited to, reasonable attorneys' fees, court costs and any
related expenses.
9.3 In the event that this Agreement is terminated due to a default by
Client, Client shall pay Administaff a sum equal to the fee rate percentage
multiplied by the estimated gross payroll for the remaining contract period as
liquidated damages, but such payment does not release Client from its
obligations under this Agreement, or from liability for future breach of such
obligations.
9.4 Upon an act of default by Client other than under Paragraph 9.1c
above, Administaff shall have the option, in its sole and absolute discretion,
of terminating this Agreement, and in the event Administaff exercises such
option, this Agreement shall terminate on the date written notice of same is
delivered to Client. In the event, however, of an act of default by Client
under Paragraph 9.1c above, Administaff shall have the option in its sole and
absolute discretion of terminating this Agreement effective on the date of such
act.
X. INDEMNITY
10.1 Client hereby agrees to indemnify, defend and hold Administaff
harmless from and against any and all liability, expense (including court costs
and attorneys' fees) and claims for damage of any nature whatsoever, whether
known or unknown and whether direct or indirect, as though expressly set forth
and described herein, which Administaff may incur, suffer, become liable for or
which may be asserted or claimed against Administaff as a result of the acts,
errors or omissions, including negligent acts and statutory violations, of
Client.
10.2 Administaff hereby agrees to indemnify, defend and hold Client
harmless from and against any and all liability, expense (including court costs
and attorneys' fees) and claims for damage of any nature whatsoever, whether
known or unknown and whether direct or indirect, as though expressly set forth
and described herein, which Client may incur, suffer, become liable for or
which may be asserted or claimed against Client as a result of the acts, errors
or omissions, including negligent acts and statutory violations, of
Administaff.
10.3 Client and Administaff expressly agree that the indemnification
provisions of this Agreement shall not be limited to claims, expenses, or
liabilities for which one of them is solely liable, but shall also apply to
claims, expenses and liabilities for which client and Administaff are jointly
and concurrently liable. In such event, if either of them advances funds in
connection with a claim, expense or liability which is subject to this Article
X in excess of its pro rata share, said party shall be indemnified by the other
party hereto for such excess amounts.
XI. MISCELLANEOUS
11.1 This Agreement may be amended from time to time as agreed by the
parties in writing. Such amendment shall become effective on the date so
designated when signed by both Administaff and Client.
11.2 Client and Administaff warrant and represent to each other that; prior
to the commencement of this Agreement, no separate agreements or arrangements
exist that would obligate Client or Administaff except as set forth herein.
11.3 Client and Administaff agree to immediately report to each other all
accidents and injuries involving Administaff employees assigned to Client.
11.4 Client agrees to comply, at its sole cost and expense, with any
applicable specific directives promulgated by: (i) a federal state or local
governmental body, department or agency, (ii) an insurance carrier providing
coverage to Administaff and/or its employees affecting this Agreement, and/or
(iii) Administaff as made necessary by circumstances which currently or
specifically affect Administaff, Client or Administaff's employees.
11.5 This Agreement is between Administaff and Client and creates no
individual rights of Administaff employees as against Client.
11.6 Administaff and Administaff's workers' compensation insurance carrier
shall have the right to inspect Client's premises, including any job site to
which Client assigns Administaff's employees. To the extent possible, such
inspection shall be scheduled at a mutually convenient time.
XII. ARBITRATION
12.1 Administaff and Client agree and stipulate that all claims, disputes
and other matters in question between Administaff and Client arising out of, or
relating to this Agreement or the breach thereof will be decided by arbitration
in accordance with the Federal Arbitration Act (9 U.S.C. Sections 10 and 11)
and the Commercial Arbitration Rules of the American Arbitration Association
then obtaining subject to the limitations of this Article XII. This agreement
to so arbitrate and any other agreement or consent to arbitrate entered into in
accordance herewith as provided in this Article XII will be specifically
enforceable under the prevailing law of any court having jurisdiction.
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12.2 Notice of the demand for arbitration will be filed in writing with the
other party to the Agreement and with the American Arbitration Association.
The demand for arbitration shall be made within a reasonable time after the
claim, dispute or other matter in question has arisen, and in no event shall
any such demand be made after the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter in question would be
barred by the applicable statute of limitations.
12.3 No arbitration arising out of, or relating to, this Agreement shall
include by consolidation, joinder or in any other manner any other person or
entity who is not a party to this contract unless:
a. the inclusion of such other person or entity is necessary if
complete relief is to be afforded among those who are already
parties to the arbitration, and/or such other person or entity
is substantially involved in a question of law or fact which
is common to those who are already parties to the arbitration
and which will arise in such proceedings; and,
b. the written consent of the other person or entity sought to be
included and Administaff and Client has been obtained for such
inclusion, which consent shall make specific reference to this
paragraph; but no such consent shall constitute consent to
arbitration of any dispute not specifically described in such
consent or to arbitration with any party not specifically
identified in such consent.
12.4 The award rendered by the arbitrators will be final, judgment may be
entered upon it in any court having jurisdiction thereof, and will not be
subject to modification or appeal except to the extent permitted by Sections 10
and 11 of the Federal Arbitration Act (9 U.S.C. Sections 10 and 11).
XIII. ASSIGNMENT
Neither party shall assign this Agreement or its rights and duties hereunder,
or any interest herein, without the prior written consent of the other party.
XIV. ATTORNEYS' FEES
The prevailing party in any enforcement action arising in respect to this
Agreement shall be entitled to recover from the other party all costs of such
enforcement action including, without limitation, reasonable attorneys' fees,
court costs and related expenses.
XV. GOVERNING LAW
EXCEPT FOR ARTICLE XII OF THIS AGREEMENT, WHICH SHALL BE GOVERNED BY THE
FEDERAL ARBITRATION ACT (9 U.S.C. Sections 10 AND 11), THIS AGREEMENT SHALL
BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
XVI. ENTIRE AGREEMENT
This instrument, including the Exhibits attached hereto, contains the entire
Agreement of the parties and supersedes all prior and contemporaneous
agreements or understandings, whether written or oral, with respect to the
subject matter hereof. No amendment or modification hereto shall be valid
unless in writing and signed by both parties hereto.
XVII. SEVERABILITY
If any provision of this Agreement, or any amendment thereof, should be invalid,
the remaining provision shall remain in effect and be so construed as to
effectuate the intent and purposes of this Agreement and any amendments
thereto.
XVIII. NOTICES
All notices, requests and communications provided hereunder shall be in
writing, and hand delivered or mailed by United States registered, certified,
or express mail, return receipt requested, and addressed to the party's
principal place of business as set forth in this Agreement adjacent the
signature of each party (or to such other address provided in writing by such
party).
XIX. WAIVER
The waiver by either party hereto of a breach of any term or provision of this
Agreement shall not operate or be construed as a waiver of a subsequent breach
of the same provision by any party or of a breach of any other term or
provision of this Agreement.
XX. EXHIBITS
The following exhibits are attached to this Agreement and incorporated
herein by reference for all purposes:
A. Exhibit A ("Confidential Census");
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B. Exhibit B ("Client Service Application"); and,
C. Exhibit C ("Employment Agreement Form").
THIS AGREEMENT is duly executed this 30 day of June, 1996.
FOR CLIENT: MHM Extended Care Services, Inc. ADMINISTAFF COMPANIES, INC.
-------------------------------- 19001 Crescent Springs Drive
(Company Name) Kingwood, Texas 77339-3802
(713) 358-8986
By: /s/ MICHAEL PINKERT
-----------------------------------------
President By: /s/ A. STEVE ARIZOF
----------------------------
Michael Pinkert Vice-President
-----------------------------------------
(Name - Typed or Printed)
Address: 7601 Lewinsville Rd.
---------------------------------
Ste 200
---------------------------------
McLean VA 22102
---------------------------------
Tel. No.: (703) 749-7612
---------------------------------
<PAGE> 7
ADDENDUM
This Addendum is attached to and made a part of that certain Client
Service Agreement (the Agreement) of even date, between Administaff Companies,
Inc. (Administaff), and MHM EXTENDED CARE SERVICES, INC. (Client). In the event
of a conflict between this Addendum and the Agreement, this Addendum shall
control.
ARTICLE I. PERSONNEL
Article I., Personnel, shall be amended to read as follows:
"Subject to the terms of this Agreement, Administaff agrees to furnish
Client, and Client agrees to engage form Administaff, employees for the
job classifications listed, by workers' compensation classification
codes, in Exhibit A ("Confidential Census"). Client warrants that
information supplied to Administaff concerning the codes applicable to
an employee is accurate."
ARTICLE II. TERM OF AGREEMENT
Article II, shall be amended to read as follows:
"This Agreement shall commence on June 30, 1996 and shall remain in
force and effect until terminated as provided for herein. Either
Administaff or Client may terminate this Agreement by giving thirty
(30) days prior written notice."
ARTICLE III. ADMINISTRATION
Article III, Administration, shall be amended to read as follows:
"3.1 Administaff and Client recognize that there are a number of federal
and state statutory, common law and regulatory provisions which define
the employer-employee relationship. It is the intent of Administaff and
Client that to the extent permitted by law, "employer" status with
respect to an employee furnished to Client by Administaff shall be
determined as set forth in paragraphs 3.2, 3.3, 3.4, and 3.7 and if not
so determined, shall be based upon the function for which the
employer-employee relationship is being considered and shall be
determined in accordance with paragraph 3.6.
"3.2 Administaff is the employer of those persons furnished to Client
and is liable as such for the following purposes:
"a. compliance with rules and regulations governing the
reporting and payment of all federal and state taxes on
payroll wages paid under this Agreement including, but
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<PAGE> 8
not limited to: (i) federal income tax withholding
provisions of the Internal Revenue Code; (ii) state and/or
local income tax withholding provisions, if applicable;
(iii) Federal Insurance Contributions Act (FICA); (iv)
Federal Unemployment Tax Act (FUTA); and (v) applicable
state unemployment provisions;
"b. except as provided in Paragraph 3.4 g., below, compliance
with applicable workers' compensation laws including, but
not limited to: (i) procuring workers' compensation
insurance; (ii) completing and filing all required reports;
and (iii) managing claims;
"c. compliance with the Consolidated Omnibus Reconciliation Act
(COBRA);
"d. compliance with the Immigration Reform and Control Act
(IRCA);
"e. compliance with the Consumer Credit Protection Act, Title
III;
"f. procuring and providing employee benefits;
"g. monitoring and transmitting to Client changes in
governmental regulations relating to policies and practices
governing the employer-employee relationship including, but
not limited to, issues such as recruiting, interviewing,
testing, selecting, orientation of, training, evaluating,
replacing, supervision, disciplining and terminating
employees.
"3.3 Client is the employer of those persons furnished by Administaff
and is liable as such for the following purposes:
"a. compliance with Occupational Safety and Health
Administration (OSHA) regulations;
"b. compliance with Environmental Protection Agency (EPA)
regulations and any state and/or local equivalent;
"c. compliance with government contracting provisions including,
but not limited to: (i) Executive Order 11246; (ii)
Vocational Rehabilitation Act of 1973; (iii) Vietnam Era
Veterans' Readjustment Assistance Act of 1974; (iv)
Walsh-Healy Public Contracts Act; (v) Davis-Bacon Act; and
(vi) Service Contract Act of 1965;
"d. compliance with the Fair Labor Standards Act (FLSA);
"e. compliance with the Worker Adjustment and Retraining
Notification Act (WARN); provided, however, that so long as
Client is an employer of less than the
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number of employees required to make Client subject to the
application of WARN, and if Client would not otherwise be
subject to the jurisdiction or application of WARN but for
the fact that Administaff is an employer of more than the
jurisdictional minimum number of employees required for the
compliance with WARN then Administaff shall be responsible
for compliance with WARN, in which case Client covenants and
agrees that it shall give Administaff no less than ninety
(90) days notice of (i) the closing or shut down of an
employment site (or one or more facilities or operating
units within an employment site) resulting in an employment
loss for fifty (50) or more employees during any thirty (30)
day period; (ii) the mass layoff of employees which does not
result in the closing or shut down of an employment site but
which will result in the loss of employment during any
thirty (30) day period for 500 or more employees, or for 50
to 499 employees if they make up at least 33% of the work
force; or (iii) any combination of the closing of an
employment site or mass layoff of employees which would not
individually trigger the WARN notice requirement if it
occurred within a thirty (30) day time period, but which
taken together during any ninety (90) day time period
reaches the threshold level of employment loss that would
require Administaff to give notice;
"f. compliance with any professional licensing requirements;
"g. compliance with any fidelity bonding requirements;
"h. professional liability, including but not limited to
malpractice or errors and omissions coverage and compliance
with any regulation mandating such coverage;
"i. Section 414(o) of the Internal Revenue Code (avoidance of
certain pension and non-pension employee benefit
requirements) (except as provided in paragraph 3.4c below);
"j. the rendering of professional medical services, including,
but not by way of limitation, the services of a psychologist
and the diagnosis and treatment of all patients under the
Client's care; it being specifically acknowledged and agreed
that Administaff's duties, responsibilities and functions
hereunder shall be administrative and managerial in nature
only, and that notwithstanding any other provision of this
Agreement to the contrary, Administaff shall engage in no
activity hereunder that would constitute the corporate
practice of medicine as defined by applicable laws in any
jurisdiction in which the corporate practice of medicine is
prohibited. The parties understand and agree that Client has
the sole responsibility for the coordination and provision
of all medical services and Administaff shall not interfere
in any way with the exercise of the professional medical
judgment of Client or Client's providers in connection with
their practice of medicine. All of Client's policies and
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procedures relating to the governance of its physicians or
psychologists who will work under the direction of Client
or its physicians or psychologists shall be adopted from
time to time in the sole discretion of Client, its
shareholders and board of directors, as applicable. Such
policies may include practice standards, peer review and
corrective action, disciplinary matters, on-call schedules,
referral physician panel and services, clinical procedures,
utilization management and quality management procedures,
credentialing, appointment and replacement of Association
medical directors, patient care decisions, physician and
other licensed health care professional compensation and
incentives, physician training, continuing education,
development and supervision and shareholder eligibility.
Should any function assigned to Administaff hereunder be
construed to be within the practice of medicine such that,
if performed by Administaff, it would be violative of
applicable prohibitions on the corporate practice of
medicine, such function thereafter shall be assigned to and
become the responsibility of Client and any such prior
activities which were undertaken by Administaff shall be
considered to have been undertaken by
Client.
"3.4 Administaff and Client will be considered co-employers ("dual or
joint employers") of those persons furnished to Client by Administaff
for the following purposes:
"a. compliance with Title VII of the 1964 Civil Rights Act;
"b. compliance with the Age Discrimination in Employment Act
(ADEA);
"c. compliance with the Employee Retirement Income Security Act
(ERISA) (except as provided by paragraph 3.3i above);
"d. compliance with the Polygraph Protection Act;
"e. compliance with the Federal Drug Free Workplace Act and any
state and/or local equivalent;
"f. compliance with state employment discrimination laws;
"g. employer liability under workers' compensation laws;
"h. implementation, of policies and practices relating to the
employer-employee relationship such as recruiting,
interviewing, testing, selecting, orientation of, training,
evaluating, replacing, supervision, disciplining and
terminating employees; and
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<PAGE> 11
"i. selection of fringe benefits, including, but not limited to,
holidays, vacation, sick leave, parental leave, military
leave, and leave of absence.
"3.5 Nothing in paragraphs 3.2, 3.3, 3.4, or 3.7 shall be construed to
require either Administaff or Client to perform any matter not referred
to therein; provided that the foregoing shall not affect the obligation
of Administaff or Client to perform any matter required by law or as
otherwise specifically provided by this Agreement.
"3.6 For purposes of this Agreement, determination of employer status
for situations not set forth and not contemplated herein shall be made
by mutual agreement of Administaff and Client.
"3.7 Client is the employer of those persons furnished by Administaff
(i) with respect to the assignment and ownership of all intellectual
property rights including, but not limited to, inventions, whether
patentable or not, and patents resulting therefrom, copyrights and
trade secrets; and (ii) with respect to any confidentiality agreements
regarding proprietary information and any covenant not to compete.
ARTICLE VI. SERVICE FEE
Article VI., Service Fee, Paragraph 6.3 (i) shall be amended to read as
follows:
"6.3 ADMINISTAFF shall not adjust the fee rate percentage for Client
more often than once annually during the term of this Agreement except
for adjustments made necessary by:
"(i) statutory and regulatory changes including, but not limited
to, adjustments to FICA and federal and/or state
unemployment taxes and workers' compensation; and/or;
"(ii) changes in the information supplied on Exhibit A
(Confidential Census) initiated by Client to the extent that
such change, when applied to the recalculation of the fee
rate percentage, causes an increase or decrease of at least
one fee rate percentage point."
Article VI., Paragraph 6.5 shall be amended to read as follows:
"6.5 Any increases in the fee rate percentages for statutory or
regulatory changes in employment taxes, insurance costs or job functions
shall be effective on the date of such statutory or regulatory increase
or change. Any such increase shall be no greater than the amount
necessary to cover the cost to Administaff of the increase in employment
taxes, insurance costs, or costs resulting from the change in job
functions."
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Article VI., Paragraph 6.8, shall be amended to read as follows:
"6.8 The fee provided for by this Agreement shall be due and payable at
least one (1) working day prior to the date of payroll delivery. So long
as Client is timely in the reporting of payroll information and payment
of the fee provided for by this Agreement Administaff shall make payroll
delivery to the employees furnished to the Client on the regularly
scheduled payday. In addition Administaff shall provide Client on each
payday with a report of the accrued leave for each employee furnished to
Client (including the leave currently accrued by each employee while
employed by Client prior to the effective date of this Agreement,
provided that such information is timely and accurately provided to
Administaff by Client for inclusion on the payday accrued leave
report)."
ARTICLE VII. INSURANCE
"7.1 Administaff shall furnish and keep in full force and effect at all
times during the term of this Agreement, workers' compensation insurance
covering all Administaff employees furnished to Client pursuant to the
terms of this Agreement. Upon written request by Client, Administaff
shall furnish a certificate of insurance verifying such coverage. Such
workers' compensation coverage will comply with applicable law."
ARTICLE IX. DEFAULT
Article IX., Default, Paragraph 9.3 shall be amended to read as follows:
"9.3 In the event that this Agreement is terminated due to a default by
Client, Client shall pay Administaff a sum equal to the fee rate
percentage multiplied by the estimated gross payroll for a thirty day
period as liquidated damages, but such payment does not release Client
from its obligations under this Agreement, or from liability for future
breach of such obligations."
Article IX., Default, shall be amended to add Paragraphs 9.5, 9.6, and
9.7 as follows:
"9.5 Acts of default by Administaff shall include, but are not limited
to:
"a. failure to pay wages to leased employees;
"b. failure to pay payroll taxes to a federal, state, or local
governmental body, department or agency when due;
"c. failure to pay premiums to an insurance carrier providing
coverage to Administaff employees leased to Client;
"d. violation by Administaff of any provision of this
Agreement."
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"9.6 Upon an act of default by Administaff, Client shall have the
option, in its sole and absolute discretion, of terminating this
Agreement, and in the event Client exercises such option, this Agreement
shall terminate on the date written notice of same is delivered to
Administaff. "
"9.7 In the event Client incurs any expenses, fines and/or liabilities
as a result of an act of default by Administaff as set forth above,
Administaff shall reimburse Client for all actual expenses, fines and/or
liabilities, including, but not limited to, reasonable attorneys' fees,
court costs and any related expenses."
ARTICLE X. INDEMNITY
Article X., Indemnity, Paragraph 10.3, shall be amended to read as
follows:
"10.3 Client and Administaff expressly agree that the indemnification
provisions of this Agreement shall not be limited to claims, expenses,
or liabilities for which one of them is solely liable, but shall also
apply to claims, expenses and liabilities for which Client and
Administaff are jointly or concurrently liable. In such event, if either
of them advances funds or makes any other payment in connection with a
claim expense or liability which is subject to this Article X in excess
of its pro rata share, said party shall be indemnified by the other
party hereto for such excess amounts.
ARTICLE XI. MISCELLANEOUS
Article XI., Miscellaneous, Paragraph 11.2, shall be amended to read as
follows:
"11.2 Client and Administaff warrant and represent to each other that,
prior to the commencement of this Agreement, no separate agreements or
arrangements exist between the parties that would obligate Client or
Administaff except as set forth herein."
Article XI., Miscellaneous, Paragraph 11.4 shall be amended to read as
follows:
"11.4 Client agrees to comply, at its sole cost and expense, with any
applicable specific directives promulgated by: (i) a federal, state, or
local governmental body, department, or agency, (ii) an insurance
carrier providing coverage to Administaff and/or its employees affecting
this Agreement and/or, (iii) Administaff as made necessary by
circumstances which currently or specifically affect Administaff, Client
or Administaff's employees except where such compliance is otherwise the
responsibility of Administaff under the terms of this Agreement."
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Article XI., Miscellaneous, shall be amended to add Paragraph 11.7 as
follows:
"11.7 Administaff hereby warrants that (i) the scope of benefits
available to eligible employees under the Administaff Benefit Plan (the
Administaff Plan) on the effective date of this Agreement are
substantially the same as are stated in the attached pamphlet entitled
Outline of Benefits attached; (ii) Administaff will give notice of any
material change in the Administaff Plan to all eligible participants at
least thirty-five (35) days prior to the effective date of such
material change; (iii) pre-existing conditions are covered by the Major
Medical Plan (the Administaff Medical Plan) which is part of the
Administaff Plan; (iv) amounts paid by a covered employee to defray a
covered expense under the Client's existing health or medical benefit
plan (Client's Plan) toward the deductible or co-payment requirements of
Client's Plan will be credited and apply to the satisfaction of the
deductible or co-payment requirement of the Administaff Medical Plan
provided that the amount paid otherwise satisfies the criteria for
credit or application to the satisfaction of the deductible or
co-payment requirements of the Administaff Medical Plan and its usual
proof of payment criteria; and (v) a former employee of Client which is
covered by COBRA under Client's Plan on the effective date of this
Agreement will be eligible for COBRA coverage under Administaff's
Medical Plan provided that Client has fully disclosed the scope and
extent of such existing COBRA coverage to Administaff prior to the
execution of this Agreement."
XVI. ENTIRE AGREEMENT
Article XVI., Entire Agreement, shall be amended to read as follows:
"This instrument, including the Exhibits attached hereto, contains the
entire Agreement of the parties and supersedes all prior and
contemporaneous agreements or understandings, whether written or oral,
with respect to the subject matter hereof. No amendment or modification
hereto shall be valid unless in writing and signed by both parties
hereto other than changes to Exhibit A (Confidential Census) from time
to time as may be necessary in the operation of Client's business and
the performance of the parties of their respective obligations under
this Agreement."
This Addendum is executed and effective of even date with the Client
Service Agreement dated June 30, 1996, between the parties hereto to which it is
attached and incorporated by reference.
ADMINISTAFF COMPANIES, INC. MHM EXTENDED CARE SERVICES, INC.
By: /s/ A. STEVE ARIZOF By: /s/ MICHAEL PINKERT
---------------------------- ------------------------------
Vice President President
- ------------------------------- ---------------------------------
Name: Typed or Printed Name: Typed or Printed
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<PAGE> 1
EXHIBIT 10.20
ADDENDUM
This Addendum is attached to and made a part of that certain Client
Service Agreement (the Agreement) of even date, between Administaff Companies,
Inc. (Administaff), and MHM OF COLORADO, INC. (Client). In the event of a
conflict between this Addendum and the Agreement, this Addendum shall control.
ARTICLE I. PERSONNEL
Article I., Personnel, shall be amended to read as follows:
"Subject to the terms of this Agreement, Administaff agrees to furnish
Client, and Client agrees to engage form Administaff, employees for the
job classifications listed, by workers' compensation classification
codes, in Exhibit A ("Confidential Census"). Client warrants that
information supplied to Administaff concerning the codes applicable to
an employee is accurate."
ARTICLE II. TERM OF AGREEMENT
Article II, shall be amended to read as follows:
"This Agreement shall commence on June 30, 1996 and shall remain in
force and effect until terminated as provided for herein. Either
Administaff or Client may terminate this Agreement by giving thirty (30)
days prior written notice."
ARTICLE III. ADMINISTRATION
Article III, Administration, shall be amended to read as follows:
"3.1 Administaff and Client recognize that there are a number of federal
and state statutory, common law and regulatory provisions which define
the employer-employee relationship. It is the intent of Administaff and
Client that to the extent permitted by law, "employer" status with
respect to an employee furnished to Client by Administaff shall be
determined as set forth in paragraphs 3.2, 3.3, 3.4, and 3.7 and if not
so determined, shall be based upon the function for which the
employer-employee relationship is being considered and shall be
determined in accordance with paragraph 3.6.
"3.2 Administaff is the employer of those persons furnished to Client
and is liable as such for the following purposes:
"a. compliance with rules and regulations governing the
reporting and payment of all federal and state taxes on
payroll wages paid under this Agreement including, but
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not limited to: (i) federal income tax withholding
provisions of the Internal Revenue Code; (ii) state and/or
local income tax withholding provisions, if applicable;
(iii) Federal Insurance Contributions Act (FICA); (iv)
Federal Unemployment Tax Act (FUTA); and (v) applicable
state unemployment provisions;
"b. except as provided in Paragraph 3.4 g., below, compliance
with applicable workers' compensation laws including, but
not limited to: (i) procuring workers' compensation
insurance; (ii) completing and filing all required reports;
and (iii) managing claims;
"c. compliance with the Consolidated Omnibus Reconciliation Act
(COBRA);
"d. compliance with the Immigration Reform and Control Act
(IRCA);
"e. compliance with the Consumer Credit Protection Act, Title
III;
"f. procuring and providing employee benefits;
"g. monitoring and transmitting to Client changes in
governmental regulations relating to policies and practices
governing the employer-employee relationship including, but
not limited to, issues such as recruiting, interviewing,
testing, selecting, orientation of, training, evaluating,
replacing, supervision, disciplining and terminating
employees.
"3.3 Client is the employer of those persons furnished by Administaff
and is liable as such for the following purposes:
"a. compliance with Occupational Safety and Health
Administration (OSHA) regulations;
"b. compliance with Environmental Protection Agency (EPA)
regulations and any state and/or local equivalent;
"c. compliance with government contracting provisions including,
but not limited to: (i) Executive Order 11246; (ii)
Vocational Rehabilitation Act of 1973; (iii) Vietnam Era
Veterans' Readjustment Assistance Act of 1974; (iv)
Walsh-Healy Public Contracts Act; (v) Davis-Bacon Act; and
(vi) Service Contract Act of 1965;
"d. compliance with the Fair Labor Standards Act (FLSA);
"e. compliance with the Worker Adjustment and Retraining
Notification Act (WARN); provided, however, that so long as
Client is an employer of less than the
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number of employees required to make Client subject to
the application of WARN, and if Client would not otherwise
be subject to the jurisdiction or application of WARN but
for the fact that Administaff is an employer of more than
the jurisdictional minimum number of employees required for
the compliance with WARN then Administaff shall be
responsible for compliance with WARN, in which case Client
covenants and agrees that it shall give Administaff no less
than ninety (90) days notice of (i) the closing or shut
down of an employment site (or one or more facilities or
operating units within an employment site) resulting in an
employment loss for fifty (50) or more employees during any
thirty (30) day period; (ii) the mass layoff of employees
which does not result in the closing or shut down of an
employment site but which will result in the loss of
employment during any thirty (30) day period for 500 or
more employees, or for 50 to 499 employees if they make up
at least 33% of the work force; or (iii) any combination of
the closing of an employment site or mass layoff of
employees which would not individually trigger the WARN
notice requirement if it occurred within a thirty (30) day
time period, but which taken together during any ninety
(90) day time period reaches the threshold level of
employment loss that would require Administaff to give
notice;
"f. compliance with any professional licensing requirements;
"g. compliance with any fidelity bonding requirements;
"h. professional liability, including but not limited to
malpractice or errors and omissions coverage and compliance
with any regulation mandating such coverage;
"i. Section 414(o) of the Internal Revenue Code (avoidance of
certain pension and non-pension employee benefit
requirements) (except as provided in paragraph 3.4c below);
"j. the rendering of professional medical services, including,
but not by way of limitation, the services of a psychologist
and the diagnosis and treatment of all patients under the
Client's care; it being specifically acknowledged and agreed
that Administaff's duties, responsibilities and functions
hereunder shall be administrative and managerial in nature
only, and that notwithstanding any other provision of this
Agreement to the contrary, Administaff shall engage in no
activity hereunder that would constitute the corporate
practice of medicine as defined by applicable laws in any
jurisdiction in which the corporate practice of medicine is
prohibited. The parties understand and agree that Client has
the sole responsibility for the coordination and provision
of all medical services and Administaff shall not interfere
in any way with the exercise of the professional medical
judgment of Client or Client's providers in connection with
their practice of medicine. All of Client's policies and
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procedures relating to the governance of its physicians or
psychologists who will work under the direction of Client or
its physicians or psychologists shall be adopted from time
to time in the sole discretion of Client, its shareholders
and board of directors, as applicable. Such policies may
include practice standards, peer review and corrective
action, disciplinary matters, on-call schedules, referral
physician panel and services, clinical procedures,
utilization management and quality management procedures,
credentialing, appointment and replacement of Association
medical directors, patient care decisions, physician and
other licensed health care professional compensation and
incentives, physician training, continuing education,
development and supervision and shareholder eligibility.
Should any function assigned to Administaff hereunder be
construed to be within the practice of medicine such that,
if performed by Administaff, it would be violative of
applicable prohibitions on the corporate practice of
medicine, such function thereafter shall be assigned to and
become the responsibility of Client and any such prior
activities which were undertaken by Administaff shall be
considered to have been undertaken by Client.
"3.4 Administaff and Client will be considered co-employers ("dual or
joint employers") of those persons furnished to Client by Administaff
for the following purposes:
"a. compliance with Title VII of the 1964 Civil Rights Act;
"b. compliance with the Age Discrimination in Employment Act
(ADEA);
"c. compliance with the Employee Retirement Income Security Act
(ERISA) (except as provided by paragraph 3.3i above);
"d. compliance with the Polygraph Protection Act;
"e. compliance with the Federal Drug Free Workplace Act and any
state and/or local equivalent;
"f. compliance with state employment discrimination laws;
"g. employer liability under workers' compensation laws;
"h. implementation of policies and practices relating to the
employer-employee relationship such as recruiting,
interviewing, testing, selecting, orientation of, training,
evaluating, replacing, supervision, disciplining and
terminating employees; and
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<PAGE> 5
"i. selection of fringe benefits, including, but not limited to,
holidays, vacation, sick leave, parental leave, military
leave, and leave of absence.
"3.5 Nothing in paragraphs 3.2, 3.3, 3.4, or 3.7 shall be construed to
require either Administaff or Client to perform any matter not referred
to therein; provided that the foregoing shall not affect the obligation
of Administaff or Client to perform any matter required by law or as
otherwise specifically provided by this Agreement.
"3.6 For purposes of this Agreement, determination of employer status
for situations not set forth and not contemplated herein shall be made
by mutual agreement of Administaff and Client.
"3.7 Client is the employer of those persons furnished by Administaff
(i) with respect to the assignment and ownership of all intellectual
property rights including, but not limited to, inventions, whether
patentable or not, and patents resulting therefrom, copyrights and trade
secrets; and (ii) with respect to any confidentiality agreements
regarding proprietary information and any covenant not to compete.
ARTICLE VI. SERVICE FEE
Article VI., Service Fee, Paragraph 6.3 (i) shall be amended to read as
follows:
"6.3 ADMINISTAFF shall not adjust the fee rate percentage for Client
more often than once annually during the term of this Agreement except
for adjustments made necessary by:
"(i) statutory and regulatory changes including, but not limited
to, adjustments to FICA and federal and/or state
unemployment taxes and workers' compensation; and/or;
"(ii) changes in the information supplied on Exhibit A
(Confidential Census) initiated by Client to the extent that
such change, when applied to the recalculation of the fee
rate percentage, causes an increase or decrease of at least
one fee rate percentage point."
Article VI., Paragraph 6.5 shall be amended to read as follows:
"6.5 Any increases in the fee rate percentages for statutory or
regulatory changes in employment taxes, insurance costs or job
functions shall be effective on the date of such statutory or regulatory
increase or change. Any such increase shall be no greater than the
amount necessary to cover the cost to Administaff of the increase in
employment taxes, insurance costs, or costs resulting from the change in
job functions."
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<PAGE> 6
Article VI., Paragraph 6.8, shall be amended to read as follows:
"6.8 The fee provided for by this Agreement shall be due and payable at
least one (1) working day prior to the date of payroll delivery. So long
as Client is timely in the reporting of payroll information and payment
of the fee provided for by this Agreement Administaff shall make payroll
delivery to the employees furnished to the Client on the regularly
scheduled payday. In addition Administaff shall provide Client on each
payday with a report of the accrued leave for each employee furnished to
Client (including the leave currently accrued by each employee while
employed by Client prior to the effective date of this Agreement,
provided that such information is timely and accurately provided to
Administaff by Client for inclusion on the payday accrued leave
report)."
ARTICLE VII. INSURANCE
"7.1 Administaff shall furnish and keep in full force and effect at all
times during the term of this Agreement, workers' compensation insurance
covering all Administaff employees furnished to Client pursuant to the
terms of this Agreement. Upon written request by Client, Administaff
shall furnish a certificate of insurance verifying such coverage. Such
workers' compensation coverage will comply with applicable law."
ARTICLE IX. DEFAULT
Article IX., Default, Paragraph 9.3 shall be amended to read as
follows:
"9.3 In the event that this Agreement is terminated due to a default by
Client, Client shall pay Administaff a sum equal to the fee rate
percentage multiplied by the estimated gross payroll for a thirty day
period as liquidated damages, but such payment does not release Client
from its obligations under this Agreement, or from liability for future
breach of such obligations."
Article IX., Default, shall be amended to add Paragraphs 9.5, 9.6, and
9.7 as follows:
"9.5 Acts of default by Administaff shall include, but are not limited
to:
"a. failure to pay wages to leased employees;
"b. failure to pay payroll taxes to a federal, state, or local
governmental body, department or agency when due;
"c. failure to pay premiums to an insurance carrier providing
coverage to Administaff employees leased to Client;
"d. violation by Administaff of any provision of this
Agreement."
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<PAGE> 7
"9.6 Upon an act of default by Administaff, Client shall have the
option, in its sole and absolute discretion, of terminating this
Agreement, and in the event Client exercises such option, this Agreement
shall terminate on the date written notice of same is delivered to
Administaff."
"9.7 In the event Client incurs any expenses, fines and/or liabilities
as a result of an act of default by Administaff as set forth above,
Administaff shall reimburse Client for all actual expenses, fines and/or
liabilities, including, but not limited to, reasonable attorneys' fees,
court costs and any related expenses."
ARTICLE X. INDEMNITY
Article X., Indemnity, Paragraph 10.3, shall be amended to read as
follows:
"10.3 Client and Administaff expressly agree that the indemnification
provisions of this Agreement shall not be limited to claims, expenses,
or liabilities for which one of them is solely liable, but shall also
apply to claims, expenses and liabilities for which Client and
Administaff are jointly or concurrently liable. In such event, if either
of them advances funds or makes any other payment in connection with a
claim, expense or liability which is subject to this Article X in excess
of its pro rata share, said party shall be indemnified by the other
party hereto for such excess amounts."
ARTICLE XI. MISCELLANEOUS
Article XI., Miscellaneous, Paragraph 11.2, shall be amended to read as
follows:
"11.2 Client and Administaff warrant and represent to each other that,
prior to the commencement of this Agreement, no separate agreements or
arrangements exist between the parties that would obligate Client or
Administaff except as set forth herein."
Article XI., Miscellaneous, Paragraph 11.4 shall be amended to read as
follows:
"11.4 Client agrees to comply, at its sole cost and expense, with any
applicable specific directives promulgated by: (i) a federal, state, or
local governmental body, department, or agency, (ii) an insurance
carrier providing coverage to Administaff and/or its employees affecting
this Agreement and/or, (iii) Administaff as made necessary by
circumstances which currently or specifically affect Administaff, Client
or Administaff's employees except where such compliance is otherwise the
responsibility of Administaff under the terms of this Agreement."
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Article XI., Miscellaneous, shall be amended to add Paragraph 11.7 as
follows:
"11.7 Administaff hereby warrants that (i) the scope of benefits
available to eligible employees under the Administaff Benefit Plan (the
Administaff Plan) on the effective date of this Agreement are
substantially the same as are stated in the attached pamphlet entitled
Outline of Benefits attached; (ii) Administaff will give notice of any
material change in the Administaff Plan to all eligible participants at
least thirty-five (35) days prior to the effective date of such material
change; (iii) pre-existing conditions are covered by the Major Medical
Plan (the Administaff Medical Plan) which is part of the Administaff
Plan; (iv) amounts paid by a covered employee to defray a covered
expense under the Client's existing health or medical benefit plan
(Client's Plan) toward the deductible or co-payment requirements of
Client's Plan will be credited and apply to the satisfaction of the
deductible or co-payment requirement of the Administaff Medical Plan
provided that the amount paid otherwise satisfies the criteria for
credit or application to the satisfaction of the deductible or
co-payment requirements of the Administaff Medical Plan and its usual
proof of payment criteria; and (v) a former employee of Client which is
covered by COBRA under Client's Plan on the effective date of this
Agreement will be eligible for COBRA coverage under Administaff's
Medical Plan provided that Client has fully disclosed the scope and
extent of such existing COBRA coverage to Administaff prior to the
execution of this Agreement."
XVI. ENTIRE AGREEMENT
Article XVI., Entire Agreement, shall be amended to read as follows:
"This instrument, including the Exhibits attached hereto, contains the
entire Agreement of the parties and supersedes all prior and
contemporaneous agreements or understandings, whether written or oral,
with respect to the subject matter hereof. No amendment or modification
hereto shall be valid unless in writing and signed by both parties
hereto other than changes to Exhibit A (Confidential Census) from time
to time as may be necessary in the operation of Client's business and
the performance of the parties of their respective obligations under
this Agreement."
This Addendum is executed and effective of even date with the Client
Service Agreement dated June 30, 1996, between the parties hereto to which it is
attached and incorporated by reference.
ADMINISTAFF COMPANIES, INC. MHM OF COLORADO, INC.
By: /s/ A. STEVE ARIZOF By: /s/ MICHAEL PINKERT
---------------------------- ------------------------------
Vice President President
- ------------------------------- ---------------------------------
Name: Typed or Printed Name: Typed or Printed
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<PAGE> 9
ADMINISTAFF(R)
CLIENT SERVICE AGREEMENT
THIS CLIENT SERVICE AGREEMENT ("the Agreement"), is made by and between
Administaff Companies, Inc., ("Administaff"), a Delaware corporation with its
principal place of business at 19001 Crescent Springs Drive, Kingwood, Texas
77339-3802, and MHM of Colorado, Inc ("Client").
I. PERSONNEL
Subject to the terms of this Agreement, Administaff agrees to furnish Client,
and Client agrees to engage from Administaff, employees for the job functions
listed in Exhibit A ("Confidential Census"). Client warrants that information
supplied to Administaff concerning the employee functions is accurate.
II. TERM OF AGREEMENT
This Agreement shall commence on the date this Agreement is executed and remain
in force and effect for a term of one (1) year ("Initial Term"). Following the
Initial Term, this Agreement shall remain in full force and effect for
successive monthly terms (the "Extended Terms") until either (i) the Agreement
is renewed; or, (ii) the Agreement is terminated. During the Initial Term, and
any Extended Term of this Agreement, either Administaff or Client may terminate
this Agreement by giving thirty (30) days prior written notice.
III. ADMINISTRATION
3.1 There are a number of federal and state statutory, common law and
regulatory provisions which define the employer-employee relationship.
"Employer" status is based upon the function for which the employer-employee
relationship is being considered.
3.2 Administaff is the employer of those persons furnished to Client and listed
on Exhibit A and is liable as such for the following purposes:
a. compliance with rules and regulations governing the reporting and
payment of all federal and state taxes on payroll wages paid under
this Agreement including, but not limited to: (i) federal income tax
withholding provisions of the Internal Revenue Code; (ii) state and/or
local income tax withholding provisions, if applicable; (iii) Federal
Insurance Contributions Act (FICA); (iv) Federal Unemployment Tax Act
(FUTA); and (v) applicable state unemployment provisions;
b. except as provided in Paragraph 3.4g below, compliance with applicable
workers' compensation laws including, but not limited to: (i)
procuring workers' compensation insurance; (ii) completing and filing
all required reports; and (iii) managing claims;
c. compliance with the Consolidated Omnibus Reconciliation Act (COBRA);
d. compliance with the Immigration Reform and Control Act (IRCA);
e. compliance with the Consumer Credit Protection Act, Title III;
f. procuring and providing employee benefits;
g. monitoring and transmitting to Client changes in governmental
regulations relating to policies and practices governing the
employer-employee relationship including, but not limited to, issues
such as recruiting, interviewing, testing, selecting, orientation of,
training, evaluating, replacing, supervision, disciplining and
terminating employees.
3.3 Client is the employer of those persons furnished by Administaff and listed
on Exhibit A and is liable as such for the following purposes:
a. compliance with Occupational Safety and Health Administration (OSHA)
regulations;
b. compliance with Environmental Protection Agency (EPA) regulations and
any state and/or local equivalent;
c. compliance with government contracting provisions including, but not
limited to: (i) Executive Order 11246; (ii) Vocational Rehabilitation
Act of 1973; (iii) Vietnam Era Veterans' Readjustment Assistance Act
of 1974; (iv) Walsh-Healey Public Contracts Act; (v) Davis-Bacon Act'
and (vi) Service Contract Act of 1965;
d. compliance with the Fair Labor Standards Act (FLSA);
e. compliance with the Worker Adjustment and Retraining Notification Act
(WARN);
f. compliance with any professional licensing requirements;
g. compliance with any fidelity bonding requirements;
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h. professional liability, including but not limited to malpractice or
errors and omissions coverage and compliance with any regulation
mandating such coverage;
i. Section 414(o) of the Internal Revenue Code (avoidance of certain
pension and non-pension employee benefits requirements) (except as
provided in paragraph 3.4c below);
j. assignment to, and ownership of all intellectual property rights
including, but not limited to, inventions, whether patentable or not,
and patents resulting therefrom, copyrights and trade secrets and all
confidentiality agreements regarding proprietary information.
3.4 Administaff and Client will be considered co-employers ("dual or joint
employers") of those persons furnished to Client by Administaff and listed on
Exhibit A for the following purposes:
a. compliance with Title VII of the 1964 Civil Rights Act;
b. compliance with the Age Discrimination in Employment Act (ADEA);
c. compliance with the Employee Retirement Income Security Act (ERISA)
(except as provided by paragraph 3.3i above);
d. compliance with the Polygraph Protection Act;
e. compliance with the Federal Drug Free Workplace Act and any state
and/or local equivalent;
f. compliance with state employment discrimination laws including, but
not limited to, Article 5221k, Texas Revised Civil Statues;
g. employer liability under workers' compensation laws;
h. implementation of policies and practices relating to the
employer-employee relationship such as recruiting, interviewing,
testing, selecting, orientation of, training, evaluating, replacing,
supervision, disciplining and terminating employees; and
i. selection of fringe benefits, including, but not limited to, holidays,
vacation, sick leave, parental leave, military leave, and leave of
absence.
3.5 Nothing in paragraphs 3.2, 3.3 or 3.4 above shall be construed to require
either Administaff or Client to provide any of the matters referred to therein
except as provided by law or as otherwise specifically provided by this
contract.
3.6 For the purposes of this Agreement, determination of employer status for
situations not set forth and not contemplated herein shall be made by mutual
agreement of Administaff and Client.
IV. SUPERVISION
Administaff shall designate one or more on-site supervisors from among its
employees furnished to Client and listed on Exhibit A. On-site supervisors shall
direct operational and administrative matters relating to services provided by
Administaff's employees and shall carry out Administaff's policies and
procedures formulated in accordance with Paragraph 3.4h above.
V. ENROLLMENT FEE
Client agrees to pay Administaff a non-refundable enrollment fee in the sum
specified in Exhibit B (Client Service Application). This enrollment fee is due
and payable at the time that this Agreement is signed by Client.
VI. SERVICE FEE
In exchange for the personnel services provided by Administaff hereunder,
Administaff and Client agree as follows:
6.1 The Administaff fee rate percentage is set forth in Exhibit B (Client
Service Application) and is calculated utilizing the data submitted by Client
in Exhibit A. If such information is inaccurate, Client shall immediately agree
to amend Exhibit A to reflect the current information and shall pay, within
ten (10) days notice from Administaff of the error, any additional costs
incurred by Administaff as a result of the inaccuracy.
6.2 Each pay period, Client shall pay Administaff its fee comprised of: (i) the
gross payroll of Administaff employees leased to Client during such pay period;
and, (ii) a service fee equal to the fee rate percentage specified in Exhibit B
multiplied by the actual gross payroll of Administaff employees furnished to
Client during such pay period.
6.3 Administaff shall not adjust the fee rate percentage for Client during any
term of this Agreement except for adjustments made necessary by:
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(i) statutory and regulatory changes, including, but not limited to,
adjustments to FICA, federal and/or state unemployment taxes and
workers' compensation; and/or
(ii) changes in the information supplied on Exhibit A (Confidential Census)
initiated by Client to the extent that such change, when applied to
the recalculation of the fee rate percentage, causes an increase or
decrease of at least one fee rate e point.
6.4 In addition to the foregoing, during any Extended Term Administaff may
adjust the fee rate percentage upon thirty (30) days written notice to Client.
6.5 Any increases in the fee rate percentages for statutory or regulatory
changes in employment taxes, insurance costs or job functions shall be
effective on the date of such statutory or regulatory increase or change.
6.6 Any increase in the fee will be billed with the next effective
payroll and be kept current at all times except for retroactive changes or
statutory and/or regulatory changes known at the time the payroll is billed.
6.7 Any change in the fee rate percentage shall be reflected in a revised
Exhibit B which shall then be made a part of this Agreement.
6.8 The fee provided for by this Agreement shall be due and payable at least
one (1) working day prior to the date of payroll delivery.
6.9 Client shall use a method of payment approved in advance by Administaff.
6.10 Client or on-site supervisor shall report to Administaff all time worked by
all Administaff employees furnished to Client each pay period and shall provide
Administaff with written verification of same.
6.11 Client shall notify Administaff within two (2) working days of any error in
billing.
6.12 Client shall reimburse Administaff for services not contemplated by this
Agreement which may be required by Client.
VII. INSURANCE
7.1 Administaff shall furnish, and keep in full force and effect at all times
during the term of this Agreement, worker's compensation insurance covering all
Administaff employees furnished to Client pursuant to the terms of this
Agreement. Upon written request by Client, Administaff shall furnish a
certificate of insurance verifying such coverage.
7.2 Client shall furnish, and keep in force and effect at all times during the
term of this Agreement, comprehensive general liability insurance including
products/completed operations coverage with minimum limits of $1,000,000 per
occurrence and $2,000,000 aggregate. Client shall cause its insurance carrier to
issue a certificate of insurance to Administaff, Inc. confirming this coverage
and to give not less than thirty (30) days advance notice of cancellation or
material change.
7.3 Client shall furnish, and keep in force and effect at all times during the
term of this Agreement, comprehensive automobile liability insurance covering
all owned, hired and non-owned automobiles with a minimum limit of $1,000,000
per occurrence combined single limit bodily injury and property damage
liability. The policy shall also provide uninsured motorists insurance with a
minimum combined single limit of Sixty Thousand Dollars ($60,000.00). In states
where "no fault" laws apply, Personal Injury Protection (P.I.P.) or equivalent
coverage shall be required to meet the requirements of the state. The client
shall cause its insurance carrier to issue a certificate of insurance to
Administaff, Inc. confirming this coverage and to give not less than thirty (30)
days advance notice of cancellation or material change.
7.4 Client shall deliver copies of all insurance certificates required pursuant
to this Article signed by authorized representatives of the insurance companies
to Administaff within fifteen (15) days of the commencement date of this
Agreement.
VIII. EMPLOYMENT AGREEMENT
Each employee furnished by Administaff to Client and listed on Exhibit A shall
be required to execute an Employment Agreement as set forth in Exhibit C
(Employment Agreement Form) before such employee shall commence the term of
assignment with Client.
IX. DEFAULT
9.1 Acts of default by Client shall include, but are not limited to:
a. failure of Client to pay a fee when due;
b. failure of Client to comply within thirty (30) days of any directive
of Administaff, when such directive is promulgated or made necessary
by: (i) a federal, state or local governmental body, department or
agency; or (ii) an insurance carrier providing coverage to Administaff
and/or its employees;
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<PAGE> 12
c. direct payment of taxable wages by Client to Administaff employees for
services contemplated by this Agreement;
d. commission or omission of any act that usurps any right or obligation
of Administaff as an employer of the employees covered by this
Agreement; and/or,
e. violation by Client of any provision of this Agreement.
9.2 In the event Administaff incurs any expenses, fines and/or liabilities as a
result of an act of default by Client as set forth above, Client shall
reimburse Administaff for all actual expenses, fines and/or liabilities,
including, but not limited to, reasonable attorneys' fees, court costs and any
related expenses.
9.3 In the event that this Agreement is terminated due to a default by Client,
Client shall pay Administaff a sum equal to the fee rate percentage multiplied
by the estimated gross payroll for the remaining contract period as liquidated
damages, but such payment does not release Client from its obligations under
this Agreement, or from liability for future breach of such obligations.
9.4 Upon an act of default by Client other than under Paragraph 9.lc above,
Administaff shall have the option, in its sole and absolute discretion, of
terminating this Agreement, and in the event Administaff exercises such option,
this Agreement shall terminate on the date written notice of same is delivered
to Client. In the event, however, of an act of default by Client under
Paragraph 9.1c above, Administaff shall have the option in its sole and
absolute discretion of terminating this Agreement effective on the date of such
act.
X. INDEMNITY
10.1 Client thereby agrees to indemnify, defend and hold Administaff harmless
from and against any and all liability, expense (including court costs and
attorneys' fees) and claims for damage of any nature whatsoever, whether known
or unknown and whether direct or indirect, as though expressly set forth and
described herein, which Administaff may incur, suffer, become liable for or
which may be asserted or claimed against Administaff as a result of the acts,
errors or omissions, including negligent acts and statutory violations, of
Client.
10.2 Administaff hereby agrees to indemnify, defend and hold Client harmless
from and against any and all liability, expense (including court costs and
attorneys' fees) and claims for damage of any nature whatsoever, whether known
or unknown and whether direct or indirect, as though expressly set forth and
described herein, which Client may incur, suffer, become liable for or which
may be asserted or claimed against Client as a result of the acts, errors or
omissions, including negligent acts and statutory violations, of Administaff.
10.3 Client and Administaff expressly agree that the indemnification provisions
of this Agreement shall not be limited to claims, expenses, or liabilities for
which one of them is solely liable, but shall also apply to claims, expenses
and liabilities for which client and Administaff are jointly and concurrently
liable. In such event, if either of them advances funds in connection with a
claim, expense or liability which is subject to this Article X in excess of its
pro rata share, said party shall be indemnified by the other party hereto for
such excess amounts.
XI. MISCELLANEOUS
11.1 This Agreement may be amended from time to time as agreed by the parties
in writing. Such amendment shall become effective on the date so designated
when signed by both Administaff and Client.
11.2 Client and Administaff warrant and represent to each other that, prior to
the commencement of this Agreement, no separate agreements or arrangements
exist that would obligate Client or Administaff except as set forth herein.
11.3 Client and Administaff agree to immediately report to each other all
accidents and injuries involving Administaff employees as signed to Client.
11.4 Client agrees to comply, at its sole cost and expense, with any applicable
specific directives promulgated by: (i) a federal, state or local governmental
body, department or agency, (ii) an insurance carrier providing coverage to
Administaff and/or its employees affecting this Agreement, and/or (iii)
Administaff as made necessary by circumstances which currently or specifically
affect Administaff, Client or Administaff's employees.
11.5 This Agreement is between Administaff and Client and creates no individual
rights of Administaff employees as against Client.
11.6 Administaff and Administaff's workers' compensation insurance carrier
shall have the right to inspect Client's premises, including any job site to
which Client assigns Administaff's employees. To the extent possible, such
inspection shall be scheduled at a mutually convenient time.
XII. ARBITRATION
12.1 Administaff and Client agree and stipulate that all claims, disputes and
other matters in question between Administaff and Client arising out of, or
relating to this Agreement or the breach thereof will be decided by arbitration
in accordance with the Federal Arbitration Act (9 U.S.C. Sections 10 and 11)
and the Commercial Arbitration Rules of the American Arbitration Association
then obtaining subject to the limitations of this Article XII. This agreement
to so arbitrate and any other agreement or consent to arbitrate entered into in
accordance herewith as provided in this Article XII will be specifically
enforceable under the prevailing law of any court having jurisdiction.
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12.2 Notice of the demand for arbitration will be filed in writing with the
other party to the Agreement and with the American Arbitration Association. The
demand for arbitration shall be made within a reasonable time after the claim,
dispute or other matter in question has arisen, and in no event shall any such
demand be made after the date when institution of legal or equitable proceedings
based on such claim, dispute or other matter in question would be barred by the
applicable statute of limitations.
12.3 No arbitration arising out of, or relating to, this Agreement shall include
by consolidation, joinder or in any other manner any other person or entity who
is not a party to this contract unless:
a. the inclusion of such other person or entity is necessary if complete
relief is to be afforded among those who are already parties to the
arbitration, and/or such other person or entity is substantially
involved in a question of law or fact which is common to those who are
already parties to the arbitration and which will arise in such
proceedings; and,
b. the written consent of the other person or entity sought to be
included and Administaff and Client has been obtained for such
inclusion, which consent shall make specific reference to this
paragraph; but no such consent shall constitute consent to arbitration
of any dispute not specifically described in such consent or to
arbitration with any party not specifically identified in such
consent.
12.4 The award rendered by the arbitrators will be final, judgment may be
entered upon it in any court having jurisdiction thereof, and will not be
subject to modification or appeal except to the extent permitted by Sections 10
and 11 of the Federal Arbitration Act (9 U.S.C. sections 10 and 11).
XIII. ASSIGNMENT
Neither party shall assign this Agreement or its rights and duties hereunder, or
any interest herein, without the prior written consent of the other party.
XIV. ATTORNEYS' FEES
The prevailing party in any enforcement action arising in respect to this
Agreement shall be entitled to recover from the other party all costs of
such enforcement action including, without limitation, reasonable attorneys'
fees, court costs and related expenses.
XV. GOVERNING LAW
EXCEPT FOR ARTICLE XII OF THIS AGREEMENT, WHICH SHALL BE GOVERNED BY THE FEDERAL
ARBITRATION ACT (9 U.S.C. sections 10 AND 11), THIS AGREEMENT SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
XVI. ENTIRE AGREEMENT
This instrument, including the Exhibits attached hereto, contains the entire
Agreement of the parties and supersedes all prior and contemporaneous agreements
or understandings, whether written or oral, with respect to the subject matter
hereof. No amendment or modification hereto shall be valid unless in writing and
signed by both parties hereto.
XVII. SEVERABILITY
If any provision of this Agreement, or any amendment thereof, should be invalid,
the remaining provision shall remain in effect and be so construed as to
effectuate the intent and purposes of this Agreement and any amendments thereto.
XVIII. NOTICES
All notices, requests and communications provided hereunder shall be in writing,
and hand delivered or mailed by United States registered, certified, or express
mail, return receipt requested, and addressed to the party's principal place of
business as set forth in this Agreement adjacent the signature of each party (or
to such other address provided in writing by such party).
XIX. WAIVER
The waiver by either party hereto of a breach of any term or provision of this
Agreement shall not operate or be construed as a waiver of a subsequent breach
of the same provision by any party or of a breach of any other term or provision
of this Agreement.
XX. EXHIBITS
The following exhibits are attached to this Agreement and incorporated herein by
reference for all purposes:
A. Exhibit A ("Confidential Census");
5
<PAGE> 14
B. Exhibit B ("Client Service Application"); and,
C. Exhibit C ("Employment Agreement Form").
THIS AGREEMENT is duly executed this 30 day of June, 1996.
---- ----- -
FOR CLIENT: MHM of Colorado, Inc.
----------------------- ADMINISTAFF COMPANIES, INC.
(Company Name) 19001 Crescent Springs Drive
Kingwood, Texas 77339-3802
(713) 358-8986
By: /s/ MICHAEL PINKERT By: /s/ A. STEVE ARIZOF
--------------------------------- ---------------------------------
(Signature) President Vice-President
Michael Pinkert
---------------------------------
(Name - Typed or Printed)
Address: 4601 Corbett Dr.
---------------------------
Ft Collins, Co 80525
---------------------------
---------------------------
Tel. No.: (970) 225-9191
---------------------------
<PAGE> 1
EXHIBIT 21
Set forth below is a list of the Company's subsidiaries, as of December 1,
1996, with their respective states of incorporation. All of such subsidiaries
were wholly-owned by the Company as of such date.
<TABLE>
<CAPTION>
State of
Name Incorporation
---- -------------
<S> <C>
MHM of Colorado, Inc. Corporation (1) DE
MHM Extended Care Services, Inc. (1) DE
MHM/LLC, Inc. (1) DE
MHM Outpatient Services, Inc. (1) DE
MHM Holdings, Inc. (1) DE
</TABLE>
- -----------------------
(1) Subsidiary of MHM Services,Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 3,611,000
<SECURITIES> 0
<RECEIVABLES> 6,084,000
<ALLOWANCES> 4,404,000
<INVENTORY> 49,000
<CURRENT-ASSETS> 7,108,000
<PP&E> 1,168,000
<DEPRECIATION> 630,000
<TOTAL-ASSETS> 10,828,000
<CURRENT-LIABILITIES> 4,161,000
<BONDS> 0
0
0
<COMMON> 33,000
<OTHER-SE> (3,615,000)
<TOTAL-LIABILITY-AND-EQUITY> 10,828,000
<SALES> 0
<TOTAL-REVENUES> 34,670,000
<CGS> 0
<TOTAL-COSTS> 25,765,000
<OTHER-EXPENSES> 15,420,000
<LOSS-PROVISION> 6,320,000
<INTEREST-EXPENSE> 1,387,000
<INCOME-PRETAX> (14,222,000)
<INCOME-TAX> (308,000)
<INCOME-CONTINUING> (13,914,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (463,000)
<CHANGES> 0
<NET-INCOME> (14,377,000)
<EPS-PRIMARY> (4.34)
<EPS-DILUTED> (4.34)
</TABLE>
